Case Notes

May a co-op refuse to permit the transfer of shares and a proprietary lease for a co-op apartment to an approved purchaser where the seller refuses to pay the co-op disputed amounts? The answer was a clear “no” in Estate of Angela Schiller.

In this case, the fiduciaries of the estate of Angela Schiller sought a preliminary injunction permitting them to proceed with the scheduled closing of the sale of Schiller’s shares in a co-op. Their petition also sought a determination of the validity of a claim by the co-op against the estate.

The present application arose within the following context. Schiller died on November 30, 2001, in an apartment fire at 60 East End Avenue in Manhattan that also killed her husband. She was survived by her daughter from a prior marriage and, possibly briefly, by her husband (who may have died shortly after the fire rather than during it). A proceeding was started to probate an instrument under which Schiller gave her co-op shares to her husband if he survived her and, after various pecuniary bequests, left her residuary estate to three charities. Preliminary letters for Schiller’s estate (valued at roughly $10 million) were issued on December 10, 2004, to the nominated executors.

Some six months after their appointment, the preliminary executors, in the absence of consent from the daughter and the husband’s successor-in-interest, requested court authorization to put the apartment up for sale. They ultimately obtained such authorization under a stipulation among all interested parties. Thereafter, they entered into a contract to sell the apartment for $2.75 million. After the co-op board approved the buyer, a closing date was set for May 16, 2006.

The co-op, however, had taken a position that threatened the fiduciaries’ ability to close and put the estate at risk of an aborted contract. The co-op was among numerous claimants who alleged that Schiller’s negligence had caused the fire. The co-op had informally demanded payment from the fiduciaries to cover damage to the building, increased insurance premiums, and miscellaneous other expenses, as well as legal fees incurred in relation to the fire.

The co-op conceded that it was uncertain as to the damages it ultimately could claim to have suffered (which apparently are subject to recalculation after various contingencies have been eliminated). Nevertheless, the co-op had reported in writing to the fiduciaries that its current estimate of its damages was $120,000, that it expected the fiduciaries to satisfy its claim at or prior to the closing, and that it would not permit such closing otherwise.

The papers indicated that the fiduciaries offered to place the amount demanded by the co-op in escrow pending resolution of the dispute. When that offer was refused, the fiduciaries began the present proceeding in which they asked that the validity of the co-op’s claim be determined and that the co-op be enjoined from interfering with the scheduled closing.

The co-op maintained that a provision of the parties’ proprietary lease entitled it to immediate payment. The terms in question were part of paragraph 16 of the co-op’s proprietary lease (under the heading “Assignment”) and said:

“16. (a) The Lessee shall not assign this lease or transfer the shares to which It is appurtenant or any interest therein, and no such assignment or transfer shall take effect as against the Lessor for any purpose, until ... (iv) [all] sums due from the Lessee shall have been paid to the Lessor, together with a sum to be fixed by the Directors to cover reasonable legal and other expenses of the Lessor and its managing agent in connection with such assignment and transfer of shares.”

In the court’s view, the quoted provision did not support the co-op’s position. The court said that it could not reasonably be read as intended to give the co-op the power to hold an approved sale hostage unless the shareholder satisfied claims that were unproved, unsettled, and unadjudicated. Such a reading would, in effect, make the instrument a license to use as a threat to the shareholder’s property. It could be leverage for forcing him to make concessions on a disputed claim.

Under the only reasonable reading, however, the court determined that the provision instead gave the co-op the right at closing to be paid only on its liquidated claims (i.e., “sums due”), as well as its fees and other expenses relating to the share transfer per se. Indeed, if the language in question were given the meaning urged by the co-op (i.e., giving it the right to demand payment on its unliquidated and liquidated claims), such provision would constitute an unreasonable restraint on alienation of property in the court’s view.

