EVICTING A SHAREHOLDER UNILATERALLY

In 2003, New York's highest court handed down  40 West 67th Street vs. Pullman. This earthshaking ruling upheld a co-op's board's decision to terminate a shareholder's proprietary lease and to cancel his stock in the co-op. Most significantly, the court said the co-op did not even have to establish in court that a shareholder's conduct was objectionable enough to warrant eviction. Instead, the court held that the co-op's actions fell under 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."

Co-ops cannot avoid court altogether in such cases, because even after a Pullman-type termination of a shareholder's proprietary lease, the co-op still must sue to evict the shareholder. Nonetheless, Pullman seems the perfect complement to the standard proprietary-lease language that co-ops assure shareholders' "quiet enjoyment" of their apartments. Now, when a co-op receives the inevitable complaint that one shareholder is causing a nuisance, the co-op can act without having to engage in protracted litigation. The co-op can be judge and jury about these issues, and unless the offending shareholder can show wrongful conduct, the co-op's decision will likely be upheld.

Pullman, which built on the previous pro-board case Levandusky vs. One Fifth Avenue Apartment Corp. (1990), has a critical issue, however, in not specifying whether the approval of co-op shareholders as well as board members is necessary. Securing the approval of the five to nine individuals on a board is far easier than securing approval of scores or hundreds of shareholders. Moreover, leaving the decision to a board 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.

The Push of Pullman

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 to stop the actions of an overreaching board.

In Pullman, the court faced a proprietary lease with an uncommon twist, in that it took the approval of at least two-thirds of shareholders, plus board approval, to terminate the lease based on "objectionable conduct." In this particular instance, involving a shareholder named David Pullman, 75 percent of the total co-op shares and 100 percent of those voting were in favor of eviction.

But in a different situation, concern exists for making ensuring that shareholder rights aren't trampled. The Pullman court had affirmed an appellate-division majority that had held, "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." However, it also 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.

What if a co-op decides to terminate a shareholder's lease with only a board vote, assuming the proprietary lease allows this? A year after Pullman, the July 28, 2004, decision 13315 Owners Corp. vs. Kennedy, held that the board-only vote in this was inadequate, and a hearing was required to determine whether there was sufficient evidence of objectionable conduct to justify lease termination. But a December 6, 2004, decision, London Terrace Towers Inc. vs. Davis — involving a board that had given the shareholder much ample opportunity to defend himself  — approved the board-only termination without requiring such evidence to be presented in court. More recent pertinent cases include 1050 Tenant Corp. vs. Lapidus and Breezy Point Cooperative vs. Young (both 2007) and the federal district court case The World Residency II Ltd. vs. Villansenor (2007).

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