From the Court to the Board Lessons from Recent Decisions

From the Court to the Board

In this and in future columns, I will be examining decisions of interest to co-ops and condo boards and suggesting what valuable lessons can be learned from these legal decisions.

Recently, there were several interesting court decisions that imparted valuable lessons. Perhaps, the most notable is the 49 West 12 Tenants Corp., which was rendered in mid-April. That decision is the first reported decision since the infamous Pullman decision concerning lease terminations for a shareholder's "objectionable conduct." And, speaking of Pullman, another chapter in the Pullman saga - this time over a board president's defamation claims against Mr. Pullman - was closed. In Pusch v. Pullman and Cooper, we learn more about the "common interest" privilege. In addition, I discuss a few other decisions that caught my eye.

49 West 12 Tenants Corp. v. Pearl Seidenberg Lesson: Shareholders participating in "objectionable conduct" beware; the spirit of the Pullman decision is alive and well. Cooperatives terminating the leases of those shareholders should also take heed; you must strictly follow the letter of the lease in terminating a lease based upon "objectionable conduct."

This Appellate Division, First Department decision is only four paragraphs long, but very important because it sends a warning to shareholders engaging in "objectionable conduct" that the principles established in the Pullman decision have plenty of legs. Many of you may already know, that the New York Court of Appeals in 2003 upheld a cooperative's termination of a shareholder's proprietary lease on the ground that the shareholder engaged in "objectionable conduct." A supermajority of the Pullman cooperative's shareholders voted to direct their board of directors to terminate Mr. Pullman's proprietary lease. Many were surprised by the court's decision which made the "business judgment rule" defense that much stronger, and many questioned how the courts would treat the next Mr. Pullman. Well, we now have an answer.

In 49 West 12 Tenants Corp., the shareholder engaged in unsafe behavior in her apartment that endangered other shareholders' lives, apartments, and person property. It seems that there was a history of gas odors, smoke and fires in the shareholder's apartment that the shareholder ignored. For example, there was a fire in her apartment - she didn't call the Fire Department, but simply left the apartment. Her dog even died in one of the fires.

The board decided that a lease termination was in order and a special meeting of shareholders was held during which more than two thirds of outstanding shares voted to oust the offending shareholder. The co-op's proprietary lease required written notice of the co-op to the shareholder that the shareholder's tenancy is "undesirable" and repeated "objectionable conduct" takes place after that notice.

Significantly, the First Department stated, "the record provides strong indication that [the co-op's] attempt to terminate [the shareholder's] lease was not without substantive basis and that [the shareholder's] success in this action may be little more than nominal." That statement is telling in that the boundaries of the Pullman decision are beginning to develop. We now have two examples of shareholder conduct that is "objectionable" which a court would sustain under the business judgment rule. The trouble in 49 West 12 Tenants Corp. is that the notice provisions of the lease were not strictly followed. The First Department found that the termination notice did not satisfy the lease requirements because it did not reference the lease and the provision the shareholder was violating, did not warn the shareholder that the lease was terminable upon her failure to cure and it was not from the co-op or an attorney with whom the shareholder was familiar.

The lesson from this case is that the courts may find reasons, particularly procedural ones, to avoid upholding a lease termination on the basis of "objectionable conduct." The First Department seemingly recognized that the shareholder's conduct was "objectionable" and that the business judgment rule applies, but then gave the shareholder a defense because procedure was not strictly followed. If your board is considering terminating a shareholder's lease because the shareholder's conduct is "objectionable," make sure your counsel analyzes your proprietary lease to assure that the proposed termination is permitted and that all procedures are strictly followed.

Cooper v. Lipschutz and Pusch v. Pullman Lesson: Courts recognize that there is a "common interest" privilege between cooperative shareholders that may insulate shareholders against defamation claims by other shareholders provided there is no "malice" or "ill will."

