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Case Notes by

Richard Siegler & Dale Degenshein, Stroock & Stroock & Lavan

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First published: Mar 2009
Kaung v. Board of Managers of Biltmore Towers Condominium Association.

We are once again faced with a situation where the courts look to the precise language of a condominium’s bylaws to establish the rights and responsibilities of the condominium and its unit-owners. Here, the bylaws did not permit the board to enter into a cell tower lease because the court found that the tower was not “incidental” to the residential use and occupancy of the building, as required by the bylaws. However, the court also held that – notwithstanding the board members’ incorrect interpretation of the by-laws – the board members’ decision to enter into the lease that allowed the cell tower to be installed was not actionable. The board members entered into the lease in accordance with their business judgment and their failure to properly interpret the document did not form the basis for a cause of action against them.

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First published: Feb 2009
Silverstein vs Westminister House Owners Inc.

Although the plaintiff tried to claim that there was self-dealing by the board members, he had no evidence of that. The board members’ wives had lost their exclusive on the apartment months before the first prospective purchaser was brought to the board and the wives had no involvement in finding either prospective purchaser. This is another case which demonstrates that, in order to prove breach of fiduciary duty, the shareholder must be able to plead acts which show that the board acted in bad faith, outside the scope of their authority or for something other than a legitimate corporate purpose. Merely framing an alternate cause of action based on the same facts as one for breach of contract will not successfully avoid application of the Business Judgment Rule. Speculation as to the intent or motives of board members is insufficient. Moreover, an unsupported claim that discovery will reveal an improper motive will not defeat a motion to dismiss.

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First published: Jan 2009
Baker vs. 16 Sutton Place Apartment Corporation

This case reminds us that when a person buys a co-op or a condo apartment, he or she gives up certain rights, including the right to determine the way in which common areas of the building can be used. This is true even if use of those areas may negatively affect a specific shareholder. Levandusky and Pullman are the seminal cases in this area. Levandusky taught us, and Pullman reaffirmed, that “the very concept of cooperative living entails a voluntary, shared control over rules, maintenance and the composition of the community.” A shareholder “voluntarily agrees to submit to the authority of a cooperative board, and consequently the board may significantly restrict the bundle of rights a property owner normally enjoys.” Although the Pullman court cautioned that courts must exercise “heightened vigilance” in examining board’s actions, there can be no question that when one purchases a cooperative apartment, one agrees to submit to the decision making authority of the board and to cede certain of the privileges of single ownership to a governing body. In this case, the plaintiffs purchased at a time when the roof garden was not in place. However, the board had the right to create a garden even though plaintiffs might lose certain privacy rights. We note that had plaintiffs and the co-op entered into a contract prohibiting the board from installing a roof garden above plaintiffs’ apartment, the business judgment rule would likely not have been applicable and the parties would have been required to abide by the terms of the contract. It is apparent from the decision that no such contract existed here.

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First published: Dec 2008
Del Puerto v. Port Royal Owners Corp.

Once again, the courts give great deference to a decision of a co-op board under the Business Judgment Rule. Here, the plaintiffs made several allegations of bad faith and disparate treatment. There were sufficient allegations so that discovery was warranted to consider and investigate plaintiffs’ claims. However, it was ultimately determined that plaintiffs did not satisfy their burden to show that the board treated them differently. The board demonstrated its basis for rejecting plaintiffs’ application to purchase. The court applied the rule as plaintiffs were already shareholders and not, as most purchasers, strangers to the co-op. Notably, the Business Judgment Rule requires courts to defer to board decisions made in good faith, in the exercise of honest judgment, and for lawful and legitimate purposes and places the burden on shareholders challenging a board’s actions. However, once challenged and faced with specific allegations of wrongdoing, it is necessary for a board to set forth the specific, legitimate basis for its rejection.

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First published: Nov 2008
Ash v. Board of Managers, The 155 Condominium

This case reminds us that courts are bound to defer to board decisions taken in good faith, in the best interests of the co-op or condominium and within the scope of their authority. This is true even if it is ultimately determined that the board’s act are unwise or inexpedient. In addition, boards have the right to rely on their experts and, if the expert makes a mistake (such as, here, allowing a reporting system to be implemented which did not give the board all of the information it required), the board will not be liable for following the expert’s advice. The case also discusses what happens when a party to a litigation asks that a judge recuse himself from the case. As this court explains, orally attacking the court and inundating it with a letter-writing campaign will not force a judge to recuse himself, which would allow the litigant to “shop” for another judge. Assuming there is no statutory obligation, a judge will not remove himself from a case unless the judge believes, as a matter of his own personal discretion, that he cannot remain impartial.

