May a co-op board be enjoined from revoking the license of a co-op shareholder to use two parking spaces? May it also be stopped from enforcing a resolution of the board preventing any shareholder from having more than one parking space while shareholders are on a waiting list for such a space? The answer was a clear “no” in Matter of Schwarz vs. Dorchester Apt. Corp.
On March 16, 2004, Simon Schwartz and Theresa Otto began this action by filing a petition and order to show cause. By an order dated January 20, 2005, the court denied the respondents’ cross-motion for summary judgment and enjoined enforcement of the resolution of the respondent board pending the resolution of an evidentiary hearing. The injunction was conditioned upon Schwartz and Otto’s payment of use and occupancy of $200 monthly for the two parking spaces in question and payment of the sum needed to bring the past payment to $200 monthly retroactive to March 23, 2004.
The following facts were undisputed. Since 1979, Otto and her mother had resided at the Dorchester, located at 3178 Nostrand Avenue in Brooklyn, in Apartment 4C. In April of 1988, the Dorchester converted to cooperative ownership and became Dorchester Apt. Corp. (DAC). On April 21, 1988, Schwartz and Otto jointly acquired 273 shares of capital stock of DAC and entered into a proprietary lease for Apartment 4C. DAC had one interior garage at the north end of the basement, which contained 19 parking spaces. There were no other on-site parking spaces. There was no provision in the proprietary lease or bylaws pertaining to parking spaces. Since at least 1988, the respondents had not entered into leases for the spaces. For at least ten years, Schwartz and Ottos had lawfully occupied two parking spaces designated numbers three and twelve.
During the year 2000, Schwartz and Ottos were paying DAC $100 monthly for the two parking spaces. In 2001, the board engaged Cooper Square Realty as its new managing agent. Cooper Square sent Schwartz and Otto monthly notices reflecting a monthly rent of $160 for the two spaces. Schwartz and Otto disputed the $60 increase in writing. By letter dated January 24, 2003, Cooper Square notified Schwartz and Otto that they were in arrears of $1,267.70 and demanded payment under threat of further collection action. By a letter to Cooper Square dated January 29, 2003, Schwartz and Otto claimed no arrears and requested an accounting. Cooper Square responded by mailing another demand for payment, which included an account history sheet. The history sheet reflected a monthly rent of $160 for the two parking spaces since September 28, 1991.
By letter dated January 20, 2004, DAC advised Schwartz and Otto that they were in default under the terms of their proprietary lease and that if they did not pay their arrears, the board would seek to terminate their lease and cancel their stock certificate. By a letter dated February 3, 2004, the board advised Schwartz and Otto that, since the arrears were for parking fees and not for maintenance charges, they were not in default under the terms of their lease.
On November 11, 2003, the board of DAC conducted a special meeting of shareholders to discuss the financial affairs of the cooperative. At that meeting, the membership discussed garage fees. Thereafter, the board unanimously voted to increase the monthly garage fees to $100 with a provision that those currently paying $60 or $70 would have their fees raised by $10 a month in annual increments until they reached $100 monthly. The board also decided that no shareholder would be allowed to rent more than one space if there were shareholders without parking spots on the waiting list.
On January 22, 2004, DAC conducted a special meeting of shareholders to discuss assessments and other matters. At that meeting, some of the shareholders expressed their willingness to allow Schwartz and Otto to keep their two parking spaces. By a letter dated February 6, 2004, the board notified the shareholders that the opinion expressed by the shareholders at the January 22, 2004 meeting was not binding upon them and that the resolution of the board made on November 11, 2003 limiting parking spaces would remain in effect.
Schwartz and Otto claimed that the board orally agreed to hear the views of the shareholders at the special meeting of January 22, 2004 concerning the board’s decision to limit the use of parking spaces and on Schwartz and Otto’s fee dispute over alleged parking fee arrears. They further contended that the board agreed to be bound by the shareholders’ expressed opinion. Schwartz and Otto contended that the majority of shareholders present voted that the one space restriction should not be applied to Schwartz and Otto. They also allegedly voted that the Schwartz and Otto parking fees should not be increased retroactively. Schwartz and Otto submitted a letter, purportedly signed by 16 shareholders, to buttress these claims. Schwartz and Otto claimed that the respondents breached the agreement evidencing their bad faith.
