The latest in the emerging line of cases applying the so-called “Pullman Doctrine” – which permits a co-op to terminate a tenancy because of objectionable conduct – has caught another victim. In the case, 1050 Tenants Corp. v. Lapidus, it was a lawyer who engaged in a “scorched earth” style of litigation for more than a dozen years in dealing with his co-op.
This was an action by a co-op against two of its shareholders, Steven R. Lapidus and his wife Iris, for ejection, use and occupancy, and attorney’s fees. The co-op moved for summary judgment granting it the relief sought in the complaint and the Lapiduses cross-moved for summary judgment to dismiss the complaint in its entirety.
Section 34(e) of the Lapiduses’ proprietary lease with the co-op provided that a lease may be terminated and the lessees may be required to surrender their apartment. To do that, the co-op had to determine, upon the affirmative vote of four-fifths of its board and the holders of two-thirds or more of its shares, that, “because of objectionable and undesirable conduct” on the part of the lessees, their tenancy “is undesirable.”
At a special meeting held on December 8, 2004, the co-op’s board unanimously voted in favor of a resolution terminating the Lapiduses’ tenancy on the ground that they had engaged in objectionable and undesirable conduct. The Lapiduses, who were given prior notice, were represented at the meeting by counsel. The Lapiduses were also given notice that, on May 24, 2005, there would be a special meeting of the shareholders to vote on the resolution. At that meeting, where counsel again represented the Lapiduses, the shareholders of 98 percent of the shares voted in favor of the resolution. By notice dated May 27, 2005, the co-op terminated the Lapiduses’ lease, effective June 15, 2005. This action was brought after the Lapiduses refused to vacate and surrender their apartment.
The co-op’s termination of the Lapiduses’ lease was the culmination of almost 12 years of constant litigation between the parties involving the Lapiduses’ repeated failure to pay all of the maintenance they were charged and their improper installation of an air conditioning system that caused water damage to the apartment below. The record before the court revealed that between 1993 and 2004, the co-op had brought at least six nonpayment proceedings in civil court against the Lapiduses. In each of these cases, the Lapiduses argued that they were justified in withholding their maintenance and were entitled to an abatement of their arrears because of inadequate conditions in their apartment and in the building.
In two of these cases, the parties settled their dispute. In one of the cases, the court, by decision dated April 18, 1993, held that the Lapiduses were not entitled to any abatement and found them to be in arrears totaling approximately $43,834. The Lapiduses’ appeal of this decision was unsuccessful. When the co-op sought attorney’s fees at a separate hearing, based upon the court’s direction that such a claim be severed from the co-op’s claim for rent arrears, the Lapiduses argued that the attorney’s fees claim had not been properly severed and was thus lost.
After the civil court rejected this argument, the Lapiduses appealed and the decision was affirmed. The Lapiduses also brought an unsuccessful proceeding to prohibit the court from holding any such attorney’s fees hearing. Following a hearing, the civil court, by decision dated October 3, 1996, found that the co-op was entitled to attorney’s fees in the amount of $336,228, plus interest. In its decision, the court found that the Lapiduses had engaged in “needless and groundless pre-trial motion practice” and that the co-op had achieved total victory and completely prevailed in the litigation with the exception of a few minor legal skirmishes.
The court went on to find that the Lapiduses had acted with “obduracy” in that “Every conceivable motion was made to delay or derail the underlying proceeding, and that their aggressive tactics, which they were able to afford because Steven Lapidus is an experienced real estate lawyer who could rely on the resources of his law firm to avoid incurring paying out-of-pocket legal expenses, were designed “to economically force the co-op to its ‘knees’.” On appeal, the award of attorney’s fees was reduced to $216,000, plus interest. Ultimately, by stipulation between the parties dated April 25, 2000, the Lapiduses agreed to, and did, pay roughly $328,000 in attorney’s fees arising out of the nonpayment proceeding brought in civil court.
