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When a Board Can Disregard Shareholders' Votes

May a board, which receives an opinion from shareholders, then disregard the shareholders' wishes and take action unilaterally? The answer was yes in Simon Schwarz and Theresa Otto v. Dorchester Apartment Corp. and Its Board of Directors.

Theresa Otto and her mother, Simon Schwarz, were shareholders and roommates at The Dorchester, at 131 Riverside Drive, near West 85th Street. The co-op has a basement garage with 19 parking spaces, but no provisions in the proprietary lease or bylaws pertaining to those spaces. For at least 10 years, Otto and Schwarz occupied two spaces in the garage, and during 2000, paid the co-op $100 per month for them.

In 2001, Dorchester hired Cooper Square Realty as the new managing agent. At some point, Cooper Square sent Otto and Schwarz a notice that showed a monthly rent due of $160 for the two spaces. Otto and Schwarz disputed the $60 increase in writing, but Cooper Square insisted the two were in arrears, and afterward sent an account history showing they had been billed $160/month for some time. The board threatened to terminate their proprietary lease and cancel their stock certificate, but then relented and advised them that since the arrears were for parking fees and not maintenance charges, they were not in default under the terms of the proprietary lease.

On November 11, 2003, the board had held a special meeting of shareholders to discuss financial affairs. There the shareholders discussed garage fees, and the board voted to increase those fees to $100 monthly, with a provision that those then paying $60 or $70 per spot would have their fees raised in annual increments until they reached $100 per month. The board also decided no shareholder could rent more than one space if there were shareholders on a waiting list.

In January 2004, the Dorchester held another special meeting, where among other matters, the issue of Otto and Schwarz having two spots was raised. Some of the shareholders expressed their willingness to allow the mother and daughter to keep their two parking spaces. However, the board in a February 6, 2004, letter notified shareholders that the shareholders' opinion was not binding upon the board, and that the board's resolution limiting parking spaces would remain in effect.

Otto and Schwarz claimed that the board orally agreed to hear the views of the shareholders, and that the board agreed to be bound by the shareholders' expressed opinion. They claimed that the majority of shareholders present voted that the "one space" restriction should not be applied to them. The shareholders also allegedly voted that the Otto and Schwarz parking fees should not have been increased retroactively. Otto and Schwarz submitted a letter purportedly signed by 16 shareholders to buttress these claims.

The court conducted a three-day evidentiary hearing to resolve the underlying claim. Otto and Schwarz testified. The Dorchester called no witnesses.

Business Judgment Rule

The court discussed the seminal Court of Appeals decision in Levandusky v. One Fifth Ave. Apartment Corp. (1990), which established that the corporate Business Judgment Rule applies to co-op boards, and courts must exercise restraint and defer to boards' good-faith decisions "so long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith." The court also acknowledged 40 West 67th Street Corp. v. Pullman , the Court of Appeals case that reaffirmed Levandusky and which held that courts should scrutinize the facts underlying a board's decision to see if a tenant-shareholder can show that the cooperative acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose, or (3) in bad faith.

The court found that Otto and Schwarz did not show that the Dorchester board had not violated those first two exceptions. Additionally, the court found that while Otto and Schwarz may have reasonably perceived that the board's decision to limit parking spaces was specifically directed against them since they were the only shareholders who occupied two parking spaces, this alone did not support a finding of bad faith. It was in the co-op's interest to increase the number of parking spaces available to its tenant shareholders, especially when there was more demand than supply. With a waiting list in existence, the determination to limit spaces to one per shareholder (or apartment) was reasonable and within the board's prerogatives.

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