40 West 67th Street v. Pullman

OPINION OF THE COURT

Mazzarelli, J.P.

In October 1998, defendant David Pullman bought a co-op apartment at 40 W. 67th Street. Plaintiff corporation owns the building, which contains 38 apartment units. Appurtenant to the proprietary lease for his apartment (7B), defendant holds 80 shares of capital stock in plaintiff corporation. Article III (first) (f) of each tenant’s lease provides that the co-op may terminate a tenancy on 30 days’ notice if a lessee is found to be undesirable because of “objectionable” conduct. This requires a vote of at least two thirds of the shareholders of the corporation, at a duly called meeting. At issue on appeal is the termination of Mr. Pullman’s lease.

Soon after Pullman moved into his apartment, he began to make numerous requests to change the building’s facilities or services. According to the affidavit of the building’s managing agent, Pullman requested that the lobby mailboxes be replaced, that video camera security be installed in the building, and that 24-hour door attendants be hired. The managing agent also stated that each of Pullman’s requests was considered by the board, and deemed inadvisable, for architectural, technical, financial, or other substantive reasons. Pullman also repeatedly complained and threatened to sue the co-op’s managing agent and the co-op board’s president for failure to abate a claimed noise problem emanating from apartment 8B, directly above Pullman. Apartment 8B had been leased for more than 20 years by a retired college professor and his wife. In the month of October 1999 alone, Pullman sent at least 16 written complaints to the co-op’s managing agent about noise from this apartment.

He said that there was banging in the middle of the night from machines that were used in a commercial book binding business. Pullman also complained of a blasting stereo or television. The co-op board investigated Pullman’s complaints, which it found to be unsubstantiated. Upon examination of apartment 8B, the members of the co-op board did not find a television or stereo. They also found no evidence that these tenants were involved in a book binding business or any other commercial enterprise. In an affidavit in a related action, Pullman stated that the prior lessees of his apartment had complained about the noise from apartment 8B. This was shown to be false. The former tenants of apartment 7B submitted an affidavit in one of the related lawsuits denying Pullman’s assertions, and stating that in the over 40 years that they occupied the apartment, they never heard unreasonable or excessive noise coming from apartment 8B. Tension between Pullman and the apartment 8B tenants continued to build, and Pullman was apparently assaulted by the husband in an elevator. This resulted in criminal charges against the husband, which were ultimately adjourned in contemplation of dismissal.

In the year 2000, Pullman instituted four lawsuits against his upstairs neighbors and the co-op and its management. The first lawsuit was brought against the apartment 8B tenants. It is still pending and seeks money damages for the nuisance allegedly created by the noise, and for injuries resulting from the husband’s assault on defendant. The second lawsuit, also against the upstairs tenants and still pending, seeks injunctive relief in the form of an order to compel them to control the noise from their apartment. The third pending action is against the co-op president. It alleges a breach of fiduciary duty for not acting to stop the upstairs tenants’ alleged transgressions. The fourth action, also still continuing, was instituted against the co-op and its managing agent. It alleges a breach of lease and violation of the warranty of habitability for failing to address the noise problem. Pullman attempted to commence two other actions against the various defendants by order to show cause. However, the IAS court refused to sign the orders when presented with them.

Pullman also circulated leaflets to the other co-op shareholders. One of these, entitled “attack crime,” detailed the assault by the upstairs tenant and urged the shareholders to evict him, stating that he “has the makings of a psychopath in our midst.” Another leaflet urged the ouster of the president of the co-op board for a conflict of interest. During this same period, the co-op board sent Pullman a letter stating that he was not in compliance with the terms of his lease. The letter informed Pullman that he had already violated a number of the terms of the proprietary lease by renovating his kitchen, installing soundproofing inside his windows, and employing a construction worker on a Saturday. The letter requested that Pullman either install carpeting in his bedrooms, or submit a waiver of the carpeting requirement to the board signed by his downstairs neighbors. Pullman ignored the board’s requests that he “furnish a list of all renovations and redecorating to [his] apartment” from the date of his purchase of shares, and he refused to allow an inspection of his apartment.

