A Terribly Strange Bed/Young Blood

May a landlord be liable for the failure to return stored property to a tenant even when the landlord did not receive payment for the storage? The answer was “yes” in Gunning vs. Regina Metropolitan Co. LLC., although the aggrieved tenant here received only nominal damages.

Kenneth Gunning lived in a rental building at 155 Riverside Drive in Manhattan for 15 years. He had stored certain items, one being a wrought-iron bed, in a storage space the landlord had made available to tenants. The storage space was under lock and key, and the key was in possession of the building’s superintendent. The bed had been placed in the storage space by a building employee, now unknown to Gunning because there were frequent personnel changes, although the bed was labeled with Gunning’s name. Sometime in March 2007, Gunning discovered the item was missing and brought this action against the landlord.

The landlord’s witness stated that there was a storage space in the building where the tenants store their property. This basement room is a dirty and dank space that is not kept well. The room was locked and the key is in possession of the superintendent. On May 2, 2005, written notice was sent to all tenants to label all items belonging to them in storage. Anything not labeled would be considered abandoned and discarded. A second notice was sent on June 6, 2005. These notices were slipped under each tenant’s apartment door.

The lease notice provision called for notice, for anything other than rent, to be sent by certified mail. The notice gave tenants until June 30, 2005, to label their property. Gunning stated he did not receive any notice because he was not residing in the building at the time it was given, and because it was not sent by certified mail, in accordance with the lease’s notice provision. In any event, Gunning stated that the notice had no effect because his property was labeled at the time he deposited it in the storage room.

In analyzing the legal issues, the court stated that a “bailment” is the possession or the retention of property by one person under circumstances obligating him to deliver that property to another upon demand or at a given time. A bailment can be for mutual benefit, for the benefit of the bailor, or for the benefit of the bailee. The standard of care required of the bailee varies with the type of bailment. When a bailment is solely for the benefit of the bailor, it is a gratuitous bailment and the bailee’s liability is limited to its gross negligence or conversion of the property. One who stores another’s property without compensation is not liable for destruction of the property unless because of his gross negligence.

The court noted that the landlord stored Gunning’s property without a fee thereby establishing a gratuitous bailment subjecting the landlord to liability only upon a showing of gross negligence. The burden of proving bailee’s negligence is upon the bailor.

However, there was a presumption of gross negligence, which arises from proof of bailment and failure to deliver the bailed property. This presumption shifts the burden of proof to the bailee who must then come forward with an explanation of the loss and how it occurred. It is not enough to show that the bailee used reasonable care in its custody of the bailed property if “mysterious disappearance” is the only explanation. The bailee must produce admissible evidence demonstrating that the loss or destruction of the property resulted from some cause other than the bailee’s negligence. The bailee must actually demonstrate the specific cause of the disappearance of the property; a mere showing that the bailee exercised due care is insufficient. If the bailee fails to produce such evidence, then the bailor has established negligence as a matter of law, said the court.

When the landlord could not produce Gunning’s bed, a presumption of gross negligence arose requiring the landlord to come forward with a legally sufficient explanation to rebut this presumption. The burden of proof shifted to the landlord. The landlord had not provided the court with an explanation for the loss of Gunning’s property, and thus the court felt compelled to find as a matter of law that the landlord was grossly negligent.

Liability having been established, the court said that Gunning needed to establish damages. In attempting to prove damages, Gunning submitted a sheet of paper with a photograph of a bed and a one-line statement from an “appraiser” which stated that the value of the bed was $5,000. There was nothing on the record as to the identity or credentials of this “appraiser” or how he arrived at the value he assigned this property.

The court said that it must be taken into account that the bed was placed in what Gunning described as a dingy, dirty, dark old room and was kept there for at least four years before Gunning noticed its disappearance. Gunning did not produce evidence of the cost of the bed, its age, and condition at the time of the loss or its replacement value. Accordingly, the court refused to grant any evidentiary weight to the appraisers’ submission. However, the court held that substantial justice consistent with the rules of substantive law would best be achieved by awarding Gunning nominal damages in the amount of $100 for the loss of the bed. The court granted judgment for Gunning against the landlord in the amount of $100 plus interest from March 14, 2007, plus costs and disbursements.

Comment: Although this case involved a rental building, the issue here, storage of property by a landlord, is equally applicable whether the building is a co-op or a condominium. The entity in whose care the property was left has some responsibility for its return. Even when the standard of care for a gratuitous bailment is relaxed to gross negligence, there may still be liability for lost property. Co-op and condo boards should insure some measure of security and control over goods stored by building occupants outside over their units and should insure that any disposition of stored property is properly documented and recorded to protect the landlord from later claims.

Pullman Progeny

Young Blood

Breezy Point Cooperative Inc. vs. Young is the latest case in which a court permitted a co-op to terminate a proprietary lease because of the objectionable conduct of its shareholders.

In this case, the proprietary lease between the co-op landlord and Thomas Young, the tenant-shareholder, provided that the lease may be terminated when the shareholders determine that “because of objectionable conduct on the part of the Lessee the tenancy of the Lessee is undesirable.” The lease further provided that a tenant engages in objectionable conduct when he or she “repeatedly violates or disregards the cooperative’s rules and regulations.”

The corporate bylaws provided that the shareholders may propose resolutions to be considered at a special meeting, which may be convened “at any time” by a majority vote of the board of directors “provided that there shall be filed with the Secretary a petition signed by 200 shareholders.” A resolution may be adopted when a majority of the shareholders are present and two-thirds or more vote in the resolution’s favor.