The Cooper case (decided by the New York City Civil Court) is the second reported case this year to recognize that certain statements between cooperative shareholders are protected by a "common interest" privilege. As long as a shareholder is not speaking or writing with "malice" with respect to another shareholder, the shareholder who is speaking or writing has a defense against a defamation claim. This "common interest" privilege defense may not prevent shareholders from suing each other for defamation, but should be used as a defense and perhaps, in an early motion to dismiss the case.

In Cooper, a 90-year-old shareholder/board member of Southbridge Towers (a Mitchell-Lama cooperative) circulated a letter to board members stating that he had to file a complaint with the police (a true statement) with respect to a fellow shareholder/board member (with whom the 90-year-old had a difference in opinion over whether to privatize the coop). The 90-year-old shareholder complained to the police that he was increasingly frightened by the other shareholder's harassing and menacing postures. The shareholder claimed that the board member elbowed him and spread his arms across a railing to keep him from holding on, pushed him up against the wall and made jeers and nasty remarks. On a motion for summary judgment, the court dismissed the complaint, explaining that even if the statements in the letter were libelous, they are "qualifiedly privileged under the common-interest doctrine" because the shareholder/ board member had a qualified right to communicate the information to the board members, motivated to protect the interests of the shareholders and tenants. The court found no evidence that the statements were made with "malice."

The other reported case this year was another chapter in the infamous Pullman dispute. In the Pullman case, a New York County Supreme Court justice dismissed a defamation claim by the board president of Mr. Pullman's cooperative against Mr. Pullman based upon the "common interest" privilege. Mr. Pullman had made numerous writings to shareholders stating, among other things, that the board president breached his duty to the cooperative, had undisclosed conflicts of interest, is married to a woman who had an intimate relationship with another woman and shared similarities with a deceased French general (i.e., Napoleon). Like the Cooper court, the Pullman court found that the board president did not sustain his burden of establishing that Mr. Pullman's statements were made with "actual malice" or "ill will."

In view of these cases, shareholders who wish to voice their opinion about other shareholders should feel a bit more comfortable doing so in view of these cases provided that the shareholders are not speaking with "malice" or "ill will." The courts have recognized two types of malice, common law and constitutional. The Cooper court explained that "under the common law, malice meant spite or ill will" and under the constitution meant that the "statements [were] made with [a] high degree of awareness of their probable falsity." Because those standards are so fact-intensive, the "common interest" privilege defense may be an effective defense, but it may not keep shareholders out of litigation.

Liberty Court Condominium Residential Unit Owners Coalition v. The Board of Managers of Liberty Court Condominium Lesson: Calling for nominations of candidates for board membership from the floor at the time of a board election is a "fair and effective method" for nominating board members.

The bylaws of many cooperatives and condominiums do not specify how to nominate candidates for election to the board. It seems that Liberty Court Condominium's bylaws did not specifically address how candidates must be nominated, but provided that unit owner meetings are to be governed by the current edition of Robert's Rules of Order or other rules acceptable to the majority of unit owners present at the meeting. A coalition of Liberty Court owners wanted precise rules covering the nomination method and sued for a bylaw amendment. The coalition lost and the Appellate Division, First Department, gave some guidance on this issue.

The court explained that the statutory requirement that bylaws provide for the nomination of a board is satisfied by Liberty's bylaw provision referring to Robert's Rules of Order. Like many co-ops and condos, Liberty's board accepted candidate nominations from the floor of the meeting. The court recognized that accepting nominations from the meeting floor is a "fair and effective method" for the nomination of board members. Notably, the court was impressed by the fact that the condominium also customarily delivered a pre-meeting notice of nominations and decided that such notice comports with Robert's Rules of Order and gives "fair and effective notice."

Ruth Mishkin v. The 155 Condominium, et al. Lesson: Condominium unit owners may or may not be entitled to a list of unit owners. There are now conflicting opinions.

There are several interesting aspects of the Mishkin decision. One aspect is how the court dealt with the question of sponsor voting rights. Even though the condominium's by-laws provided that "not more than three members of the Condominium Board shall serve by reason of the votes by Sponsor"¦" the court decided that the sponsor could designate two board members and then could vote its shares for as many other candidates as it sees fit provided that the candidates whom the sponsor is voting for were not on the sponsor's payroll and did not receive other remuneration from the sponsor.