In the meantime, in 1995, the co-op brought another nonpayment proceeding against the Lapiduses for about $55,680. By a decision dated December 5, 1997, the court, after holding a trial that followed what the court characterized as “extensive motion practice,” awarded the co-op a judgment of $55,681.81. In its decision, the court found that the Lapiduses were entitled to a rent abatement of $3,340.91. Thereafter, the court, upon the co-op’s application, awarded the co-op $15,226.18 for pre-judgment interest and $115,000 in attorney’s fees. On appeal, the amount of attorney’s fees was reduced to $75,000.
In 1999, the co-op brought another nonpayment proceeding, which the parties settled by stipulation, dated April 20, 1999. In the stipulation, the Lapiduses agreed that they owed maintenance and other charges amounting to roughly $16,100 and the co-op agreed to credit the Lapiduses’ account $10,000 for repairs in the Lapiduses’ premises. In this stipulation, the Lapiduses agreed that they would not thereafter withhold maintenance until they had first complied with certain specified procedures.
In 2004, the co-op brought yet another nonpayment proceeding against the Lapiduses in which the court found that they had failed to follow the procedures set forth in the April 20, 1999 stipulation and, on September 2, 2005, issued a judgment against them for $62,380.
Finally, the tenant in the apartment below the Lapiduses brought a nuisance action in supreme court against the Lapiduses and the co-op claiming that the water-cooled air conditioning system that the Lapiduses had installed in their apartment without prior permission had caused water to leak into his apartment, resulting in substantial property damage.
On September 30, 2002, the parties entered into a stipulation of settlement, “so ordered” by the court, which required that the Lapiduses disconnect the two air conditioning units in their apartment from the building’s water supply and then cap the supply and the return piping on their respective risers. On February 4, 2003, upon the co-op’s motion, the court found the Lapiduses in contempt because of their failure to do this. The court directed that the Lapiduses comply with the stipulation.
Thereafter, the co-op brought a second motion for contempt, claiming that, although they disconnected the air conditioning units from the building’s water supply, the Lapiduses had failed to cap three of the four pipes serving the units at their respective risers, thereby increasing the danger that the old branch lines would leak into the apartment below.
By order and judgment entered October 29, 2004, the court, after a hearing, found the Lapiduses once again in contempt of court. In the judgment, the court vacated the stipulation, issued a permanent injunction directing the Lapiduses, to remove the air conditioning system, which is the subject of this action from their apartment, and awarded the co-op attorney’s fees, disbursements that and other costs that they incurred in the action.
The court’s review of the co-op’s termination of the Lapiduses’ lease was governed by the principles set forth in Matter of Levandusky v. One Fifth Ave. Apt. Corp. (1990) and 40 West 67th Street v. Pullman (2003). In Levandusky, the Court of Appeals held that a co-op’s promulgation and implementation of bylaws, proprietary lease provisions, and policies are governed by the “Business Judgment Rule,” which limits a court’s inquiry to whether the challenged actions were (1) authorized, (2) taken in good faith, and (3) in furtherance of the corporation’s legitimate interests. In Pullman, the Court of Appeals said that the Business Judgment Rule was applicable to decisions by a co-op to terminate a tenancy because the tenant had engaged in objectionable conduct making his or her tenancy undesirable.
Here, the Lapiduses argued that the termination of their tenancy was unauthorized because the conduct on which it was based was not the type of objectionable conduct that falls within the scope of Section 34(e) of the Lapiduses’ proprietary lease. As already noted, this section provides that a lease may be terminated if the co-op should determine that a lessee’s tenancy is undesirable because of objectionable and undesirable conduct. It goes on to provide, in parentheses, that to repeatedly violate or disregard the house rules or to permit a person of immoral character to enter or remain in the building “shall be deemed to be objectionable or undesirable conduct.”
The Lapiduses contended that this parenthetical statement was intended to provide an exclusive definition of what constitutes “objectionable or undesirable conduct” under section 34(e) and that since it clearly did not apply to their conduct, the co-op was without authority to terminate their tenancy.
The court disagreed. In its view, there was nothing in the parenthetical statement that suggested that it was intended to provide anything more than specific examples of objectionable or undesirable conduct. Indeed, if the drafter of the lease intended to limit the scope of the provision by so confining the broad phrase “objectionable or undesirable conduct,” the court said that it would not have placed such a definition in a parenthetical sentence that employed no language indicating any exclusivity.
