Court Affirms Co-op Boards Can Target Individuals & Have Powers Not in Lease

Frank Lovece in Board Operations

May 13, 2011 — A recent court ruling in Manhattan has reaffirmed that the Business Judgment Rule grants a co-op board "virtually unfettered power" to make decisions — even when the power to make a specific financial decision that directly affects a single shareholder is not stated in either the proprietary lease or the co-op's bylaws. Whether Justice Emily Jane Goodman felt her decision was fair or simply the constraints of precedent is uncertain — the term "cooperative," she wrote, is "often, and perhaps in this case, a misnomer."

Whether a matter of bureaucratic authoritarianism or wise financial prudence, the issue arose at the tony cooperative at 1045 Fifth Ave., near the Metropolitan Museum of Art. Thomas P. Kikis, who owns the shares of several apartments, wanted to use one of them, appraised at a cool $7 million, as collateral for $3 million home-equity line of credit. But the co-op board, headed by president Elisabeth Brenhouse, denied his denied his application for a recognition agreement, the standard document a lender generally needs from a co-op board before it can give a loan or a line of credit.

Dusting Off Levandusky

Goodman's April 11 decision in the case, Kikis v. 1045 Owners Corp., was based on the landmark — and, to co-op boards, highly familiar — Levandusky v. One Fifth Ave. Apt. Corp. The ruling in that 1990 case found that even in not-for-profit housing corporations, the corporate Business Judgment Rule applies. That means, in Goodman's words, that "the exercise of a board's power over the common and general interests of the corporation may not be questioned" — even, as in this case, when it prevents a shareholder from the common, everyday action of using one's duly owned shares as collateral for a line of credit.

The board's right to deny this standard financial instrument wasn't specified in the proprietary lease nor in the bylaws, however, prompting Kikis to sue the board alleging a breach of fiduciary duty -- which, along with discrimination and self-dealing, is one of the only exceptions to the Business Judgment Rule. (The policy was, however, stated in the Purchase Application and in a disputed Corporate Resolution passed without proper notice and, Kikis felt, targeted specifically against him.)

The court, however, did not find that Kikis — whom all agreed had finances and assets to support the line of credit — receiving disparate treatment. The board, Goodman wrote, "does not wish to have such an encumbrance on the shares allocated to apartments in the building…. This the Board has the power to decide."

She noted that when a shareholder claims a breach of fiduciary duty, he or she must show, very specifically,  that the board or its individual members acted outside of the scope of their authority, or in a way that did not legitimately further the co-op, or in bad faith.

Okay to Go After a Shareholder

In fact, quoting the case Konrad v. 136 E. 64th St. Corp., Goodman said co-op boards, remarkably, can even personally target a shareholder: "That the cooperative corporation's board of directors may have taken action that 'deliberately singles out individuals for harmful treatment' does not, ipso facto, expose the individual board members to liability."  If the shareholder — who generally does not have access to complete board-meeting minutes and certainly not to conversations among board members — cannot prove "independent tortious conduct to any individual," then the board can get away with singling him or her out for harmful treatment.

She granted the board's motion to dismiss the case, establishing once more, in the words of the decision, that a board's power "for the common and general interests of the corporation may not be questioned," even if the results are "unwise or inexpedient."

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