1050 Tenants Corp. vs. Lapidus

This appears to be the last in a long series of decisions involving the co-op at 1050 Fifth and the Lapiduses over a variety of issues related to the defendants’ occupancy and conduct in the co-op. Prior decisions have been the subject of earlier “Case Notes.” Here, the co-op’s patience with the Lapiduses’ repeated objectionable conduct was at an end, and it invoked the Pullman decision to validate its lease termination. This case is the latest progeny of Pullman and is further evidence of what a potent weapon this decision has become for co-op boards when faced with seriously objectionable conduct.

In 1050 Tenants Corp. vs. Lapidus, the appellate division of the Supreme Court appears to have ended 15 years of litigation between a co-op and a shareholder over various defaults by the shareholder. In this case, based upon the decision in 40 West 67th Street Corp. vs. Pullman (see “Hotline: Voting Out Your Neighbor,” Habitat, July/August 2002), the appellate court confirmed the co-op’s lease termination and action for ejection and cleared the way for the co-op to evict the shareholder for objectionable conduct.

In 1983, defendants Steven and Iris Lapidus purchased the shares allocated to the proprietary lease for Apartment 4B in the defendants’ co-op building. Beginning in 1992, the Lapiduses, claiming unremedied conditions in their apartment, withheld payments for maintenance, electricity, and special assessments repeatedly and for extended periods of time. The co-op brought multiple nonpayment proceedings, which, either by court order or settlement stipulation, resulted in the defendants’ payment of over $170,000 in arrears and more than $400,000 in attorneys’ fees.

In a 1992 nonpayment proceeding, the housing court awarded the co-op $43,834.24 in arrears and denied the Lapiduses any abatement after discrediting their testimony that “they would allow themselves to live in fear and with terrible conditions for years on end without taking any affirmative steps to correct the problems,” and finding their other assertions either unsubstantiated or pertaining to purely cosmetic appearances in the common areas. The court found the defendants’ arguments particularly incredible in light of the fact that Steven Lapidus was an experienced real estate and landlord-tenant lawyer. After a protracted hearing on attorneys’ fees for that case, the civil court commented on the defendants’ “obduracy,” “needless and groundless pretrial motion practice,” attempts to “delay or derail the underlying proceeding … implicitly designed to economically force the [co-op] to its knees,” and the co-op’s “total victory.” Following an appeal, defendants stipulated to pay $328,655.84 in attorneys’ fees, plus interest.

Before the issue of attorneys’ fees in the first action was resolved, the co-op began a second nonpayment proceeding in 1995, as a result of which the housing court directed defendants to pay $55,681.81 in arrears, offset by $3,340.91 as a rent abatement, thereby totaling $52,340.90. In addition, the court awarded the co-op $115,000 in attorneys’ fees and over $15,000 in prejudgment interest, later reduced by stipulation to $75,000 in fees and $6,000 in interest.

Another nonpayment proceeding brought in 1999 was settled by stipulation, so ordered by the court in which the defendants paid $16,098.29 in arrears, and the co-op credited their account $10,000 to replaster walls and ceilings, hang new wallpaper, and clean a carpet. The defendants further agreed that “under no circumstances” would they withhold payment of electric charges, and that they would not withhold maintenance or additional assessments unless they first sent written notice to the co-op’s managing agent, superintendent, and attorneys; allowed the co-op 10 business days from the date of notice to cure; started a housing court proceeding if the co-op failed to cure; and substantially prevailed in the housing-part proceeding.

Notwithstanding that stipulation, defendants thereafter withheld payments for maintenance and additional assessments without complying with the agreed-upon procedures, and withheld payments for electricity. In a subsequent nonpayment proceeding, the housing court found incredible Steven Lapidus’s testimony that he never knew about the stipulation, “even though he was a partner of a law firm, he specialized in real estate law, an associate of his firm signed the stipulation, he received a $10,000 abatement, he was involved in a great deal of litigation with his co-op, and he knew that his case ended the day his associate appeared in court.” The court also rejected the Lapiduses’ argument that their tendering maintenance for a single month constituted a defense to withholding payments for many months. The court issued a judgment in favor of the co-op for $59,270.69, plus interest.

Not only did the defendants disregard their obligations under the stipulation, but they also installed, without the permission of the co-op, a water-cooled air conditioning system, which caused substantial water damage to the apartment and personal property of the tenant-shareholder below. The Lapiduses ignored the protests of their neighbor and denied the co-op access to inspect the system, compelling the co-op and the neighbor to bring separate actions (later consolidated) against them.