The co-op purported to distinguish a prior reported case (Chemical Bank) in which the shareholder had a claim against the co-op, rather than vice versa. But such distinction did not amount to a meaningful difference, said the court. The co-op in Chemical Bank proposed to use its power over a closing as a way to force a shareholder into concessions that he otherwise would not have made. The court said that the co-op here proposed to do the same. The co-op tried to distinguish the two cases by arguing that the shareholder here (unlike his counterpart in Chemical Bank) did not have to settle or surrender as the price for going forward with the closing. The co-op insisted (without any support from the terms of the proprietary lease, said the court) that the shareholder here could simply pay “under protest” and seek to recover the funds thereafter. It was observed that the prospect of payment “under protest” appeared to have arisen not from the lease, but rather only as a possible concession offered by the co-op during abortive settlement discussions with the fiduciaries.

At least equally important, a payment by the fiduciaries “under protest” would give the co-op/claimant an inordinate advantage in any litigation, relieving it of its burden of proving liability and damages and shifting the burden of proof to the fiduciaries. Accordingly, the courts said that the co-op’s insistence that the fiduciaries would “lose nothing” by caving in to its demand was hollow (particularly in light of the co-op’s clear conviction that it, on the other hand, would “gain something” as a result).

Consequently, the elements needed to warrant the issuance of a preliminary injunction were present here. First, the fiduciaries had a likelihood of success on the merits of whether an injunction should issue enjoining the co-op from preventing the closing from occurring. Second, the record indicated that the estate would suffer irreparable harm if an injunction were not issued: the loss of a sale in an uncertain market.

The court noted that the interim relief sought by the fiduciaries, in effect, amounted to an injunction that is mandatory as well as prohibitory (requiring cooperation as well as restraint on the part of the co-op) and thus required special justification.

Nevertheless, such an interim mandate was justifiable where, as here, its denial would result in irreparable harm to the applicant (rendering ultimate relief academic), and the granting of it will result in less or no harm to the enjoined party. In this case, where the estate was solvent, there could be no harm whatsoever to the co-op, particularly if the injunction was conditioned on the establishment of an escrow of the disputed amount.

The court ordered that the co-op and its managing agent, pending the final decree in this proceeding, be restrained and enjoined from obstructing the pending sale of the shares in the co-op held by the executors and from requiring the executors to pay the claim of the co-op as a precondition to a closing of the sale.

The court further ordered that the preliminary executors deposit the sum of $135,000 in escrow in an interest-bearing attorney’s subaccount of counsel to the executor under the estate’s and co-op’s taxpayer identification numbers.

Comment: If the amounts sought in this case were not disputed, or at the least easily calculable under some specific provision of the co-op’s bylaws or proprietary lease which give the co-op the right to impose a specific item, for example, a late fee, a sublet fee, or a transfer fee, the court would have upheld such payment as a precondition to the transfer.

However, in this case, where the amounts were unliquidated, speculative, and disputed, the court refused to give the co-op an advantage by requiring the requested payment.

This will require further legal action. The issue might be changed in the future by a proprietary lease amendment giving the board specific authority to charge amounts in certain disputes with shareholders.

The Ejector Seat

In 1050 Tenants Corp. vs. Lapidus, the appellate division of the Supreme Court appears to have ended 15 years of litigation between a co-op and a shareholder over various defaults by the shareholder. In this case, based upon the decision in 40 West 67th Street Corp. vs. Pullman (see “Hotline: Voting Out Your Neighbor,” Habitat, July/August 2002), the appellate court confirmed the co-op’s lease termination and action for ejection and cleared the way for the co-op to evict the shareholder for objectionable conduct.

In 1983, defendants Steven and Iris Lapidus purchased the shares allocated to the proprietary lease for Apartment 4B in the defendants’ co-op building. Beginning in 1992, the Lapiduses, claiming unremedied conditions in their apartment, withheld payments for maintenance, electricity, and special assessments repeatedly and for extended periods of time. The co-op brought multiple nonpayment proceedings, which, either by court order or settlement stipulation, resulted in the defendants’ payment of over $170,000 in arrears and more than $400,000 in attorneys’ fees.

