The Legacy of Pullman

I have read that co-op boards can evict shareholders for annoying conduct, and now they don’t even need to go to the court to do this. Is that true? Does that mean that my board must take this action against my neighbor, who blasts his speakers at all hours?

You are correct that, in 2003, New York’s highest court handed down an earth-shaking decision in 40 West 67th Street vs. Pullman, which upheld a co-op’s board’s decision to terminate a shareholder’s proprietary lease and cancel his stock in the co-op by reason of, among other things, his harassment of shareholders residing above him, and of the board about those shareholders. And, most significantly, the court terminated his right to occupy his apartment without requiring the co-op to establish in court by competent evidence that the shareholder’s conduct was objectionable. Instead, the court held that the co-op’s actions should be judged by the Business Judgment Rule, which provides that co-op decision-making will be upheld unless it can be shown that, to quote Pullman, the “board (1) acted outside of its authority; (2) in a way that did not legitimately further the corporation’s purposes; or (3) in bad faith.”

You are incorrect, however, in thinking that co-ops can avoid court all together. Because even after a Pullman-type termination of a co-op shareholder’s proprietary lease, the co-op still must sue in court to evict or eject him (except in the highly unlikely event that the shareholder voluntarily surrenders his apartment). And it is at that point that cracks in the Pullman armor may appear.

Nonetheless, Pullman seems the perfect complement to the standard language in proprietary leases that co-ops are required to assure shareholders’ “quiet enjoyment” of their apartments. Now, when a co-op receives the inevitable complaint that one shareholder is causing a nuisance to another, or to a larger group, or to the co-op as a whole, the co-op has the means to act against the offending shareholder without having to engage in a protracted litigation over the precise details and extent of the nuisance. In effect, the co-op can be judge and jury about these issues, and, unless there is a showing by the offending shareholder of wrongful conduct, the co-op’s decision should be upheld on a motion for summary judgment in an action to eject.

In Pullman, the high court had taken the free reign that co-ops already had in making decisions about building operations (established in the even more sublime case of Levandusky vs. One Fifth Avenue Apartment Corp.) and extended it to the ultimate decision that co-ops can make concerning a co-op shareholder. Now, innocent victims of neighbor abuse can and should demand that co-ops act to deter and eliminate harassing, nuisance, and other anti-social conduct!

But you don’t need me to tell you that few things in law or life are as good as they first appear – except my wife, of course, but that’s a discussion for another day and, perhaps, another magazine. And as a corollary to that, if something looks or sounds too good to be true, it probably is not true. So, one huge issue that arose was whether the approval of co-op shareholders as well as board members, is necessary for a Pullman-type termination of a co-op shareholder’s proprietary lease.

This was a critical issue. In all but co-ops with very few shareholders, securing the approval of the five to nine individuals on a board for a Pullman-type proprietary lease termination is plainly far easier than securing approval of scores or hundreds of shareholders. Moreover, leaving the decision to a board rather than to the shareholders allows co-ops to avoid publicizing occurrences from the private lives of victims and accusers, which inevitably would emerge if building-wide shareholder votes are conducted. That check on the spread of rumors and gossip and avoidance of the potential for civil war within a co-op could greatly reduce the disruption of a Pullman-type vote and would help the co-op return to normal once the Pullman action has been resolved, one way or another.

The problem, of course, is that requiring board-only approval for a Pullman-type termination creates the possibility of some overly aggressive co-op boards voting to end shareholder leases. With a board-only vote, of which shareholders might even be unaware, there might be no opportunity for more mild-mannered shareholders to stop the actions of such a board.

Now, if Pullman had better clarified these and other related issues, then most of this would be academic. Yet courts seldom do that. The main reason is that courts are supposed to decide only the case before them, and any decision-making is beyond the scope of what is proper.

The Pullman court confronted a co-op proprietary lease that had an uncommon twist to a standard provision. Determining whether a shareholder’s tenancy had become “undesirable” based on “objectionable conduct” and thus that the shareholder’s lease could be terminated, required the approval of at least two-thirds of shareholders as well as approval of the board.

