When is enough enough? How much objectionable behavior should a board, and the cooperative building it represents, stomach before throwing the rascal(s) out? In short, what can a board legally do when faced with an unrelenting rule-breaker and disturber-of-the-peace?
The landmark case of 40 West 67th Street v. Pullman, decided in 2002 by New York’s highest court, permitted a co-op to evict a shareholder for objectionable conduct – provided the board followed lease requirements, which, in this case, meant obtaining a shareholder vote to approve the action. But what would happen if the board acted unilaterally?
The events leading up to this case, which would answer that question, began on July 9, 1993, when Michael Davis bought the shares for Apartment 2F at the London Terrace Towers co-op in Manhattan’s Chelsea. In a later court case, London Terrace Towers Inc. v. Michael Davis, the cooperative alleged that Davis engaged in objectionable conduct for many years and refused, despite written warnings, to abide by the proprietary lease and the house rules.
The list of offenses was long. On November 12, 1993, four months after Davis’s tenancy began, the co-op sent him a letter asking him to stop playing his stereo at an unreasonably loud volume level. On January 7, 1994, the co-op sent Davis a letter asking him to stop slamming his doors and playing his television and stereo loudly after 11 P.M. On August 19, 1999, the co-op’s managing agent, Insignia Residential Group, sent Davis a letter pleading with him to leave a copy of his key with the lobby attendant so that Davis could be let into his apartment when he locked himself out. On March 29, 2000, Insignia sent Davis a letter that asked him to stop using the stairwell and hallway around his apartment to store his personal belongings. In the same letter, Insignia warned Davis of the security risk he created when he rigged the second-floor stairwell doors to remain unlocked after they closed.
There were more complaints. On October 11, 2000, the co-op’s lawyers sent Davis a letter to ask him to stop leaving his personal property in the common hallways, to stop making loud noises from 11 P.M. to 8 A.M., and, once again, to give the co-op a key to his apartment. On June 30, 2003, the co-op sent Davis a letter banning him from the laundry room, health club, and sundeck because he allegedly stole from residents who used these facilities.
The co-op’s staff also lodged numerous complaints against Davis. For example, the building superintendent complained that Davis locked himself out of his apartment from two to four times a month from 1997 to 1999, often requiring staff to open his door between the hours of 11 P.M. and 8 A.M.
In addition to the behavior listed in the letters that the co-op sent to Davis, the cooperative alleged in its motion for summary judgment that Davis had engaged in other objectionable conduct. He spray-painted his own furniture in the hallway and stairwell and left the furniture there to dry. He allowed two fires to burn in his apartment. He had loud guests after hours and would get into noisy fights with them. The co-op claimed that one fight became so loud that the police had to be called to restore order. Also, while trying to unclog a neighbor’s drain, workers were almost pricked by used hypodermic needles they found in Davis’s sink drain.
Davis did not deny the objectionable conduct that the co-op reported; however, his explanations and/or responses were bizarre. For instance, he did not dispute that fires had flamed in his apartment. In his affidavit in opposition, Davis argued that the co-op had not presented the court with objective evidence supporting the fires. Davis did not deny that the police had to be called to restore order after a fight broke out among his guests and himself. He only said that the co-op had not given the court the police report from the incident.
Davis did deny knowing that syringes were in the drainpipes he shared with the neighbor, but he did not deny that the syringes were his. He simply expressed frustration that the building staff damaged his sink trap when they tried to unclog his neighbor’s sink and that the co-op had never repaired the damage.
On May 31, 2001, the board sent Davis a notice of objectionable conduct advising him that if his disruptive behavior continued, it would consider terminating his lease. Specifically, the board asked him to stop obstructing the common hallways, creating loud disturbances after 11 P.M., using the public elevators instead of the service elevators to move furniture, and spray-painting furniture in the stairwells.
The board called for a special meeting to be held on August 22, 2001, to decide whether Davis’s proprietary lease should be terminated. Paragraph 31(f) allowed the co-op’s board to call such a meeting if there was an affirmative vote by two-thirds of the directors. Davis attended the August 2001 meeting and defended himself against the board’s charges of continued objectionable behavior. According to the minutes of the meeting, the board voted unanimously to end Davis’s tenancy.
