Voting Out Your Neighbor

One of the cornerstones of cooperative housing law is that owners of co-op apartments and their boards of directors enjoy extremely broad discretion in choosing with whom they wish to share their elevators, common halls, and facilities and their homes." Indeed, New York City co-ops are famous — some would say infamous — for the level of scrutiny given to prospective purchasers.

What happens, though, when admitting someone to the "club" turns out to be a mistake because the individual engages in a pattern of objectionable conduct antithetical to cooperative living? Can the shareholder's proprietary lease be terminated and the shareholder ejected from the building based solely on the vote of a super-majority of shareholders? Or, more simply stated, can an objectionable shareholder be thrown out of the building without first having a court trial? The answer is "yes," according to a sharply divided decision issued in May by the Appellate Division, First Department, in 40 West 67th Street Corp. v. Pullman. However, the case will be heard by the Court of Appeals later this year and the decision from the high court could potentially change the landscape of co-op law for years to come.

The underlying dispute in the Pullman case began when, shortly after moving into 40 West 67th Street, David Pullman, a well-known financier and the inventor of the "Bowie Bond," began complaining about the building's facilities and services. Shortly thereafter, he began to incessantly complain and threatened to sue the co-op's managing agent and the co-op board president for failing to abate an alleged noise problem emanating from the apartment directly above his. That apartment had been owned and occupied for over 20 years by a retired college professor and his wife without incident. Pullman alleged that there was banging in the middle of the night from machines that were used in a commercial book-binding business and that there was a blaring stereo or television. After receiving these complaints, the co-op board conducted an investigation and found Pullman's complaints to be unsubstantiated.

Tensions in the building continued to increase at the end of 1999 when Pullman claimed his upstairs neighbor assaulted him. Shortly after that incident, Pullman circulated a leaflet to other shareholders titled "Attack Crime," urging the other shareholders to evict his upstairs neighbor, stating that he "has the makings of a psychopath in our midst." Another leaflet urged the ouster of the president of the co-op board for a conflict of interest and contained scurrilous remarks about the one of his upstairs neighbors and another occupant of the building.

In early 2000, Pullman asserted four lawsuits against his upstairs neighbors, the co-op and its managing agent, claiming a host of wrongdoings. Many of those claims were dismissed. In addition, he sought, unsuccessfully, to assert at least two other actions against those various defendants.

During this same period, the co-op board sent Pullman a letter stating that he was not in compliance with the terms of his proprietary lease because he had performed alterations to his apartment without first obtaining the board's consent and because he had failed to install carpeting in his apartment. Pullman ignored the board's requests that he "furnish a list of all renovations and redecorating to [his] apartment" and he refused to allow an inspection of his apartment.

Not surprisingly, these events greatly troubled the owners of what had previously been a relatively sleepy 37-unit building. Accordingly, a number of shareholders decided to take action.

Using a provision commonly found in many co-op bylaws, a group of shareholders signed a petition demanding that the board of directors call a special meeting to determine whether Pullman's tenancy in the building was "objectionable." In June 2000, such a meeting was held and, after a discussion of the issues, the shareholders voted by a count of 2,048 shares to none in favor of a resolution detailing how Pullman's continued tenancy was objectionable, and directed the board to terminate Pullman's proprietary lease. Although Pullman was notified of the meeting, he declined to attend.

Pullman's proprietary lease was terminated and, after he refused to vacate his apartment, the co-op began an action in Supreme Court, New York County, to eject him. Justice Marilyn Shafer refused to issue an order ejecting Pullman from the apartment without a trial to determine if the board was justified in terminating Pullman's proprietary lease. She reasoned that it was the province of the court, not the co-op board, to determine whether a tenancy should be terminated based upon objectionable conduct.

The co-op appealed and, in an unusual 3 to 2 split decision, the appellate division reversed that portion of Judge Shafer's decisions that refused to grant the co-op a judgment ejecting him. The three-judge majority found that the case was governed by the holding of the Court of Appeals decision in Levandusky v. One Fifth Avenue Apt. Corp., which applied the "business judgment rule" to expressly prohibit judicial inquiry into actions of corporate directors "taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes."