The most interesting part of the Mishkin opinion, however, is the New York Supreme Court, New York County justice's determination that a condominium unit owner is not entitled to a list of unit owners. The court reasoned that the state's Condominium Act, which governs condos, does not require condominiums to provide such information to unit owners and that the information is available as a matter of public record. The court noted however that the condo offered this information four months prior to the contested election, but the unit owner declined.

The Mishkin opinion is at odds with a 1998 decision out of the same court by another judge. In A&A Properties NY Ltd. v. Soundings Condominium, the court directed the condominium to permit a unit owner to inspect the list of unit owners even though the court recognized that the Condominium Act does not authorize such an inspection. A part of the Soundings Condominium court's reasoning was that the information is of public record so there "is no valid reason why the board should not furnish a unit owner this information and avoid the owner having to incur the time and expense of obtaining the list from the public records." It is remarkable that the Mishkin court came to a different conclusion based upon the same argument. That is, a unit owner is not entitled to a list of unit owners because such information is of public record. The parties in Mishkin decided to withdraw their appeals and thus, we are left with conflicting opinions and no appellate authority on this issue.

44-46 West 65th Street Apartment Corp. v. Stvan Lesson: A "waiver of jury trial" provision in the proprietary lease can be waived if you do not invoke it. When the time comes to choose between a jury or judge trial, review your proprietary lease for a "waiver of jury trial" provision and decide whether to invoke it. There is a strong court preference for adjudicating landlord-tenant disputes in the Civil Court rather than in the Supreme Court.

This lawsuit has spawned two recent decisions of import. The 44-46 West 65th Street Apartment Corp. cooperative brought an action against tenant-shareholders in Supreme Court to recover damages to the tenant-shareholders' apartments from an improper alteration. The cooperative alleged breach of contract and fraud claims against its tenant-shareholders. The cooperative subsequently noticed the termination of the tenant-shareholders' proprietary lease and commenced a landlord-tenant action in Civil Court. The tenant-shareholders asked the Supreme Court for an order staying the landlord-tenant action in view of the Supreme Court action. The Appellate Division, First Department refused to stay the Civil Court proceeding.

In the first decision, the First Department recognized that the "Civil Court is the preferred forum for resolving landlord-tenant issues." Unless the Civil Court does not have authority to grant the relief sought, the claim usually should be decided in the Civil, not Supreme Court. The parties tried to convince the court to consolidate both Supreme Court and Civil Court suits, but the court rejected the attempt because of the distinct nature of the claims asserted in both courts. Thus, the parties moved toward trial, which led to the second decision.

Most proprietary leases contain a provision stating that the parties to the lease waive a jury trial in the event that there is litigation between them in any way concerning the lease or apartment. In other words, the cooperative and shareholder agree that if they litigate, a judge and not a jury will decide the dispute. In New York state court, after discovery is complete, a party files a document called a "Note of Issue" and states therein whether the party demands a jury trial. In New York federal court, the election is done at the beginning of the lawsuit before any discovery takes place. If your proprietary lease contains a "waiver of jury trial" provision that you want to invoke, you must do so at the time the decision as of whether to demand a jury trial is made. If not, the Stvan court held that the "waiver of jury trial" provision is waived.

About one year ago, the cooperative filed a Note of Issue and demanded a jury trial. The shareholders did not object to the jury demand and thus, did not invoke the waiver of jury trial provision that was contained in their proprietary lease. Likewise, the cooperative did not invoke the provision because it demanded a jury trial. As trial was approaching this year, the cooperative had a change of heart and asked the court for permission to withdraw its demand for a jury trial, pointing to the "waiver of jury trial" provision in the proprietary lease. The court denied the cooperative's request finding that the cooperative waived the lease provision by not invoking it when it demanded a jury trial.

Joseph G. Colbert is a partner with Rosen & Livingston, specializing in the representation of cooperatives and condominiums. He also is an adjunct professor at St. John's University School of Law.

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