After the vote, Davis implored the board to give him another chance. The board agreed, asking him to sign a document acknowledging his past behavior and which would also indicate his agreement to abide by the house rules. Davis signed the document on December 6, 2001, admitting that he had obstructed the common hallways of the building by leaving his bicycle and other equipment there; that he had used the building’s laundry facilities to clean rugs and other items as part of his business; that loud noises regularly emanated from his apartment after 11 P.M.; that he had continually allowed his dog to roam the hallways without a leash, and that he had himself sometimes walked the public hallways semi-naked.
According to the co-op, the 2001 agreement did not result in an end to the objectionable conduct. Nearly two years later, the board called another special meeting, in September 2003, to decide once again whether to terminate Davis’s lease.
The co-op alleged in a notice sent to Davis that he had failed to comply with the December 2001 agreement to conform his conduct with the house rules. The notice told Davis that the board had scheduled a special meeting to decide whether to end his tenancy or not. The notice informed Davis that he could bring an attorney to represent him. The meeting took place at London Terrace Towers on September 3, 2003. All nine members of the board attended, as did the co-op’s attorney, a representative from Insignia, and Davis. Davis did not bring counsel. The board recorded the meeting and later had the tape transcribed. The transcript was 26 pages long, not including the board’s deliberations.
The gathering was structured simply: the board advised Davis of the behavior to which it objected and then gave Davis the opportunity to answer the allegations. The board first listed the behavior that Davis acknowledged in the December 2001 agreement and then detailed the new items that he had allegedly committed.
There were many complaints. According to the board, at least eight times Davis had allowed his dog to run around the hallways without a leash. One of Davis’s guests had set off an alarm on the roof. Davis had continued to slam his doors and the stairwell door and created loud noises in his apartment at night. A resident of the building called the police to report that Davis was harassing her. Two employees saw him on a security camera stealing another person’s clothing out of the laundry room. On August 14, 2003, the night of the electrical blackout, Davis set up a table in the hallway outside his apartment, lit candles, and continuously slammed his apartment door, waking up his neighbors.
The last straw was the most outrageous action: Davis apparently took a homeless man with him to use the showers in the building’s health club on June 25, 2003. The club attendant refused to admit Davis and his guest because Davis did not have valid passes to gain access to the club. But Davis and his guest sneaked into the showers anyway, where they were seen allegedly having sex.
The board asked Davis to explain his conduct. He chose to refute only some of the charges, taking time to address one of the allegations he acknowledged in his December 2001 agreement. In that document, he admitted that he once walked through the public hallways semi-naked. He argued at the September 2003 meeting that, although he had left his apartment wearing only a shirt and one sock, he did so unintentionally because he was sleepwalking.
In response to the allegation that he let his dog roam the public hallways without a leash, he stated that his dog was well-behaved. Davis then argued that it was a mischaracterization to state that his dog roamed, because the dog never left his floor. Davis also tried to explain his actions during the August 2003 blackout by stating that he had lit a candle in the hallway and needed to come out into the hallway several times to light another candle he had in his apartment so that he could see into his apartment. Davis claimed that the candle in his unit was necessary to place a leash on his dog to take it for a walk. He denied slamming his doors after 11 P.M.
He also addressed the accusation that he had stolen from the laundry room. He explained that he had found a jacket in a puddle in the laundry room and assumed that someone had thrown it away. He denied removing any clothing from the laundry room. He said he left it hanging on a doorknob.
Davis spent a significant amount of time responding to the board’s accusation that he had engaged in sexual relations in the showers. He stated that he was entitled to use the showers and he had guest passes. Davis explained that his homeless guest had a foul odor and needed to shower, and adamantly denied having sex with him. Although he admitted that they were both naked in the same shower at the same time, he explained that he was merely trying to free an ingrown hair from his guest’s back.
To test Davis’s honesty, the board members halted the meeting so that he could go to his apartment to bring back the guest passes he said he had used to gain access to the club. When Davis returned to the meeting with the passes, the board inspected them and noted that they had expired in 1994 and thus were invalid for admission to the health club. When a board member asked Davis why he did not shower with the homeless man in his own apartment, he replied that his unit was a mess and that he did not want to bring a stranger near his dog.