The Lapiduses also argued that, as a matter of public policy, the co-op should not be permitted to terminate a tenancy based on objectionable or undesirable conduct where such conduct only involved a tenant’s attempt to obtain habitable conditions in an apartment and building through the use of the courts. The record, however, indicates that for more than a decade, the Lapiduses repeatedly withheld maintenance, which led to almost constant and unsuccessful litigation with the co-op.
In addition, the Lapiduses’ unreasonable refusal to eliminate, at little cost, the leakage from their air conditioner (which was causing damage to the apartment below and the ensuing litigation) unnecessarily burdened the co-op with yet additional litigation. The Lapiduses did not cite any authority which suggested that it was against public policy for a co-op to determine that a shareholder’s tenancy should be terminated as undesirable where, over a 12-year period, the shareholder refused to remove a nuisance, repeatedly withheld rent without legal justification and caused the co-op to engage in almost constant litigation.
The Lapiduses also argued that the shareholder vote on the resolution terminating their tenancy was illegal because, in violation of Business Corporation Law Section 609(3), the board agreed that the co-op would indemnify and hold harmless any shareholder who voted in favor of the resolution against any claims thereafter asserted by the Lapiduses.
The court decided that this argument was also without merit. Section 609(3) provides that a shareholder shall not sell his vote to any person for a sum of money or for anything of value. This provision merely prohibited a shareholder from obtaining a profit in exchange for his vote. In this respect, a shareholder did not profit from being indemnified against any claim arising out of his or her vote and, by offering such indemnification, the board did not provide an incentive to vote in favor of the resolution. Rather, it merely eliminated a disincentive. Thus, the court held that the board did not act in violation of section 609(3). The court therefore found that the co-op was authorized to terminate the Lapiduses’ tenancy on the asserted grounds.
As to bad faith, the Lapiduses argued that the co-op had discriminated against them by using their installation of an air conditioner as a basis for terminating the lease when, in fact, other apartments in the building had installed air conditioners without permission to do so. Irrespective of whether other tenants had installed air conditioners without prior permission, it was entirely proper, the court said, for the co-op to partially base its decision to terminate the Lapiduses’ lease on their refusal to remove the air conditioner when it was found to have caused water damage, their exposure of the co-op to further litigation, and their failure to comply with the settlement stipulation.
Noting that the co-op had suggested that it may rent the Lapiduses’ apartment at a fair market price in excess of the monthly maintenance that would otherwise be charged, the Lapiduses also argued that the co-op’s termination of their lease was a bad faith attempt to obtain an apartment that might be used to increase the building’s revenue. There was, however, nothing in the record that indicated that the co-op’s reason for terminating the Lapiduses’ lease had anything to do with increasing the building’s revenue. The court therefore found that there was no evidence that the co-op’s termination of the Lapiduses’ lease was made in bad faith.
Finally, the court noted that a number of the arguments that the Lapiduses had made in support of their contention that the co-op’s actions were unauthorized and made in bad faith could also be interpreted as suggesting that the termination of their lease was not undertaken in furtherance of the co-op’s legitimate interests. Since the court had rejected these arguments and since the Lapiduses had not asserted any other arguments on this issue, the court found that the termination of the Lapiduses’ lease was undertaken in furtherance of the co-op’s legitimate interests.
Thus, all three prongs of the Business Judgment Rule were satisfied and the court was required to defer to the decision of the co-op to terminate the Lapiduses’ tenancy.
The Lapiduses, however, raised two procedural arguments against an order granting the plaintiff’s request for ejection. First, they argued that the co-op’s action was barred by the six years statute of limitations applicable to breach of contract claims because many of the grounds for terminating the lease occurred more than six years prior to the start of the action. The court said that the Lapiduses were mistaken. The termination of their lease was not based on their breach of contract but on the resolution finding that they were undesirable tenants. The cause of action for ejection accrued when the lease was terminated on June 15, 2005. The action was therefore timely.
