Three Legal Landmarks All Co-op and Condo Boards Need to Know

Barely a day goes by without a new court decision involving a cooperative or a condominium. But it was landmark decisions from decades ago that set the pattern for what we’re seeing today. All board members need to be aware of these three momentous court cases: 

Levandusky. The New York Court of Appeals decision in Levandusky v. One Fifth Avenue Apartment Corp., established a form of the Business Judgment Rule that is applicable to co-ops and condos. This decision defines the power of boards and the relationship between boards and their shareholders or unit-owners. The case involved a board president who moved a riser while renovating his kitchen, which was against board policy. When the board stopped the renovation, the president sued the board and lost in the Supreme Court, lost in the Appellate Division, and lost big time in the Court of Appeals.

The holding of Levandusky is that the courts will not review boards’ decisions unless there is a showing of bad faith, self-dealing, or discrimination. Without Levandusky, virtually every decision would be subject to a lawsuit, and no board would be able to function. 

Pullman. The second major decision is 40 West 67th Street v. Pullman, a 2003 decision that extended the ruling in Levandusky to hold that it is the board of directors – not Landlord-Tenant Court judges – that have the right to determine what constitutes objectionable conduct. Since the beginning of co-ops in New York, proprietary leases have contained an Objectionable Conduct provision in which a disruptive shareholder’s proprietary lease could be terminated if the shareholder or an occupant of the apartment exhibited  behavior that was objectionable after receiving a written warning. 

The co-op board in the Pullman case terminated the proprietary lease of a shareholder and brought an action for eviction in Supreme Court. The court ruled that the board had the power to evict – provided the terms of the proprietary lease were strictly followed and the shareholder had an opportunity to defend his or her actions. When Pullman was decided, I was afraid it would produce a nightmare of thousands of shareholders being evicted. But the opposite happened. This decision reduced the number of evictions and forced better behavior by shareholders and their guests. 

Biondi. The third decision demonstrates that the Levandusky ruling has its limits, and boards face liability if they exceed those limits. In Biondi v. Beekman Hill House Apartment Corp., the Court of Appeals held that if the members of the board discriminate, not only will the court review their actions, but it can also find that the board members are subject to punitive damages – and neither the indemnification provision of the corporation’s bylaws nor its Directors and Officers liability insurance will be responsible for covering those damages. 

In the Biondi case, a shareholder attempted to sublease her apartment to a mixed-race couple. Initially, the board president interviewed the couple (both of whom were lawyers) and expressed his uneasiness with their application. Then the full board reviewed the application and rejected them. The shareholder complained that the board was racist. Then the potential subtenants sued in federal court, claiming the board had violated the Fair Housing Act. The couple was awarded $640,000 in damages, and the shareholder was awarded $164,000. Of the total, $355,000 was owed personally by the board president. Ever since, boards have been acutely aware of the danger of even the appearance of discrimination. 

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