The state’s highest court approved the termination of a proprietary lease in a situation in which the shareholder’s conduct was judged “undesirable” by at least two-thirds of the cooperative’s shareholders – in fact, 75 percent of the total co-op shares and 100 percent of those voting – and not simply by a vindictive, short-sighted, or otherwise deficient co-op board.

In a situation in which concern exists for making sure that the rights of shareholders are not trampled (given the denial to them of a court hearing about their conduct and the possibility of losing their apartment), one could infer that the Pullman court ruled as it did because the shareholder vote was mandated and occurred. Indeed, the Pullman court had affirmed an appellate division majority that had held that “the termination of the tenancy because of undesirability [was] based not only upon a board’s resolution, but upon the vote of two-thirds of shareholders. Thus, the decision here was not made by a small group of people, but the concensus of 75 percent of shareholders.”

On the other hand, the highest court firmly linked its decision to Levandusky, in which only a board vote was involved, and focused on whether the co-op was consistent with the “contract” (i.e., the proprietary lease) between the co-op and each of its shareholders. If that contract requires only a board vote for termination (as is usual), then it can be inferred that no shareholder vote is necessary.

This uncertainty left the courts unsure how to proceed in the post-Pullman world. If a co-op secures shareholder approval for a lease termination (whether or not required and at the two-thirds level applicable to the Pullman co-op), then all other matters being equal, the termination should stand without further scrutiny.

But what if a co-op decides to terminate a shareholder’s lease with only a board vote (in a situation in which that is all that the proprietary lease requires)? Is the reach of Pullman strong enough to sustain that? And is there enough risk that a co-op should secure shareholder approval simply to be safe?

Just over one year after Pullman, in a July 28, 2004, decision, 13315 Owners Corp. vs. Kennedy, the court avoided the board-only vote issue based on a finding that the co-op board in this case had not strictly complied with its rules regarding the vote that the board alone took to terminate a shareholder’s proprietary lease.

Therefore it held that even if Pullman approves board-only firings, the board vote here was inadequate, and a hearing was required to determine whether there was sufficient competent evidence of the objectionable conduct to justify lease termination.

Then, in a December 6, 2004, decision, London Terrace Towers Inc. vs. Davis, the court confronted the issue head on. A board had voted to terminate a shareholder’s proprietary lease and had done so in exacting compliance with its procedures. It had also given the shareholder one last chance and then an extensive opportunity to explain immediately before the board vote occurred. After once more thoroughly recounting the steps that the board took to give the shareholder the opportunity to reform and defend himself, the court approved the board-only termination without requiring the board to present competent evidence of objectionable conduct at a court hearing.

This does not stand, however, as the definitive interpretation of Pullman and is qualified also by the thorough and patient job that the London Terrace board did in considering the evidence that shareholder presented to try to defend himself. In a real sense, the shareholder got to be heard by a jury of his peers (who all happened also to have been his fellow shareholders and neighbors).

As a result, co-op boards are left regularly monitoring the precedents in the hope that an intermediate appellate court will rule definitely on this sometime soon. I normally would say that any hope for further clarification from New York’s highest court is doubtful in the near future given the limited and discretionary scope of that court’s jurisdiction. On the other hand, given the high emotions, stakes, and resources of the participants in co-op versus shareholder controversies (Pullman- type or otherwise), it should not shock us if New York’s highest court clarifies this issue soon.

In the meantime, does a board that is contemplating ejecting someone trust that one court decision is correct that a board vote alone is enough? Or does it consider playing it safe by securing the shareholder imprimatur even though not necessarily required by its documents or Pullman? The answer lies in reading the tea leaves of some recent Pullman-type cases and then resolving to keep an open mind about what the particular situation dictates.

The recent cases are a mixed bag in more ways than one. In two, appellate courts upheld terminations of proprietary leases. But in both, the governing documents required shareholder votes (just as they did in Pullman), and such shareholder votes were undertaken. They do, however, provide some helpful insight that suggests that the appellate courts are pleased to enforce and the build upon Pullman.

