13315 Owners Corp. v. Kennedy

The case of 40 West 67th Street v. Pullman decided in 2002 by New York’s highest court is a landmark case permitting a co-op to evict a shareholder for objectionable conduct if proper procedures are followed. Now, a 2004 case reflects a trial court’s struggle to deal with the Pullman doctrine and apply it to a different fact pattern.

In 13315 Owners Corp. v. Kennedy, the co-op began a holdover proceeding on the ground that its board of directors had terminated Morgan Kennedy’s right to occupy the premises. The board voted to terminate his proprietary lease after finding that he had engaged in objectionable conduct. Kennedy, moving for summary judgment, argued that the co-op acted outside the scope of its authority by not precisely following the procedure prescribed by the co-op documents in voting to terminate his tenancy. Kennedy also argued that the co-op acted in bad faith by denying his right to be heard before the vote.

The co-op cross-moved for summary judgment and for use and occupancy. It contended that it acted within its authority and in good faith and that the court should defer to the board vote and evict Kennedy. In the alternative, the co-op maintained that if it had acted outside its authority or in bad faith, Kennedy should still be evicted based on evidence that his conduct was objectionable.

The co-op’s motion for use and occupancy was granted. The co-op’s motion to dismiss Kennedy’s affirmative defenses was granted in part and denied in part. The co-op’s motion for summary judgment was denied. Kennedy’s first three affirmative defenses were withdrawn or denied. Kennedy was granted partial summary judgment on certain affirmative defenses. But unresolved questions of fact remained regarding how much objectionable conduct the court could attribute to Kennedy and whether the conduct was objectionable. The court said that only a trial could resolve these questions.

Kennedy purchased the shares to his apartment on November 20, 1986, and entered into a proprietary lease with the co-op. In January 2003, Kennedy sublet the apartment to David Holland. Bad blood soon developed between subtenant Holland and the building’s tenant-shareholders. Holland renovated the apartment and removed portions of the walls and ceiling without the board’s consent and without securing proper permits from the New York City Department of Buildings. On March 5, 2003, the co-op sent a letter to Kennedy notifying him that Holland was making unapproved renovations and reminding him that renovations required board approval. Kennedy never responded.

On April 15, 2003, the co-op sent Kennedy a second letter, informing him that Holland’s renovations had caused a small fire in the wall of the apartment, that neighbors were complaining about noise from his work, that someone had removed appliances without board approval, and that three individuals were living in the apartment without board approval. In its April 15 letter, the board requested that Kennedy evict Holland and engage a licensed professional to “assess the construction and electrical work.” Kennedy did not respond to that letter.

On May 14, 2003, the co-op board held a meeting with Kennedy to discuss the problems surrounding the apartment. The minutes from the meeting reflect that Kennedy told the board that he was entirely unaware of the complications that Holland’s renovations had caused. Members of the board urged Kennedy to begin eviction proceedings against Holland. After some conversation, Kennedy agreed to talk to Holland and respond to the management office within ten days.

Kennedy did not respond. Instead, and without the co-op’s consent or approval, he entered into a new sublease with Holland for a term beginning August 1, 2003, and expiring on January 31, 2005.

On September 12, 2003, the New York City Police Department executed a search warrant at the co-op and arrested Holland for allegedly possessing Class A-I felony weight of narcotics inside Kennedy’s apartment. Holland was released and indicted. (The case awaits trial in New York County.) On September 19, 2003, the co-op wrote to Kennedy about Holland’s arrest and requested that Kennedy begin immediate eviction proceedings against Holland. The September 19 letter stated that “[i]f anything further should happen [the co-op] will hold [Kennedy] personally responsible for [Kennedy] is the owner of the apartment.” Kennedy did not respond.

On October 23, 2003, the co-op sent Kennedy a letter stating that Holland’s renovations had resulted in a severed electric cable that cut off the building’s heat. The co-op alleged that by allowing Holland to conduct the renovations, Kennedy had violated the house rules.

On November 22, 2003, the police executed a second warrant at the premises and again arrested Holland, this time for allegedly possessing class A-II felony weight of narcotics inside Kennedy’s apartment. (That case is also pending.)