On June 27, 2000, the shareholders held a special meeting pursuant to article I, section 1 of the corporation’s bylaws. The purpose of the meeting was to determine whether Pullman’s tenancy in the building was “objectionable.” Pullman was notified of the meeting, but did not attend. After discussion of the issues, a supermajority, the holders of 75% of the outstanding shares in the co-op, voted in favor of a resolution detailing how Pullman’s continued tenancy was objectionable, and directing the Board to terminate Pullman’s proprietary lease. The vote was 2,048 shares in favor of termination, 0 opposed, and 542 shares not present and not voting. The Board delivered the notice of termination to Pullman, dated July 7, 2000, and effective August 31, 2000. Pullman ignored the notice and continued to reside in the apartment after its effective date.

In October 2000, plaintiff brought this action. The amended complaint contains five causes of action. The first and second seek ejectment and possession of the apartment. The second cause of action specifically alleges that Pullman’s tenancy is “objectionable.” The third cause of action is for a declaratory judgment canceling Pullman’s stock. The fourth cause of action prays for a money judgment for use and occupancy from September 1, 2000. The fifth cause of action seeks reasonable attorneys’ fees and costs of the litigation.

Pullman moved to dismiss the complaint for failure to state a claim (CPLR 3211 [a] [1], [7]). In opposition, plaintiff sought summary judgment pursuant to CPLR 3211 (c). The court dismissed plaintiff’s first claim, denied dismissal of the remainder of the complaint, and denied plaintiffs motion for summary judgment. The court reasoned that under RPAPL 711 (1), it was the province of the court, not the co-op board, to determine whether a tenancy should be terminated based upon “objectionable” conduct. It found numerous disputed factual issues surrounding the termination of Pullman’s tenancy which would require a trial. The motion court also determined that among the issues to be tried was the question of whether the eviction was retaliatory, as proscribed by Real Property Law § 223-b.

We reject Pullman’s argument, adopted by the dissent, that RPAPL 711(1) requires judicial scrutiny of the basis for this tenant’s ejectment. This case is governed by the holding of the Court of Appeals in Matter of Levandusky v One Fifth Ave. Apt. Corp. (75 NY2d 530, 537-538), which applied the “business judgment rule” to explicitly “prohibit [] judicial inquiry into actions of corporate directors ‘taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.’ (Auerbach v Bennett, 47 NY2d 619, 629, supra.)” Levandusky generally prohibits judicial scrutiny of the actions of the board of directors, and its holding insulates the determination of this co-op board from judicial review. The board’s action here was premised upon the unanimous vote of a supermajority of the shareholders at a duly called meeting. It terminated the defendant’s lease for breach of a provision requiring that shareholders not engage in “objectionable conduct,” inimical to the welfare of the cooperative community.

The dissent argues that the Levandusky rule should not apply in this case because the defendant-tenant faces the loss of his home. However, the defendant, as did all the other shareholders, agreed to just such a sanction when he purchased shares in a cooperative. By doing so, Pullman voluntarily “agree [d] to submit to the decisionmaking authority of [the] cooperative board” (Levandusky, supra at 536). Prior to his purchase, Pullman was aware of the restrictions on his behavior and limitations on the ownership of his shares, and, nonetheless chose to buy his apartment. Pursuant to the Court of Appeals holding in Levandusky, “would-be apartment owners must generally acquiesce [to] a governing board [‘s] * * * significant[ ] restriction] [of] the bundle of rights a property owner normally enjoys” {id.). Any other result would undermine the purpose of this unique form of shareholder-lease, in which the paramount interest of the board of directors is the welfare of the “entire community of residents in an environment managed by the board for the common benefit” {id. at 537).

In Levandusky, a cooperative tenant sought to renovate his kitchen. The proposed renovation necessitated the realignment of a steam riser in the kitchen, and the lease specifically provided that this type of alteration required the co-op board’s prior written consent. The board’s consulting engineer advised that any change in the building’s old piping system risked causing difficulties, or awakening “gremlins.” The board thus conditioned its approval of the renovation upon submission of a revised plan which would not involve moving the steam riser. Notwithstanding the board’s determination, the tenant hired a contractor who moved the steam riser. The board issued a “stop work order,” and the tenant brought a CPLR article 78 proceeding to have the stop work order set aside. The Court of Appeals concluded that “the business judgment rule applies to the decisions of cooperative governing associations enforcing building policy, and that the action taken by the board in [that] case [fell] within the purview of [that] rule” (id. at 535). Significantly, the Court (at 536) described the co-op association as,

“a quasi-government — a little democratic sub society of necessity * * * The proprietary lessees or condominium owners consent to be governed, in certain respects, by the decisions of a board. Like a municipal government, such governing boards are responsible for running the day-to-day affairs of the cooperative and to that end, often have broad powers in areas that range from financial decision-making to promulgating regulations regarding pets and parking spaces * * *. Through the exercise of this authority, to which would-be apartment owners must generally acquiesce, a governing board may significantly restrict the bundle of rights a property owner normally enjoys.” (Internal quotation marks and citations omitted.)