In early 2004, 225 shareholders signed a petition to require a vote, at the annual or a special meeting, on a resolution terminating Young’s propriety lease. The proposed resolution cited the tenant’s past conduct in continual disregard and violation of the rules and regulations of the cooperative and his abuse of the judicial system in bringing unfounded lawsuits against the co-op.

In response to the petition, the board voted to hold the special meeting when the shareholders convened for the annual shareholders’ meeting in August 2004. At the meeting, after several shareholders spoke with respect to the resolution and Young addressed the shareholders, 1,259 of the 1,380 voting shareholders supported the resolution.

In October 2004, the co-op served Young with notice that his lease had been terminated. The notice alleged that on 94 occasions, from March 31, 1996, through April 28, 2004, the tenant violated one or more of the cooperative’s bylaws or its rules and regulations, thereby “engag[ing] in objectionable conduct in violation of the proprietary lease.”

In an attached listing, the co-op set forth the dates and nature of the violations, which included the repeated harassment of security officers; the defacement of cooperative property; numerous violations of noise, litter, animal, and motor-vehicle regulations (certain of which threatened the safety of other shareholders); and interfering with the rights of other shareholders.

In response to the subsequent notice of petition and the petition itself, Young answered by alleging, among other matters, that the procedures employed to terminate his lease were flawed, that insofar as the termination was based on the parties’ prior litigation, such a ground is not specified in the lease, bylaws, or rules and regulations as a form of objectionable conduct and, in any event, represented an impermissible retaliation for his exercise of his right to legal process. Young also asserted counterclaims based on the co-op’s retaliation and bad faith and for attorney’s fees.

The co-op moved for summary judgment on its petition and to dismiss Young’s counterclaims. In its supporting papers, the co-op set forth his violations, the lengthy history of Young’s frivolous litigation against the cooperative, which cost the co-op several hundred thousand dollars in legal fees, the procedures required by the lease and bylaws to terminate tenancies, and the actions taken by the shareholders and the board, from the circulation of the petition to the vote which terminated the tenancy.

Young opposed the motion and cross-moved for an order dismissing the petition, calling it impermissible retaliation and citing improprieties in the procedures leading to the shareholders’ vote and the co-op’s failure to provide him with an opportunity to contest certain violation notices. He added that the parties’ prior litigation was an improper basis to terminate his tenancy.

The court denied Young’s cross-motion and granted the co-op’s motion, concluding that the co-op met its burden to establish sufficient grounds to terminate the tenancy, that it terminated the tenancy in conformity with Young’s procedural rights under the lease, bylaws, and regulations, and that Young failed to establish an issue for trial with respect to any defense or counterclaim. Young appealed and the appellate court affirmed.

In supporting its decision, the appellate court cited the landmark case, 40 West 67th Street vs. Pullman, where the court invoked the Business Judgment Rule to uphold a co-op board’s termination of a shareholder’s proprietary lease (see “Voting Out Your Neighbor,” Habitat, July/August 2002). The rule requires the courts to “exercise restraint and defer to good faith decisions” made by boards of directors in business settings so long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith. The evidence that is the basis for the shareholder vote will be reviewed under the Business Judgment Rule, and the courts will normally defer to that vote and the shareholders’ stated findings that the tenant is indeed objectionable even if “the results show that what they did was unwise or inexpedient.”

With respect to a board’s conduct, the Pullman court acknowledged that “the broad powers of cooperative governance carry the potential for abuse when a board singles out a person for harmful treatment or engages in unlawful discrimination, vendetta, arbitrary decision making or favoritism,” which conduct is “incompatible with good faith and the exercise of honest judgment.”

To overcome the presumption that the board members exercised their honest judgment to promote the lawful and legitimate interests of the corporation, a tenant must raise sufficient facts with respect to fraud, self-dealing, or other misconduct by the board to “trigger further judicial scrutiny.” When scrutinizing a cooperative’s conduct in terminating a tenancy, the court said that courts will examine the corporate rules and bylaws to determine whether the action was authorized, whether the cooperative followed its own procedures for terminating a tenancy, and whether the cooperative acted in good faith and in the corporate interest to terminate the tenancy for the reasons alleged.

Here, the co-op established that more than the necessary 200 shareholders signed the petition, that the resolution specified the nature of the conduct alleged to be objectionable, that the board properly convened a special meeting after timely notification of all the shareholders, including Young, of the text of the resolution to be presented at the special meeting, that the requisite number of shareholders were present for the vote, and that the required two-thirds of those voting supported the resolution.

The court said that Young showed no support in the lease or bylaws for his contention that a special meeting to consider a shareholders’ resolution may not be convened in the course of an annual shareholders’ meeting, and he failed to establish that the meeting and voting were improperly conducted. The court also rejected Young’s challenge to the shareholders’ determination that the rules violations and litigation constituted objectionable conduct.

The co-op rule barring shareholders from “interfering with the rights of other [shareholders]” is sufficiently broad to encompass the rules violations and litigation that the cooperative deemed to constitute objectionable conduct. As Young had failed to “overcome the presumption that the [shareholders] exercised their honest judgment to promote the lawful and legitimate interests of the corporation,” no further judicial scrutiny of this issue was warranted, said the court. Accordingly, the final judgment was affirmed.

Comment: The Pullman progeny keep coming, about one every year since the landmark decision in 2002. While the number is still small, almost all of the progeny have supported the action of the co-op in terminating proprietary leases for objectionable conduct. Does the limited number of cases suggest the difficulty in establishing objectionable conduct or restraint on the part of co-op boards in applying Pullman to only the most egregious instances of objectionable conduct? Stay tuned!