In 1050 Tenant Corp. vs. Lapidus (2007), the appellate division judged the attacks on a termination by an attorney and his wife whose battles with its co-op were well-known, long (over 15 years), and bitter, involving, among other things, protracted withholding of maintenance and installation of an air conditioning system without permission. In the process, the court substantially bolstered Pullman with a statement about how “[d]eferring to the cooperative’s decision would not give boards ‘almost unfettered license’ to evict owners from their homes as defendants assert...to the contrary, prohibiting the cooperative from ejecting [the shareholders] would allow shareholder-tenants to flout their most basic obligations, i.e., to pay maintenance and refrain from causing physical damage to the building.”

In Breezy Point Cooperative vs. Young (2007), the appellate term okayed a shareholder-approved lease termination that was initiated by the shareholders themselves and not the board. Notably, the terminated shareholder claimed that it was improper for the co-op to end his lease based in part on the “lengthy history of tenant’s largely meritless litigation against the cooperative, which cost the cooperative several hundred thousand dollars in legal fees.” He claimed that the co-op’s rules did not bar this litigation and that the termination thus “represented an impermissible retaliation for his exercise of his right to due process.”

The court rejected this, finding that the co-op had meticulously followed its rules in implementing the termination; that the “co-op rule...barring shareholders from interfering with the rights of other [shareholders] is sufficiently broad to encompass the rule violations and litigation which the cooperative deemed to constitute objectionable conduct,” and that since “tenant has failed to overcome the presumption that the [shareholders] exercised their honest judgment to promote the lawful and legitimate interests of the cooperative...no further judicial scrutiny of the stockholders’ determination...is warranted.”

In a third case, The World Residency II Ltd. vs. Villansenor (2007), a federal district court relied on Pullman to approve the termination of the luxury passenger ship residency rights of an owner/resident accused of harassing his fellow residents. In doing so, the court cited London Terrace for the proposition that the board-only termination that occurred there was sufficient provided that, as Pullman mandated, the ship’s co-op board strictly followed its own procedures and was not guilty of wrongful conduct.

But then another case shows the court possibly having second thoughts. That was 565 Tenants Corp. vs. Adams, (2007). After a co-op terminated a shareholder’s proprietary lease, the parties entered into a settlement under which the shareholder agreed, mainly concerning his dogs, to “certain terms relating to the upkeep and cleanliness of his apartment.”

Even though the stipulation also provided that a violation would be treated with “zero tolerance,” the court here refused to enforce the stipulation and reinstate termination of the lease. It took the appellate term to reverse the court’s decision and enforce the stipulation.

Finally, in a decision rendered in late January of this year, Trump Plaza Owners vs. Weitzner, the appellate division affirmed a lower court’s grant of a preliminary injunction to a co-op enjoining a shareholder’s misconduct and reversing the lower court dismissal of the co-op’s complaint seeking the ouster of a shareholder following termination of his proprietary lease.

In doing so, the appellate division cited Pullman, as well as Levandusky, for its finding “that, in voting to terminate the tenant’s lease, the Cooperative’s board acted for the purposes of the Cooperative, within the scope of its authority and in good faith...”

One could infer that no shareholder vote was required or taken in that case, although the decision does not so state, one way or another. If so, then Weitzner seems to support board-only, Pullman-type terminations.

With regard to the “good faith” standard, the Pullman court stated that there was not the “slightest indication of any bad faith, arbitrariness, favoritism, discrimination or malice on the cooperative’s part...” But the high court cautioned that courts should not use the Business Judgment Rule “as a rubber stamp for cooperative board actions, particularly those involving tenancy terminations.” So a board contemplating a termination of this type must thoroughly vet its own actions to wring out any conceivable bad faith.

All is not lost if a co-op attempts a termination and gets knocked down because no shareholder vote was taken or for some other reason the procedures taken are deemed somehow inadequate. I recently had success taking the longer route – of introducing evidence and testimony that the conduct of an investor- shareholder’s rent-stabilized subtenant was objectionable and required her removal, based on years of harassing board members, management, fellow shareholders, and staff.

After the investor-shareholder’s surrender of the unit and payment of a substantial amount to the co-op midway through a nine-day trial, a jury of her peers ordered her ouster from the apartment in which she had resided for over 35 years. The co-op thus was able to remove this tenant and, from the sale of the apartment, recoup its expenses.

Pullman is nice if you can achieve it, but boards should remember that they should always be gathering the evidence necessary to defend themselves in court, just in case they fall prey to the Pullman uncertainties.