Stuart Saft in Board Operations on December 6, 2016
In 1990, a man named Ronald Levandusky wanted to remodel his kitchen at One Fifth Avenue. In the process, he changed the position of a two-inch steam pipe, which led to his neighbors objecting and the board issuing a stop-work order on the grounds that he had violated the building’s renovation guidelines. (Ironically, Levandusky was on the board when those same guidelines were written.) Levandusky sued to get the order lifted, but eventually lost.
What started out as a simple disagreement between a shareholder and the board, though, rippled in a way few decisions do. As Habitat wrote in 2007: “The New York Court of Appeals ruled unanimously that co-op and condo boards could not be second-guessed – and dragged into court – by shareholders and tenants who believed that their board had failed to act ‘reasonably’ in a dispute. From then on, the court ruled, the burden shifted to the shareholders and unit-owners to prove that the board had breached its fiduciary duties.”
The late Court of Appeals Chief Judge Judith Kaye established the threshold issue for courts to permit lawsuits against boards in Levandusky v. One Fifth Avenue Apartment Corp. This suit was especially important because of how it explained the foundation of – and need for – the general powers of a board.
The court noted that the residents in a co-op or condo give their consent to be governed by the decisions of a board. Like the leaders of a municipal government, the board is responsible for running the day-to-day affairs of the building. To that end, boards have broad powers in areas that range from financial decision-making to promulgating regulations regarding pets and parking spaces. As with any authority to govern, the broad powers of a board hold the potential for abuse.
The stability a board offers, though, has its own economic and social benefits, and the purchase of an apartment represents a voluntary choice to cede certain privileges of single ownership to a governing body. The board, in return, takes on the burden of managing the property for the benefit of all residents, which means, by implication, that it has the power to ignore the wishes of some residents.
“Allowing an owner who is simply dissatisfied with a particular board action a second opportunity to reopen the matter before a court...threatens the stability of the common living arrangement,” wrote the court. “Moreover, the prospect that each board decision may be subjected to full judicial review hampers the effectiveness of the board’s managing authority. The Business Judgment Rule protects the board’s business decisions and managerial authority from indiscriminate attack.”
The Court of Appeals has held that unless there is a showing of bad faith, self-dealing, or discrimination, the courts will not even consider a lawsuit against the board or its members. In the almost 30 years since the Court of Appeals decided Levandusky, decisions against boards have been rare. And those usually involved extreme situations where the board was clearly acting beyond the scope of its authority.
For this, boards owe a debt of gratitude to Ronald Levandusky.
Stuart Saft is a partner in the law firm of Holland & Knight.
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