In a 1992 nonpayment proceeding, the housing court awarded the co-op $43,834.24 in arrears and denied the Lapiduses any abatement after discrediting their testimony that “they would allow themselves to live in fear and with terrible conditions for years on end without taking any affirmative steps to correct the problems,” and finding their other assertions either unsubstantiated or pertaining to purely cosmetic appearances in the common areas. The court found the defendants’ arguments particularly incredible in light of the fact that Steven Lapidus was an experienced real estate and landlord-tenant lawyer. After a protracted hearing on attorneys’ fees for that case, the civil court commented on the defendants’ “obduracy,” “needless and groundless pretrial motion practice,” attempts to “delay or derail the underlying proceeding … implicitly designed to economically force the [co-op] to its knees,” and the co-op’s “total victory.” Following an appeal, defendants stipulated to pay $328,655.84 in attorneys’ fees, plus interest.

Before the issue of attorneys’ fees in the first action was resolved, the co-op began a second nonpayment proceeding in 1995, as a result of which the housing court directed defendants to pay $55,681.81 in arrears, offset by $3,340.91 as a rent abatement, thereby totaling $52,340.90. In addition, the court awarded the co-op $115,000 in attorneys’ fees and over $15,000 in prejudgment interest, later reduced by stipulation to $75,000 in fees and $6,000 in interest.

Another nonpayment proceeding brought in 1999 was settled by stipulation, so ordered by the court in which the defendants paid $16,098.29 in arrears, and the co-op credited their account $10,000 to replaster walls and ceilings, hang new wallpaper, and clean a carpet. The defendants further agreed that “under no circumstances” would they withhold payment of electric charges, and that they would not withhold maintenance or additional assessments unless they first sent written notice to the co-op’s managing agent, superintendent, and attorneys; allowed the co-op 10 business days from the date of notice to cure; started a housing court proceeding if the co-op failed to cure; and substantially prevailed in the housing-part proceeding.

Notwithstanding that stipulation, defendants thereafter withheld payments for maintenance and additional assessments without complying with the agreed-upon procedures, and withheld payments for electricity. In a subsequent nonpayment proceeding, the housing court found incredible Steven Lapidus’s testimony that he never knew about the stipulation, “even though he was a partner of a law firm, he specialized in real estate law, an associate of his firm signed the stipulation, he received a $10,000 abatement, he was involved in a great deal of litigation with his co-op, and he knew that his case ended the day his associate appeared in court.” The court also rejected the Lapiduses’ argument that their tendering maintenance for a single month constituted a defense to withholding payments for many months. The court issued a judgment in favor of the co-op for $59,270.69, plus interest.

Not only did the defendants disregard their obligations under the stipulation, but they also installed, without the permission of the co-op, a water-cooled air conditioning system, which caused substantial water damage to the apartment and personal property of the tenant-shareholder below. The Lapiduses ignored the protests of their neighbor and denied the co-op access to inspect the system, compelling the co-op and the neighbor to bring separate actions (later consolidated) against them.

By stipulation dated September 30, 2002, so ordered in another court proceeding, the defendants agreed to disconnect their water-cooled air conditioning units from the building’s water supply and drain lines and to cap those lines. They further agreed to pay $7,345.94 in arrears of maintenance and electric charges through October 2002. The co-op placed $15,000 in escrow to reimburse defendants for the costs of removing the system and replacing it with an air-cooled one.

Even though the co-op deposited the funds in escrow to underwrite the replacement of the air conditioning system, the Lapiduses refused to honor their obligations under the stipulation, and on February 4, 2003, the court then found them in contempt for failure to abide by the terms of the stipulation and directed them to disconnect their water-cooled air conditioning system. By order and judgment entered October 29, 2004, the court adjudged them in contempt a second time, vacated the stipulation, directed that the funds in escrow be returned to the co-op, permitted the co-op to retain the Lapiduses’ payment of arrears of $7,345.94, and issued a permanent injunction that the Lapiduses remove their water-cooled air conditioning system.

