East Village Co-op Board Fails to Evict “Neighbor From Hell”

Ever since the Court of Appeals of New York issued its landmark Levandusky decision in 1990, co-op and condo boards have been protected by the sturdy armor of the business judgment rule. It states that so long as a board acts in good faith, within the scope of its authority and for the purposes of the cooperative, courts will not substitute their judgment for the board’s. The rule applies even if the board’s actions prove to be “unwise or inexpedient.” Over the past three decades, the ruling has protected boards from an unknowable number of frivolous lawsuits.

Many co-op and condo board members believe, wrongly, that this armor gives them the freedom to act as they please. The error of such thinking was brought home recently when the board of an East Village co-op tried to deal with the “objectionable conduct” of a shareholder named Ismael Hernandez, whose friends, according to a report in The New York Post, shot drugs and had sex in the building’s common areas. The Post article appeared under the headline “East Village Street Has Another Neighbor From Hell.”

The co-op board sent Hernandez a notice of default on March 19, 2019, giving him 30 days to cure the default. Another notice was served on May 7, giving Hernandez 15 days to cure. There were no reported incidents of objectionable conduct after the notices were served for a very simple reason: a fire had rendered his apartment uninhabitable, and Hernandez was living with his daughter in the Bronx. The shareholders voted to terminate Hernandez’s proprietary lease, and the board moved to evict him.

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But the Appellate Division of the state Supreme Court ruled that the co-op board had run afoul of the business judgment rule. “Without new allegations about defendant’s conduct arising after service of the notices,” the court states, “and having expressly stated in both notices that defendant had a right to cure, plaintiff’s board of directors acted outside the scope of its authority because it failed to adhere to the procedures required under the proprietary lease for terminating a tenancy on the basis of objectionable conduct. Likewise, there was no basis under the proprietary lease for plaintiff to proceed with the shareholder vote to terminate defendant’s tenancy. As a result, plaintiff’s determination to terminate defendant’s tenancy is not protected under the business judgment rule.”

It was a curious twist: instead of protecting the co-op board, the business judgment rule protected a shareholder who allegedly invited his friends over to shoot drugs and have sex in the common areas.

And that twist carries a lesson for co-op and condo boards. Ira Matetsky, a partner at the law firm Ganfer Shore Leeds & Zauderer, puts it this way: “Most proprietary leases contain provisions authorizing the board or the shareholders to terminate a tenant-shareholder’s proprietary lease for ‘objectionable conduct’ under certain circumstances. Where the board or shareholders act in good faith and follow all of the proprietary lease’s requirements, their decision will often be upheld under the business judgment rule. But if the requirements are not followed, the courts are more likely to step in.”

Is there a way for boards to make sure they’re protected — and not punished — by the business judgment rule?

“Legal counsel should be involved at all stages of this process,” Matetsky says, “to help ensure that a termination is effectuated properly and thereby maximize the chances it will be upheld.”