N.Y. Appellate Court Opinions Say No to Board’s Business Judgment Rule Reliance

By Herbert Fisher, Esq. and Randall Pentiuk, Esq.

Authors’ Note: The authors did not research N.Y. Probate Law to see how it treats the inheritance of the shares as personal property (personalty). Under most state laws, the shares would transfer upon order of a probate court or a small estates affidavit, if applicable.

Once that occurs, the shares are the property of the heir. The heir’s ability to take possession may be controlled by the cooperative’s documents, such as permitting only limited number of people in occupancy, income maxima for occupancy or terms of a contract, e.g., regulatory agreement. If the heir cannot take occupancy, he or she still has inherited the shares and whatever realizable value goes with that ownership and is entitled to sell those shares to a person qualified to purchase. There may be a difference of opinion as to whether the cooperative can deny the right to inherit possession,

i.e. entitled to a proprietary lease, or whether the cooperative must wait and declare a default once the heir takes possession that is in violation of the lease or breaches the lease.

On December 20, 2016 of the Estate of Del Terzo v 33 Fifth Ave. Owners Corp., in which a board ofOn February 11, 2016, a New York Appellate Court decided the case and the Court of Appeals (N.Y.’s highest court) affirmed it

directors, relying heavily on the business judgment rule, denied an application for “ownership” and possession of a cooperative apartment (which was two apartments consolidated at the time of conversion) owned by sons’ deceased mother. The court, split

3-2, was in agreement that the business judgment rule did not apply where a proprietary lease provides, that in event of inheritance, the cooperative shall not unreasonably withhold consent to an assignment

of the lease and shares to a financially responsible member of the lessee’s (i.e., decedent’s) family and that the cooperative unreasonably denied the application. Proprietary leases are issued by N.Y.

statutory cooperatives and those incorporated under

business incorporation acts. Sometimes, they are called Corporate Lease to Shareholder. In cooperatives incorporated under their respective state’s not for profit statutes and in the HUD world, they are ordinarily referred to as occupancy agreements.

The business judgment rule, as interpreted in New York, provides that a board’s decision will not be questioned by the courts if the board

“acted for the purposes of the Cooperative, within the scope of its authority and in good faith.” However, the majority held that provisions of the proprietary lease took it out of the scope of the business judgment rule and imposed a standard of reasonableness as the test of the board’s decision.

The facts relied upon by the majority were that both sons jointly applied for board approval. Son A was wealthy enough to afford the maintenance of the unit, but son B was not. Son A, in addition to becoming a co-owner with son B, offered to guarantee son B’s performance under the proprietary lease. Son A had a medical practice and resided with his family in Pennsylvania and stated that he would  be staying in the apartment only periodically. Son B was in occupancy of the apartment with his family  and would physically remain in the apartment. The proprietary lease does restrict occupancy to one married couple. The minority noted additional facts relevant to the ownership in that the application for approval presented to the board was on behalf of both sons and their families, which totaled eight occupants. The minority also noted that son B had a substantial inheritance from his mother and that son B had filed his tax returns with a Nevada address.

The majority, in finding that the cooperative had breached its duty to act reasonably by denying the application, relied upon:

  • The history of no arears or any documented complaints against the applicants;
  • Finding that the board’s concern that two families would be living in the apartment, and the apartment would be over occupied was contradicted by son A’s intent not to live there. The concern was speculative;
  • The board’s disfavoring “nonprimary occupants” as lessees was also speculative in light of son A’s intent not to live there; Although ordinarily the board is not restricted in its   withholding consent to transfer of an apartment, it is held to a standard of reasonableness when dealing with an inheritance; Son A could easily afford the apartment   alone;
  • The board’s concern about son A not living in apartment full time, “being an absentee owner,” is inconsistent with the
  • concern that the apartment would be overcrowded and owner occupancy is satisfied by son B being in occupancy; and
  • The proprietary lease does not require that the “lessee” be only one person but can be multiple since the lease provides for joint ownership and for all owners to be liable.

The minority, in finding that the cooperative had not breached its duty to act reasonably by denying the application, relied on:

  • The consent sought included a family member who was not financially responsible;
  • Part ownership would be held by a non-resident;
  • The lease prohibits more than one married couple from occupying an apartment (the two former apartments are now one apartment) which is covered by one lease;
  • The joint ownership as proposed could create more potential complications; and
  • Any future disagreements between joint owners as to occupancy could entangle the cooperative in legal problems.
  • The majority also held that although the proprietary lease did not provide for the sons to recover legal fees, New York’s real
  • property law provides that if a landlord has the right to recover legal fees, there is implied right for the tenant to recover fees if the landlord does not comply with the lease.

