Making Repairs, Reducing Apartment Size

Making Repairs, Reducing Apartment Size

May a cooperative corporation, when repairing an apartment completely damaged as a result of a water leak, minimally reduce the size of the apartment? That was the question in the latest decision in the long-running battle entitled Goldstone v. Gracie Terrace Apartment Corporation.

The Background

Maro Goldstone is a shareholder of Gracie Terrace Apartment Corporation, located at 605 East 82nd Street in New York City. She and her husband, Thomas R. Newman, suffered extensive damage to their apartment when a 10,000-gallon water tank above them overflowed in 2003. The co-op proposed a plan for remediation, which required a 50-square-foot reduction in the 1,400-plus-square-foot apartment. Goldstone objected, claiming the proposal violated the terms of the proprietary lease. She sought a preliminary injunction to stop the co-op from performing the work. The motion court denied her motion, and she appealed. The appellate court affirmed – allowing the co-op to proceed with its proposal.

By way of background, after the water tank overflowed in 2003, flooding the apartment and causing toxic mold to develop, the co-op had the apartment gutted down to the cement floors, ceilings, and walls. It remains uninhabitable. Goldstone began an action in 2007, seeking monetary damages and equitable relief. She asserted claims for breach of contract, breach of the warranty of habitability, constructive and actual eviction, and several torts.

Over the years, in a series of motions, she was awarded a complete abatement of maintenance from the date of the water damage through the date the apartment is restored to habitable condition. In addition, she had previously been granted summary judgment on her claim that the co-op breached its warranty of habitability and the proprietary lease by failing to make repairs. In another motion, the co-op sought – and was granted over Goldstone’s objection – access to perform work to the apartment.

A Remedy Challenged

Goldstone immediately brought this motion and challenged the co-op’s plan for remediation. She sought to prevent the work from going forward. She had given the co-op plans prepared by her architect in 2008, which provided for a design that would have prevented water infiltration in the future by demolishing and rebuilding portions of the exterior of the building. Rather than respond to that proposal, the cooperative had its own engineer prepare plans that provided for waterproofing and façade repair work, as well as renovation of the apartment. The co-op asserted that its plan avoided the prohibitively expensive need to demolish the exterior of the building.

Goldstone objected because the co-op’s plan would decrease the size of the interior of the apartment. Specifically, she argued that by placing insulation on the apartment’s interior, the alteration would decrease the size and alter the unit’s configuration because it would cause the loss of two-and-a-half inches along every wall at which insulation was placed, for a total loss of 50 square feet. She argued that if this alteration were permitted, it would reduce the size of a hallway to a width less than that required by the building code; also that, to maintain the code-required dimensions of the hall, an adjoining room would have to be decreased in size. These alterations, according to Goldstone, would require changes to her storage and display units and custom-designed kitchen and built-ins. The co-op did not dispute the findings.

Finally, Goldstone argued that under the proprietary lease, the apartment was defined as “the rooms in the building as partitioned on the date of the execution of this lease...”

The court explained that injunctive relief would only be awarded if the one demanding the relief made a clear showing that she would be successful on the merits, that there was a danger of irreparable injury unless the injunction was approved, and that the balancing of the equities was weighted in her favor.

Thus, the co-op argued that Goldstone could not meet the elements necessary for the court to grant a preliminary injunction – that she could not be successful on the merits of her claims because the board’s decisions concerning repairs were protected by the Business Judgment Rule; that she could not show irreparable harm because the reduction in space was de minimis and could be compensated for by a reduction in maintenance charges; and that the equities balanced in favor of the co-op, i.e., that it should not have to accede to her demand that it demolish the exterior walls, causing undue expense to all shareholders, to whom the co-op owed a fiduciary duty.

A Breach of Duty

The court agreed with Goldstone that she would likely be able to show that the repairs would constitute a breach of the proprietary lease, because the co-op did not dispute that the plan would create a diminution of space and necessitate reconfiguration of the apartment. The court stated that the co-op’s reliance on the Business Judgment Rule was misplaced because the rule did not shield co-ops from a breach of contract.

The court confirmed the long-standing rule – as recited in another case – “While it may be good business to walk away from a contract, this is no defense to a breach of contract claim.” As the court explained, even though a breach of a shareholder’s lease may be the best option, it does not protect the co-op from liability for that breach.

However, the court did not believe that Goldstone demonstrated irreparable harm or that the equities balanced in her favor. She had argued that there would be the loss of square footage and that the apartment would have to be reconfigured, so that adjustments would have to be made to her built-in cabinets and other places. The court found, however, that this could be compensated for with payment for damages and, thus, would not cause irreparable harm.

Further, the court recognized that the anticipated diminution of square footage caused an injury; however, it believed that the injury was de minimis insofar as the claim for harm was made. Goldstone had failed to demonstrate that the possible reduction of such a small fraction of the apartment was more than minimal, or that she could not be compensated by some other means.

Finally, the court explained its finding that the equities balanced in favor of the co-op. Goldstone proposed an alternative method of performing work on the exterior. However, she did not respond to the co-op’s assertion that the method would entail substantial additional expenses that the co-op should avoid because it owed a fiduciary duty to all shareholders, not just Goldstone. Ultimately, the court determined that the potential damage to her was far outweighed by the expense to the co-op of demolishing exterior walls, particularly when those walls had been repaired and treated for waterproofing.

The Take-Away

This case raises interesting issues in that it specifically acknowledges that the co-op will be in breach of the proprietary lease by reducing the size of the apartment and requiring the reconfiguration of rooms. Notwithstanding, the court would not issue a preliminary injunction because this de minimis “taking” could be compensated by money damages and because the equities were such that the co-op’s concerns far outweighed those of the plaintiff. Notably, the court acknowledged the co-op’s obligations to all shareholders such that demolition and reconstruction of portions of the building – if other solutions were available – were not required.

Given the particular (although not unique) facts of this case – that the space was being taken in connection with a repair to the plaintiff’s apartment, where the only other alternative was prohibitively expensive – we do not know how or if this decision will affect other situations where a co-op may wish to “take” a portion of living space from an apartment. Initially, the decision comes to us in the posture of a preliminary injunction, so that there is very limited precedential value. Regardless, we can envision situations where a co-op might want to enlarge a common area hallway (particularly in older buildings) to make it wheelchair accessible by reducing the size of someone’s closet or foyer. Will it be permitted (required?) to do so based on the holding here? Unlikely as such an outcome may be, it is certainly something that should be considered by boards and their counsel.

Attorneys
For Plaintiff: Duane Morris
For Defendant: Tarter Krinsky & Drogin