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Does the Business Judgment Rule allow a board to violate its own rules?
AUTHORRichard Siegler and Dale J. Degenshein
PAGE #pp. 80-81
When a second-floor owner, Anne Haffey, asked Fred Dicker for permission to build a terrace above his apartment, he refused.
Does the Business Judgment Rule allow a board to violate its own rules? That was the main question in Fred Dicker v. Glen Oaks Vil. Owners Inc.
Glen Oaks Village is a Queens cooperative with more than 2,900 garden-style apartments in 134 two-story buildings spread over 110 acres. The co-op had a rule: a second-floor owner could construct a balcony if the first-floor owner granted permission. The rule was probably adopted because light and air in the first-floor apartments would be affected by construction of a balcony upstairs. The board could also modify or waive the rule on a case-by-case basis at any time.
When a second-floor owner, Anne Haffey, asked Fred Dicker for permission to build a terrace above his apartment, he refused. Dicker is an investor who owns eight units but does not live in any of them. The board stepped in, resolving that, in situations where a first-floor apartment is owned by an investor who does not intend to move in within the coming year, permission to build a deck or terrace will not be required. In reaching this decision, the board conducted an economic analysis and determined that the presence of a terrace had no impact on the value of first-floor apartments. Accordingly, the board allowed Haffey to build the terrace without Dicker’s consent.
Dicker then started an Article 78 Proceeding, which could annul the board’s decision if it was found to be arbitrary. The lower court discussed the Business Judgment Rule, which says that decisions of boards are given deference, provided those decisions are for the purposes of the cooperative, within the scope of the board’s authority, and made in good faith. Turning to the Article 78 requirements, the court determined that Dicker failed to show that the board’s decision was arbitrary or made in bad faith.
On appeal, the appellate court also cited the Business Judgment Rule but disagreed with the lower court. It looked to a long-standing principle, articulated by New York’s highest court in an unrelated matter: “The broad powers of cooperative governance carry the potential for abuse when a board singles out a person for harmful treatment or engages in unlawful discrimination, vendetta, arbitrary decision-making, and favoritism.”
Given that standard, the appellate court found that the board’s decision to dispense with the consent requirement was not protected by the Business Judgment Rule because the board had deliberately singled out Dicker and other shareholders who did not reside in their apartments. The appellate court annulled the board’s decision.
Decoding the Case
We cannot stress enough that the Business Judgment Rule does not give boards carte blanche. Boards may not act outside the scope of their authority, may not act in bad faith, and may not violate their own contractual obligations, including those set forth in the proprietary lease.
There are a number of cases that raise the type of “disparate treatment” discussed in this case – that is, whether a board can treat some shareholders differently than others. We have seen other appellate level cases where the court upheld the right of a board to treat disimilarly situated shareholders differently. In one case, one group consisted of resident-owners, and another included investor-owners.
A final question: would the appellate court have reached the same conclusion if the board had modified its rule under ordinary circumstances – not while the legal issue was pending between Haffey and Dicker? Boards have certain discretion, but we have found that to avoid the appearance of the board treating a shareholder disparately, it sometimes is preferable for a board to exercise its discretion when there is no specific matter before it. Although we cannot be certain as to how the court would have ruled had the modified rule already been in existence when Haffey decided to build her terrace, experience tells us that the rule might have been more likely to pass judicial muster.
For Dicker: Steven G. Legum
For Glen Oaks: Kaufman Friedman Plotnicki & Grun
Richard Siegler is counsel and Dale J. Degenshein is special counsel at Stroock & Stroock & Lavan.
The authors thank Zach Perron, a law student awaiting admission at Stroock, for his assistance.