Limiting Board Power: No Exit

How much does a certified letter cost? About a year and a half of your time, plus legal fees.

That’s just one of the lessons of a major, recent judicial ruling that seriously affects the Business Judgment Rule and what’s referred to as the “Pullman decision” (more formally known as 40 West 67th Street v. David Pullman), two cornerstones of a co-op’s ability to run itself and to terminate the lease of an undesirable shareholder. The other lessons of the ruling? Do things promptly, don’t play armchair psychiatrist, and contact the appropriate people who can help you. Call it “All I Really Need to Know I Learned in New York County Civil Court.”

“The Business Judgment Rule and Pullman already made clear that the board doesn’t have carte blanche to do whatever it wants,” says attorney William J. Robbins, a partner at Rosenberg & Estis, which is not involved in the case. The June 2009 ruling in F.T. Apartments Corp. v. Barbara L. (identified in court records as Barbara L. and in other public records as Barbara Lerner) nailed down a specific limitation that hadn’t come up before. It’s significant because it emphasizes the importance of being sure that the aggrieved shareholder is afforded due process rights when termination is involved, specifically that she received notice and the opportunity to be heard. What FT Apartments makes clear is that due process does not take place if there’s a three-year gap between when notice is given and when the actual shareholder meeting to evict someone takes place.

“I didn’t want to throw her out,” says Harry Eisenstein, vice president of Manhattan’s David Eisenstein Real Estate, where his brother is president. Lerner is mentally ill.

The issue first arose in 2004, when the shareholder in apartment 6C, a floor below Lerner’s, sent the board written complaints about Lerner’s “erratic behavior, overflow of water, and noise,” according to the ruling. The co-op sent Lerner a letter to notify her that her “objectionable conduct” was a breach of the proprietary lease. And that’s the last she ever formally heard of it until the co-op – the 350-unit Fort Tryon Gardens, a complex of seven buildings at Broadway and Bennett Avenues between West 192nd and West 193rd Streets, in Hudson Heights near The Cloisters – began eviction proceedings three years later, in December 2007.

(In addition to Lerner, the court did not identify the co-op or the managing agent. These were derived from a Housing Preservation & Development complaint number in the decision, and independently confirmed. A sales agent at the complex said that while there is a board with resident-shareholder members, the complex, which according to the court went co-op in December 1984, is still 60 percent under control of its sponsor, Clipper Equity.)

Eisenstein and the board evidently made their own medical diagnosis that Lerner would not understand their notifications. Because of this, they instead sent sporadic letters to her cousin, identified only as Dennis S., and to her brother, Bruce. But Eisenstein says he eventually realized, “The family – forget it, they walked away from her. The family’s not interested in helping her out.”

But he offers no explanation as to why it took from mid-2004 until August 2007 to discover this. It is also unclear why the board did not, as a pro forma matter of course, send Lerner or her attorney, if she had one, a certified letter to notify her so she could defend herself before the board if she desired, as the Pullman decision dictates.

More pointedly, if the board and its agents felt Lerner was so incapacitated that she could not understand a notification, why didn’t they contact either the state agency Protective Services for Adults (PSA) or the city’s Adult Protective Services (APS)? Anybody can do it; the latter just takes a call to 311, some questions, and maybe some paperwork – all a lot less costly and time-consuming than the rigamarole the co-op went through, and certainly more humane and beneficial to the shareholder.

“If the [co-op] corporation was concerned that the shareholder was incapacitated, the corporation could have gone so far as to seek a guardian appointed, or to seek an evaluation,” advises attorney Marc A. Landis, a partner at Phillips Nizer, which is unaffiliated with the case. “You can contact APS and it will send its trained people, get an evaluation, and, if need be, have a guardian appointed.” In November 2008, in the course of this eviction proceeding, Judge Shlomo S. Hagler did, in fact, appoint the Jewish Association for the Services for the Aged as Lerner’s guardian.

Such a guardianship is ultimately beneficial to a board. “You have a responsible party acting on behalf of an incapacitated person,” says Landis, “who can potentially cure defaults, whether it’s fixing a leak or attempting to change behavior. The corporation’s first goal,” he points out, “is usually to have the faulted situation brought into compliance” rather than jumping to eviction – especially in a case like this. “When the shareholder suffers from some degree of incapacity, and is ultimately determined by the court to be incapacitated, a judge will bend over backwards to make sure that a person’s rights are not violated.”

In the end, the court ruled that, according to precedent, notices can go “stale” in as little as 11 months. Hagler quoted a previous judge’s ruling: “It was not intended that [the landlord’s notice] could hang like the sword of Damocles over the head of the tenant, to be used at some future date.” While a shareholder, he wrote, “may not have a right to be present during the actual deliberations and vote of the cooperative board, she does have to be timely informed of the allegations and [to have] an opportunity to be heard to respond to the complaints.”

“I wasn’t happy with the outcome,” says Eisenstein. “The stipulation is not exactly what I wanted. It’s costing the co-op a lot of legal fees.” Lerner was temporarily relocated, under the guardian’s care. “She was out for awhile and now she’s back on a trial basis,” he says. “It’s a whole song and dance.”

The case, says Robbins, clarifies that even when a board wants to play doctor and make medical assumptions, “You have to notify the tenant. If you want to notify a relative you think might better realize the significance at issue, that’s fine. But you still have to communicate with the shareholder.”