No Preference

May an original co-op shareholder sublet an apartment when non-original purchasers do not have the same right? The answer was a clear "no" in Edith K. Spiegel v. 1065 Park Avenue Corporation because of the requirements of Section 501(c) of the Business Corporation Law that says, "each share shall be equal to every other share of the same class."

In a 2002 declaratory judgment action involving Spiegel's right to sublet her co-op apartment, upon the parties' respective motions for summary judgment, the motion court declared that Spiegel's remedy for any unreasonable withholding of consent by the managing agent to the subletting was not judicial review, but rather a further application for consent addressed to the co-op's board of directors or shareholders.

The appellate court, however, modified the motion court decision and declared instead that paragraph 38 of the proprietary lease and the second paragraph of Article V, Section 4 of the co-op's bylaws violated Business Corporation Law Section 501(c), that Spiegel was not entitled to special subletting privileges by reason of such provisions, and that Spiegel could not sublet the apartment without the consent of the co-op's board of directors or shareholders.

Insofar as pertinent, the cited paragraphs of the proprietary lease and bylaws provided that original purchasers of the co-op's shares, such as the plaintiff, need the consent of only the co-op's managing agent in order to sublet their apartments. That consent was not to be unreasonably withheld, and that if such consent was withheld, an original purchaser could apply for consent to the board or shareholders as provided in paragraph 15 of the proprietary lease.

The latter paragraph prohibits all non-original purchasers from subletting their apartments without the consent of the board or a supermajority of the lessees, which consent can be withheld for any reason. Spiegel claimed that the managing agent unreasonably withheld its consent and sought an injunction compelling its consent.

There was no question in the appellate court's view that lease paragraph 38 and the related bylaw provision violated BCL Section 501(c) by giving the original purchaser more favorable subletting rights than non-original purchasers. The only question was whether the co-op waived or should be stopped from asserting the illegality of such preferential treatment.

The court held not. It said that the defense of illegality, i.e., that a contract is void as against public policy, is not waived by a failure to affirmatively plead it in an answer, and will be entertained without reference to the state of the pleadings, at least where its interposition does not take the plaintiff by surprise. Here, the plaintiff could not have been surprised by the co-op's assertion of Section 501(c) in its motion for summary judgment where such had been raised by the cooperative in a prior motion for summary judgment that was denied with leave to renew upon completion of disclosure.

Nor could waiver or estoppel based on the co-op's conduct be relied upon to enforce corporate documents that are contrary to public policy, noted the appellate court. Thus, it did not avail Spiegel that she relied on the sponsor's offer of special subletting privileges in buying the apartment, that the co-op learned of her intent to sublet the apartment when she purchased a second larger apartment in the building with her husband, that the co-op was continuing to permit subletting by other original shareholders, and the co-op was itself subletting an apartment. In this regard, the court also noted the "no waiver" clause in the proprietary lease.

Comment: This case reinforces established law about treating some shareholders differently from others. Because of the Business Corporation Law dictates, this is not permissible. Special privileges, even if provided for in the proprietary lease, are unenforceable. However, rights of holders of unsold shares may still be protected.