The board listened to Davis’s explanations, arguments, and excuses, but ultimately found them unpersuasive. It unanimously passed a corporate resolution to terminate Davis’s tenancy. The resolution stated that Davis’s proprietary lease was terminated for repeated instances of bad behavior after the board notified him in writing of its objection to his conduct.
On September 16, 2003, the board served a notice of termination on Davis stating that the board had unanimously voted to end his proprietary lease because he had violated the agreement of December 6, 2001. The notice of termination advised Davis that his lease would end on September 30, 2003. On October 24, 2003, the co-op began an eviction proceeding, moving for summary judgment because he had not left.
On to Court
The co-op alleged that no issue of fact existed about whether the board voted properly to terminate Davis’s tenancy. Davis, on the other hand, argued that the vote was entitled to no so-called “business judgment rule deference” – i.e., it did not have to bow to the board’s implicit power to make good faith decisions under the business judgment rule. The business judgment rule is the standard of reviewing business decisions that courts use to prevent judicial interference and second-guessing of corporate decisions made in good faith and in furtherance of the corporate purpose. Courts have given business judgment deference to a wide range of co-op board actions and decisions.
Davis argued, principally, that only a court, after a trial, can decide whether he had engaged in objectionable conduct. He did not suggest, however, that the board vote was outside the scope of its authority, that the board’s decision was invalid or made in bad faith, or that in voting as it did, the board did not further the co-op’s corporate purpose.
Given the board vote in this case, the court was called upon in this holdover proceeding to resolve an issue on which it reserved decision in 13315 Owners Corporation v. Kennedy (see “Case Notes: A Failure to Follow Proper Procedure,” Habitat, October 2004). In Kennedy, the court debated whether a trial court must adhere to the court of appeals’ dictum in Pullman that a vote of the co-op’s board of directors, rather than only a shareholder vote, is entitled to business judgment deference that a shareholder is objectionable. The Kennedy court opined that Pullman’s language, that a co-op board can terminate a tenancy, was key because Pullman was based on a shareholder vote, not a board vote, and because Pullman was an eviction case, whereas the cases on which it relied were not.
Because the board in Kennedy did not give the tenant-shareholder proper notice or a fair opportunity to be heard, did not vote in good faith, and acted outside the scope of its authority, the court found that the co-op was not entitled to Pullman-like deference. The Kennedy court therefore did not allow the co-op board’s vote terminating the shareholder’s tenancy to satisfy the competent-evidence standard necessary. For that reason, the Kennedy court did not decide whether Pullman applied only to shareholder votes. Instead, it reached Pullman’s second prong: assuming that a board has the power to terminate a tenancy if the shareholder’s conduct was objectionable. In Kennedy, the court concluded that any decision on that issue required a trial.
In the London Terrace proceeding, however, the board vote finding the shareholder objectionable was made validly, in good faith, and within the scope of the board’s authority. What the court had to determine was whether a co-op board had the authority to terminate a shareholder’s tenancy or whether a shareholder has the right to have a court rather than a board decide such a question.
This court had to accord great weight to the court of appeals’ language in Pullman that a board’s vote to terminate a proprietary lease must receive business judgment deference. The court found, therefore, that the board’s vote to terminate Davis’s proprietary lease was the evidence needed to satisfy the court of appeals.
In analyzing the law, the court said that summary judgment would be granted if the co-op established that no disputed issues of fact existed to be settled at trial. Once the party seeking summary judgment demonstrates its right to such a judgment, the party opposing the motion must come forward with admissible proof establishing the existence of disputed issues of fact to be tried or must demonstrate an acceptable excuse for its failure to do so. When faced with a motion for summary judgment, the court had to view the evidence in the light most favorable to Davis and give him all the reasonable inferences that can be drawn from the evidence.
The parties disagreed about what Davis had to prove to prevail on summary judgment. Davis argued that the co-op had to prove that he had committed objectionable conduct. The co-op argued that the board’s vote to terminate Davis’s tenancy was entitled to business judgment deference. It contended that it was unnecessary on this motion for summary judgment to prove that Davis had engaged in the bad behavior, arguing that a valid board vote is all the proof necessary to establish its case for possession.
