You're Fired Evicting Shareholders for Objectionable Conduct

You're Fired

While not a common practice, boards of directors of New York cooperatives have, at times, reached the decision to evict a shareholder based on objectionable conduct. Nearly every cooperative corporation's proprietary lease contains a section on dealing with default. Objectionable conduct on the part of the shareholder or other residents in the apartment provides the board with the basis for terminating the shareholder's shares and evicting them from the building.

Originally, these provisions required the corporation to prove in a Housing Court trial or hearing, that the occupants' behavior was in fact objectionable and warranted eviction. Not surprisingly, many judges were hesitant to find the behavior of these residents questionable, leaving the boards in the precarious position of placating upset shareholders and dealing with the difficult resident on their own. However, as a result of two recent court decisions heralding the removal of what were once major roadblocks, a board's recourse for dealing with a difficult shareholder/occupant has become much clearer.

The first court decision was handed down by the New York Court of Appeals in 2003 in 40 West 67th Street v. Pullman. In Pullman, the proprietary lease provided that the court did not have the authority to make the determination as to whether the resident's behavior was objectionable, if the board was exercising its business judgment and was not acting out of discrimination, self interest or bad faith.

Suddenly the rules changed, and instead of the board being required to convince a judge that the shareholders' behavior was objectionable, the burden shifted to the shareholder to demonstrate that the board violated the business judgment rule, as laid down by the Court of Appeals in its landmark 1990 decision in Levandusky v. One Fifth Avenue Apartment Corp. In Levandusky, the unanimous outcome was that courts could not look into decisions made by cooperative and condominium boards unless there was a showing of bad faith, self dealing or discrimination.

Despite the drastic change brought about by the Pullman case, the decision left one very large question: could a board act without a vote by the shareholders? In Pullman, the board acted after a shareholder vote because the proprietary lease for 40 East 67th Street clearly stated that such a vote was necessary before a lease could be terminated for objectionable conduct. However, the question still remained. If a given lease did not require it, would the courts still require a shareholder vote to evict an owner/occupant?

Fortunately for New York area co-ops, this issue was resolved this past December in London Terrace Towers, Inc. v. Michael Davis, by Housing Court Judge Gerald Lebovits. [For purposes of full disclosure, the author must note that his law firm is counsel to both One Fifth Avenue Apartment Corp. and London Terrace Towers, Inc., and the information contained in this article is solely from the public record.]

London Terrace, a 712-unit, four-building cooperative located in the Chelsea neighborhood of Manhattan and established in the mid-1980s, has a proprietary lease that-unlike the one in Pullman-states that it in an event of default, "If at any time the Lessor shall determine, upon the affirmative vote of two thirds of its then Directors, at a meeting duly called for that purpose, that because of objectionable conduct on the part of the Lessee, or a person dwelling or visiting in the Apartment, repeated after written notice from Lessor, the tenancy of the Lessee is undesirable."

On July 9, 1993, Michael Davis acquired the shares and lease for apartment 2F in one of London Terrace's buildings and immediately moved into the apartment. During this time, Davis allegedly committed numerous acts of objectionable conduct (including harassing his neighbors, spray-painting furniture in the hallways, improperly using the common hallways for storage, making inordinate amounts of noise late at night, and allegedly sneaking a homeless person into the building's health club showers for the purposes of sex. -Ed.)

In 2001, the board moved to have him evicted. At the last minute, the board approved an arrangement in which Davis agreed to improve his objectionable behavior. Unfortunately, following the agreement, the board claimed his behavior only became worse. Finally, on September 3, 2003 the board held a special meeting at which Davis attended and attempted to defend some of his conduct. The result of the meeting was a unanimous decision to terminate Davis' proprietary lease for objectionable conduct.

Following the board's decision, the corporation commenced an action in Housing Court to obtain possession of the apartment. After gaining custody of the unit, the cooperative was to auction off the shares and lease, reimburse itself for its fees and expenses, as well as anything else Davis owed to the corporation. In addition, the corporation would also give the balance to any bank holding a mortgage on the apartment, with the remaining capital going to Davis. At the court hearing Davis took the position that the board did not have the authority to terminate his shares and lease.

In a detailed, 13-page opinion, Judge Lebovits analyzed the facts and the conduct of Davis and the board, and reviewed the decisions of the Court of Appeals in Levandusky and Pullman, as well as a prior Housing Court decision issued in 13315 Owners Corporation v. Kennedy. (For that case, the court held that the board did not have the authority to terminate the shareholder's lease and shares). In contrast to Davis's situation, in the Kennedy case the judge ruled that the board had not given the shareholder proper notice or a fair opportunity to be heard. In addition, there were questions about whether the board had been properly elected.

Judge Lebovits then reviewed Pullman and its predecessor, Levandusky, and found that the Court of Appeals in Pullman had extended the authority of boards to make business decisions to eviction actions and proceedings-the only exception being if a shareholder showed that the cooperative acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose, or (3) in bad faith. The court believed these three exceptions protected the corporation as well as the shareholders from a board's abuse of power.

The judge noted Pullman required two steps: determining whether the corporation acted within the business judgment rule and, if so, the court must grant possession. In the Davis case, the court did just that.

The outcome of the two cases is significant as they impact all cooperative boards facing similar situations. The most important outcome is that now the law allows for a more defined process when dealing with the objectionable conduct of a shareholder. As long as the board adheres to the precise terms of the lease and gives the shareholders/residents ample opportunity to defend themselves, it will be able to terminate a proprietary lease, if and when it finds the resident's behavior was objectionable.

Stuart Saft is an attorney with Wolf Haldenstein Adler Freeman & Herz LLP, and is board chair of National Cooperative Bank.

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