The court conducted an evidentiary hearing on March 12, April 7, and April 18, 2005 to resolve the merits of the underlying claim. Schwartz and Otto testified. The board called no witnesses. By a so-ordered stipulation dated April 18, 2005, the court granted the co-op’s leave to submit a memorandum of law on the issue of the respondents’ rights to attorney’s fees if they prevailed on the Article 78 petition.
On April 15, 1990, the Court of Appeals issued its decision in Matter of Levandusky vs. One Fifth Ave. Apt. Corp., setting forth the Business Judgment Rule as the standard of judicial review when evaluating decisions made by residential cooperative corporations. On May 13, 2003, the Court of Appeals reaffirmed this principle in its holding of 40 West 67th Street Corp. vs. Pullman, in which the state’s highest court said:
“The very concept of cooperative living entails a voluntary, shared control over rules, maintenance, and the composition of the community. Indeed, as we observed in Levandusky, a shareholder-tenant voluntarily agrees to submit to the authority of a cooperative board, and consequently the board may significantly restrict the bundle of rights a property owner normally enjoys.”
The court noted that the Business Judgment Rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings. In the context of cooperative dwellings, the Business Judgment Rule provides that a court should defer to a cooperative board’s determination “[s]o long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith.”
The Pullman decision held that courts should scrutinize the facts underlying a board’s decision if a shareholder-tenant can show that the cooperative acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose, or (3) in bad faith. These three exceptions to the business judgment rule balance protecting the interests of the entire cooperative community and the judiciary’s interest in protecting against the board’s possible abuse of its broad powers. The Pullman case established a two-phase process of reviewing a cooperative’s decision. In the first phase, the court must determine whether the cooperative’s action is entitled to business judgment deference. It is the shareholder-tenant’s burden to show that the board vote is not entitled to deference. The shareholder-tenant will satisfy that burden by showing 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.
After considering the hearing evidence, the pleadings, oral argument and memorandum of law of the respective parties, the court found that Schwartz and Otto did not meet their burden to show that the board had acted in bad faith or outside the scope of its authority, or in a way that did not legitimately further the corporate purpose. The court said that while Schwartz and Otto may have reasonably perceived that the board’s decision to limit parking spaces was peculiarly directed against them since they were the only shareholders who currently occupied two parking spaces, this alone did not support a finding of bad faith.
The court found that it was in the co-op’s interest to increase the number of parking spaces available to its tenant-shareholders, especially when there was more demand than supply. With a waiting list in existence, in the court’s view the determination to limit spaces to one per shareholder was objectively reasonable and clearly within the board’s business judgment prerogatives.
The court noted that Schwartz and Otto claimed a fee dispute regarding past parking fees. In particular, they alleged that Cooper Square, the respondent’s managing agent, unilaterally chose to raise their parking fees for their two parking spaces from $100 to $160 retroactive to September 1991 and by doing so created previously non-existent arrears. Schwartz and Otto attached to their petition a letter from Cooper Square pertaining to the arrears. This exhibit supported their contention, said the court.
In the absence of any evidence to rebut this claim either in the pleadings or in the hearing, the court found that Schwartz and Otto had proven their claim that there were no parking fee arrears for the period of September 1991 through and including April 1, 2003. The court found that Cooper Square made a claim for parking fee arrears, which it created by unilaterally and retroactively increasing Schwartz and Otto’s fees. It was noted that the respondents, by their letter to Schwartz and Otto, dated February 3, 2004, partially corrected their error by conceding that the alleged arrears did not support a notice of default under the proprietary lease agreement. They did not, however, set aside the determination of arrears. Although Cooper Square had the authority to take this action on the board’s behalf, the issue was in substance a billing error unrelated to Schwartz and Otto’s proprietary lease rights. The court, nevertheless, found the board’s determination through Cooper Square to unilaterally increase parking fees retroactively to be arbitrary and capricious. This action was improper and was annulled.