The court turned to the Pullman decision for guidance. In Pullman, a co-op sought to recover possession from David Pullman, a shareholder who engaged in objectionable conduct that eventually led to the termination of his tenancy. Pullman had sued his neighbors, called the police against his neighbors, altered his apartment without permission, distributed flyers in the building that accused a neighbor of being mentally unstable, and accused other residents of being unfaithful to their spouses. The shareholders held a meeting to decide whether to pass a resolution ordering the board to terminate Pullman’s tenancy. At the meeting, shareholders representing a supermajority of the shares were present; Pullman did not attend. The shareholders voted 2,048 shares to 0 to end the tenancy.
When Pullman did not vacate the apartment, the co-op brought an action in supreme court to eject him based on the shareholder vote. Ultimately, the court of appeals found for the co-op. The Pullman court relied heavily on Levandusky v. One Fifth Avenue Apartment Corporation from 1990 to apply the business judgment rule to the co-op’s decision. The Levandusky court applied that rule as the standard to review board action in an Article 78 proceeding that challenged a cooperative board’s decision to prevent a shareholder from renovating an apartment. The Pullman court’s reliance on Levandusky was noteworthy. Pullman extended Levandusky’s business judgment rule deference to eviction actions and proceedings.
The Pullman court held that courts should scrutinize the facts underlying a board’s decision if a tenant-shareholder could show that the cooperative acted:
(1) outside the scope of its authority,
(2) in a way that did not legitimate
ly further a corporate purpose, or
(3) in bad faith.
These three exceptions to the business judgment rule balance protecting the interests of the entire co-op community with protecting residents against the board’s possible abuse of its broad powers. Without proof of one or all of the three exceptions, the Pullman court said that a shareholder vote to terminate a tenancy because of objectionable conduct satisfied the “competent evidence” standard. That entitled the cooperative to summary judgment because “relationships among shareholders in cooperatives are sufficiently distinct from traditional landlord-tenant relationships” and courts should not look behind proper board votes.
The Pullman case established a two-phase process for reviewing a cooperative’s decision to terminate a shareholder’s tenancy. In the first phase, the court must determine whether the co-op’s action is entitled to business judgment deference. If the business judgment rule applies, the court must grant summary judgment to the co-op, if the co-op moves for it, and must grant a final judgment after trial without requiring the co-op to prove whether the shareholder is innocent or guilty.
It is up to the shareholder to show that the board vote was not entitled to deference. The shareholder must show that the board’s actions were outside the scope of its authority, that the board’s actions did not further the cooperative’s corporate purpose, or that the board’s decision was made in bad faith. If the shareholder satisfied that burden, the court moved on to phase two: an independent evaluation, based on competent, admissible evidence, of whether the shareholder committed objectionable conduct or not.
The issue in this case was whether a board vote terminating a shareholder’s proprietary lease is entitled to business judgment deference. The Pullman and Kennedy decisions engendered much discussion among legal commentators about the advisability of allowing a board vote to terminate a shareholder’s tenancy, as opposed to requiring a full shareholder vote. Pullman was a shareholder – not a board – case. But the court in London Terrace felt that it had to follow the court of appeals thinking in Pullman. The court said that the reasoning in Pullman applied here and was persuasive.
In the court’s view, the place from which the Pullman decision came was an important consideration when deciding what weight to give the previous ruling. The source was the highest court in New York State. In Pullman, the court of appeals stated unanimously that board votes were entitled to deference under the business judgment rule.
The Pullman court also recognized that the board represents the interests of the collective. It acknowledged concerns over limiting judicial review of board decisions but articulated with unambiguous clarity that procedurally proper board votes that end a shareholder’s tenancy are entitled to deference under the business judgment rule (adding that courts must exercise “heightened vigilance” when faced with board votes to terminate leases). Allowing boards to terminate co-op tenancies might affect the value of the apartments. But it said that cases cannot be decided on market forces, which have no force of law. The court thus concluded that it had to apply the court of appeals reasoning in deciding the co-op’s motion for summary judgment.
