Breezy Point Cooperative Inc. vs. Young

The Pullman progeny keep coming, about one every year since the landmark decision in 2002. While the number is still small, almost all of the progeny have supported the action of the co-op in terminating proprietary leases for objectionable conduct. Does the limited number of cases suggest the difficulty in establishing objectionable conduct or restraint on the part of co-op boards in applying Pullman to only the most egregious instances of objectionable conduct? Stay tuned!

Breezy Point Cooperative Inc. vs. Young is the latest case in which a court permitted a co-op to terminate a proprietary lease because of the objectionable conduct of its shareholders.

In this case, the proprietary lease between the co-op landlord and Thomas Young, the tenant-shareholder, provided that the lease may be terminated when the shareholders determine that “because of objectionable conduct on the part of the Lessee the tenancy of the Lessee is undesirable.” The lease further provided that a tenant engages in objectionable conduct when he or she “repeatedly violates or disregards the cooperative’s rules and regulations.”

The corporate bylaws provided that the shareholders may propose resolutions to be considered at a special meeting, which may be convened “at any time” by a majority vote of the board of directors “provided that there shall be filed with the Secretary a petition signed by 200 shareholders.” A resolution may be adopted when a majority of the shareholders are present and two-thirds or more vote in the resolution’s favor.

In early 2004, 225 shareholders signed a petition to require a vote, at the annual or a special meeting, on a resolution terminating Young’s propriety lease. The proposed resolution cited the tenant’s past conduct in continual disregard and violation of the rules and regulations of the cooperative and his abuse of the judicial system in bringing unfounded lawsuits against the co-op.

In response to the petition, the board voted to hold the special meeting when the shareholders convened for the annual shareholders’ meeting in August 2004. At the meeting, after several shareholders spoke with respect to the resolution and Young addressed the shareholders, 1,259 of the 1,380 voting shareholders supported the resolution.

In October 2004, the co-op served Young with notice that his lease had been terminated. The notice alleged that on 94 occasions, from March 31, 1996, through April 28, 2004, the tenant violated one or more of the cooperative’s bylaws or its rules and regulations, thereby “engag[ing] in objectionable conduct in violation of the proprietary lease.”

In an attached listing, the co-op set forth the dates and nature of the violations, which included the repeated harassment of security officers; the defacement of cooperative property; numerous violations of noise, litter, animal, and motor-vehicle regulations (certain of which threatened the safety of other shareholders); and interfering with the rights of other shareholders.

In response to the subsequent notice of petition and the petition itself, Young answered by alleging, among other matters, that the procedures employed to terminate his lease were flawed, that insofar as the termination was based on the parties’ prior litigation, such a ground is not specified in the lease, bylaws, or rules and regulations as a form of objectionable conduct and, in any event, represented an impermissible retaliation for his exercise of his right to legal process. Young also asserted counterclaims based on the co-op’s retaliation and bad faith and for attorney’s fees.

The co-op moved for summary judgment on its petition and to dismiss Young’s counterclaims. In its supporting papers, the co-op set forth his violations, the lengthy history of Young’s frivolous litigation against the cooperative, which cost the co-op several hundred thousand dollars in legal fees, the procedures required by the lease and bylaws to terminate tenancies, and the actions taken by the shareholders and the board, from the circulation of the petition to the vote which terminated the tenancy.

Young opposed the motion and cross-moved for an order dismissing the petition, calling it impermissible retaliation and citing improprieties in the procedures leading to the shareholders’ vote and the co-op’s failure to provide him with an opportunity to contest certain violation notices. He added that the parties’ prior litigation was an improper basis to terminate his tenancy.

The court denied Young’s cross-motion and granted the co-op’s motion, concluding that the co-op met its burden to establish sufficient grounds to terminate the tenancy, that it terminated the tenancy in conformity with Young’s procedural rights under the lease, bylaws, and regulations, and that Young failed to establish an issue for trial with respect to any defense or counterclaim. Young appealed and the appellate court affirmed.

In supporting its decision, the appellate court cited the landmark case, 40 West 67th Street vs. Pullman, where the court invoked the Business Judgment Rule to uphold a co-op board’s termination of a shareholder’s proprietary lease (see “Voting Out Your Neighbor,” Habitat, July/August 2002). The rule requires the courts to “exercise restraint and defer to good faith decisions” made by boards of directors in business settings so long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith. The evidence that is the basis for the shareholder vote will be reviewed under the Business Judgment Rule, and the courts will normally defer to that vote and the shareholders’ stated findings that the tenant is indeed objectionable even if “the results show that what they did was unwise or inexpedient.”

With respect to a board’s conduct, the Pullman court acknowledged that “the broad powers of cooperative governance carry the potential for abuse when a board singles out a person for harmful treatment or engages in unlawful discrimination, vendetta, arbitrary decision making or favoritism,” which conduct is “incompatible with good faith and the exercise of honest judgment.”

To overcome the presumption that the board members exercised their honest judgment to promote the lawful and legitimate interests of the corporation, a tenant must raise sufficient facts with respect to fraud, self-dealing, or other misconduct by the board to “trigger further judicial scrutiny.” When scrutinizing a cooperative’s conduct in terminating a tenancy, the court said that courts will examine the corporate rules and bylaws to determine whether the action was authorized, whether the cooperative followed its own procedures for terminating a tenancy, and whether the cooperative acted in good faith and in the corporate interest to terminate the tenancy for the reasons alleged.

Here, the co-op established that more than the necessary 200 shareholders signed the petition, that the resolution specified the nature of the conduct alleged to be objectionable, that the board properly convened a special meeting after timely notification of all the shareholders, including Young, of the text of the resolution to be presented at the special meeting, that the requisite number of shareholders were present for the vote, and that the required two-thirds of those voting supported the resolution.

The court said that Young showed no support in the lease or bylaws for his contention that a special meeting to consider a shareholders’ resolution may not be convened in the course of an annual shareholders’ meeting, and he failed to establish that the meeting and voting were improperly conducted. The court also rejected Young’s challenge to the shareholders’ determination that the rules violations and litigation constituted objectionable conduct.

The co-op rule barring shareholders from “interfering with the rights of other [shareholders]” is sufficiently broad to encompass the rules violations and litigation that the cooperative deemed to constitute objectionable conduct. As Young had failed to “overcome the presumption that the [shareholders] exercised their honest judgment to promote the lawful and legitimate interests of the corporation,” no further judicial scrutiny of this issue was warranted, said the court. Accordingly, the final judgment was affirmed.