Evicting a Shareholder with “Pullman” - Ganfer & Shore

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Matthew J. Leeds, Partner, Ganfer & Shore. Can a co-op board actually eject a problem shareholder with a Pullman action?

BACKSTORY This involves a co-op tenant-shareholder whose behavior went beyond the pale. Her perceived transgressions included frequent verbal and physical confrontations with tenant-shareholders and staff, and even behavior toward tenant-shareholders in the neighborhood outside.

These were not isolated incidents: there was a course of conduct that disrupted the decorum and smooth operation of the building, as well as the morale of the staff, and potentially hurt the values of the apartments.

The actions the board could take included political avenues such as reasoning with the person and talking to her relatives or friends. In some situations of this kind, it is recognized that there might be recourse to the authorities. Boards have administrative recourse such as fines and hortatory letters from management, the board, and even counsel (with the additional admonition that the legal expenses will be put over to the tenant-shareholder). There might be the possibility of seeking an injunction against the behavior. And, as has become common knowledge over the past few years in the co-op community, there is the possible “nuclear option” of canceling the shares and proprietary lease of the owner, using the provisions in virtually every proprietary lease of default for nonspecific “objectionable conduct” (called a “Pullman” action, after the 2002 case; see p. 12).

COMMENT The board in this instance seemed to intuitively understand our explicit advice, which was to respect both the rights of the tenant-shareholder and also to respect the process. We counseled that the mere fact that such an action is possible does not mean that it will always be upheld by the courts. Accordingly, we consulted with the board to make sure that certain steps of fairness and notice were taken. These included:

1) An investigation of the initial charges and careful review of management’s log of complaints and reports of events, including the correspondence from the tenant-shareholder explaining matters from her point of view. The board observed a course of conduct from this information.

2) The board tried to take the steps mentioned above about contacting the tenant-shareholder informally about the behavior.

3) Numerous notices outlining the offenses and offering opportunities to cure were extended, giving the appropriate time periods set forth in the proprietary lease. These warned of the possible repercussions of failure to adjust the behavior, and also suggested that the tenant-shareholder’s counsel be engaged in the conversation. (Note that the specific provision in the proprietary lease should be examined carefully. Among other things, it should be determined if a vote of the board is sufficient – as was the case here – or whether there needs to be a vote of tenant-shareholders. Also, it should be determined if the notice that needs to be given is to cure the behavior or that the lease will be canceled unless the cure is effected within a certain period of time.)

4) The tenant-shareholder and counsel were invited to meet with the board about the issues even before cancellation was to be considered. Such a meeting took place.

5) Over a period of time, the board monitored the situation and eventually concluded that it would examine the possibility of termination. Before deliberating, the board set a meeting at a time convenient to the tenant-shareholder and her counsel and asked them to appear to discuss the matter. That portion of the meeting took place on the record, with a court reporter present to create a transcript. The deliberation afterward should not be perfunctory and should involve careful consideration.

6) It is more meaningful if the board’s decision is unanimous. In a case our firm was involved in that included many of the features outlined above, a tenant-shareholder challenged a board’s termination on the grounds of objectionable conduct. In Perry v. 61 Jane Street Tenants Corp., the Supreme Court, New York County, upheld the apartment corporation’s termination of the shares and proprietary lease, leading to possession of the apartment.

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