During the arrest, the police damaged the locks on the building’s front door, and the co-op had the locks changed. On November 26, 2003, the co-op sent a letter to Kennedy informing him of the arrest and telling Kennedy where he could acquire new keys. Kennedy did not give a copy of the keys to Holland, who was unable to enter the building.

Because they were denied access, Holland and his roommate, David Rubin, brought an illegal-lockout proceeding against both Kennedy and the co-op to repossess the apartment. In an affidavit, Kennedy claimed that he was not involved in their lockout. Kennedy averred that the co-op and the building’s superintendent had locked Holland out. On January 30, 2004, another court ordered Kennedy to restore Holland and Rubin to possession. On February 18, 2004, Kennedy began a holdover proceeding against Holland and Rubin. Kennedy regained possession on April 1, 2004.

Before Kennedy regained possession of the premises from Holland and Rubin, the board called for a meeting to discuss what it termed Kennedy’s objectionable conduct. The board announced the meeting to the shareholders by a notice on the letterhead of an entity named “133 East 15th Street Owners Corp.” The notice was signed by “[t]he management of 133 East 15th Street Owners Corp.” The co-op’s correct name is 13315 Owners Corp. The board meeting took place on February 10, 2004.

Kennedy and his attorney attended the February 10 meeting. According to Kennedy, three board members, some shareholders, an employee of the management company, and the co-op’s attorney were at the meeting, along with Kennedy and his attorney. Kennedy argued, and the co-op did not dispute, that shareholders did not duly elect the board members present at the meeting of February 10.

At the February 10 meeting, board members silenced Kennedy’s attorney. The co-op claimed that Kennedy became disruptive shortly after his attorney began his presentation. As a result of Kennedy’s supposed disruptions, the board cut short the presentation and called for a vote. Kennedy claimed that board members rejected his attorney’s request to discuss his allegedly objectionable conduct.

Shortly after Kennedy’s attorney finally began speaking, someone at the meeting told him to “shut up.” Neither Kennedy nor his attorney spoke further.

At the conclusion of the meeting, the board, but not the shareholders, voted to terminate Kennedy’s proprietary lease because of his alleged objectionable conduct and that of his subtenant, Holland. The board objected to Kennedy’s failure to respond to its letters, to his decision not to evict Holland in a timely fashion, and to his entering into a second sublease with Holland without the board’s approval after it had already asked Kennedy, at their May 14 meeting, to evict Holland. The board also objected to Kennedy’s allegedly dumping garbage on the street in front of the building. That alleged dumping resulted in the New York City Environmental Control Board’s issuing tickets to the building.

On February 11, Kennedy received a termination notice from the board informing him that under Paragraph 31(f) of the proprietary lease, his lease and right to occupy the premises were terminated effective February 20, 2004. Paragraph 31(f) of the lease, which addresses a tenant-shareholder’s objectionable conduct, provides that at any time an affirmative vote of two-thirds of the board of directors can establish a tenant-shareholder’s conduct as objectionable. Kennedy refused to vacate and the co-op began the holdover proceeding.

The co-op moved to dismiss Kennedy’s affirmative defenses and asked for summary judgment. The co-op argued that the business judgment rule shields the board’s decision to terminate Kennedy’s proprietary lease and that it was entitled to a judgment of possession in its favor. Alternatively, the co-op argued that, if the court declined to apply the business judgment rule to the board’s decision, the court should award the co-op summary judgment based on the alleged objectionable conduct.

This case hinged on the application of 40 West 67th Street v. Pullman. In Pullman, the co-op owned a building containing 38 apartments. Pullman bought into the co-op and acquired the proprietary lease for his apartment. Soon after moving in, Pullman began complaining about his upstairs neighbors and distributed flyers, some referring to his neighbor as a potential “psychopath,” others describing the neighbor’s wife and the board president’s wife as having “intimate personal relations” with each other. Pullman repeatedly called the police, began various lawsuits against other neighbors and board members, and illegally altered his apartment.

In response to this behavior, the cooperative called a meeting under Article III (First) (f) of their lease agreement. The board sent a timely notice of the meeting to all the shareholders, including Pullman. Pullman did not attend the shareholder meeting, but owners of more than 75 percent of the outstanding shares of the cooperative, a super-majority, were present. By a unanimous vote, they passed a resolution declaring Pullman’s conduct “objectionable” and directing the board to terminate his proprietary lease and cancel his shares. Pullman remained in the apartment, and the co-op brought an action in Supreme Court for possession and removal and a declaratory judgment to cancel his shares.