With regard to Schwartz and Otto’s claim that the board breached an agreement to abide by the expressed opinion of the shareholders at the special meeting of January 24, 2004, the court found this claim to be unsupported. There was no evidence that shareholders were notified that the special meeting was to be considered a binding referendum on the respondents. Furthermore, the terms of this alleged agreement, even if true, are indefinite and uncertain and cannot be binding or enforceable under a contract theory.
The court, however, did not find the claim to be credible. Rather, it would be much more plausible and persuasive that the respondents agreed to hear the shareholders’ views regarding Schwartz and Otto’s disputes and to take the shareholders’ opinion under consideration. This is consistent with the respondents’ letter to the shareholders, dated February 26, 2004. Once again, it was within the scope of the respondents’ authority to listen to the shareholders, and notwithstanding the shareholders expression of disapproval, to make a decision to adhere to its prior determination so long as they deemed it to legitimately further the co-op interest. The court found that this was what occurred. The board’s decision to limit parking spaces to one per shareholder while a waiting list for spaces exist was entitled to deference under the Business Judgment Rule and was neither arbitrary nor capricious. Schwartz and Otto’s request to enjoin enforcement of this decision was therefore denied.
The board also sought to recover reasonable attorney’s fees associated with their defense against Schwartz and Otto’s Article 78 proceeding. The court noted that it was well settled in New York that a prevailing party may not recover attorney’s fees from a losing party except where authorized by statute, agreement, or court rule. The board did not claim a right to attorney’s fees based on a statutory right or court rule. Rather, they relied on Paragraph 37 of the proprietary lease agreement as authority for their request for attorney’s fees. That provision pertained to default by the lessee and said: “If the Lessee shall at any time be in default hereunder and the Lessor shall incur any expense in performing acts which the Lessee is required to perform, or in instituting any action or proceeding based on such default, or defending or asserting a counterclaim in, any action or proceeding brought by the Lessee, the expenses thereof to the Lessor, including reasonable attorney’s fees and disbursements, shall be paid by the Lessee to the Lessor, on demand as additional rent.”
There was no dispute that Schwartz and Otto were not in default of any provision of their proprietary lease agreement. In fact, the board corrected itself and advised Schwartz and Otto by letter dated February 3, 2004, that their dispute over parking fee arrears was not a default of their lease agreement. Inasmuch as attorney’s fees are only authorized when the lessee was in default of the lease agreement, the court concluded that there was no authority or basis to award attorney’s fees to the respondents.
Comment: This is another case in the long line of decisions sustaining board action under the Business Judgment Rule when challenged by a shareholder. New York law is very clear that courts will grant broad deference to action by a co-op or condo board where the board acts within the guidelines of Levandusky and Pullman. Courts in New York do not usually second-guess board actions. However, the court here stopped short of awarding legal fees in favor of the co-op.
In Strax vs Murray Hill Mews Owners Corp., an appellate court made it clear that a co-op board member could not collect a brokerage commission for services to the co-op even without a clear and specific engagement to provide such services to the co-op.
In 1987, while serving as a member of the board of directors of the defendant co-op, Lisa Strax, the plaintiff attorney, and several other board members attended a bankruptcy auction of commercial restaurant space in the co-op’s building. She submitted a winning bid on co-op’s behalf, and then procured a prospective tenant for the commercial premises. The $91,000 real estate commission was paid by the co-op to Hampton Management, the building’s managing agent, in accordance with the governing management agreement. When Strax objected, Hampton agreed to share the commission equally with her.
