Bill Morris in Legal/Financial on July 20, 2017
The uncivil war at the Seward Park co-op has finally reached its Appomattox.
In a major affirmation of the Business Judgment Rule, New York Supreme Court Justice Arthur Engoron has thrown out a lawsuit brought by shareholders who were disgruntled by the Seward Park co-op board’s decision to switch from a self-park system to a professional valet-parking operator.
“The board was elected specifically to conduct the day-to-day affairs of the co-op,” Engoron wrote in his decision. “It would be nearly impossible for co-op boards to function if every time they had to act, they had to entertain potentially endless debate involving numerous varying positions.”
Engoron noted that the Business Judgment Rule gives co-op boards broad protection provided they act within the scope of their authority and in good faith. He wrote: “The board acted within its authority – i.e., converting the garage for the co-op’s financial benefit – even if its decision to do so was unpopular with some (apparently a minority of) shareholders.”
In a final rebuke to the shareholders who brought the lawsuit, Engoron ordered that they must pay the legal fees the co-op board incurred in defending its position. The precise sum will be determined later.
The opening shots of this uncivil war were fired in January of 2016. Noting that property taxes had more than doubled in the previous seven years while monthly maintenance had increased by just 14 percent at the sprawling, 1,728-unit co-op on the Lower East Side, the 11-member Seward Park board began exploring new ways to generate revenue. Following a consultant’s recommendation that a switch to valet parking could add to the 388 existing parking spaces, shorten the waiting list, and generate an additional $200,000 in annual revenue, the board sent out bids to seven garage operators. On Jan. 27, 2016, the board voted to lease the parking space to Icon Parking Systems for 10 years. When the board announced its decision the following day, disgruntled shareholders began plotting a counterattack. Eventually they filed the lawsuit in state Supreme Court, seeking to invalidate the contract with Icon.
These shareholders had an ally in Mendy Erez, a 12-year board veteran who has lived in the co-op for 38 years. “There was no reason for this haste,” he said. “We should have informed people earlier about the change instead of hitting them over the head.”
The lawsuit claimed the board exceeded its authority in three ways: by not providing prior notice to a change in the co-op’s house rules; by destroying the rights of shareholders who had designated parking spaces; and by entering into an illegal contract.
The news of the decision was welcomed by Arthur Weinstein, one of the co-op’s attorneys. “The board has the power to run the business of the corporation,” Weinstein said, “and I believe this decision is entirely appropriate and legally correct. Seward Park is pleased it will recover its costs of litigation from the plaintiffs.”
Attorney Ezra Glaser, who filed the suit on behalf of the disgruntled shareholders, said he is unsure if his clients intend to appeal. “I happen to think Judge Engoron is a very good judge,” Glaser said. “But his decision basically allows the board to sidestep the rights of shareholders, which we think is wrong. The board took this common area away from the shareholders. It’s very sad.”
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