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.

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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.

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