Robert D. Tierman in Board Operations on January 28, 2014
A. There are two main courses of action to consider, each of which is potentially potent but not without possible pitfalls. The first is an "objectionable conduct" termination of the offending shareholder's proprietary lease, following the 2002 New York State high court case of 40 West 67th Street vs. Pullman. If available and done properly, this could lead to eviction of the shareholder and the sale of her apartment, with the proceeds first applied to any amounts due to the co-op, including attorneys' fees.
Given the stakes to the shareholder, however, the court indicated that courts must "exercise heightened vigilance" in examining whether the board's action meets the standards of the Business Judgment Rule, deemed applicable to co-op board decision-making in the groundbreaking case Levandusky v. One Fifth Ave. Apt. Corp.
Simply put, a co-op can terminate a shareholder's proprietary lease by this route provided that the shareholder cannot establish that the board acted:
There are at least two additional considerations. The Pullman court seemingly decided to defer to the co-op to make the lease-termination decision in part because the court was impressed that all shareholders in attendance at a meeting (constituting shareholders owning three-quarters of the co-op's shares) voted in favor of the termination. That shareholder vote occurred because that co-op's proprietary lease demanded it.
Safest Course: Hold Shareholder Vote
Most leases require only board (and not shareholder) vote for an objectionable-conduct termination, and a subsequent case of the New York Appellate Division, Trump Plaza Owners, Inc. v. Weitzner, held (though without discussion) that this is good enough. I have some reservations about whether New York's high court would agree, which presents the vexing problem about whether a co-op considering an objectionable-conduct termination should seek shareholder approval, even if the lease does not require it. This would eliminate the possibility of leaving the door open to an appealable issue that could go against the co-op after years of expensive litigation.
The other consideration is that it is well accepted that the co-op must give the shareholder facing objectionable-conduct termination a full and fair opportunity, with the assistance of an attorney, to hear and respond to the co-op's charges. This was implicit in Pullman, because the shareholder was notified of the shareholders' meeting at which the co-op conducted the termination vote.
But for board-only terminations, the co-op must make sure to properly invite the shareholder to attend the meeting, with an attorney, and present a defense before the vote. Indeed, even for terminations requiring shareholder approval, I believe that the board should consider inviting the shareholder to make a presentation first to the board in advance of the board's vote to ask the shareholders to approve the termination. They should then meet again at the shareholders' meeting before their vote.
If the co-op would like to avoid a shareholder vote (assuming one is required), it could forgo objectionable-conduct termination and instead declare the shareholder in default of the proprietary lease (including some house rules) and provide the shareholder with the standard 30 days to cure, in the absence of which the co-op could terminate the lease.
One deficiency of this route, however, is that, under New York State Real Property Actions and Proceedings Law 753(4), even after the court awards the co-op legal possession of the apartment, the shareholder would have at least 10 days to cure the default and retain possession. One further consideration is that, in some cases, it might make sense for the co-op to proceed simultaneously under both the default and "objectionable conduct" provisions.
The good news is that co-ops have substantial power to respond, as they see fit, to nuisance and worse conduct by shareholders and others occupying or visiting their apartments. The cautionary note is that the courts will hold co-ops to high scrutiny in exercising those powers.
Robert D. Tierman, a longtime co-op and condo attorney, is a partner at Litwin & Tierman.
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