The majority also held that although the proprietary lease did not provide for the sons to recover legal fees, New York’s real

property law provides that if a landlord has the right to recover le- gal fees, there is implied right for the tenant to recover fees if the landlord does not comply with the lease.

Regardless of how strongly each of the opposing parties felt about the positions in pushing this litigation, the above summary shows how tenuous a party’s position may be in light of the interpretation that is to be given to the facts and the law by the court. Consequently, it is important to keep an eye open to the possibility of  compromise in the event that any dispute leading to litigation or in litigation may be settled and yet meet the goals of both par-  ties or come close enough to doing so as to bring about agreement.  It would appear that the cooperative did not want to get involved in any disputes that might arise between the two brothers in the future in the event of a disagreement as to who should have occupancy in anticipation of a violation of the provision of the proprietary lease that there is to be one married family per unit or over  any other occupancy situation. The cooperative could have tested out son A’s confidence in he and son B working out any problems

between them should they arise or the ability of the sons to make an agreement between them in advance of the board’s decision by offering that son B be the applicant as sole owner with son A trans- ferring his inherited interest to son B with son A being a full guar- antor of son B’s performance under the lease and by taking into consideration son B’s sizeable inheritance (unless it was left to him in a spendthrift trust, not touchable by the cooperative) and son A consenting to be sued in New York. Son A’s refusal to such an offer might have turned the minds of  the majority of  the  court.

The take away lesson for housing cooperative boards from this case is that in the event of a dispute, there can be different legal out- comes. Here, the court held in favor of son A and B, and the cooperative not only lost on the substantive issue and had to grant shares and a lease to the two brothers, it also had to pay their legal fees. It is an obligation on the part of attorneys to advise their clients of the strengths and weaknesses of positions taken by each party, and a probability of outcome in terms of degree of favorableness, unfavorableness or a toss-up, which is what we believe this case represents. Additionally, housing cooperative boards should work closely with their attorney to make sure that their governing documents, such as proprietary leases or occupancy agreements, by laws, or articles of incorporation do not have contradictory provisions, which would lend the cooperative to future litigation.

Lessons Learned for Those Residing Outside of New York

Of interest to non-New York attorneys is both the majority and minority recognizing that the application was “to transfer shares allocated to a cooperative apartment and the proprietary lease appurtenant thereto” from the deceased’s estate to the sons. Yet, in the minorities’ opinion, there is reference to the application “being for the transfer of the apartment to them jointly” and  “to approve part ownership of the apartment by an individual who would not be living there.” New York Courts, lawyers and cooperators appear too often to short circuit the definition of what is owned by wrongfully condensing the joint interest of corporate shares (memberships) and possession as apartment ownership, potentially misleading those unsophisticated in housing cooperative terminology or those outside of New York.

Conclusion

So, be aware that the business judgment rule does not apply if corporate documents or the law puts a reasonableness standard on a board’s decisions on behalf of the cooperative in specific situations; and the reasonableness, often times, is in the eye of beholder, whether board member, attorney or court.

Co-ops back in U.S. Census after 20-year absence | NCBA CLUSA

Published: Tuesday, 09 May 2017 Written by Elizabeth Lechleitner
Source: Co-ops back in U.S. Census after 20-year absence

NCBA

Co-ops back in U.S. Census after 20-year absence

NCBA CLUSA is thrilled to announce that a decades-long absence of federally-reported data on co-ops in the U.S. will end with the 2017 Economic Census. The Office of Management and Budget on Friday approved without change or question the main 2017 Economic Census package, which includes a question identifying cooperative businesses.

“This is a breakthrough moment for cooperatives nationwide,” said Judy Ziewacz, president and CEO of NCBA CLUSA. “The data gathered by the 2017 Economic Survey will fill a critical gap within the cooperative sector, allowing us to tell the story of cooperative economic impact in a more compelling way.”

Including co-ops in the 2017 Economic Census will help pinpoint the scope and impact of cooperative businesses nationwide.

Including co-ops in the 2017 Economic Census will help pinpoint the scope and impact of cooperative businesses nationwide.