The Court of Appeals, in Pullman, affirmed the appellate division’s summary judgment award to the co-op, explaining that a court can apply the business judgment rule consistently with RPAPL 711. According to the Court of Appeals, the shareholders’ vote and stated findings are proof of the “competent evidence” that RPAPL 711(1) required. The court envisioned that a court would review under the business judgment rule the competent evidence that is the basis for the shareholder vote. The court said that this was because “[t]he [Pullman] court concluded that in the realm of co-op governance the vote of the shareholders [is] the functional equivalent of competent evidence that would establish to the satisfaction of the court that the tenant [is] objectionable.”

Under Pullman, therefore, the court concluded that courts should defer to a board’s vote as competent evidence that the tenant-shareholder’s conduct is objectionable under RPAPL 711 unless the tenant-shareholder makes a showing of one of the following: “[T]hat the board acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose or (3) in bad faith.” When a tenant-shareholder successfully raised one of these defenses, the court could no longer assume that the shareholders and board members properly examined the evidence, and the court must determine from its own evaluation of the evidence whether the cooperative is entitled to possession.

In the court’s view, the Pullman analysis had two phases. Phase one determines whether to apply the business judgment rule to a shareholder or board vote. It is the tenant-shareholder’s burden to persuade the court why it should not apply the business judgment rule and defer to the vote. If the court does not apply the business judgment rule, in phase two the court determines from its own evaluation of the evidence whether the co-op is entitled to possession. In phase two, the cooperative has the burden to prove that it is entitled to possession.

Pullman could not successfully rely on any of these three defenses: that the board (1) acted outside its authority, (2) illegitimately furthered its corporate purpose, or (3) behaved in bad faith. The Court of Appeals noted that the cooperative had acted within its authority because it “unfailingly followed the procedures contained in the [proprietary] lease when acting to terminate defendant’s tenancy.”

The court concluded that the board furthered the corporate purpose because the unanimous vote of everyone present at the shareholders’ meeting expressed the cooperative’s collective will. And, because Pullman did not show that the cooperative engaged in any bad faith, arbitrariness, favoritism, discrimination, or malice, the court assumed that the cooperative corporation had acted in good faith.

Having deferred to the shareholders’ evidence, the court, in 13315 Owners Corp. v. Kennedy, said that the Pullman court did not evaluate whether the tenant-shareholder’s conduct was objectionable. Had the respondent in Pullman successfully raised one of the three defenses, the court would have needed to evaluate on its own whether the tenant-shareholder’s conduct was objectionable.

It was unclear to the court in 13315 Owners Corp. whether Pullman applied to this proceeding, which involved a board of directors’ vote rather than a shareholders’ vote. The court noted that the Court of Appeals interpreted Levandusky v. One Fifth Ave. Apt. Corp. to mean that “[i]n the context of cooperative dwellings, the business judgment rule provides that a court should defer to a cooperative board’s determination . . . .” In Pullman, the Court of Appeals recognized “that a cooperative board’s broad powers could lead to abuse” that requires courts to “exercise a heightened vigilance in examining .... the board’s action.” Although the court’s multiple references to cooperative boards might mean that the court intended the business judgment rule to apply to a board vote, the court here said that these references had no binding precedential value.

The Pullman court’s multiple references to co-op boards arose because Pullman was “expanding the scope of Levandusky [, which] had held that the business judgment rule applied generally to decisions by residential cooperative corporations, but left the scope of its holding somewhat ambiguous and the case had not specifically been applied to removal actions.” Because Levandusky referred to co-op boards, the Pullman decision, which expanded Levandusky, also referred to co-op boards.

It was also possible, in the 13315 Owners Corp. court’s view, that when the Court of Appeals referred to the “board” in Pullman, it meant a board’s taking actions required by a shareholder vote. Pullman’s proprietary lease was terminated under what is typically known in New York as Paragraph 31(g) of a proprietary lease. Paragraph 31(g) calls for a shareholder vote to determine whether the “objectionable” tenant’s conduct merits lease termination. If, under Paragraph 31(g), a super-majority of the shareholders votes to terminate a lease, then the board may confirm the decision and begin an eviction proceeding. When the Court of Appeals discussed “the board’s determination” or “board decisions,” it might have meant a board whose actions are based on a shareholder vote. The court here said that only time will write the perfect ending to this question.

