Jeffrey S. Reich, Partner, Schwartz Sladkus Reich Greenberg Atlas

Does a co-op board have the right to terminate a shareholder's proprietary lease after the board determines that the shareholder, or someone living in the shareholder's apartment, has engaged in a pattern of objectionable conduct? This question was answered in 2004 in the decision in London Terrace Towers vs Davis.

Co-op boards faced with truly problematic residents have the ability to address these issues by utilizing the objectionable-conduct provisions contained in most cooperative proprietary leases. These provisions state that a co-op board may terminate a shareholder's lease if the shareholder, or someone residing in the shareholder's apartment, continues to act in an objectionable manner after having been warned by the board. It can determine what is objectionable conduct so long as the determination is made in good faith.

The first decision, which empowered co-op boards to get rid of objectionable residents, was 40 W. 67th Street v. Pullman, which is one of the most important decisions in the area of cooperative law in the last 20 years.

In May 2003, the state Court of Appeals held that a co-op board had the right to terminate a shareholder's proprietary lease based on the board's exercise of its rights under the proprietary lease and the vote of 75 percent of the shareholders. (The lease in that building required a shareholder vote to determine if the resident's conduct was objectionable.)

In the Pullman case, the board was also dealing with a proprietary lease that required a shareholder vote to determine if conduct was objectionable. Pullman had engaged in a series of activities in which he was aggressive toward members of the board, had accused them of breaking the law, had spread rumors about board members having affairs, had made noise, had made numerous complaints to the managing agent, and had often called the police for minor incidents.

The Pullman court, after looking at the process the board followed in the shareholder vote, determined that the board had the right to terminate Pullman's lease. In reaching its decision, the court applied the Business Judgment Rule, which holds that a court should not substitute its judgment for that of a corporate body – in this case, the corporate shareholders voting on the issue of objectionable conduct.

However, consistent with the Business Judgment Rule, the Pullman court noted that it would reach a different decision if it was determined that the shareholder had proven that the board had acted outside of the scope of its authority or in bad faith. Neither of those things were found to be the case with Pullman.

Shortly after that decision came down, a number of people involved in the co-op industry were concerned about rogue boards acting in a willy-nilly manner and just kicking out people for petty reasons or because they had grudges against them. And even courts evidenced some skepticism.

In the case of 13315 Owners Corp vs Kennedy, the board was dealing with Morgan Kennedy, a problematic resident who had a clause in his proprietary lease that allowed the board to terminate the lease on its own vote, without going to the shareholders.

The court looked carefully at the process that the 13315 Owners Corp. board followed and found fault with it. They found that there was a technical error in the board's notice to Kennedy. The board actually included the wrong name of the corporation. The board did not give Kennedy or his attorney an opportunity to be heard when they held a meeting to determine whether or not his conduct was objectionable. They invited Kennedy and allowed him to bring a lawyer, but then shouted them down and didn't give them a chance to make their case. And finally, the court was concerned that the board had not been properly elected, that it had been more than two years since there had been a meeting of the shareholders at which a quorum was available, and therefore the board may not have properly been sitting in judgment of Kennedy.

It was in that context that my law partner represented one of our cooperative clients in the matter of London Terrace Towers vs Michael Davis. Davis provided a great test case for the concept of board power because he was a truly awful resident and the board steadfastly followed the provisions of its proprietary lease in removing him. Again, in this situation the board had a clause that allowed it to terminate the lease based on a vote of the board.

Davis had moved into London Towers in 1993. Between 1993 and 2001, the board notified him on several occasions that his conduct was objectionable, including unreasonable stereo and television volume, slamming of doors, failing to leave a key with management even though he repeatedly locked himself out and had to disturb the building staff. He also stored personal belongings in the common hallways and the fire stair, tampered with building locks and fire doors, stole resident property from the sun deck, the gym, and the laundry room, spray-painted furniture in the hallways, set at least two fires in his apartment, fought with his guests (which resulted in calls to the police, and discarded hypodermic needles in the plumbing systems of the building.

Based on this behavior, the board sent Davis a notice that they were holding a meeting, and they invited him to attend and state his case. Even after voting that Davis’s conduct was objectionable, the board agreed to give Davis another chance provided he didn't violate any of the terms of the bylaws, the house rules, or the lease. That did not last long.
Davis continued his objectionable conduct. The board called a second meeting in 2003. Davis' further objectionable conduct included allowing his dog to run free in the building; letting guests of set off the building fire alarm], slamming his door and creating noise disturbances, harassing of other residents, stealing laundry, and engaging in sexual activities in the health club showers.

Davis was once again given notice that the board was going to meet to discuss his objectionable conduct. He again came to the meeting to plead his case. The board vote determined his conduct was objectionable and terminated his lease.
Then the board brought an action to evict him from the building. Davis contested, and the court found that the board's determination was made in good faith and within the scope of its authority. The court, relying on the Pullman decision, upheld the eviction.

The takeaway from this case is that co-op boards, armed with proprietary-lease provisions dealing with objectionable conduct, have the ability to terminate a shareholder's proprietary lease. In order to do that, though, they need to steadfastly follow the provisions of the lease and the process outlined in it.