London Terrace: A View from the Board

The board members at London Terrace Towers always considered themselves a congenial group. In fact, notes former board president Nancy Frawley, the residents, staff, and management of the 712-unit, four-building Chelsea co-op all lived in relative harmony. When problems arose, the nine-member board sought consensus not confrontation, thereby hoping to avoid a great number of conflicts.

“We don’t pounce on anyone for anything,” she explains. “We try to work things out, reach consensus, and move forward. It’s a really cooperative spirit.”

Everything was relatively fine, in fact, until Michael Davis entered the scene. “We had problems with him almost from the moment he moved in,” recalls Frawley, a former flight attendant.

Indeed, Davis, who bought a sponsor apartment and thus was never approved by the board, began making his presence felt with minor disturbances – slamming his door at all hours and letting his dog roam freely in the hallways – to more significant incidents – spray-painting his furniture in the public stairwell and allegedly stealing clothing from the pool’s locker room. “The building manager would write letters to him about each incident,” says Frawley. “Sometimes, [Davis] would deny that he did it; sometimes, he would ignore the letter; sometimes, he would say he would not do it again.”

After repeated disturbances, the board voted to evict Davis in 2001, but relented when he signed an agreement to obey all the house rules. Two years later, however, after he had broken dozens of house rules again, including allegedly having sex in the public showers with a homeless man whom he had smuggled in, the board made good on its initial threat and evicted him. After a lawsuit, the court upheld the action in a landmark decision that builds on the famous 40 West 67th Street Corp. v. Pullman. In that case, the objectionable conduct of a shareholder led to his eviction but only after a majority of the shareholders approved.

A Road Map

“There was a vote by the shareholders in that case because it was required by the proprietary lease,” explains Stuart Saft, a partner in Wolf Haldenstein Adler Freeman & Herz, the London Terrace Towers attorney. “Since Pullman, we’ve all been wondering whether or not you needed a vote of the shareholders in a building where there was no provision in the proprietary lease for a shareholder vote, and it only required a board vote. What the London Terrace case establishes is that if the proprietary lease does not require a shareholder vote, then you need not have one. It can be done exclusively on the board’s say-so. And the great thing about the decision is that it goes into great detail explaining the basis for the law and how it’s applied, which the court of appeals didn’t do in Pullman. So it lays out the entire framework for what has to happen for a Pullman-type case to go through.”

“London Terrace gives you a road map of what a board should do before they start one of these objectionable shareholder default actions,” agrees attorney James Samson, a partner in Bangser Klein Rocca & Blum who was not involved in the case. “They had meetings, sent letters, and tried to work it out. They bent over backwards. The notices [to Davis] were very specific, and the board didn’t jump to a conclusion quickly; it had a very well-thought-out plan. The conduct of the board was not precipitous. I don’t know many boards that would have tolerated such behavior for that long.”

Back Bends

The board did indeed bend over backwards, giving Davis every opportunity to reform – and documenting every time he erred. “I don’t think any board takes revocation of a proprietary lease lightly,” observes Frawley. “For most people, the home you buy represents your single largest investment and it is your home. No one wants to throw anybody out on something small. The slamming of the doors is annoying, yes, but is it, in and of itself, enough to throw somebody out? Probably not. Up until the Pullman case you had to go through legal gymnastics to get anyone out. Once the Pullman case happened, it opened the door a little more and made it easier for the board to go forward.”

Saft says there is the potential for board abuse but is not overly concerned because the London Terrace decision is so specific about the steps that need to be taken. Others are not as sanguine. “Is this a sharp tool?” asks John Fink, a partner in Bangser Klein Roca & Blum. “You bet it is. Now we all live in fear that some idiots will abuse it and that the court of appeals will say, ‘Oh dear,’ and take away what is a very useful tool.”

Nonetheless, Frawley thinks the court made the right decision in not requiring a full shareholder vote for the eviction. For one thing, “there was a big difference between the building Pullman lived in and London Terrace Towers. His was a single building, much smaller, and London Terrace [consists of] four separate resident buildings with 712 apartments. The idea of having the shareholders all vote on revoking someone’s proprietary lease would be an unbelievable burden. It’s tough enough to get them to the annual meeting to vote on officers. And I don’t think it would be the most pleasant thing in the world to have to stand up in front of hundreds of people and tell some of these details.”

The board may indeed have been patient, but it often became very frustrating. “The board is a pretty focused group,” observes Frawley, whose term as president ended soon after the case was resolved. “We know that nothing happens in a day. We just kept focused and went forward and did what we had to do. Believe me, at times it was very frustrating – all the [legal] delays – but you just deal with the facts and try to keep your eye on the prize.”

Their patience – and diligence in creating a paper trail – was ultimately the key to their success. Notes Frawley: “If there’s objectionable behavior, I think it’s important to do the neighborly thing and talk to people. When it’s clear that that’s not working, you must start documenting – written reports on the behavior; but also copies of letters to the person telling them what they need to do to correct it. Because if we had not done that, I don’t think we would have been successful.”