New York Law Review

Tag: Cooperative Law

  • Kralik v. 239 E. 79th St. Owners Corp., 5 N.Y.3d 54 (2005): Determining ‘Unsold Shares’ in Co-ops via Contract Law

    5 N.Y.3d 54 (2005)

    Whether an apartment owner qualifies as a holder of unsold shares in a cooperative building is determined by interpreting the relevant contract documents, not by compliance with regulations governing public offerings of securities.

    Summary

    George and Sara Kralik, shareholders in a cooperative building, sought a declaration that they were holders of unsold shares, exempting them from sublet restrictions. The cooperative argued they failed to comply with regulatory requirements under the Martin Act. The New York Court of Appeals held that the Kraliks’ status as holders of unsold shares depends on the interpretation of their contract with the cooperative, not on compliance with regulations applicable to public offerings of securities under the Martin Act. The court reversed the lower court decisions, emphasizing that the Attorney General’s regulations are for public disclosure and fraud prevention, not private rights determination.

    Facts

    The Kraliks purchased shares and a proprietary lease for apartment 16E in a cooperative building as an investment. They understood they were holders of unsold shares, exempt from restrictions on subletting. Initially, they sublet the apartment without board approval or fees. Later, the board demanded sublet fees, which the Kraliks paid under protest before ceasing payment. The board then issued a notice of default threatening lease termination.

    Procedural History

    The Kraliks sued for a declaration that they were holders of unsold shares and for damages. The Supreme Court granted summary judgment to the cooperative, finding the Kraliks failed to comply with regulatory prerequisites for unsold shares status. The Appellate Division affirmed, stating compliance with the proprietary lease alone was insufficient, and regulatory compliance was also required. The Court of Appeals reversed the Appellate Division’s order.

    Issue(s)

    Whether an apartment owner’s status as a holder of unsold shares in a cooperative is determined by compliance with regulations promulgated under the Martin Act, or by interpreting the contract documents defining their relationship with the cooperative corporation.

    Holding

    No, because the determination of whether plaintiffs are holders of unsold shares should be determined solely by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation. The Martin Act regulations pertain to public offerings and are not the basis for determining private rights between the shareholder and the cooperative.

    Court’s Reasoning

    The Court of Appeals reasoned that the Martin Act and its regulations (13 NYCRR part 18) govern the offer and sale of securities, including cooperative apartment shares, to protect the public from fraud through disclosure requirements. The Attorney General’s role is to review disclosures and investigate fraud, not to determine private rights. The court emphasized that part 18 only applies when shares are offered for sale to the public, and only the Attorney General can enforce its requirements. “Because section 352-e is ‘a disclosure statute, designed to protect the public from fraudulent exploitation in the sale of real estate securities’ (Council for Owner Occupied Hous. v Abrams, 72 NY2d 553, 557 [1988]), part 18 is similarly limited and only applies to disclosures made in a public offering.” The court held that the lower courts erred by relying on Pacella v 107 W. 25th St. Corp. and Gorbatov v Gardens 75th St. Owners Corp., to the extent that those cases suggest that compliance with 13 NYCRR part 18 is necessary to attain holder of unsold shares status in the absence of a public offering. The determination of whether someone is a holder of unsold shares should be based on the terms of the proprietary lease and other governing documents, interpreted according to contract law principles. The court directly stated that “the terms of the controlling documents—not part 18—determine whether plaintiffs are holders of unsold shares.”

  • Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y.2d 530 (1990): Business Judgment Rule for Co-op Board Decisions

    75 N.Y.2d 530 (1990)

    The business judgment rule, requiring good faith and legitimate corporate purpose, applies to decisions made by cooperative boards of directors, protecting them from judicial second-guessing absent evidence of bad faith, self-dealing, or discriminatory treatment.

    Summary

    Ronald Levandusky, a shareholder in a cooperative apartment building, sought to renovate his kitchen, including altering a steam riser. The co-op board initially approved the plans but later rescinded approval and issued a stop-work order after learning of the riser alteration, citing a policy against moving risers. Levandusky sued, arguing the board’s decision was arbitrary. The New York Court of Appeals held that the business judgment rule applies to decisions of cooperative boards, meaning courts should defer to board decisions made in good faith for a legitimate purpose. Because Levandusky failed to show the board acted outside its authority or in bad faith, the Court upheld the board’s decision.

    Facts

    Levandusky, a shareholder and former board president of One Fifth Avenue Apartment Corp., planned to renovate his kitchen. His plans, approved by the building architect and initially by the board, included modifications to plumbing risers but did not explicitly mention altering a steam riser. After the board learned of Levandusky’s intent to move the steam riser, they reaffirmed a policy against relocating risers and denied him a variance. Levandusky proceeded with the alteration, prompting the board to issue a stop-work order.

