GANFER & SHORE, LLP
COURT FINDS IT IMPROPER TO SUE INDIVIDUAL BOARD MEMBERS
IN LITIGATION CHALLENGING A COOPERATIVE’S DECISION
A recent appellate court decision emphasizes that a plaintiff challenges a decision by a cooperative’s board of directors and seeks injunctive relief, such as an order that the board consent to a renovation plan, it is neither necessary nor proper for the plaintiff to sue the individual board members in addition to the cooperative itself. Weinreb v. 37 Apartments Corp., 943 N.Y.S.2d 519, 2012 N.Y. Slip Op. 3754 (App. Div. 1st Dep’t May 10, 2012).
The plaintiff tenant-shareholders in this case purchased a penthouse apartment in a Manhattan Cooperative. They alleged that although members of the Board were aware that the apartment required major renovations to make it habitable, the Board unreasonably withheld its approval of the renovations, in breach of the proprietary lease, which provided that such consent “shall not be unreasonably withheld.” The tenant-shareholders asserted that for three years, the Board continually found fault with their proposed renovation plans, even after the plans were repeatedly revised to reflect the Board’s concerns. The tenant-shareholders then brought suit against the Cooperative and all its Board members, including a claim for a permanent injunction requiring the Cooperative and the Board members to approve plaintiffs’ renovations and to refrain from any action interfering with them. The trial court denied the Board members’ motion to dismiss the claim for an injunction insofar as it was asserted against them, and they appealed.
The Appellate Division dismissed the claim against the Board members, holding that it was unnecessary and improper to name the individual Board members as defendants on the claim for an injunction. The court emphasized that any injunction that might be granted against the Cooperative would automatically be binding on the Cooperative’s officers and directors. The Appellate Division also observed that the By-Laws required that renovations must be approved by “the Lessor” (i.e., the Cooperative as an entity) rather than individual directors. In addition, because the lower court had dismissed a breach of fiduciary duty claim against the Board members, the Appellate Division held that there could be no basis for an injunction against the board members in the absence of a viable substantive claim against them.
This decision is significant for cooperatives because in many cases, lawyers for tenant-shareholders dissatisfied with a Cooperative Board’s decision name the individual Board members as defendants, in addition to the Cooperative itself. Individual directors are thus placed in the position of being named as wrongdoers in litigation that may remain pending for a considerable period of time, which can cause them significant negative financial or personal consequences. The directors also often have to obtain separate counsel from the Cooperative, increasing the complexity and expense of litigation. The Appellate Division has now reaffirmed that in the absence of specific wrongdoing by a particular Board member, this litigation tactic should not be permitted.
NEW COURT PROCEDURES FOR FORECLOSURE ACTIONS DO NOT
APPLY TO CONDOMINIUMS FORECLOSING COMMON CHARGE LIENS
In the wake of the economic turmoil of recent years and the corresponding increase in the number of foreclosure actions brought in the New York State courts, the Legislature and court system have implemented a number of procedures to protect homeowners. Among other things, the court rules have been amended to require that mandatory settlement conferences must be held near the outset of most residential foreclosure actions. However, this requirement does not apply to an action brought by a condominium to foreclose on its lien for a unit owner’s unpaid common charges, according to the decision in Board of Managers of St. James Tower Condominium v. Kutler, 2012 WL 1440394, 2012 N.Y. Slip Op. 31042(U) (Sup. Ct. N.Y. Co. April 16, 2012).
The condominium had filed an action to foreclose on a lien for a unit owner’s nonpayment of common charges. The condominium asserted that the unit owner had refused to pay her common charges even after the condominium sent her a notice to cure and placed a lien on the unit. Initially, the unit owner failed to respond to the condominium’s complaint, leading the court to rule in favor of the condominium on default. Thereafter, the unit owner sought to set aside her default, arguing among other things that it was improper for the court to have granted foreclosure without first holding a mandatory settlement conference. The court rejected this argument, holding that the rule requiring such conferences applies only in certain actions to foreclose on loans used to purchase or finance a residence. It was undisputed that no such loan was at issue here.
TENANT-SHAREHOLDER CANNOT AVOID CONSENT REQUIREMENT
FOR SUBLEASES OR BOARD POLICY LIMITING DURATION OF SUBLEASES
A tenant-shareholder is bound by proprietary lease provisions requiring Board approval to sublease her apartments, as well as a Board resolution limiting the time that an apartment can be sublet to no more than two years in a four-year period and imposing subletting fees. Bregman v. 111 Tenants Corp., 943 N.Y.S.2d 100, 2012 N.Y. Slip Op. 3545 (App. Div. 1st Dep’t May 1, 2012).
The plaintiff tenant-shareholder had owned the shares corresponding to two apartments since 1972 and had subleased them for virtually the entire time. She asserted that when she bought her apartments, she was promised “full, unconditional and perpetual sublet rights.” However, no such promise was reflected in any of the relevant documents. In fact, the proprietary leases for the apartments, as well as other documents also signed by the tenant-shareholder, explicitly required board approval for any subleases. The court observed that even if the Cooperative had granted preferential subletting rights to the plaintiff tenant-shareholder as she alleged, such a grant would violate Section 501(c) of the New York Business Corporation Law, which requires that “each share [of stock] shall be equal to every other share of the same class,” and thus would be unenforceable.
The tenant-shareholder also argued that a Board resolution restricting subletting was adopted in bad faith and with the intent to discriminate against her. However, the court found that the resolution was prompted by the goals of maximizing owner residency and, therefore, the value of the Cooperative’s shares. Because this is a legitimate interest for the welfare of a Cooperative, the Board was authorized to adopt the resolution and its decision to do so was protected under the business judgment rule. The court added that, even assuming that plaintiff’s situation was the impetus for the Board’s decision to restrict subletting and that she was the only shareholder currently affected by the resolution, the resolution nonetheless applied equally to all shareholders. The fact that plaintiff was the individual most immediately affected did not render the resolution impermissibly discriminatory.