The Court of Appeals said that the need for a “check [against abuse of a board’s] potential powers to regulate residents’ conduct, life-style and property rights” must be balanced with the desire to promote the primary objective of the cooperative structure, which is “protection of the interest of the entire community of residents in an environment managed by the board for the common benefit.” (Id. at 537.) To best achieve this balance, the Court determined that the deferential business judgment rule was the appropriate standard for judicial review (id.; Sirianni v Rafaloff, 284 AD2d 447; Jones v Surrey Coop. Apts., 263 AD2d 33, 36). The majority specifically adopted the business judgment rule as preferable to a “reasonableness” rule, which would have allowed the court to independently evaluate the merits of a board’s decision (Levandusky, supra at 535).

Under the business judgment rule, it is presumed that the actions of a cooperative’s directors are “taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes” (Auerbach v Bennett, 47 NY2d 619, 629). Absent a showing of a breach of fiduciary duty, “the exercise of [the co-op board’s powers] for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient” (Pollitz v Wabash R.R. Co., 207 NY 113, 124).

While the action reviewed in Levandusky was the denial of a tenant’s application for a variance to move a steam riser in a tenant’s kitchen, its holding has been repeatedly applied to boards’ determinations of what are appropriate policies and procedures (see, e.g., Jacobs v 200 E. 36th Owners Corp., 281 AD2d 281 [1st Dept] [rule regulating procedure for handling food deliveries]). The majority decision in Levandusky explicitly stated that the business judgment rule should be applied to all co-op board determinations. The Court found universal application of this standard of review appropriate because “unnecessary confusion [would be] generated by prescribing different standards for different categories of issues that come before cooperative boards” (id. at 541). The deference granted to the board under this rule is consistent with the settled notion of a co-op as a voluntary association of individuals who agree to compromise their rights to obtain the benefits of living in a cooperative type of community. This includes choosing “with whom they wish to share their elevators, their common halls and facilities, their stockholders’ meetings, their management problems and responsibilities and their homes” (Weisner v 791 Park Ave. Corp., 6 NY2d 426, 434).

Two recent cases from this Court have applied the business judgment rule to insulate co-op boards’ valuations of tenants’ shares in cooperative corporations. In Jones v Surrey Coop. Apts. (263 AD2d 33), upon termination of a tenancy, the co-op board exercised an option in its bylaws to repurchase the tenant’s shares at book value. The tenant sued to recover market value of the stock, which was considerably higher. We granted the board’s motion for summary judgment. We found that the plaintiff failed to meet the burden of showing that the board of directors breached its fiduciary duty by engaging in discrimination, self-dealing, or other misconduct. We held that under Levandusky, the absence of these factors prohibited judicial inquiry into the actions of the co-op’s directors (id. at 36). More recently, in Schultz v 400 Coop. Corp. (292 AD2d 16), the plaintiffs sought redress for the alleged overallocation of shares to their apartment, asserting unequal treatment between the plaintiffs and another apartment owner on the same floor. We found that “[although ‘unequal treatment of shareholders is sufficient to overcome the directors’ insulation from liability under the business judgment rule ***>*** the disparate treatment alleged to comprise a breach of fiduciary duty [did not] result in [any] injury to [plaintiffs,] the complaining tenant” (id. at 22 [citations omitted]). We concluded that “[p]laintiffs have not been subjected to discriminatory treatment, and they have set forth no other basis warranting departure from the application of the business judgment rule to subject the actions taken by the cooperative board of directors to judicial scrutiny” (id. at 23).

Also of note is the Second Department’s recent application of Levandusky in Sirianni v Rafaloff (284 AD2d 447). In that case, the Second Department upheld a co-op board’s decision to terminate a tenancy for breach of a lease provision prohibiting the use of a residential unit for commercial purposes (see, Sirianni, supra at 448). There, as in Jones and Schultz, the Court found no basis to intrude upon the board’s decision to enforce a lease provision.