Strax brought suit to recover the 50 percent commission retained by Hampton, as well as legal fees for her services in connection with submitting the winning bid and procuring the new tenant. At the initial jury trial held in 1993, the court dismissed plaintiffs Strax’s claim based upon an unpled defense of accord and satisfaction purportedly stemming from her acceptance of Hampton’s offer of half the commission. On a prior appeal, the court, by order entered December 6, 1995, reversed the dismissal order, reinstated the complaint, and directed a new trial, framing the relevant issues as whether “the services rendered by plaintiff in connection with the purchase and re-renting of the commercial space were [part of] her duties as a director and whether the services were assented to or ratified by defendant’s directorate.”
Following a five-day bench trial, the court resolved each of the framed issues in the co-op’s favor and dismissed the complaint. In a thoughtfully written decision, the court, pointed to, among other factors, the plaintiff’s own acknowledgment on cross-examination that at least some of her actions in connection with the brokerage deal were taken at her “own risk” in the “hope of acting as a broker,” expressly found that any brokerage services or legal work undertaken by Strax were rendered “in her capacity as a director and volunteer…in accordance with her fiduciary duties toward the board and cooperative.”
The court further found that “[a]t no time did the [defendant’s] board of directors assent or ratify any decision by [the board president] to approve a commission,” citing the absence of any board minutes or other credible showing of concerted board action on the matter. Underlying the trial court’s factual findings was its explicit assessment of Strax as a witness who was not “particularly credible or forthright” and its conclusion, based in part on plaintiffs “demeanor,” that her “current trial testimony appeared calculated to meet the demands” of the court’s decision on the prior appeal.
The ruling was based on the court’s favorable evaluation of the credibility of the testimony offered on the issue by defendant’s witness, Maidenbaum (a board member). It also stated skepticism over how the plaintiff’s recollection of the meetings had become “clearer” during the retrial begun in December 2000 than it was at her 1990 deposition when she could not recall “anything that was said about [her] commission” at the meetings. The court did not believe Strax’s statement that individual board members may have known of her “hope” to receive a brokerage commission at the time that the underlying lease transaction was consummated.
Inasmuch as the trial court explicitly and appropriately rejected Strax’s newly formed remembrance of the 1987 board meetings, there was no record support for a finding that her participation in the lease transaction was bargained for or ratified by the co-op, and not as the trial court reasonably found, gratuitously rendered by Strax in furtherance of her fiduciary duties as a director. To the extent that Strax argued that the court’s resolution of this issue was against the weight of the evidence, the court concluded that the argument lacked merit since it could not be said that the evidence bearing on the issue so preponderated in favor of plaintiff that the verdict could not be reached on any fair interpretation of the evidence.
The trial court’s detailed findings that Strax acted as a volunteer in her capacity as a director and without valid authorization to serve as an independent broker. The court quoted a prior case when it was held that: “It is the general rule that a director, assuming office as such without any agreement as to compensation, is presumed to render his official services gratuitously” and no basis was shown on the cold of the case record to disturb the trial court’s fact and credibility-laden determination that Strax had failed to overcome that presumption at the full and fair (re)trial of this long-pending litigation.
There was a dissent to the decision which argued that the issue on the appeal was whether the terms of the written commission agreement signed by the president of the co-op’s board of directors was ratified by the board’s decision to consummate the lease transaction procured by Strax. Since the dissenter found that the terms of the written commission agreement were so ratified and this justice would have reversed and granted judgment to Strax for $45,955.67. The dissenting opinion concluded that since the co-op received and accepted the benefit of Strax’s work and acknowledged the value by paying the commission to the managing agent who did not broker the lease transaction, it should have paid Strax the commission that she had earned.
Comment: Under New York law, attorneys admitted to practice are entitled to brokerage fees for acting as a broker in real estate transactions without specifically holding themselves out as a broker. Here, the attorney-board member may not have been recognized initially as seeking a commission, especially when that person served on the board without compensation. The confusion of the two roles could have been avoided if the board member had asserted from the beginning her intention to seek a commission for services that other board members could otherwise reasonably have assumed were being provided without an expectation of compensation.