BOARDS REJECTING OWNERS, P.2

The board argued that its decision to deny the application was insulated from judicial review under the Business Judgment Rule. Sagona testified that the del Puerto application was denied due to deficient credit information, insufficient income verification and their record as shareholders. She also testified that the income Ms. del Puerto stated on her application was greater than the support she gave for such a figure.

Board member Eric Lehmann testified that the del Puertos had very little income coming in as far as their debt-to-income ratio. He also said the board was concerned about 31 inquiries in a 12-month period on their credit report and that the credit report showed multiple deficiencies. Lehmann further explained that to purchase the unist, del Puerto was borrowing money from a friend or an associate. Ruiz stated that the board was concerned over the del Puertos' large amount of debt.

The court determined that the board was entitled to summary judgment dismissing the complaint, and that the Business Judgment Rule applied to the board's decision to deny the application. The court explained that absent discrimination, self-dealing or misconduct by board members, the Business Judgment Rule presumed corporate directors to be acting in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes. Accordingly, so long as the board acted for the purposes of the cooperative within the scope of its authority and in good faith, the court would not substitute its judgment for the board's.

Rule Not Absolute

The court did note, however, that the rule is not absolute. Given a board's duty to treat all shareholders "fairly and evenly," a substantiated showing of unequal treatment of shareholders was sufficient to overcome the rule.

In this case, three of the board members testified that the application was denied because of an unacceptably high debt-to-income ratio; the failure of Ms. del Puerto to provide adequate verification of her income; a large number of credit card delinquencies and open cards with balances; accumulated arrears and late maintenance payments on unit 117; the proposed interest-only private financing for the purchase by an individual for whom del Puerto provided little information; and a lack of information regarding the sale of 117, which allegedly would take place after the del Puertos' purchase of 217.

While the del Puertos had submitted calculations demonstrating that at least three other shareholders had less favorable debt-to-income ratios than they did, but were nonetheless approved by the board to purchase additional units in the co-op, one such shareholder was approved only after she obtained a guarantor and placed eight months of maintenance payments in escrow until she sold her original unit. As to the others, the court found that while their debt-to-income ratios might have been less favorable than the del Puertos', the del Puertos did not offer evidence that those shareholders had any other financial deficiencies, such as poor credit reports, past arrears in mortgage or maintenance payments, unverified income or private, interest-only financing.

Hearsay, Hearsay

To the extent the del Puertos alleged the existence of self-dealing or bad faith on the board's part, there was no admissible evidence that the board denied the application based upon factors other than the best interest of the shareholders. Rather, the del Puertos primarily relied on unsubstantiated hearsay statements that the denial of their application was done in retaliation for Ms. del Puerto's opposition to the proposed dog ban.

The Oliveros were also entitled to summary judgment dismissing the complaint. The del Puertos' had claimed the Oliveros allegedly paid a finder's fee of $5,000 to Kerr, the boyfriend of board member Ruiz, thereby engaging in fraud and tortiously interfering in the contract of sale between Toole and the del Puertos. Given that the Oliveros' alleged interference with contract and fraud was intertwined with the del Puertos' claims against the board defendants, the claims failed for much of the same reasons.

Once again, the courts give great deference to a decision of a co-op board under the Business Judgment Rule. Here, the plaintiffs made several allegations of bad faith and disparate treatment. There were sufficient allegations so that discovery was warranted to consider and investigate plaintiffs' claims. However, the court ultimately determined that plaintiffs did not satisfy their burden to show that the board treated them differently. The board, however, did demonstrate its basis for rejecting the del Puertos' application.

Counsel in the Case
For Plaintiff: McElroy, Deutsch, Mulvaney & Carpe
For Defendants: Winget, Spadafora & Schwartzberg, Abraham, Lerner & Arnold, and Porzio, Bromberg & Newman

Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan. Dale J. Degenshein is a special counsel for that firm.

Illustration by Liza Donnelly

Adapted from Habitat December 2008. For the complete article and more, join our Archive >>