Case Notes in


First published: Dec 2013
Goldstone v. Gracie Terrace Apartment Corporation

This case raises interesting issues in that it specifically acknowledges that the co-op will be in breach of the proprietary lease by reducing the size of the apartment and requiring the reconfiguration of rooms. Notwithstanding, the court would not issue a preliminary injunction because this de minimis “taking” could be compensated by money damages and because the equities were such that the co-op’s concerns far outweighed those of the plaintiff. Notably, the court acknowledged the co-op’s obligations to all shareholders such that demolition and reconstruction of portions of the building – if other solutions were available – were not required. Given the particular (although not unique) facts of this case – that the space was being taken in connection with a repair to the plaintiff’s apartment, where the only other alternative was prohibitively expensive – we do not know how or if this decision will affect other situations where a co-op may wish to “take” a portion of living space from an apartment. Initially, the decision comes to us in the posture of a preliminary injunction, so that there is very limited precedential value. Regardless, we can envision situations where a co-op might want to enlarge a common area hallway (particularly in older buildings) to make it wheelchair accessible by reducing the size of someone’s closet or foyer. Will it be permitted (required?) to do so based on the holding here? Unlikely as such an outcome may be, it is certainly something that should be considered by boards and their counsel.

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First published: Jul 2013
Thomas Campaniello v. Greene Street Holding Corp. and the Board of Directors of Greene Street Holding Corp.

In many co-ops, the commercial space is owned by the co-op and leased to a tenant, whether through a “sweetheart” lease to the sponsor or an arm’s length lease to a tenant. In those situations, the commercial occupant is only a tenant, and the lease forms the agreement between the parties. In arm’s length transactions, those leases are negotiated and the terms of any sublet would be contained in the commercial lease. In this situation, the commercial units were owned by shareholders of the co-op, so that the agreements between the parties were the same as the agreements between the co-op and its residential shareholders – the proprietary lease and bylaws. This case reminds us that it is important for the managing agent to maintain accurate and complete records of meetings and, in particular, votes by the board or shareholders. In order for a board to amend bylaws, the terms of the amendment should be set forth in the notice of meeting. Because the board (or agent) did not have a copy of the notice of meeting in this instance, the shareholder was able to argue that the meeting was not properly announced. Here, the board was able to locate persons who had served as board members more than 30 years ago, and those persons were able to recall the sum and substance of the notice of meeting on this issue. Without their affidavits, we do not know how the court would have resolved this issue – although there appeared to be evidence that the shareholders were advised of the bylaw amendment. Additionally, this case underscores the importance of uniformly implementing lease and bylaw provisions, as the court noted that the sublet fee had been charged to all shareholders – residential and commercial – for more than 30 years.

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First published: Jun 2013
Barasch v. Williams Real Estate Co., Inc.

Again, this is not a case that directly involves cooperatives or condominiums. However, it is an issue we see frequently. Here, the court, relying on various factors to determine whether a shareholder/director had an absolute right to all board-attorney communications, offered some guidance. Barasch and Williams clearly were adversaries to one another at a certain point in time. In fact, the communications from counsel discussed ways in which Barasch could make it difficult for Williams to take action in accordance with the plan of the other, majority directors. The New York appellate court found it important that Barasch’s claims were made by her in her capacity as a shareholder and that the corporate attorney-client privilege trumps the director’s right to information when the director is acting in her capacity as a shareholder. The decision states that it is important for cooperatives and condominiums, in any instance where they are asked for documents in a litigation with a director, to review carefully whether the documents and communications are privileged and thus should not be produced.

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First published: May 2013
Elias v. Orsid Realty Corp.

This case reminds us that there is a difference between the Business Judgment Rule and a requirement that a board or its agent act “reasonably.” Under the rule, a court defers to a board if its actions are taken in good faith, with honest judgment, for the lawful and legitimate furtherance of corporate purposes. Although some of the case law is unclear, typically, the Business Judgment Rule will not apply if the document at issue – a proprietary lease or bylaws, for example – requires consent to be “reasonable” or “not unreasonably withheld.” Cases have said that this reasonableness standard requires that the board or its agent take actions “legitimately related to the welfare of the cooperative.” In many circumstances, this is a distinction without a difference. As demonstrated in this case, however, boards and their agents must be mindful that there can be actions that may be protected under the rule but may not be acceptable. It has been the law for several years that a managing agent has the right to impose the rules of a cooperative if the proprietary lease requires the agent – and not the board – to approve purchasers of unsold shares. Here, the court determined that the board’s rules could be applied in principle. But because specific language in the lease required the managing agent to be “reasonable,” it could not reject a purchaser solely because the financing was in excess of the amount permitted by the board. This decision is subject to appeal and therefore could be modified or reversed.