The motion to dismiss Davis’s first, second, and third objections was granted. Davis did not suggest that the board’s decision was outside the scope of the board’s authority, that the vote was invalid, or that the vote was made in bad faith, and the court on its own review agreed. Davis instead raised three defenses. In his first objection, he argued that the court lacked jurisdiction because, he claimed, the co-op had failed properly to allege the facts of this cause of action. In his second objection, Davis argued that the petition should be dismissed because the co-op did not adequately specify the alleged objectionable behavior in the termination notice. In his third objection, Davis argued that the allegations in the termination notice did not constitute a nuisance.
The court rejected these defenses, saying that the co-op had sufficiently stated a cause of action. The termination notice specified the alleged behavior; it listed, in detail, Davis’s objectionable conduct and annexed the December 2001 agreement. The allegations, if true, constituted objectionable conduct by any fair definition. In any event, the board vote was competent evidence of Davis’s objectionable behavior. Paragraph 31(f) of the proprietary lease allowed the co-op to terminate a proprietary lease if a shareholder continued to commit objectionable conduct after the shareholder received written notice of it.
The specific nature of the allegations in the notice in question was relevant, therefore, in a context that Davis had never argued. A termination notice must be specific so that a court may compare the allegations in the initial written notices complaining about objectionable conduct with the allegations in special meeting notice accusing the shareholder of engaging in the bad behavior. A comparison is necessary to ensure that the shareholder has notice before a special meeting is called to terminate the lease. The court said that having that notice assures due process and an opportunity to defend. A comparison is also necessary to ensure that the board voted on the same repeated misconduct about which the shareholder had received prior written notice.
The co-op had sent Davis numerous written notices about his objectionable behavior, asking him to correct it. Davis had been warned in writing – many times – about the possible consequences of his actions, all as required by Paragraph 31(f) of the proprietary lease and by a strict reading of Pullman’s heightened-vigilance standard.
The co-op’s motion for summary judgment was granted. The court was under a directive from the court of appeals to ensure the good faith of co-op decisions to terminate a shareholder’s tenancy, warning future petitioners that business judgment deference may not be used to rubber-stamp a board’s decision. But the board’s decision in this case was entitled to such deference, even if one construed all the facts in favor of Davis.
The court held that a properly elected board had acted within its authority in terminating Davis’s tenancy. The board gave Davis proper notice of its proposed action. The board provided Davis with a forum to dispute the claimed objectionable behavior. After he acknowledged it in writing and agreed to change, the board had given Davis one more chance to conform his conduct with the co-op community standards. When he failed to comply, the board gave him another notice, of objectionable conduct and asked him to appear for a special meeting. With that notice, and an opportunity to be heard, Davis appeared and defended himself against the board’s allegations.
The board listened but found him unconvincing. After unanimously voting to terminate his tenancy, following a fully transcribed hearing, the board passed a corporate resolution and sent Davis a notice to terminate his tenancy. Here, as in Pullman, the cooperative unfailingly followed the procedures contained in the lease.
Evicted: Some Advice
What guidance does this case afford co-op boards? In Pullman, the court held the business judgment rule is the standard to review lease terminations. Now, in a New York City civil court case, the parameters of Pullman have been expanded and clarified to determine that, in a proper case, board action to terminate a lease for objectionable conduct without shareholder action is permissible.
Four important things to remember:
What does it say in the lease about termination? If a proprietary lease permits a board to terminate the lease for objectionable conduct, courts will uphold proper board action. If the lease provides that only shareholders may act, then board action alone is insufficient.
Are you following required procedures? If the board acts to terminate, it must scrupulously follow the required procedures to the letter to insure due process to the shareholder whose lease is being terminated because of the drastic nature of such action. Failure to do so will invalidate the board’s action and invite a judicial hearing on the merits of the objectionable conduct.
Have you documented the facts? Where the facts of alleged objectionable conduct are as egregious as in this case, a court’s decision to uphold the co-op’s action should be easy. If the facts are less unusual, a court might be less inclined to accept a board’s action without finding the need for independent judicial review.
Are you aware of the shifting legal sands? The ramifications of Pullman are still emerging and the law is not yet settled. A co-op board needs good legal advice before proceeding.
Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan, and a member of the Committee on Condominiums and Cooperatives of the Real Property Section of the New York State Bar Association. He is also an adjunct professor at New York Law School, where he teaches a course on cooperative and condominium law.