By stipulation dated September 30, 2002, so ordered in another court proceeding, the defendants agreed to disconnect their water-cooled air conditioning units from the building’s water supply and drain lines and to cap those lines. They further agreed to pay $7,345.94 in arrears of maintenance and electric charges through October 2002. The co-op placed $15,000 in escrow to reimburse defendants for the costs of removing the system and replacing it with an air-cooled one.

Even though the co-op deposited the funds in escrow to underwrite the replacement of the air conditioning system, the Lapiduses refused to honor their obligations under the stipulation, and on February 4, 2003, the court then found them in contempt for failure to abide by the terms of the stipulation and directed them to disconnect their water-cooled air conditioning system. By order and judgment entered October 29, 2004, the court adjudged them in contempt a second time, vacated the stipulation, directed that the funds in escrow be returned to the co-op, permitted the co-op to retain the Lapiduses’ payment of arrears of $7,345.94, and issued a permanent injunction that the Lapiduses remove their water-cooled air conditioning system.

Thereafter, the co-op’s board of directors sent the defendants written notice of a special meeting of the board to consider a resolution to terminate their proprietary lease, under section 34(e) of the lease, “on the grounds that the tenancy of the [Lapiduses] is undesirable” because of their chronic withholding of maintenance and other payments, the nuisance of installing and refusing to dismantle a water-cooled air conditioning system that caused damage to their downstairs neighbor, and the protracted litigation in which defendants’ arguments were repeatedly found to be meritless and in bad faith. At the special meeting, where counsel appeared on the defendants’ behalf, the board unanimously adopted the resolution.

The defendants threatened to sue any shareholder who voted to terminate their tenancy, and therefore the board enacted a resolution to indemnify and hold the shareholders harmless. At the special shareholders’ meeting to consider the resolution to terminate the Lapiduses’ proprietary lease, the couple’s counsel warned the shareholders of “the serious legal consequences” and “substantial liability” that would befall them should they “choose to evict the Lapiduses.” Nevertheless, 98 percent of the shares voted in favor of the resolution.

The pair refused to vacate their apartment, and the co-op began this action. Justice Marylin G. Diamond, well acquainted with the history of the case, granted the co-op summary judgment on the ejection cause of action and referred the issue of attorneys’ fees to a special referee.

In discussing the issues involved, the court noted that decisions of residential co-op corporations, including termination of a shareholder’s tenancy for objectionable conduct, were assessed under the business judgment rule based on Pullman. It is also said that courts will not substitute their judgment for that of a co-op’s board of directors and shareholders, as long as the corporate action is authorized, in furtherance of the co-op’s legitimate interests, and taken in good faith.

The co-op terminated defendants’ tenancy pursuant to section 34(e) of the propriety lease, which provided for termination:

“If at any time the Lessor [the cooperative] shall determine, upon the affirmative vote of both four-fifths of the Board of Directors and the holders of record of two-thirds or more of the shares of the Lessor then issued and outstanding, at meetings of both such directors and such shareholders duly called to take action on the subject, that because of objectionable and undesirable conduct on the part of the Lessee [the Lapiduses], or of a person dwelling in or visiting the apartment, the tenancy of the Lessee is undesirable. (Repeatedly to violate or disregard the house rules hereto attached or hereafter established in accordance with the provisions of this lease, or to permit or tolerate a person of dissolute, loose or immoral character to enter or remain in the Building or the apartment, shall be deemed to be objectionable and undesirable conduct.)”

The defendants contended that the parenthetical situations enumerated in the proprietary lease are the sole bases for establishing “objectionable and undesirable conduct,” or at least that there is an ambiguity, which must be resolved against the co-op as drafter, whether those are exclusive factors or merely examples. As the motion court noted, there was nothing in the parenthetical statement to indicate it is other than illustrative, and an exhaustive list would not have been placed in an aside. In any event, House Rule Four in the proprietary lease stated that “[n]o lessee ... of an apartment shall...do or permit anything to be done therein which will interfere with the rights, comforts or conveniences of other occupants of the building.”

