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When a co-op decides to evict a shareholder for objectionable conduct, is it the board or the court who rules ultimately?
Most boards are familiar with the Pullman decision that allows them to evict objectionable shareholders. 1855 7th Ave. Housing Dev. Fund v. Wigfall addresses these principles again.
Objectionable Conduct – Again
Most of us are familiar with the decision in 40 West 67th Street v. Pullman – that when a co-op board or shareholders (depending on the proprietary lease) vote to evict a shareholder based on “objectionable conduct,” the court will defer to that decision on the theory that the Business Judgment Rule allows the board – and not the courts – to make that decision. These principles were recently addressed in 1855 7th Ave. Housing Dev. Fund v. Wigfall.
Lethea Wigfall and her father owned shares in 1855 Seventh Avenue HDFC. She lived in the apartment with at least five other people, including her children. There were claims that Wigfall and occupants of her apartment urinated and defecated in the hallways and elevators, loitered, smoked, sold drugs, and had sex in the stairwells – incidents that were caught on the building’s security cameras. After supposedly 744 of these incidents (notices had been previously sent to Wigfall about them), the co-op served a comprehensive notice detailing the conduct and inviting Wigfall to a meeting with the board so that she could present her side of it. After hearing Wigfall, the notice said, the board would vote on whether to terminate her tenancy because of objectionable conduct. The meeting was held, Wigfall appeared and, after the meeting, the board voted unanimously to terminate Wigfall’s proprietary lease. When Wigfall failed to leave, the board began an eviction action.
The board moved for summary judgment and the court decided there was an issue of fact, i.e., whether the board had somehow reinstated Wigfall’s tenancy after terminating it. As a result, the court decided – consistent with other cases – that there should be a two-pronged approach. First, Wigfall had the burden of showing why the court should not defer to the board’s decision to evict her. If she was successful, the court would hold a second phase of the trial where the court would make its own evaluation of whether Wigfall’s conduct was objectionable.
On the first phase of the trial, six witnesses testified, showing that the proprietary lease and house rules prohibited certain behavior, that the building staff kept a log of the behavior of Wigfall and her occupants, and that nothing was entered into the log until it was confirmed by security video footage. The court analyzed many of the cases decided after Pullman and concluded that the co-op met each of the three elements of the Business Judgment Rule – that the board acted for the purposes of the co-op, within the scope of its authority and in good faith.
The court specifically mentioned and rejected one of Wigfall’s claims – that she was denied due process because she was not told she could have a lawyer with her at the board meeting. The court said there was no case law that required a co-op to tell a shareholder they could have a lawyer present at a meeting and that, because this was not a criminal case, there was no “right” to have a lawyer present.
Ultimately, because Wigfall failed to show that the Business Judgment Rule should not be applied, the co-op was awarded possession without having to hold a trial on the specific allegations of misconduct. The court also said the co-op had the right to seek attorneys’ fees.
After analyzing a number of post-Pullman decisions, the court laid out the procedure courts should use when there is an issue of fact that eliminates the possibility of summary judgment. The court was given a copy of the co-op’s proprietary lease and house rules; there was testimony about the procedure put in place by the board in order to record the misconduct (including entry into a log book and review of security footage); and Wigfall had received earlier notices telling her that the behavior had to stop.
With this information, the court did not need to satisfy itself that the conduct was objectionable, but instead found that the Business Judgment Rule applied so that the court was bound to defer to the board’s decision. As always, it is important to remember that one of the key factors of the Business Judgment Rule is that it is the one challenging the board’s decision who has the burden of showing that what the board did was improper. Here, Wigfall was unable to successfully challenge the procedure the board used to evict her.
Silversmith & Associates Law Firm, PLLC
Himmelstein, McConnell, Gribben, Donoghue & Joseph
Follow-Up: Remember This One?
In our September 2013 “Case Notes” called “It Started with a Lonely Cat,” we reported the case of 433 Sutton Corp. v. Broder. Without going back to all the details of the case – the co-op entered an apartment and then sued a shareholder because of the stench from a cat that had been left alone – the intermediate appellate court, in a 3-2 decision, found that even if the shareholder breached the proprietary lease, the co-op acted improperly by starting an action before giving the shareholder time to cure. Accordingly, the court decided the shareholder was entitled to attorneys’ fees from the co-op. The highest appellate court in New York reversed so that the co-op does not have to pay the shareholder’s fees.
The authors wish to thank Josie Morris, an associate at Stroock & Stroock & Lavan, who assisted in the preparation of this article.
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