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Business Judgement Rule

February 24, 2021

An important decision was handed down recently from the New York County Supreme Court that gives a newfound power to co-op apartment shareholders. On February 9th, 2021, the justices in the matter of Kotler v. The 979 Corporation ruled that the co-op board could not deny a transfer of shares from a decedent lessee to a family member provided that the family member is proven to be financially responsible according to the proprietary lease agreement.

Additionally, the shareholder was awarded damages for the unreasonable withholding of consent to transfer shares by the co-op board as well as attorney’s fees ensured in the proprietary lease agreement. This is a large victory for shareholders and presents a weakness to the co-op boards’ shield by the Business Judgement Rule.

New York real estate includes a rather large number of co-op (cooperative) apartment buildings that may sound strange in suburban and rural areas but is quite common in large cities. A co-op apartment building is a building that is treated as a corporation and each apartment owner is a shareholder of the corporation [1]. When you buy into a housing co-op, you are not purchasing real estate, but instead you are purchasing shares of the corporation [2]. These shares, however, provide the shareholders with property leases and ownership. Just like in a regular corporation, a board of directors, in this case known as the co-op board, is elected to make decisions on behalf of the apartment building [1]. In a co-op apartment everyone is committed to the same venture; one owner’s loss is borne by the entire building. Proving financial viability can be an invasive process, and often leads to decisions by the board to deny requests for ownership or sales to people they deem as “unfit” buyers.

Until recently, co-op boards were almost always protected in lawsuits by the Business Judgement Rule. This rule is meant to protect managers of corporations from legal liability for decisions they make in their day-to-day operations, and this rule applies to co-op boards because of the building’s corporate status. As long as the board is found to have been acting “in good faith,” they are protected from legal action on any decision they make [3]. But some recent cases in New York have broken this seemingly absolute power of the boards and have given shareholders a new opportunity for success in court.

In the matter of The Estate of Helen Del Tozo v. 33 Fifth Avenue Owners Corporation [4], the co-op board denied the transfer of shares from the deceased Helen Del Tozo to her two sons Michael and Robert, without giving a reason. The court found that holding to paragraph 16(b) of the proprietary lease agreement, the board cannot withhold consent of transfer to a lessee’s family member (or members) who is deemed to be financially responsible. Instead of being protected by the Business Judgement Rule, in a case where there is a proposed transfer of shares to a lessee’s family member, the board is held to a “heightened standard of reasonableness” which is a higher standard of care compared to the Business Judgement Rule. The board must prove that said family member is not able to make their required payments. If they cannot do this, they must approve the transfer of shares to the family member(s).

In a similar fashion to The Estate of Helen Del Tozo, the recent ruling of Kotler v. The 979 Corporation [5] stated that the board must approve a transfer of shares to the deceased lessee’s daughter after she proved that she would be able to make regular maintenance payments. In this case, the deceased lessee’s daughter provided the court with extensive financial statements and proof of assets that have a greater value than the costs of maintaining the apartment and shares. Therefore, the co-op “had no lawful basis to demand a transfer fee.” [6]

Additionally, the court ruled that the board breached the lease by improperly withholding consent on the transfer of shares and that the new shareholder was entitled to monetary damages. In cases where the tenant breaches the lease, the board is entitled to have their legal fees paid for them by the tenant. This is a reciprocal rule, meaning that in a case where the co-op board breaches the lease, the tenant is entitled to legal fees. This ruling gives substantial power to shareholders who want to transfer their ownership in an apartment to a financially responsible family member – not only do shareholders and potential shareholders now have a way to get past the Business Judgment Rule, but they have the further potential to recover legal fees if the co-op board acts unfairly. Even without commencing litigation, this now puts an actual liability on boards and cooperatives to act fairly and reasonable, rather than being able to hide behind the protection and shield of the Business Judgment Rule.

If you have a dispute with a co-op board and want to know if you have legal rights and the ability to litigate, don’t hesitate to contact The Law office of Alexander Paykin, P.C., for a free initial phone consultation, where we can discuss the merits of your particular case.

1 https://streeteasy.com/blog/what-is-a-co-op-apartment-nyc/

2 https://www.bankrate.com/glossary/c/cooperative/

3 https://www.law.cornell.edu/wex/business_judgment_rule

4 136 A.D.3d 486, 488 (1st Dept 2016), aff’d 28 N.Y.3d 1114 (2016), available at http://nycourts.gov/reporter/3dseries/2016/2016_01039.htm

5 2021 NY Slip Op 00801, available at: http://nycourts.gov/reporter/3dseries/2021/2021_00801.htm

6 Id.


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