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First published: Apr 2013
Alphonso v. Commissioner of Internal Revenue

We do not normally report on tax cases; however, we believe that this decision is significant. Putting aside whether Alphonso can ultimately demonstrate that the wall collapse was a “casualty,” it is important that the appeals court determined that the shareholders had a property interest in the wall and the common areas owned by the cooperative corporation such that they could take a casualty loss deduction. If it had been determined that only the co-op had a property interest, it would have left the shareholders with little comfort, as cooperative corporations themselves typically operate on a break-even basis and have little or no net income, so that the right to take a loss has no practical benefit to the co-op. The lease required tenant-shareholders to pay “cash requirements,” which included maintenance of the property owned by the co-op. It was also important that the house rules, which are incorporated into the proprietary lease and which grant shareholders their leasehold interest, specifically permitted shareholders use of the grounds. This decision may have an impact on the ability of co-op shareholders to claim losses in connection with money paid for co-op assessments for, among other expenses, hurricane-related damage.

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First published: Mar 2013
The Board of Managers of the Lore Condominium v. Steven Gaetano and Lore Gaetano

This case is significant because it addresses many of the issues typically raised in a case where a plaintiff claims construction defects, and does so in a circumstance where the Gaetano family played many roles in the conversion, something that is, in our experience, not the norm. The court discussed the impact and import of Mr. Gaetano signing certifications that are required by the Office of the Attorney General – both in his capacity as sponsor and in his capacity as architect. Consistent with other cases we have seen, the court found that the architect’s certification did not expose Mr. Gaetano to liability for fraud in his capacity as an architect and determined that only the attorney general had the right to sue him for fraud, in accordance with the Martin Act. However, when Mr. Gaetano signed a certification in his capacity as a principal of sponsor, it did expose him to potential liability for breach of contract, consistent with other case law. Here, the court not only held that there was potential personal liability relating to alleged construction defects, but also to the sponsor’s failure to pay common charges. These claims were not precluded by the Martin Act. As to the fraud claims, they were duplicative of the breach of contract claims and were dismissed for that reason.

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First published: Feb 2013
Reinhard v. Connaught Tower Corporation

This is one in a series of cases – most at the lower court level – where the courts are grappling with secondhand smoke. Breach of warranty of habitability and constructive eviction are issues that have an impact on leased properties, including co-ops. The court here determined that there were issues of fact as to whether there was a breach of the warranty, and it will presumably determine at trial whether the infiltration of secondhand smoke was so pervasive as to breach the warranty. Similarly with respect to the breach of contract (lease) cause of action, the court must determine at trial whether the board maintained the building in “good repair,” as it is required to do under the lease. Breach of warranty of habitability and constructive eviction are claims that are not available to condominium owners, and we have seen courts consider claims of nuisance where condo owners complain of secondhand smoke. While in certain respects secondhand smoke cases can be analogized to cooking odor cases, as we understand the latest studies, secondhand smoke is a health hazard so that the level of responsibility to abate the smoke infiltration may be greater. This is an evolving area and we await direction from appellate level cases. As to individual director liability, we note that this decision is dated before the decision in Fletcher v. Dakota, Inc. (previously reported) and cannot comment as to whether the decision would have been different had Fletcher already been decided. It appears from the decision, however, that the board member sued did nothing more than sit on the co-op’s legal committee and sign a letter addressed to plaintiff.

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First published: Jan 2013
Joanne Payson v. 50 Sutton Place South Owners, Inc. and Brown Harris Stevens Residential Management, LLC

By reviewing the insurance policy in its entirety, the court disregarded “form over substance,” and concluded that the policy’s references to the “condominium” were applicable to the insured cooperative. Setting aside the question of how or why a policy issued to a cooperative referred repeatedly to the insured as a condominium, it is important to note that an insurance professional as well as the managing agent should review any policy before it is purchased by the board. The court also pointed out, through its reference to another case, that there are circumstances where shareholders/lessees could waive their right to recover from the cooperative, but their insurance policy might retain that right. The statute of limitations holding is also significant. In most instances, a statute of limitations begins to run on the date of the occurrence of the harm. Consistent with other cases we have seen in the cooperative context, however, this case explained that each recurrence of the same leak constitutes a new occurrence, allowing the statute to begin anew. Consequently, although the plaintiff could not recover for damage that occurred more than three years before the action started, she could recover for any damage that occurred within the three-year period, even if from the same continuing leak.

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