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First published: Oct 2008
Matter of Schwarz v. Dorchester Apt. Corp.

This case serves as a reminder that, except for decisions specifically reserved to the shareholders, it is a board’s right and obligation to make decisions for the best interests of all of the co-op’s shareholders. This is consistent with Business Corporation Law Section 701, which prescribes that “the business of a corporation shall be managed under the direction of its board of directors.” The board’s power is broad, but it does not go unchecked. Here, the decision to limit parking spaces to one per apartment was made by the petitioners, within its authority, in good faith, and in the legitimate interests of the cooperative pursuant to the Business Judgment Rule. However, the decision to retroactively charge increased fees to the petitioners was not and thus the court annulled that decision. The case also reminds us that being successful in a lawsuit does not necessarily allow the prevailing party to obtain attorneys’ fees from the other side. There must be a statute or a written agreement (typically a proprietary lease, or in condominiums, the bylaws) that allows fees to be awarded to the successful party. In this case, the co-op conceded, by its own letter, that plaintiffs had not breached the proprietary lease. Without such a breach, no fees could be awarded.

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First published: Sep 2008
Fraser vs. 301-52 Township Corp.; Bryan T. Netti vs. Auburn Enlarged City School District; Friedman vs. Madison 40 Associates

The issue of whether there is a causal relationship between personal injury (and specifically respiratory problems) and a moldy or damp environment is being heavily litigated in matters concerning apartments, schools and the workplace. At this time, we await the appellate court’s decision in Fraser, as that holding will likely dictate whether the courts in Manhattan and the Bronx will be required to allow experts to testify that a plaintiff’s illness was caused by a moldy or damp environment. Boards of co‑ops and condominiums should be reminded that, regardless of whether it is ultimately determined by the courts that there is a causal relationship between mold and personal injury, it is important to remediate mold to mitigate property damage claims. Whether the remediation is to be performed by the cooperative or condominium, or the shareholder or unit-owner, may be an issue to be determined on a building-by-building basis based on the specific governing documents.

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First published: Jul 2008
Pello vs. 425 East 50 Owners Corp.

This case teaches us that it is important that boards read both the proprietary lease and the bylaws in order to determine how the building is to be governed. If, after looking at these documents, it should turn out that one imposes a higher burden than the other, then the cooperative may well be required to meet that higher burden. What this case also teaches is that, even in a small building, the board cannot act informally. Compliance with the corporate documents is necessary in order for the actions of either the board or the shareholders to be deemed legally binding and enforceable. Here, the board did not follow the lease requirements and the outcome was predictable.

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First published: Jun 2008
Branscombe Investments Ltd. vs. Board of Managers of the Olympic Tower Condominium

This is a case where the parties should have been able to come to a resolution without resorting to a lawsuit. The court made clear in its decision that it expended significant efforts to try and settle this matter and that, since the parties were neighbors, settlement would have been preferred. From the condominium’s perspective, the court was able to dismiss claims because it complied with the Business Judgment Rule. It retained a competent expert and made decisions based on that expert’s advice. Even though there was a claim that the board acted without holding a board meeting, the evidence submitted to the court showed that its actions were taken at meetings, in accordance with its bylaws. By pursuing claims in the face of evidence that the condominium retained experts, relied on those experts, and followed its own rules, the Bankses were required to pay the condominium’s legal fees. In this case, we join the court in its belief that this was a dispute among neighbors that should have been settled.

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First published: May 2008
Pappas vs. New 19 West LLC

Once again, the courts remind purchasers to read the documents. It is not enough to rely upon oral statements, promises, or omissions by real estate brokers or counsel for the sponsor. If a purchaser wants to have exclusive use of a roof area, the purchaser must make sure that such use is legal and authorized in writing. The courts have repeatedly made it clear that representations made in an offering plan cannot be ignored, particularly by those who purchase from the sponsor of a conversion plan. Here, the purchasers tried to ignore the plain statements made in the offering plan and sought to rely instead on oral statements made concerning the sponsor’s “intent” to legalize the roof setback for use as a terrace. This strategy was unsuccessful. Based on the disclosures in the offering plan, we believe the sponsor would also be successful were it to move to dismiss the action.

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