| Cooperative and condominium directors owe a | | | | Levandusky, stated that the standard for judicial |
| fiduciary duty to the membership to exercise | | | | review of the actions of co-op is analogous to the |
| their authority in the best interests of the | | | | business judgment rule applied by courts to |
| corporation or association and all of its | | | | determine challenges to decisions made by |
| shareholders and owners. The concept of | | | | corporate directors. However, in light of the |
| cooperative living is both utilitarian and libertarian. It | | | | individual interests of the board members in the |
| embodies community and freedom. | | | | maintenance charges, it could be argued that the |
| The standard by which decisions of a board of | | | | directors were not disinterested parties when |
| directors of a cooperative or condominium are to | | | | responding to the shareholder's claim. |
| be reviewed by the courts is known as the | | | | Similarly, in Cooper v. Greenbriar owners Corp., |
| "business judgment rule." In its simplest terms, the | | | | judicial review was denied. In Cooper, the court |
| business judgment rule provides that a board | | | | held that the business judgment rule protected a |
| action is protected from challenge if there is a | | | | board's decision to reject a prospective purchaser |
| good business justification for the decision and it | | | | of a co-op apartment. The shareholders |
| isn't fraudulent or an abuse of discretion. When | | | | commenced an action against the co-op to |
| the business judgment rule is applied, the burden | | | | recover monetary damages contending in their |
| of proof to establish the impropriety of the | | | | complaint that the board acted in an arbitrary, |
| decision is on those challenging it. | | | | capricious and illegal manner when they rejected a |
| In lawsuits claiming directors violated their duty in | | | | prospective purchaser. Their complaint alleged that |
| finding a tenant conduct "objectionable", the | | | | the rejection was based on the possibility that the |
| courts have routinely applied deference to the | | | | prospective purchaser might have a baby-sitting |
| cooperative directors determination. However, is | | | | business in the apartment. |
| the reasonableness of the directors determination | | | | A lower court dismissed the shareholders' |
| better standard? Below is a discussion of the | | | | complaint finding that there was a reasonable bias |
| evolution of the business judgment doctrine as it | | | | and support for the rejection of the applicant, |
| applies to cooperative and condominium directors. | | | | that the proceedings used by the board were fair |
| As is discussed below, it is clear that New York | | | | and did not differ from the established procedures |
| courts generally defer to cooperative and | | | | used by the board in such matters and that there |
| condominium board decisions. Nevertheless, if | | | | was insufficient evidence to show that the board's |
| board action is taken for a purpose other that | | | | actions were unfairly motivated or made in bad |
| that of the entity, is beyond the scope of the | | | | faith. The boards' counter claim was also |
| board's authority or is in bad faith, the courts are | | | | dismissed. On appeal, the court affirmed the |
| authorized to strictly scrutinize such action. | | | | decision of the lower court and cited Levandusky |
| In the 1990 seminal decision of Levandusky v. | | | | stating that when the co-op board "acts for the |
| One Fifth Avenue Apartment Corp., the Court of | | | | purposes of the cooperative, within the scope of |
| Appeals held that the business judgment rule was | | | | its authority and in good faith, courts will not |
| the standard for judicial review of actions taken | | | | substitute their judgment for the board's. |
| by cooperatives and condominiums boards. The | | | | In 1998, the Appellate Division First Department in |
| business judgment rule set forth in Levandusky | | | | Elkman v. Southgate Owners Corp., declined to |
| bars judicial review of a board's actions if the | | | | substitute its judgment for that of the co-op's |
| court finds that the actions were taken in: (i) | | | | board. Shareholders commenced an action against |
| futhe4rance of the purposes of the entity; (ii) | | | | the co-op to recover damages for breach of |
| within the scope of the board's authority; and (iii) | | | | implied warranty of habitability, breach of fiduciary |
| in good faith. However, Levandusky does not | | | | duty, partial constructive eviction and breach of |