Thereafter, the co-op’s board of directors sent the defendants written notice of a special meeting of the board to consider a resolution to terminate their proprietary lease, under section 34(e) of the lease, “on the grounds that the tenancy of the [Lapiduses] is undesirable” because of their chronic withholding of maintenance and other payments, the nuisance of installing and refusing to dismantle a water-cooled air conditioning system that caused damage to their downstairs neighbor, and the protracted litigation in which defendants’ arguments were repeatedly found to be meritless and in bad faith. At the special meeting, where counsel appeared on the defendants’ behalf, the board unanimously adopted the resolution.

The defendants threatened to sue any shareholder who voted to terminate their tenancy, and therefore the board enacted a resolution to indemnify and hold the shareholders harmless. At the special shareholders’ meeting to consider the resolution to terminate the Lapiduses’ proprietary lease, the couple’s counsel warned the shareholders of “the serious legal consequences” and “substantial liability” that would befall them should they “choose to evict the Lapiduses.” Nevertheless, 98 percent of the shares voted in favor of the resolution.

The pair refused to vacate their apartment, and the co-op began this action. Justice Marylin G. Diamond, well acquainted with the history of the case, granted the co-op summary judgment on the ejection cause of action and referred the issue of attorneys’ fees to a special referee.

In discussing the issues involved, the court noted that decisions of residential co-op corporations, including termination of a shareholder’s tenancy for objectionable conduct, were assessed under the business judgment rule based on Pullman. It is also said that courts will not substitute their judgment for that of a co-op’s board of directors and shareholders, as long as the corporate action is authorized, in furtherance of the co-op’s legitimate interests, and taken in good faith.

The co-op terminated defendants’ tenancy pursuant to section 34(e) of the propriety lease, which provided for termination:

“If at any time the Lessor [the cooperative] shall determine, upon the affirmative vote of both four-fifths of the Board of Directors and the holders of record of two-thirds or more of the shares of the Lessor then issued and outstanding, at meetings of both such directors and such shareholders duly called to take action on the subject, that because of objectionable and undesirable conduct on the part of the Lessee [the Lapiduses], or of a person dwelling in or visiting the apartment, the tenancy of the Lessee is undesirable. (Repeatedly to violate or disregard the house rules hereto attached or hereafter established in accordance with the provisions of this lease, or to permit or tolerate a person of dissolute, loose or immoral character to enter or remain in the Building or the apartment, shall be deemed to be objectionable and undesirable conduct.)”

The defendants contended that the parenthetical situations enumerated in the proprietary lease are the sole bases for establishing “objectionable and undesirable conduct,” or at least that there is an ambiguity, which must be resolved against the co-op as drafter, whether those are exclusive factors or merely examples. As the motion court noted, there was nothing in the parenthetical statement to indicate it is other than illustrative, and an exhaustive list would not have been placed in an aside. In any event, House Rule Four in the proprietary lease stated that “[n]o lessee ... of an apartment shall...do or permit anything to be done therein which will interfere with the rights, comforts or conveniences of other occupants of the building.”

The defendants’ repeated refusal to remove an air conditioning system that leaked into the apartment below and caused damage interfered with the “rights, comforts or conveniences” of their neighbors, and thus constituted a violation or disregard of the house rules for purposes of Section 34(e) of the proprietary lease. The appellate court determined that the unjustified withholding of maintenance and other payments for extensive periods of time, as found by several courts, which compelled the co-op to bring multiple costly nonpayment proceedings, fell within any definition of “objectionable and undesirable conduct,” and, since the financial burdens were borne by the tenant-shareholders, also interfered with their “rights, comforts or conveniences.” As such, the votes in favor of the resolution were authorized. Relatedly, the court concluded that evicting tenants who consciously and unabashedly damage another neighbor’s property and inflict thousands of dollars in unnecessary legal fees was in furtherance of the co-op’s legitimate interests.

According to defendants, the term “objectionable and undesirable conduct” was so vague that it was unenforceable. The court said that the provision was fairly concrete, defendants were given detailed written notice of what actions were deemed objectionable and undesirable, and the co-op’s interpretation was reasonable. Thus, defendants’ attempt to involve the court in “judicial second-guessing” was precisely why the Business Judgment Rule applied to co-op determinations.