The Lapiduses also argued that, by continuing its 2004 nonpayment proceeding against them after the termination of the lease on June 15, 2005 and obtaining a money judgment that included rent through the beginning of September 2005, the co-op waived its right to bring this action. The court said that it was true that the start of a nonpayment proceeding vitiates a holdover proceeding since the former acknowledges the continuation of a tenancy by seeking to enforce its terms whereas the latter requires a prior termination of the tenancy.
However, where a nonpayment proceeding was brought before a landlord’s decision to terminate a lease, there is nothing inconsistent about the landlord’s attempt to terminate the tenancy while continuing the nonpayment proceeding, the court said. The fact that an event occurs that the landlord believes terminates the tenancy while a nonpayment proceeding is pending, hardly requires that the landlord discontinue the pending proceeding. The landlord simply had to be certain that, after the attempted termination of the lease, he did not make any representation or assert any argument in the nonpayment proceeding that suggested that the lease was still in effect.
In this respect, the Lapiduses have not provided any evidence that the co-op made any such representation or argument. On the contrary, the co-op claimed that it had advised the court of its decision to terminate the Lapiduses’ tenancy. The Lapiduses had not disputed this assertion.
Moreover, there was no significance to the fact that the money judgment issued by the civil court on September 2, 2005 included monies due up to and including September 5, 2005. Under the law, a landlord may accept rent after the start of a holdover proceeding without waiving its right to assert that the lease had been terminated. If a landlord may accept rent after initiating such a proceeding, the court said that a civil court could surely issue an order in a pending nonpayment proceeding directing the payment of monies which became due after the start of the holdover proceeding. Under the circumstances, the co-op’s motion for summary judgment ejecting the plaintiffs had to be granted.
In its second cause of action, the co-op sought the attorneys’ fees and costs that it had incurred in this action through the date of eviction. The co-op was clearly entitled under the lease to recover these expenses said the court. However, the co-op was not entitled to recover the expenses that it allegedly incurred in preparing and conducting the special meetings at which the board and the co-op’s shareholders voted to terminate the Lapiduses’ tenancy. There was nothing in the lease that entitled the co-op to any such expenses.
In its third cause of action, the co-op sought rent and occupancy through the date that the Lapiduses vacated the premises at a rate reflecting the fair market rental value of the apartment. Alternatively, in the fourth cause of action, the co-op sought to recover the maintenance and electric charges normally due under the lease. The court declined to grant rent and occupancy as sought under the third cause of action.
After the surrender of the Lapiduses’ shares and their departure from the premises, the court said that it would be incumbent upon the co-op to sell the shares in a reasonable and expeditious manner, to apply the monies obtained through the sale to any monies owed by the Lapiduses and to then distribute the balance to them. The co-op should not be encouraged to hold onto the shares in order to obtain additional revenue in the form of rent in excess of the maintenance, which would otherwise be due under the proprietary lease. Nor should the co-op be given a windfall arising out of the termination of the Lapiduses’ lease.
The court noted that the co-op was entitled to recover the expenses it incurred in leasing the apartment. Under the circumstances, the court was persuaded that the co-op was only entitled to use and occupancy from the Lapiduses in an amount equal to the maintenance and additional rent, such as electric charges, that would normally be due. The third cause of action was therefore dismissed and summary judgment on the fourth cause of action was granted.
Since the co-op had already obtained a money judgment in civil court for the equivalent of maintenance and additional rent due through September 5, 2005, any money judgment entered in this case under the fourth cause of action should only include the period from September 6, 2005 until the date that the Lapiduses vacated the premises. Accordingly, the co-op’s motion for summary judgment was granted with respect to the first, second, and fourth causes of action. The motion was otherwise denied. The Lapiduses’ cross-motion for summary judgment was granted with respect to the third cause of action and this cause of action was dismissed. The cross-motion was otherwise denied.
Comment: The objectionable and undesirable characteristics of Lapidus appear self-evident. His dispute with the co-op has become a cause celebre in the co-op legal community. Here, the co-op properly followed the Court of Appeals-mandated requirements under both the seminal Levandusky case and its Pullman progeny, leaving the court little choice but to approve the co-op’s termination of the Lapidus tenancy for objectionable conduct. Increasingly, Pullman should be seen as a real wake-up call for any co-op shareholder who acts in an outrageous anti-social manner.