Considerable argument has been made against applying Pullman to a board vote. Some law journal articles since Pullman have contended that Pullman reduced tenant-shareholder protection against arbitrary and discriminatory eviction. If Pullman applied to board votes as well as shareholder votes, the court said this result would increasingly erode tenant-shareholder protection, since rather than requiring a majority of the shareholders to consider the tenant-shareholder’s conduct “objectionable” before the co-op evicts the tenant-shareholder, it will be enough that a board of several members finds it so.

In deciding Pullman, the Court of Appeals noted that the state legislature designed RPAPL 711 (1) to protect tenant-shareholders from eviction upon their landlord’s whim. But the court there was satisfied that “relationships among shareholders in cooperatives are sufficiently distinct from traditional landlord-tenant relationships that the statute’s ‘competent evidence’ standard is satisfied by the application of the business judgment rule.”

However, in 13315 Owners Corp. v. Kennedy, the court said that members of a board might develop their own definition of objectionable conduct that other cooperative shareholders do not share. Having elected officials, such as board members, decide questions of objectionability prevent the possibility of mob rule that can result from a shareholder vote. Nevertheless, the court said that greater potential for abuse arises in a board vote than in a shareholder vote.

A second advantage of Pullman was the benefit to the overall quality of living of other tenant-shareholders. As the Pullman court explained, the “concept of cooperative living entails a voluntary, shared control over rules, maintenance and the composition of the community.” If those involved in community living understand what is at stake and what they must give, cooperation among cooperators will result.

Ultimately, the 13315 Owners Corp. court determined that it need not decide whether Pullman applied to this case. Kennedy raised successful defenses to applying the business judgment rule. The court held that the co-op acted outside the scope of its authority and in bad faith in conducting its vote to terminate Kennedy’s proprietary lease. The court, therefore, could not apply the business judgment rule and had, instead, to engage in competent-evidence analysis. If Pullman did not apply to a board vote, then the court would apply evidence analysis anyway.

The court analyzed the issue as follows: when a co-op brings a summary eviction proceeding under Pullman, the court must engage in two phases of analysis. During the first phase, the court must decide whether to apply the business judgment rule and defer to the board or shareholder’s vote on whether the tenant-shareholder engaged in objectionable conduct. The court will apply the business judgment rule, and the co-op will be granted summary judgment, unless the respondent can show that the co-op acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose, or (3) in bad faith. It is not enough for a shareholder to show how “unpalatable” the impact of the board’s actions have been. The shareholder must show that the board’s actions were improper. Because the co-op sought to terminate Kennedy’s proprietary lease, the court must use “heightened vigilance” in assessing the board’s exercise of its business judgment.

Kennedy raised five defenses to show that the co-op acted outside the scope of its authority. Two of these defenses had no merit: (1) that the co-op did not give Kennedy a notice to cure and (2) that the co-op incorrectly described the apartment. But three of the defenses – (1) that the notice of the board meeting did not give the co-op’s correct name, (2) that no cooperative board officer signed the notice of the board meeting, and (3) that the shareholders did not properly elect the board members – were appropriate defenses under phase one of a Pullman analysis.

In support of his motion for summary judgment, Kennedy raised as a defense that the co-op did not give him a notice to cure before the board terminated his lease. The court said that the co-op was not required to give Kennedy a notice to cure. The co-op based Kennedy’s termination notice on Paragraph 31 (f) of the proprietary lease. Paragraph 31 (f) addresses a lessee’s objectionable conduct and does not provide a lessee with a chance to cure.

Kennedy also argued that the petition’s description of the apartment was improper. This argument, if true, would require dismissal in a New York holdover proceeding because a “petition must provide a specific enough description of the premises occupied by Kennedy to allow the Marshal when executing the warrant of eviction to locate the premises without additional information.”

