There Are Limits to Co-op Boards’ Powers

A five-year legal battle by two sons trying to take over the Manhattan apartment bequeathed by their late mother has raised questions about the power of co-op boards to review the applications of family members. The ruling has also pointed out that co-op board powers, though vast, do have limits.

The New York State Court of Appeals agreed with a lower court ruling that the co-op board at 33 Fifth Avenue had violated the proprietary lease by “unreasonably withholding its consent” to transfer shares from the estate of Helen Del Terzo to her adult sons, Michael and Robert.

Decisions of co-op boards are usually protected by the Business Judgement Rule, and courts are loath to get involved if transactions are made in good faith and without discrimination against a member of a protected class.

But a provision in the Del Terzo’s proprietary lease states the board would not “unreasonably withhold consent” to the assigning of the lease and shares to a financially responsible member of the lessee’s family – a provision that, in the courts’ opinions, trumps the Business Judgement Rule.

“Unless a board decision shows a breach of their duty, a court would not examine the board’s decision,” says attorney Michael Manzi, a partner at Smith, Gambrell and Russell, who represents co-op and condo boards but did not work on the Del Terzo case. “But because of this provision, it’s a different standard.”

Michael Del Terzo, a physician in Pennsylvania, told the board he would pay for the maintenance and other expenses associated with the co-op even though he did not plan to live there. According to court records, Robert had moved in with his family to help care for his mother in the final years of her life. She died in 2010. Their parents had lived in the apartment since 1955 and purchased the apartment in 1986, after the building was converted to a co-op.

The brothers sued in 2012 after their application was rejected. In court papers, the board stated that only Michael Del Terzo met the requirement of financial responsibility. The board was also concerned that Michael would not be living in the apartment even though he was a lessee.

“The board believed it had reasonable grounds to reject the application,” says attorney Bryan Mazzola, a partner at Boyd, Richards, Parker and Colonnelli, who represented the co-op board in the litigation. “There was a list of things they went through in making their decision. I really think this is a warning to other boards that when determining whether something is unreasonable or not, they need to take this case into consideration.”

But attorneys Ken Jacobs and Jack Malley, partners at Smith, Buss and Jacobs, which represented the Del Terzos, believe the circumstances of the case were unique and would not change the way boards do business.

“We would love to tell you this case represents a sea change, but it doesn’t,” says Jacobs. “This is a specific clause in a proprietary lease that under certain circumstances applies a different standard. It gives weight to the wishes of a decedent. What’s wrong with that?”

Sea change or no sea change, this court ruling carries an important message: co-op boards have tremendous powers, but the power to be unreasonable is not among them.