The defendants’ repeated refusal to remove an air conditioning system that leaked into the apartment below and caused damage interfered with the “rights, comforts or conveniences” of their neighbors, and thus constituted a violation or disregard of the house rules for purposes of Section 34(e) of the proprietary lease. The appellate court determined that the unjustified withholding of maintenance and other payments for extensive periods of time, as found by several courts, which compelled the co-op to bring multiple costly nonpayment proceedings, fell within any definition of “objectionable and undesirable conduct,” and, since the financial burdens were borne by the tenant-shareholders, also interfered with their “rights, comforts or conveniences.” As such, the votes in favor of the resolution were authorized. Relatedly, the court concluded that evicting tenants who consciously and unabashedly damage another neighbor’s property and inflict thousands of dollars in unnecessary legal fees was in furtherance of the co-op’s legitimate interests.

According to defendants, the term “objectionable and undesirable conduct” was so vague that it was unenforceable. The court said that the provision was fairly concrete, defendants were given detailed written notice of what actions were deemed objectionable and undesirable, and the co-op’s interpretation was reasonable. Thus, defendants’ attempt to involve the court in “judicial second-guessing” was precisely why the Business Judgment Rule applied to co-op determinations.

The proprietary lease did not violate public policy by restricting access to the courts. In the court’s view, there was no public policy favoring the repeated assertion of unsustainable arguments, nor was there a pattern of delaying tactics designed to inflict extensive costs on the adversary. There were no signs of dishonesty or disingenuousness with the court, either, nor was there a disregard of “so-ordered” stipulations and “contempt of court” orders.

With respect to the Lapiduses’ argument that the board purchased the shareholders’ votes, in violation of Business Corporation Law Section 609(e), by promising to indemnify them against any potential lawsuits by defendants, the court held that the promise was not conditioned on any particular vote by the shareholders and was merely a response to the defendants’ threats to pursue anyone who opposed them. The appellate court noted also that, in a letter to the shareholders, the defendants previously took the position that the board’s promise of indemnification was worthless: “Where does the board think the money for any such indemnification would come from? The answer is simple, it comes out of your pocket. Therefore, the board is doing nothing in promising to indemnify you with your own money.”

Moreover, under the Lapiduses’ own interpretation, their threats against shareholders who might vote in favor of the resolution offered something of value to those who voted against it, i.e., freedom from “serious legal consequences” and “substantial liability,” and thus ran afoul of Business Corporation Law Section 609(e).

With a doctrinaire blunderbuss said the court, defendants contended that legal precedents precluded the co-op from beginning this ejection because, at the time of filing, there was a pending nonpayment proceeding for maintenance and other charges due under the lease. There was nothing inconsistent in the co-op’s actions, and defendants cited no authority requiring a lessor to abandon its earlier-asserted claims for unpaid rent after the lease was terminated. The court found that the defendants displayed no inhibition to arguing certain “affirmative defenses,” including that their own apartment was uninhabitable or insufficiently repaired, which they conceded were previously raised and rejected in the nonpayment proceeding.

Assuming, that the board had permitted other tenant-shareholders to install or retain water-cooled air conditioning systems, the court noted that there was not even a suggestion that any such units caused damage to an apartment; thus, the co-op’s decision to terminate the defendants’ tenancy was not discriminatory.

The board did not retaliate against defendants because they “sought redress for landlord’s own breach of its contractual and statutory responsibilities through the courts,” as defendants claimed; the board did not breach any duties, unlike defendants, who chronically failed to meet their financial obligations and obstinately refused to abate a nuisance.

Defendants’ inability to corroborate their final charge of bad faith on the part of the board and/or the shareholders did not warrant a denial of summary judgment. The current record, most of which was generated in the courts over the past 15 years, demonstrated, in the court’s view, the co-op’s lack of malice. Deferring to the co-op’s decision would not give boards “almost unfettered license” to evict owners from their homes, as defendants asserted; to the contrary, the court held that prohibiting the co-op from ejecting defendants would allow the tenant-shareholders to flout their most basic obligations, i.e., to pay maintenance and refrain from causing physical damage to the building.

The court held that by the terms of the resolution, defendants’ lease terminated on June 15, 2005. The co-op began the ejection on June 21, 2005, and therefore the action was timely. Defendants argued that the time within which the co-op had to bring an action started to run in 1992, when defendants first breached the proprietary lease by unjustifiably withholding maintenance payments. While the co-op might have spared itself much grief and expense had it sought to remove defendants at that time, the court concluded that it should not be penalized for its forbearance or good faith attempts to settle the matter.