Co-op boards wield immense power – within limits. For instance, boards can reject the assignment, transfer or sale of an apartment for any or no reason, as long as that rejection is not based on illegal discrimination – except when a surviving spouse receives an apartment after the death of his or her spouse. In addition, if the cooperative corporation has a flip tax (or transfer fee), it is common for the surviving spouse to be exempt.
Another common familial exception was the subject of Olcott v. 308 Owners Corp. The proprietary lease at this Upper East Side co-op stated: “(I)f the Lessee shall die, consent shall not be unreasonably withheld to an assignment of the lease and shares to a financially responsible member of the Lessee’s family (other than the Lessee’s spouse, as to whom no consent is required).”
The apartment in question was originally purchased in 1994 by Bernard Olcott, who never moved in but purchased it as a residence for his son, James, the plaintiff. James and his wife lived in the apartment for decades, and when Bernard died in 2006, the apartment became the property of the Estate of Bernard Olcott. James continued to live in the apartment. All was quiet for more than a decade. Then, in 2017, James submitted an application to management for the transfer of the apartment to him from his father’s estate.
Two months after the application was submitted, the cooperative’s transfer agent sent a letter to James informing him that his application was denied. This is particularly interesting since the application was accompanied by a letter from the property manager stating that James had resided in the building for many years, “always” paid his maintenance on time and “always” abided by the cooperative’s house rules.
After rejecting James’s application, the board commenced an eviction proceeding, claiming that the estate was subletting the apartment to James in violation of the lease. James filed suit to prevent the co-op from evicting him, his wife and his son and to prevent the co-op from issuing a lease – and the shares allocated to the apartment – to anyone else.
James took the position that the board was acting unreasonably. The application showed that he had a nearly perfect credit score of 844, net assets of over $1.6 million and an annual income of approximately $150,000 (though some of this was disputed by the co-op). While the board might normally have the right to determine who can buy into the cooperative, his situation was different. As noted, the co-op’s proprietary lease stated that the board could not unreasonably withhold the transfer of shares to a financially responsible member of a decedent’s family.
The court sided with James and stopped the eviction proceeding. In doing so, the court found that James demonstrated the likelihood of winning the case once it was heard in its entirety, since the court held that the board was unreasonable in finding that he was unqualified financially. The court noted that a decision by the board of a cooperative corporation is typically not second-guessed by a court – by virtue of the longstanding business judgment rule. However, since the lease stated that board approval could not be “unreasonably withheld,” the business judgment rule no longer applied and the court was able to look into whether the board was being reasonable. As expressed by another court and echoed by this court, that provision of the lease imposed “a heightened standard of reasonableness” on the board.
The court agreed with the board’s argument that there might have been some issues with the paperwork submitted by James. Perhaps James was not as financially stable as he had indicated. However, the court looked at the entire financial picture and determined that after reviewing his finances, net assets, credit score and longstanding history with the building, the board was being unreasonable.
The decision was appealed, but the Appellate Division determined that the original court was correct, and that even if the board was correct about the discrepancies in James’s finances, one could not ignore that James and his family had lived in the building for more than 25 years, he was current on his maintenance and he had an “undisputed” history of payment.
Consider All of the Facts
There are two lessons in the story of the Olcotts. The first is that one must consider the precise language of the proprietary lease, and if a provision contains the word “reasonable,” the protection afforded by the business judgment rule is lost, and the courts will review the board’s decision and make its own decision based upon what it believes to be reasonable.
The other lesson is more abstract. In this case, a man and his family had lived in a co-op apartment in his father’s name for many years, without incident and without a history of arrears. Suddenly, there is an issue about whether he would be worthy of being a shareholder. Is a judge really going to evict the family? Boards must consider all of the facts. What is legally correct and what is fair given all of the facts are often two different things. And if the matter lands in court, a judge, who is only human, may make a determination based on what’s reasonable rather than on what’s purely legal.
For 308 Owners Corp.: Gary Ehrlich
For James Olcott: John Malley
Andrew P. Brucker is a partner at the law firm Armstrong Teasdale. The statements and views in this article are his own and not necessarily those of the firm.