Beatrice Lesser is a partner at Gallet Dreyer & Berkey. She worked with partner David L. Berkey on the Lapidus case.
Cooperatives, plagued by shareholders who repeatedly violate the proprietary lease or who create a continuing nuisance, now have an easier way to evict the objectionable shareholder. Several courts have upheld a cooperative’s right to terminate the lease and evict the offending shareholder without going to trial by instead using the “objectionable conduct” provision of the proprietary lease.
Cooperatives should use this lease provision to address long-standing or repeated serious breaches of tenancy obligations, such as excessive noise (from music to barking dogs), offensive odors emanating from an apartment, chronic failure to pay maintenance, or a shareholder’s commencement of baseless lawsuits against the cooperative, its board, or a shareholder’s neighbors. A cooperative that carefully follows the procedures set forth in the lease for an “objectionable conduct” termination can avoid the necessity of a full trial, where it must produce witnesses (usually reluctant neighbors and building employees) to testify against the offending shareholder.
Each cooperative’s proprietary lease is written differently, but a typical provision provides that the lease may be terminated by a vote of the board of directors or shareholders, or both, on the grounds that the shareholder engaged in objectionable conduct which was repeated after he was sent a notice that advised him of the nature of the complaint against him and the consequences if the conduct was repeated. Usually a super-majority vote (greater than 50 percent) of the board or the shareholders in favor of termination is required. In 2003, the Court of Appeals held that the Business Judgment Rule applies to a cooperative’s decision to terminate a proprietary lease for objectionable conduct, provided that the board follows the required procedures set out in its proprietary lease and acts in good faith and for a proper business purpose that serves the common interests of the cooperative’s shareholders. When that rule is applied, courts will not review the shareholder’s offending conduct to determine if he should be evicted. Unless the offending shareholder proves that the board or shareholders acted in bad faith (for example, a board member wanted to obtain the offending shareholder’s apartment) or that the cooperative failed to follow the procedures for an objectionable conduct termination (for instance, the number of votes did not add up to the super-majority required for eviction), or the board did not act for a proper business purpose, the courts will not interfere with the cooperative’s decision to evict the offending shareholder.
The cooperative 1050 Tenants Corp. had the misfortune of having Steven Lapidus as a shareholder. For over 15 years, Lapidus failed to pay maintenance for his three-bedroom Park Avenue apartment, claiming the cooperative was responsible for repairs. The cooperative was forced to commence multiple suits against him, each of which went on for years. Each time it sued, the cooperative incurred significant legal fees as Lapidus, a real estate lawyer, launched aggressive defenses – almost all of which he lost – and took multiple appeals all the way up to the Court of Appeals. Lapidus failed to pay maintenance unless the court ordered him to do so.
In addition, Lapidus had installed an illegal, water-cooled central air conditioning system in his prewar apartment, which leaked into his downstairs neighbor’s apartment. When Lapidus failed to repair the conditions causing the leaks and remove the illegal system, the cooperative brought suit against Lapidus to force him to do so, and the neighbor sued both Lapidus and the cooperative for the same purpose. The trial court ordered Lapidus to remove the air conditioning system and held him in contempt three times when he failed to do so. Gallet Dreyer & Berkey successfully represented the cooperative against Lapidus.
The law firm also counseled the 1050 board how to terminate Lapidus’s lease based upon his objectionable conduct. This is a drastic remedy because the shareholder does not get the opportunity to defend his conduct in court. It requires planning and preparation. Where the proprietary lease requires that the shareholders vote by super-majority to evict the offending shareholder, the board must educate the shareholders as to why their votes are required and then gather sufficient support, in person or by proxy, in order to obtain the super-majority vote required.
The co-op’s proprietary lease required both a super-majority vote of the board and of the shareholders. The cooperative prepared a detailed statement of Lapidus’s objectionable conduct and its effect, which was given to the shareholders (including Lapidus). The board collected proxies from those who could not attend the special meeting. Lapidus was given notice of the special meetings and was allowed to attend with his own attorney. He threatened to sue any shareholder who voted to terminate his tenancy. The board protected its shareholders by enacting a resolution providing that the cooperative would indemnify any shareholder so sued. The board voted unanimously in favor of termination. At the special shareholders’ meeting, Lapidus’s attorney again threatened to sue anyone who voted to evict Lapidus. Despite this, 98 percent of the shares were voted in favor of terminating Lapidus’s lease. The board then issued a notice to Lapidus terminating his lease, but he did not surrender his apartment.
