The Other Two Landmark Cases Every Board Needs to Know

In a recent post, I discussed the three landmark legal decisions that were most influential in shaping the scope and limitations of co-op and condo boards’ powers. Today I add the final two that comprise the Big Five. 

To recap: The ruling in the Levandusky case established that courts will not review a board decision – provided it was made in the interest of the co-op corporation or condominium association, within the scope of the board’s authority, and in good faith. In the Pullman case, the court ruled that a co-op board has the power to evict a shareholder for objectionable conduct – provided the terms of the proprietary lease were strictly followed and the shareholder had an opportunity to defend his or her actions. And in the third landmark ruling, the Biondi case, the courts ruled that the Levandusky case does not protect boards that discriminate against a member of a protected class. 

There are two more landmark decisions worth noting. The Bankers Trust v. Pal case involved a Park Avenue condominium that was owed common charges by one of its unit-owners. Prior to this ruling, condo boards argued that because they needed common charges to maintain the building and the value of the collateral, they should have lien priority over banks at a foreclosure sale. The Bankers Trust decision reversed this. Now condo boards don’t see a dime of the common charges that accrued during the foreclosure, which can take five years, until the lender has received its principal, interest, default interest, and legal fees. This means that if the value of the asset has depreciated, the condo board will see none of its common charges and will have to write them off because the buyer is not liable for them. 

In the fifth and final landmark decision, Zimiles v. Hotel Des Artistes, the co-op’s proprietary lease required the consent of the directors to any sublease, but did not expressly authorize the board to attach any conditions to its consent, such as charging a sublet fee. The lower court had found that the board needed express authority to attach conditions to granting or withholding consent. This decision was affirmed by the Appellate Division, which ruled that, "Since the Bylaws and Proprietary Lease ... contained no specific authority for the imposition of a sublet surcharge" and since the cooperative did not amend the proprietary lease to authorize such a surcharge, the surcharge was properly voided from the beginning. The court affirmed that all improperly obtained surcharges had to be returned. The court ignored the possibility that many of these charges may have been paid without protest and without any reservation of rights on the part of the shareholders. 

Additionally, the court held that it was proper to award attorney's fees to the plaintiffs under a provision in the proprietary lease. Apparently the court assumed that the improper imposition of sublet fees constituted a default under the proprietary lease. Interestingly, the sublet fee had been authorized by a majority of the shareholders at an annual meeting, but the court held that the majority vote was not sufficient to enact the sublet fee. The corporation’s proprietary lease had to be amended to authorize the sublet fee. 

Each of these five decisions expanded or limited the authority of co-op and condo boards. All board members should familiarize themselves with these rulings because they’re invaluable guides to what boards can and cannot do. When serving on a board, it’s always wise to know where the legal lines are drawn.

Stuart Saft is a partner at the law firm Holland & Knight.