Although the descriptions diverge, both the co-op and Kennedy identified the same apartment. The apartment was contained entirely on the first floor of the building; it simply had three levels on the first-floor space it occupied. Using either the co-op’s or Kennedy’s description, a marshal would have no problem locating the apartment, said the court. In any event, the petition’s description of the apartment is nearly identical to the description of the apartment Kennedy used in his verified holdover petition against Holland. Collateral estoppel prevented Kennedy from making this argument.

Kennedy further raised as a defense that the notice of the board meeting of February 10 was posted on the letterhead of an entity, and was signed by an entity, whose name did not match the co-op’s name. Kennedy argued that the notice was defective and that any meeting held under the defective notice was without legal effect.

The co-op contended that, because Kennedy did not object to the notice’s defect before or during the board meeting, Kennedy could not do so now. The co-op pointed to cooperative bylaw, Article II, Section 5, which provides that “notice of a meeting need not be given to any director who.... attends the meeting without protesting the lack of notice prior thereto or at its commencement.” The co-op also referred to Section 711 (c) of the business corporation law (BCL), which further provides that directors need not receive notice under these circumstances. The co-op’s arguments were not convincing. Kennedy was not a director. Therefore, the bylaw, Section 5, and BCL 711(c) did not apply.

The court noted that, if a court was to defer to a board or shareholders’ vote, it was important that the tenant-shareholder who risks eviction be entitled to attend the meeting at which that vote takes place. That is where the tenant-shareholder will have a chance to defend himself.

The co-op’s name and the name on the notice were similar. The co-op’s correct name was 13315; the notice was on the letterhead of an entity named “133 East 15th Street Owners Corp.” and was signed by “[t]he management of 133 East 15th Street Owners Corp.” Despite the difference, Kennedy attended the meeting of February 10. But when the name on the notice is not identical to the co-op’s name, the court found that the shareholder might be misled and legitimately decide not to attend the meeting. In the court’s mind, the difference in names was a failure on the co-op’s part unfailingly to follow procedures and was evidence that the board acted outside the scope of its authority.

Kennedy also supported his summary judgment motion by showing that the meeting notice failed to indicate which co-op board officer signed the notice. Article II, Section 5, of the bylaws prescribes that “special meetings shall be called by the president or secretary in like manner and on like notice.” Again, the co-op failed to follow procedure. Not everyone may call a meeting that shareholders must attend or face losing their apartment.

Finally, Kennedy argued that shareholders did not elect the board members who voted at the February 10 meeting in accordance with bylaws. The meetings of August 5, 2002 and May 14, 2003, at which shareholders should have elected the board members, violated the cooperative bylaws.

To obtain the minutes for those meetings, Kennedy was forced to begin an action in Supreme Court, New York County, to inspect the shareholder minutes. On March 16, 2004, another court granted Kennedy permission to examine the corporate minutes for 2000-2003. Had Kennedy so moved here, the court said it would have granted him the right to examine the corporate minutes as discovery appropriate in a Pullman proceeding.

The minutes proved that, in the court’s view, the board did not follow procedure in acting to terminate Kennedy’s proprietary lease. The board members also held the election meeting of August 5, 2002 without the required notice to the shareholders. The minutes for the meeting showed that only two shareholders were present.

The co-op did not dispute these facts. It instead argued that a board’s improper election cannot be raised in a holdover proceeding. Ordinarily, the co-op would be correct; improper election of the board is an inappropriate defense in a case such as this. As the co-op noted, its board can continue to function under the Business Corporation Law even though the shareholders did not elect it in accordance with its bylaws.

BCL, Section 602 (b) provides that the “failure to hold the annual meeting on the date so fixed or to elect a sufficient number of directors to conduct the business of the corporation shall not work a forfeiture or give cause for dissolution of the corporation.” BCL Section 603 (a) provides an exclusive remedy to a shareholder aggrieved by the failure to hold annual elections. An aggrieved shareholder along with “holders of ten percent of the votes of the shares entitled to vote in an election of directors may, in writing, demand the call of a special meeting for the election of directors specifying the date and month thereof.”

Had Kennedy wished to object to the failure to hold annual elections, he should have done so shortly after the failed election meetings of August 5, 2002, or May 14, 2003.