The Levandusky court explicitly stated that the business judgment rule should be applied to all co-op board determinations. Over the years, courts following the precedent established by Levandusky have protected co-op boards from judicial review of their good faith decisions in connection with a wide range of issues, ranging from the imposition of rules regulating procedure for the handling of food deliveries to disputes concerning the valuation of shares. The Pullman majority found no basis to carve out an exception for a board's decision to terminate a shareholder's lease based upon "objectionable conduct." The court specifically noted that, "The lease provision at issue in this case requires that the termination of a tenancy because of undesirability be based not only upon a board's resolution, but upon the vote of two-thirds of the shareholders. Thus, the decision here was not made by a small group of people, but reflects the consensus of 75 percent of the shareholders."

Furthermore, the court found that Pullman failed to provide any evidence that his proprietary lease was terminated based upon "illegal or impermissible considerations" or that the board's decision did not have a "legitimate relationship to the welfare of the cooperative." Accordingly, the court found that there was nothing improper about the termination of Pullman's proprietary lease and that the co-op was, therefore, entitled to an order ejecting the shareholder.

In dissent, two judges on the five-judge panel argued, among other things, that the business judgment rule was not so broad so as to preclude Pullman from having a court consider if Pullman's conduct warranted his ouster from the building.

In support of this argument, the dissent relied primarily upon a statue which prohibits a tenant from being evicted based upon objectionable conduct, "unless the landlord shall by competent evidence establish to the satisfaction of the court that the tenant is objectionable."

The dissent further urged that Pullman had not waived the protections afforded by the statute and that the business and financial decisions which have historically been protected by the business judgment rule, "are simply too narrow a prism to protect tenants against the loss of their homes." Based on that, the dissent ultimately concluded that the business judgment rule must "yield" to the statute.

Pullman has already placed an appeal to the state's highest court, which will probably hear argument later this year. Since the decision was issued, many experts, on both sides of the case, have weighed in on whether it will be affirmed by the Court of Appeals.

Naturally, from the point of view of many members of the co-op community, the decision should be upheld. Such a result would further solidify the notion that when an individual voluntarily decides to become part of a cooperative housing community, he or she agrees to be bound by whatever obligations are contained within the governing documents. Under this analysis, the appellate division's decision would not be disturbed, since there is no dispute that Pullman entered into a contract (the proprietary lease) which expressly contemplated his being ejected from the building in the event a super-majority of his fellow shareholders construed his conduct to be objectionable. This result would also be entirely consistent with one of — if not the — major theme of cooperative living; i.e., the "would-be apartment owners must generally acquiesce [t]o...a governing board's... significant restrict[ion] [of] the bundle of rights a property owner normally enjoys."

On the other hand, an extremely troubling result would be if the Court of Appeals reversed the decision based upon a rationale that the business judgment rule does not apply to the facts and circumstances of the Pullman case. The business judgment rule, as it currently exists, both in its application to business organizations and cooperative apartment corporations, does not make an exception from its protections any particular class of decisions. Any chipping away or weakening of this protection could potentially threaten the now-exclusive province of co-op boards to carry out decisions in furtherance of their corporation's best interests.

The Court of Appeals will have the difficult task of balancing the co-op's fundamental right of carrying out the terms of a proprietary lease, with a host of competing rights of a tenant. One thing just about everyone agrees on — it's a close call.

Finally, co-op boards and shareholders who may be thinking that the Pullman case finally gives them the opportunity to oust the shareholder whose dog keeps urinating in the planters should, at minimum, discuss taking any action with the building's attorney. Needless to say, protracted litigation with fellow shareholders is both unpleasant and costly. Moreover, the outcome can never be predicted with certainty. Efforts to resolve these disputes through means short of litigation should usually be undertaken.

Robert J. Braverman is a member of the law firm of Braverman & Associates, specializing in cooperative and condominium law. He represents 40 West 67th Street Corp. in related lawsuits started against it.