The cooperative brought an “ejectment action” to evict Lapidus. The trial court granted the cooperative summary judgment evicting Lapidus without the need for a hearing or trial. The appellate division resoundingly affirmed. The trial and appellate courts vindicated the co-op, holding that the cooperative followed all appropriate procedures. They rejected Lapidus’s claim that the co-op violated law by offering to indemnify shareholders who might be sued for their vote to evict. The Court of Appeals, the state’s highest court, denied him permission to appeal further.
Lapidus vacated his Park Avenue apartment the day before the sheriff was scheduled to arrive, but refused to give possession to the cooperative. The sheriff performed the eviction and delivered lawful possession to the cooperative. As permitted by the proprietary lease, the cooperative sold the apartment and deducted all of its expenses, including legal fees incurred for the eviction and the sale, from the proceeds of sale. The entire process, including the termination notices, litigation, and sale, took approximately four years, but the building removed a problem tenant forever.
The cooperative was successful because the board was committed to pursuing the objectionable conduct eviction. The cooperative expected the worst from Lapidus and got it, and the legal fees and related expenses mounted. The cooperative expected that it would sell Lapidus’s apartment and be reimbursed from the proceeds of the sale, but it took no chances, forcing Lapidus to pay “use and occupancy” every month until the apartment was sold. Ultimately, the cooperative was paid all sums due to it by Lapidus, amounting to more than $1 million, including maintenance, use and occupancy, late fees, attorney’s fees, all costs of sale, and pre- and post-judgment interest.
Other cooperatives faced with a shareholder who repeatedly violates his tenancy obligations should assess whether the conduct is sufficiently troublesome to warrant an objectionable conduct termination. The term “objectionable” is not clearly defined. One incident of improper subletting and even multiple failures to pay maintenance requiring the start of multiple non-payment proceedings, may not be sufficient to be “objectionable conduct” that would result in a super-majority vote to terminate a fellow shareholder’s proprietary lease.
The board should keep careful records of shareholder misconduct and consult with its attorney. Where the shareholder is causing a nuisance and disturbing his neighbors or building employees, then the cooperative’s attorney should speak directly with those having firsthand knowledge of the offending conduct, be they building staff or other residents, to get the specifics of the complaints. It will usually be necessary to ask shareholders and staff to keep logs of the improper conduct – dates, times, duration, and description of the conduct.
Counsel should assess whether the offending shareholder’s conduct is serious enough to warrant attempting an objectionable conduct termination. Even though the courts defer to the board’s exercise of its business judgment, if the facts indicate that the board was being abusive, the shareholder could claim that the board acted in bad faith when terminating the proprietary lease or that no proper corporate purpose was served in evicting the shareholder.
Counsel should prepare the default notice to the shareholder that is required by the proprietary lease. The notice should include a warning that if the offending conduct is repeated, the cooperative may begin an objectionable conduct holdover pursuant to the lease. The notice should describe the improper conduct in detail, including dates and times (information obtained from the logs or other records). It may include copies of prior notices or prior court determinations if any exist.
The notice to the shareholder should state that any response to the notice must be sent to counsel. Counsel should notify the board, any residents who were involved (regardless of whether logs were kept), building staff (if relevant), and the managing agent that they should not communicate with the shareholder; if approached, they should say that they were advised by the cooperative’s attorney not to communicate with him and that he should contact the lawyer who sent him the notice.
One of the reasons for this advice is that the offending shareholder might seek to enlist a sympathetic board member hoping to convince others not to vote for eviction. Regardless of what the board member actually says in response, the shareholder may later claim that the board member assured him that all would be forgiven and he will not be evicted, or even that he was told that the vote was not conducted properly. No board member should have a private conversation with the shareholder once the decision has been made to send the default notice. Finally, if there is any danger of retaliation to staff, board members or residents, they should be advised that if they feel threatened, they should call 911. People need to be reminded of their right to be free from harassment.