But when deciding whether to apply the business judgment rule to a Pullman holdover, the board’s failure to hold annual elections in a proper manner was directly related to whether the board “acted outside the scope of its authority.” The court said that a situation in which a board can evict tenant-shareholders who never had a chance to vote for its members is precisely the kind of situation the Court of Appeals wished to avoid in requiring that the cooperative board unfailingly follow procedure. Without election as prescribed by its bylaws, a cooperative board can become authoritarian and heavy-handed, assuming a position reminiscent of a dictatorial landlord, said the court.

In light of the incorrect notice for the February 10 meeting and the board’s improper election, the court held that Kennedy had proven that the co-op had acted outside the scope of its authority.

For the court to find that the co-op acted in bad faith, Kennedy had to show evidence of “bad faith, arbitrariness, favoritism, discrimination or malice” on the co-op’s part. Kennedy presented evidence to the court that the co-op had denied Kennedy’s right to be heard at the board meeting on February 10, 2004. For the co-op to deny Kennedy’s right to plead his cause to the board after it expressly invited him to attend the meeting showed malice, the court stated. It also violated the Court of Appeals’ requirement that a tenant-shareholder have “the opportunity to be heard” before a termination vote.

Kennedy described in great detail the events at the meeting. When Kennedy’s attorney asked for a chance to present evidence to the board and to discuss the items alleged in the proposed resolution – which listed Kennedy’s allegedly objectionable conduct and which was the basis for the board vote – the board rejected Kennedy’s requests.

The president of the cooperative stated at the meeting that Kennedy was involved in “illegal activity” concerning the apartment. Kennedy and his attorney protested that this was false but were not given a chance to explain why. Kennedy’s attorney again sought to initiate a discussion of the contents of the items alleged in the board’s proposed resolution. A board member then told Kennedy and his attorney that there was “no need to discuss the allegations in the resolution.” When the attorney protested again, another board member told him to “shut up.” Someone then told Kennedy that his lawyer would be allowed to make a statement. Shortly after Kennedy’s attorney began speaking, however, the co-op’s attorney silenced him. At this point, the board voted and the meeting was adjourned.

The co-op did not dispute these facts. It did not even mention the events that took place before Kennedy’s attorney began to make a statement. The co-op contended only, and only in a conclusive way, that Kennedy’s attorney was silenced because Kennedy was creating a “disturbance” during his attorney’s speech. The co-op did not define the purported disturbance.

The co-op also argued that Kennedy, an attorney, was repeatedly informed about objectionable conduct occurring in the apartment through the letters the co-op sent him over a period of almost 12 months. Kennedy ignored most of these warnings and letters. The co-op argued that Kennedy could not disregard multiple notices and then pretend that no one would listen to him.

At issue, however, was Kennedy’s opportunity to be heard at the meeting on February 10, before the board voted to terminate his proprietary lease. The court determined that whether Kennedy might have received and ignored earlier notices was irrelevant to whether Kennedy was denied the right to be heard at the February 10 meeting.

Under the law, the court said that it must assume that the co-op unfairly silenced Kennedy. Because Kennedy had successfully raised the third defense to Pullman – that the co-op had acted in bad faith – the court concluded that it could not apply the business judgment rule and defer to the board’s vote of February 10, 2004. The court concluded that it must move to the second phase of a Pullman analysis.

The co-op argued that if even if it acted outside its authority or engaged in bad faith – as Kennedy had now shown it did – it could evict Kennedy based on competent evidence that Kennedy’s conduct was objectionable. The co-op contended that a competent evidence analysis would result in the court’s finding Kennedy’s actions objectionable.

The co-op presented a list of allegedly objectionable conduct on Kennedy’s part. The board found objectionable that Kennedy (1) ignored its March 5 letter, (2) ignored the April 15 letter, (3) did not respond to the board after the meeting of May 14 as promised, (4) entered into a new sublease with Holland in defiance of the board’s wishes, (5) ignored the September 19 letter and took no actions to evict Holland from the apartment, (6) ignored the October 23 letter, (7) did not try to stop Holland’s renovations, and (8) dumped garbage on the street in front of the building.

The court noted that the co-op described many instances of supposedly problematic behavior, but said that only a court could decide whether these instances add up to objectionable conduct and whether Kennedy was responsible for them. As a result, the proceeding was adjourned for a trial at which the court could so decide.