No Tomfoolery at Tomfol Owners Corp.

**THE TOMFOL OWNERS** Corp., a 17-unit cooperative at 204-206 E. 7th St. in Manhattan, has an unusual provision in its governing documents: maintenance increases must be voted on by shareholders – not the board. Three shareholders refused to pay the increase, claiming that the meeting at which the increase was voted on was not a meeting at all. One of the three was also assessed fines for allowing short-term rentals in his apartment. The court in *Tomfol Owners Corp. vs. Walker,* had to decide whether the cooperative could pursue the shareholders in the court’s housing part, where the relief sought is not only money damages but also, upon failure to pay, eviction.
The proprietary lease states that assessments or increases in maintenance require the approval of holders of at least 51 percent of the shares. The bylaws allow shareholders to vote in person, by proxy or ballot. Slightly more than the required 51 percent voted in favor of the maintenance increase. There were two ballots that the court found questionable – one had no shares listed, the other had no printed name or number of shares. Even without these two ballots, however, the 51 percent threshold had been met.
The three shareholders complained that the meeting itself was invalid. They argued that there was no quorum because there were not enough board members present. The bylaws do not require board members to be at the meeting; rather, a majority of those entitled to vote must be present.
The court examined the language of the bylaws, which allowed shareholders to attend a meeting in person or by ballot. Corporations are to conduct elections so as to afford all shareholders the “fullest liberty in expressing their wishes.” In other words, shareholders should not be disenfranchised, and a corporation may take reasonable measures to allow shareholders who are not physically present to participate. Thus, there was nothing wrong with allowing shareholders to vote by ballots submitted by email. Because more than half of shareholders submitted a ballot or proxy, or were physically present, a quorum was achieved.
The shareholders also challenged the form of certain ballots. The court did not find that there were any requirements imposed on the form of ballots, and accordingly this argument could not prevail. The court awarded the cooperative a judgment as to the maintenance increases.
Turning to the fines for short-term rentals, a landlord (here, the cooperative) can seek a money judgment in a nonpayment proceeding only for rent or, in this case, monthly maintenance. It was the board, and not the shareholders, who voted on the fines. Accordingly, the bylaws preclude the treatment of those charges as rent. The corporation can bring an action for recovery of the fines in another action, but not in landlord-tenant court.
What We Learned
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In this case, the court relied on two new statutes. Specifically, the Business Corporation Law, under which many cooperatives are formed, recently added a provision that allows boards to permit shareholders to participate in meetings electronically. (This article is being written while there is an executive order in place that, among other things, bans annual meetings from taking place in person.)
It used to be that only board members could join board meetings by conference call or video. Now, if the board allows it, shareholders can come to meetings electronically – and ballots can be cast electronically. Many buildings use what are called “directed proxies,” that is, a proxy in which the shareholder checks off the candidate(s) he or she wants the proxy holder to vote for. Some have proxies that allow the proxy holders to vote any way they choose. Either way, proxies can always be revoked by the shareholder attending the meeting and issuing a ballot. The new statute allows boards to accept electronic ballots so that shareholders do not have to be physically present at the meeting.
Another new statute invoked is the Housing Stability and Tenant Protection Act, which, unless it is amended as to cooperatives, allows eviction proceedings to be commenced for “rent” but not for any other monies that a tenant, or shareholder, may owe. This means, as was the case here, that if the shareholder owes rent in addition to fines, the cooperative will have to make a choice. It can either maintain two separate actions: one for rent in housing court, where, if the court determines rent is owed but remains unpaid, a judgment of eviction can issue; and another in a separate court seeking money damages for the non-rent portion of what the cooperative claims is owed. Alternatively, cooperatives can commence one non-housing-court action for all monies due, including rent, but without the threat of eviction. It seems that these decisions will need to be made on a case-by-case basis by the board after consulting with counsel, and they may depend on the amount and duration of the arrears.
**ATTORNEYS:**
*Attorney for Tomfol*: Vernon & Ginsburg
*Attorney for Walker*: Kaplan & Chun
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Dale J. Degenshein is a partner at the law firm Armstrong Teasdale. The statements and views in this article are her own and not necessarily those of the firm.