    Procedural History

    Levandusky filed an Article 78 proceeding to set aside the stop-work order. The Supreme Court initially granted his petition, then reversed itself, applying the business judgment rule. The Appellate Division modified the judgment, siding with Levandusky and finding the board’s decision unreasonable. The Court of Appeals reversed the Appellate Division, holding that the business judgment rule applied, and reinstated the Supreme Court’s revised ruling.

    Issue(s)

    Whether the business judgment rule is the appropriate standard for judicial review of decisions made by the board of directors of a residential cooperative corporation regarding building policy.

    Holding

    Yes, because the business judgment rule best balances the interests of individual shareholders and the cooperative as a whole, protecting board decisions made in good faith and for a legitimate purpose from undue judicial interference.

    Court’s Reasoning

    The Court reasoned that cooperative boards, like corporate directors, are responsible for managing the affairs of the entity. Applying the business judgment rule, which protects corporate directors’ decisions made in good faith and for a legitimate corporate purpose, is appropriate for cooperative boards as well. This standard prevents courts from second-guessing board decisions unless there is evidence of self-dealing, bad faith, or discriminatory treatment. The Court emphasized that cooperative living involves ceding some individual rights to the collective good, and the board’s authority is necessary to maintain the stability and desirability of the community. The Court rejected a “reasonableness” standard, finding it would lead to excessive judicial involvement in board decisions. The Court stated, “So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the board’s.” The Court found that Levandusky did not meet the burden of proving that the board breached its fiduciary duty. The court noted the board acted on the advice of its engineer and was enforcing a consistent policy. Ultimately, the Court concluded, “Under the rule we articulate today, we decline to review the merits of the board’s determination that it was preferable to adhere to a uniform policy regarding the building’s piping system.” The concurring opinion agreed with the result, but argued for applying an “arbitrary and capricious” standard, typical of Article 78 proceedings, instead of the business judgment rule.

  • Fe Bland v. Breezy Point Cooperative, Inc., 66 N.Y.2d 492 (1985): Interpreting Conflicting Amendment Clauses in Cooperative Agreements

    Fe Bland v. Breezy Point Cooperative, Inc., 66 N.Y.2d 492 (1985)

    When a cooperative’s proprietary lease and by-laws contain conflicting provisions for amending the lease, both procedures must be followed to effect a valid amendment.

    Summary

    Fourteen members of Breezy Point Cooperative, Inc. sued the cooperative, challenging amendments to the standard proprietary lease that increased their monthly maintenance charges. The lease and the cooperative’s by-laws contained conflicting procedures for amending the lease. The cooperative followed the amendment procedure in the lease but not the stricter requirements in the by-laws. The New York Court of Appeals held that because the cooperative created the conflicting provisions, it must comply with both amendment procedures to validly amend the lease. The court annulled the amendments and enjoined their implementation.

    Facts

    Breezy Point Cooperative, Inc., a nonprofit cooperative, was established in 1960. Plaintiffs purchased interests in the cooperative at various times between 1960 and 1976. Initially, maintenance charges were based on the number of shares owned by each member relative to the total shares outstanding. In 1977, 1978, and 1981, the cooperative amended its standard proprietary lease to change the maintenance charge assessment to a formula based on the tax assessment of the individual member’s property and the cooperative’s operating expenses. These amendments increased the plaintiffs’ monthly charges.

    Procedural History

    The plaintiffs sued the cooperative and its officers and directors, challenging the validity of the lease amendments. The lower courts ruled in favor of the Cooperative. The case was appealed to the New York Court of Appeals.

    Issue(s)

    Whether amendments to the standard form proprietary lease are valid when the cooperative followed the amendment procedure outlined in the lease but did not comply with the more stringent requirements outlined in the cooperative’s by-laws.

    Holding

    Yes, because under the circumstances, to effect the desired change in the lease, there must be compliance with both the procedure contained in the by-laws and those contained in the lease. The amendments, not having been adopted as required, are annulled and defendants are enjoined from implementing them in the future.

    Court’s Reasoning

    The court addressed the conflict between the amendment procedures outlined in the lease and the by-laws. The lease allowed amendments with a two-thirds recommendation from the board and a majority vote at a special meeting. The by-laws required a three-quarters vote at an annual meeting, with at least 50% of the membership present. The cooperative argued the by-law provision was for member-initiated amendments, requiring greater support. The court rejected this argument, stating that if the procedures were intended as alternatives, all relevant documents would reflect both options. The court reasoned that since the Cooperative drafted the documents and created the conflict, it must comply with the stricter by-law procedure. The court emphasized that a “different procedure would not be found in each [document, prospectus, by-laws and leases].” Because the amendments did not follow both procedures, they were deemed invalid. The court effectively adopted a rule requiring strict construction against the drafter in cases of conflicting legal documents within a cooperative governance structure. Compliance with both procedures was deemed necessary to ensure the amendments’ validity.