The proprietary lease did not violate public policy by restricting access to the courts. In the court’s view, there was no public policy favoring the repeated assertion of unsustainable arguments, nor was there a pattern of delaying tactics designed to inflict extensive costs on the adversary. There were no signs of dishonesty or disingenuousness with the court, either, nor was there a disregard of “so-ordered” stipulations and “contempt of court” orders.

With respect to the Lapiduses’ argument that the board purchased the shareholders’ votes, in violation of Business Corporation Law Section 609(e), by promising to indemnify them against any potential lawsuits by defendants, the court held that the promise was not conditioned on any particular vote by the shareholders and was merely a response to the defendants’ threats to pursue anyone who opposed them. The appellate court noted also that, in a letter to the shareholders, the defendants previously took the position that the board’s promise of indemnification was worthless: “Where does the board think the money for any such indemnification would come from? The answer is simple, it comes out of your pocket. Therefore, the board is doing nothing in promising to indemnify you with your own money.”

Moreover, under the Lapiduses’ own interpretation, their threats against shareholders who might vote in favor of the resolution offered something of value to those who voted against it, i.e., freedom from “serious legal consequences” and “substantial liability,” and thus ran afoul of Business Corporation Law Section 609(e).

With a doctrinaire blunderbuss said the court, defendants contended that legal precedents precluded the co-op from beginning this ejection because, at the time of filing, there was a pending nonpayment proceeding for maintenance and other charges due under the lease. There was nothing inconsistent in the co-op’s actions, and defendants cited no authority requiring a lessor to abandon its earlier-asserted claims for unpaid rent after the lease was terminated. The court found that the defendants displayed no inhibition to arguing certain “affirmative defenses,” including that their own apartment was uninhabitable or insufficiently repaired, which they conceded were previously raised and rejected in the nonpayment proceeding.

Assuming, that the board had permitted other tenant-shareholders to install or retain water-cooled air conditioning systems, the court noted that there was not even a suggestion that any such units caused damage to an apartment; thus, the co-op’s decision to terminate the defendants’ tenancy was not discriminatory.

The board did not retaliate against defendants because they “sought redress for landlord’s own breach of its contractual and statutory responsibilities through the courts,” as defendants claimed; the board did not breach any duties, unlike defendants, who chronically failed to meet their financial obligations and obstinately refused to abate a nuisance.

Defendants’ inability to corroborate their final charge of bad faith on the part of the board and/or the shareholders did not warrant a denial of summary judgment. The current record, most of which was generated in the courts over the past 15 years, demonstrated, in the court’s view, the co-op’s lack of malice. Deferring to the co-op’s decision would not give boards “almost unfettered license” to evict owners from their homes, as defendants asserted; to the contrary, the court held that prohibiting the co-op from ejecting defendants would allow the tenant-shareholders to flout their most basic obligations, i.e., to pay maintenance and refrain from causing physical damage to the building.

The court held that by the terms of the resolution, defendants’ lease terminated on June 15, 2005. The co-op began the ejection on June 21, 2005, and therefore the action was timely. Defendants argued that the time within which the co-op had to bring an action started to run in 1992, when defendants first breached the proprietary lease by unjustifiably withholding maintenance payments. While the co-op might have spared itself much grief and expense had it sought to remove defendants at that time, the court concluded that it should not be penalized for its forbearance or good faith attempts to settle the matter.

Comment: This appears to be the last in a long series of decisions involving the co-op at 1050 Fifth and the Lapiduses over a variety of issues related to the defendants’ occupancy and conduct in the co-op. Prior decisions have been the subject of earlier “Case Notes.” Here, the co-op’s patience with the Lapiduses’ repeated objectionable conduct was at an end, and it invoked the Pullman decision to validate its lease termination. This case is the latest progeny of Pullman and is further evidence of what a potent weapon this decision has become for co-op boards when faced with seriously objectionable conduct.