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The Son Also Inherits

When a shareholder dies, most proprietary leases contain a provision allowing an assignment of the shares and lease to a financially responsible member of the deceased’s family. When the board in Koeppel v. 130 East End Avenue Tenants Corp. refused to permit a shareholder’s son to acquire the shares, the son sued. Thomas Koeppel’s father bought an apartment at 130 East End Avenue in 1972. After he died in 2016, the apartment was in disrepair and required substantial renovations. Although Thomas Koeppel had never lived in the apartment, his father had left it to him in his will. The proprietary lease provided that the board may not “unreasonably withhold” consent to an assignment of the shares that a shareholder made in his will, provided the assignment was to a “financially responsible member” of his immediate family.

Thomas Koeppel submitted an application to the board. According to a board member, the application raised financial concerns. Koeppel was retired and had earned less than $15,000 for the past few years. He claimed he would soon receive additional income from family real estate holdings, but the board was unable to determine how Koeppel computed his share of the business or the amounts he anticipated he would receive. In addition, the board was concerned that the estate would have to pay taxes, which would affect Koeppel’s financial position. Finally, renovations to the apartment were expected to cost more than $185,000.The board asked Koeppel for additional information, particularly about the family investments, but Koeppel declined, saying that he had already provided all the information he could. Even though the board was concerned about Koeppel’s financial picture, he was interviewed. It appears that what was said did not alleviate the board’s concerns, and Koeppel’s application was denied.

Koeppel asked that the board reconsider, and he offered to put two years of maintenance payments in escrow as security. The board didn’t budge. Koeppel then sued, asking that the court issue an order declaring that he was financially qualified to own the apartment. Among other things, he claimed that he had been paying maintenance on the apartment out of his personal funds and that all payments were made on time. He asserted that he had substantial assets and income and that the board’s rejection was actually grounded in its animus toward his father, with whom the board had had a tense relationship.

Koeppel made a motion for an order permitting him to live in the apartment while the action was pending. The court explained that in order to get such injunctive relief, Koeppel would have to show that he probably would succeed on the merits, that he would face irreparable harm if there was not an injunction, and that the financials were in his favor. Koeppel claimed he would succeed on the merits because he had a net worth far in excess of the value of the apartment. He also claimed that the board had been unreasonable because it did not, in its letter rejecting Koeppel’s application, state the basis for his rejection. While the court acknowledged the reasonableness standard, it also looked at the affidavit of a board member that set out the board’s concerns and added some evidence detailing why the board did not believe Koeppel’s finances were sufficient to meet the standard of a “financially responsible” family member entitled to own the apartment. The court determined that Koeppel did not demonstrate that he was likely to succeed on the merits.

While the court could have stopped its inquiry there, it found that Koeppel’s claims of irreparable harm were more in the nature of emotional distress. Koeppel expressed that this was a unique and beautiful prewar building in a prime location. He argued that if he could not live there, he would be forced to sell an apartment that had been in the family for 40 years, and which was of great sentimental value. Finally, Koeppel explained that he had not renewed his lease, and he feared his landlord could evict him at any time. Noting that the building is indeed in a prime location, the court was not persuaded by Koeppel’s claims as, among other things, he never lived in the apartment. Moreover, as more than $185,000 of renovations were required, it doubted that Koeppel could move in immediately. The court denied the relief sought by Koeppel and determined that if it is ultimately decided he is damaged, he could be compensated monetarily. An injunction was not appropriate.

Reading the Ruling

The court here addressed a provision, typically found in proprietary leases, which is prone to create problems. Certainly, financial wherewithal is important. While not before the court in this action, there can be circumstances in which a family member is financially responsible, but the board may rightly want to reject their application. The proposed shareholder may be litigious, evicted from a prior building because of disruptive or objectionable conduct, or there is something else in his or her history that would make for an undesirable neighbor. It is one thing when an apartment passes, upon death, from one spouse to the other when both have lived in the building. It is another when this provision allows an estate to introduce a completely new individual into the mix. It is for this reason that many boards, when considering whether to propose lease revisions to their shareholders, often consider revisions to this paragraph.
Dale J. Degenshein is special counsel at Stroock & Stroock & Lavan.

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