NCBA CLUSA has worked diligently on behalf of its members, co-ops across the country and cooperative researchers to make sure co-op businesses are identified in the 2017 Economic Census.

In 2007, a group of researchers led by Brent Hueth, director of Agriculture and Applied Economics at the University of Wisconsin Center for Cooperatives, conducted their own research on the economic impact of cooperatives. That study found that there were 29,000 co-ops in the U.S. that account for more than $3 trillion in assets, more than $500 billion in revenue and sustain nearly two million jobs.

Now a decade later, NCBA CLUSA estimates that there are closer to 40,000 cooperative businesses in the U.S., but census data is needed to confirm that number. Since the UW Center for Cooperatives study, Hueth, the USDA, NCBA CLUSA and other stakeholders have worked to transfer the collection and ownership of that data back to the U.S. Census Bureau.
In May 2016, the U.S. Department of Commerce committed to “researching the feasibility” of a request made on behalf of NCBA CLUSA by the Congressional Cooperative Business Caucus to reinstate a question recognizing cooperative businesses that was dropped from the census in the 90s.
Approval of that question on Friday by the OMB is among the final steps toward a more timely and relevant picture of the cooperative economy. While the question approved applies to single-unit cooperative businesses, a question for multi-unit companies will be submitted later in the year as part of a supplementary OMB package, said Andrew Baer, Assistant Division Chief for the Economy-Wide Statistics Division of the U.S. Census Bureau.
“OMB had no questions or concerns about the cooperative portion of the single unit survey, so we are hopeful that it will flow through smoothly for the multi-unit companies as well,” Baer said. Census applies the “single-unit” definition to a local co-op staffed by a handful of people with a small economic footprint; “multi-unit” refers to a co-op with multiple stores and significant sales. This distinction governs how co-ops receive the census, or report form: all multi-unit co-ops receive the report form, while a sampling is taken of the single-unit co-ops.
Electronic collection of data is expected to begin in early 2018. In an effort to produce cleaner data faster and cheaper, the U.S. Census Bureau will for the first time in 2017 conduct its census electronically.
“We look forward to following this process and really quantifying the scope and impact of the cooperative economy,” said Alan Knapp, Vice President of Advocacy for NCBA CLUSA. “Having concrete data about cooperatives is crucial to advance the sector.”
Conducted every five years, the Economic Census provides a snapshot of the U.S. economy that informs legislation and guides policy decisions.
The OMB’s approval Friday builds on a string of recent wins for NCBA CLUSA members and supporters in the U.S., including the Congressional Cooperative Business Caucus, the Interagency Working Group on Cooperative Development and the newly-established Council of Cooperative Economists.

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NAHC Gets a New Executive Director

NAHC Gets a New Executive Director

By Altoria Bell Ross

For those who attend recent annual conferences, NAHC’s new Executive Director, Mik Bauer, is a familiar face. He’s the friendly face enthusiastically greeting members as they approach the conference welcome desk. Formerly NAHC’s membership director, Mik moved into his new position on February 1.

mikIn the past five years, Mik said he has experienced firsthand NAHC’s challenges and opportunities. He listens to members needs and always puts their voices first. He said a large obstacle NAHC faces, and the struggle of a lot of other organizations, is a need for student and youth involvement in the association, as well as in the cooperative housing industry.  Many young people’s unawareness of cooperative housing’s existence is a huge struggle in the growth of our organization. Thus, Mik’s vision for NAHC is simple.  “I’d like bring an awareness, a deeper connection, and understanding of housing cooperatives to the next, younger generation. They are the future and the future of growing our mission.”

The Tulsa, Oklahoma native, has assisted multiple executive directors, senior advisors, business consultants and directors in a wide array of managerial duties since 2011. In addition to NAHC, Mik serves the International Biometric Society (IBS) as the director of administration. The IBS serves a large international membership with more than 30 chapter regions worldwide. Bauer is the international liaison between the regions and the members, supporting the executive board and performing membership management, conference logistics and planning, education, communications and website support.

Prior to coming to NAHC, Mik worked as a corporate trainer with Caribou Coffee Company and served as the coffee industry’s management certification and employee development supervisor in the greater Chicagoland area. He also developed and successfully launched a half dozen corporate locations as well as the company’s first five franchise locations in Illinois and Indiana.

Mik, who studied business administration and earned his associate’s degree from Tulsa Community College, holds a certification in association management from the American Society of Association Executives.