Marc Luxemburg, Partner, Gallet Dreyer & Berkey

When they are doing business in their buildings, boards need to pay attention to the lessons of Levandusky vs One Fifth Avenue Apartment Corporation. Under the certificate of incorporation and the proprietary lease, a board of directors has broad authority. But the board has to be careful to exercise this power properly. Let's look at some common issues that a board may face and see how the Levandusky case, which adopted the Business Judgment Rule as the governing standard for reviewing board action, would apply.

Some common situations:

An alteration. A shareholder tries to install an air-conditioning unit. The board president lives next door and doesn't like it.
A sale. A shareholder seeks to sell the unit and submits an application package.

A board member would like to buy the unit so her mother can live there. How is the board to react to the application package?
A disability. A shareholder claims to have a disability and seeks to keep a dog in the apartment, even though there's a prohibition against pets.

A fine. A shareholder gets into a dispute with the board and becomes rude and insulting. The board fines the shareholder $25,000 in connection with the underlying dispute.

A grandfathering clause. The board wants to prohibit further installation of washing machines, but leave existing ones in place. It also wants to ban smoking but allow existing smokers to continue. Is this beyond the board's authority?

How does the Business Judgment Rule, as set out years ago in the Levandusky case, apply to these situations? The rule prohibits the courts from inquiring into the actions of corporate directors, provided that they are taken in good faith, in the exercise of honest judgment, and in the lawful and legitimate furtherance of corporate purposes.

What that means is there are four rules that encompass the actions of board. They  are: (1) the action has to have a legitimate relationship to the welfare of the cooperative; (2) the action cannot deliberately single out individuals for harmful treatment; (3) the action must be taken with notice or concerns or consideration of all of the relevant facts; and (4) the action cannot be beyond the scope of the board's authority.

Given those four constraints, let's go back and look at the situations that we cited earlier.

An alteration. A shareholder seeks to install an air-conditioning unit, and the president lives next door and objects. If the board turns the request down, would it be legitimate? In other words, would the rejection benefit the building? The board can't simply consider the welfare of the president, it has to consider the well-being of the cooperative. And the president's wishes are not necessarily in the interests of the cooperative as a whole. The board needs to consider whether there are objective reasons to reject. To decide that, the board would probably need an engineering or other objective report concerning whether the air-conditioning would be a problem.

A sale. A unit is for sale, and a board member would like to buy the unit so her mother can live there. This is question of self-dealing. It also raises the same question we asked earlier: would a board's decision to turn down the application be in the cooperative’s best interests, or just the shareholder’s?  Now on the face of it, I think most people would say that's clearly self-interest. But there may be considerations that a board could point to. For example, it might be a very family-oriented co-op and there may be a value in having family units. Or it may be a tradition in the building of having only families reside there. So that there may be reasons why a board could turn the applicant down. But again the question would be: is this in the best interest of the cooperative?

A disability. A shareholder claims to have a disability and seeks to keep a dog in the apartment, even though there's a no-pets rule. The board must consider whether it has taken into consideration of all the relevant facts. The board cannot just say, “No, that's our rule. You can't have a dog, regardless of whether you claim a handicap or not.” The board has to investigate the facts. It  has to find out whether there is legitimately a handicap and whether the dog qualifies as a service animal or emotional support animal. If so, the board would have to accommodate the shareholder. But before it can make that decision, it has to be aware of the relevant facts. The board has not only the right but the obligation to investigate.

A fine. A shareholder gets into a dispute with the board and becomes rude and insulting. The board fines the shareholder $25,000. One of the four rules that we discussed earlier is that the board can't deliberately single out an individual for harmful treatment. The question here is: has the board done that? The board would have to show that a fine of that magnitude was not simply a punishment. You might have an affluent building where the $25,000 fine is not out of line. But in most buildings, that probably would be considered very high and a court would probably find that the shareholder had been singled out for harmful treatment.

A grandfathering clause. There is a rule that shareholders must all be treated equally. If, however,  the board wants to prohibit further installation of washing machines but leave existing ones in place, there may be legitimate reasons. For example, one line of pipes may be sufficient to carry the extra load by the washing machines, while another line may not. Or the number of machines may have reached the limit that the pipes can handle, and therefore it would be legitimate to set limits on adding more machines. What about banning smoking but allowing existing smokers to continue? Is this beyond the board's authority? So, the question here is whether the board has the authority to pass a rule that has different results for different shareholders.

In light of the new smoking policy requirements pushed by the government, there are buildings that have instituted an absolute ban on smoking. And the question is: what do you do with existing smokers? Would you be allowed to treat different shareholders differently? There's really no answer to that question.

In each of these cases the board must look to the fundamental rule set out in the Levandusky case. Find the guidelines to reach an appropriate conclusion.