| automatically preclude judicial review. If an owner | | | | express lease covenants. Shareholders claimed |
| can prove that a board's actions were taken for: | | | | there was a noxious odor emanation from a retail |
| (i) purposes other than those of the entity; (ii) | | | | fish store in an adjacent building that was not |
| beyond the scope of the board's authority; or (iii) | | | | owned or controlled by the co-op. |
| in bad faith, the courts will review the challenged | | | | The alleged that the odor permeated their |
| action. | | | | apartment, making certain portions of their |
| If a unit owner can demonstrate that the actions | | | | apartment uninhabitable and that the co-op and its |
| appear to b discriminatory, Levandusky | | | | board had failed to do anything to remedy the |
| established that a court may review the actions | | | | situation despite numerous requests to do sol, |
| of a board. Decided nearly eighteen years ago, | | | | The lower court dismissed the shareholders' |
| Levandusky continues to be a weapon for co-op | | | | complaint except for the cause of action for |
| and condo boards as it mitigates suits brought by | | | | breach of the implied warranty of habitability. On |
| apartment owners against boards. In the recent | | | | appeal, the court affirmed the decision of the |
| cases, the issues covered include discriminatory | | | | lower court. In upholding the dismissal of the claim |
| actions, claims of bad faith, board managerial | | | | for breach of fiduciary duty, the court, citing |
| decisions and the enforcement of house rules and | | | | Levandusky, stated that it would not substitute its |
| proprietary lease provisions. The bulk of the cases | | | | judgment for that of the board of directors when |
| indicate continued adherence to the Levandusky | | | | there were no allegations of fraud, misconduct or |
| judicial deference principle. | | | | self-dealing. |
| In 1997, the Appellate Division, First Department in | | | | In 2003, the Court of Appeals in 40 West 67th |
| Goodman v., 225 East 74th Apartments Corp., | | | | Street Corp. v. Pullman extended the reach of the |
| judicial review was held to be warranted when | | | | business judgment rule. In that case, Mr. Pullman |
| the plaintiffs, two shareholders, alleged that too | | | | accused his upstairs neighbors of noise violations, |
| many shares had been allocated to their studio | | | | running a bookbinding business and housing toxic |
| apartment, and, as a result, they overpaid | | | | substances. Upon investigation, the board of |
| maintenance charges for more than ten years,. | | | | directors ascertained that the upstairs neighbor |
| The shareholders owned 460 shared allocated to | | | | had no such equipment and didn't even have a |
| an apartment in the co-op building. They had | | | | television. Thereafter, Mr. Pullman initiated four |
| bought the apartmne3t from the sponsor's | | | | lawsuits against the co-op. After a period of time, |
| assignee and when they purchased the | | | | the co-op decided to evict Mr. Pullman for |
| apartment, rent-regulated tenants occupied it. | | | | "objectionable conduct". |
| After the tenants vacated the apartment, the | | | | A special meeting of shareholders was called for |
| shareholders learned that they had bought a | | | | this purpose and the requisite super majority was |
| studio apartment, not a two-bedroom apartment | | | | reached to terminate his lease. The case went to |
| as described in the offering plan, As a | | | | court and the co-op encountered Real Property |
| consequence of the mis-description in the | | | | Actions and Proceedings Law Section 711, which |
| offe3ring plan, the shareholders had been paying | | | | essentially required the co-op to prove a person's |
| maintenance charges based on a share allocation | | | | actions to be objectionable. The court found that |
| that exceeded their share allocation by 210 | | | | the determination of the shareholders itself |
| shares. | | | | constitutes satisfactory proof that Mr. Pullman |
| The shareholders demanded that the co-op | | | | acted objectionably, and the cooperative did not |
| correct the improper number of shares allocated | | | | have to bring in witnesses to testify as to what |
| to their apartment, but the board refused to do | | | | he did. Pullman further demonstrates that the |
| so. Subsequently the shareholders commenced an | | | | trend continues to be deference to the business |
| action against the co-op. The court, citing | | | | judgment of the cooperative housing corporation. |