Bill Morris in Legal/Financial on November 5, 2020
The seesaw battle for access to co-ops’ and condos’ books rages on. In the latest skirmish – a major victory for co-op boards – Manhattan Supreme Court Justice Nancy M. Bannon has ruled that a disgruntled shareholder’s request for access to corporate books and records was “overly broad” and was supported “only by speculation” of mismanagement by the white glove Park Avenue co-op’s board of directors.
In the lawsuit, Cayne v. 501 Park Ave. Corp., shareholder James Cayne, the former chief executive at Bear Stearns, claimed that the co-op board’s president had “personal animus” that led to the rejection of several prospective purchasers of Cayne’s 5-bedroom, 6-bathroom apartment between 2016 and 2019, and the denial of the ability to sublet the apartment while it was on the market. (The alleged animus dated back to 1999, when a dispute arose over Cayne’s desire to buy a maid’s room.)
Under Section 624 of the Business Corporation Law (BCL), co-op shareholders have the right to inspect board meeting minutes, a roster of shareholders, and financial statements. In July 2019, as a way of investigating “potential wrongdoing, mismanagement and breaches of fiduciary duty” by the board members, Cayne demanded to inspect eight categories of documents, only two of which fell within the scope of inspection authorized by the BCL – the shareholder roster and meeting minutes. The remaining categories included “all books and records” pertaining to the board’s consideration and rejection of the prospective purchasers of Cayne’s apartment; the board’s consideration, approval, or rejection of prospective purchasers of all other apartments in the building; the rental of any apartment in the building; the market value of the co-op corporation and each of its units; the recusal of any board member from any board deliberations; and any proposed or adopted modifications to the proprietary lease.
In her opinion, Justice Bannon wrote: “The fact that a cooperative board has denied a shareholder permission to sell their shares does not alone justify a shareholder’s attempt to litigate around the sound exercise of the board’s judgment. Consistent with the foregoing, the [co-op’s] governing documents, by which all shareholders are bound, expressly reserve the board’s ‘right to grant or withhold consent, for any or no reason, absent unlawful discrimination’ any purchase application. . . . As such, the petitioner has not established a proper purpose to support his petition to access the respondent’s books and records.”
Not all co-op and condo boards fare so well in the battle of the books. In 2011, Linda Pomerance brought a lawsuit against her condo board at 310 W. 52nd St., seeking extensive access to board documents. The appellate court reiterated that, under existing law, condo unit-owners have the right to see financial reports, invoices, minutes of board meetings and redacted legal invoices “so long as [it is] in good faith and for a valid purpose … at the managing agent’s office, during convenient weekday hours.” The court went a step further and granted Pomerance the right to see a roster of unit-owners and make electronic copies of the documents – while granting the board the right to demand that she sign a nondisclosure agreement.
In a similar case, Armand Musey, a shareholder in the co-op at 425 E. 86th St., sued for access to board documents after a dispute erupted over the rooftop terrace outside Musey’s apartment. The court ruled that co-op shareholders also are allowed to copy documents, which they could not do before, and that boards can require a confidentiality agreement. After the Musey ruling, attorney Jesse Schwartz of Kagan Lubic Lepper Finkelstein & Gold told Habitat: “I think the courts have been going in this direction for a while, allowing broader inspections, consistent with common law.”
And then came Justice Bannon’s decision in the Park Avenue case, which sent the seesaw battle of the books in the opposite direction. As Bannon wrote: “Even under the liberal discovery standard, a shareholder may not engage in ‘an intrusive probe into the confidential financial records’ of other shareholders, let alone attempt to delve into a prospective purchaser’s finances well beyond the contemplated scope of the BCL.”
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