The lease provision at issue in this case requires that the termination of a tenancy because of undesirability be based not only upon a board’s resolution, but upon the vote of two thirds of the shareholders. Thus, the decision here was not made by a small group of people, but reflects the consensus of 75% of the shareholders. In fact, every shareholder who attended the meeting agreed that Pullman “has engaged in repeated actions inimical to cooperative living and objectionable to the corporation and its shareholders.”

The affidavit of the managing agent of the co-op, submitted in opposition to Pullman’s motion for summary judgment, emphasized that the termination of his tenancy will not cause Mr. Pullman to forfeit the economic value of his apartment. He states that upon sale of the apartment, the co-op will “turn over [to Pullman] all proceeds after deduction of unpaid use and occupancy, costs of sale and litigation expenses incurred in this dispute.”

Contrary to the dissent’s analysis, RPAPL 711 (1) does not preclude our deference to the co-op board’s determination to terminate Pullman’s tenancy in this plenary ejectment action. While RPAPL 711 (1) provides that a landlord may terminate a tenancy in a summary holdover proceeding, upon a showing “to the satisfaction of the court that the tenant is objectionable” (emphasis supplied), Levandusky explicitly precludes judicial inquiry into the lawful actions taken by a co-op board of directors. As applied here, the Levandusky holding is in complete harmony with RPAPL 711 (1), the vote of the super-majority of the shareholders of the co-op providing, in the realm of co-op governance, the functional equivalent of “competent evidence [which would] establish to the satisfaction of the court that the tenant is objectionable” (see, RPAPL 711 [1]).

Moreover, the Court of Appeals explicitly addressed the limitations on deference to co-op board action, and the role of the court in such situations when it wrote that the business judgment rule, “permits review of improper decisions, as when the challenger demonstrates that the board’s action has no legitimate relationship to the welfare of the cooperative, deliberately singles out individuals for harmful treatment, is taken without notice or consideration of the relevant facts, or is beyond the scope of the board’s authority” (Levandusky at 540 [emphasis supplied]).

Further, our holding also does not eviscerate the important policy underlying RPAPL 711 (1), which is to prevent arbitrary self-help evictions. This is certainly an important consideration which applies equally to co-op tenants. However, following Levandusky does not mean that tenants are without protection if a board acts in an illegal, discriminatory, or bad faith manner. Under the facts presented, no improper motive has been established on the part of the co-op board. Pullman has not provided any factual support for his allegations that he was evicted based upon illegal or impermissible considerations (see, Walentas v Johnes, 257 AD2d 352, lv dismissed 93 NY2d 958). In the absence of such evidence, we must presume that the consensus of 75% of the shareholders that the defendant’s conduct was “objectionable” was sincere. Moreover, the presumption of regularity applies, and defendant has failed to rebut it. He has not provided any basis to show that the determination to terminate his tenancy was without a “legitimate relationship to the welfare of the cooperative” (Levandusky, supra at 540). Thus, we defer to the unanimous vote of assembled shareholders to terminate defendant’s tenancy, without passing on the merits of that decision. We also note that while Adams Hotel Owners v Wolf (64 Misc 2d 614) and Brisbane House v Sims (122 Misc 2d 46) both applied RPAPL 711 (1) to preclude the termination of tenancies pursuant to a provision in a cooperative leasehold, these cases were decided prior to Levandusky.

However, were we to look behind plaintiffs actions, we would find that the record amply supports the determination that Pullman’s tenancy is “objectionable.” He attempted to institute six lawsuits based upon an unsubstantiated noise complaint; he bombarded the managing agent with demands and complaints, in rapid sequence and accompanied by threats; he distributed leaflets containing offensive personal allegations against another leaseholder; and he violated building rules by failing to install carpeting and making unauthorized alterations. These actions have had a negative effect on all of the 37 other leaseholders including making them responsible for the payment of thousands of dollars in unnecessary legal fees.

Accordingly, the order of the Supreme Court, New York County (Marilyn Shafer, J.), entered July 12, 2001, which, inter alia, granted defendant’s motion to dismiss the first cause of action of the amended complaint and denied plaintiffs cross motion for summary judgment pursuant to CPLR 3211 (c) on its first and third causes of action, should be modified, on the law, to grant plaintiff summary judgment on its first, third, fourth and fifth causes of action, to remand for a hearing on use and occupancy, legal fees and costs, to dismiss plaintiffs second cause of action, and otherwise affirmed, without costs.