Court grants shareholders right to evict tenants.

A cooperative board's power to terminate a tenant-shareholder's tenancy and evict the tenant-shareholder has been upheld by New York State's highest court, the Court of Appeals.

In May 2003, the Court of Appeal's decision held that the business judgment rule, applies to the termination of a tenant-shareholder's tenancy.

In addition, the Court stated that while a competent standard applies, courts should generally defer to the findings of the shareholders in the termination of the tenant-shareholder's tenancy.

The case in point, 40 West 67th Street Corporation vs. Pullman, strikes a balance between protecting the collective rights of shareholders and shielding unpopular residents from the wrath of neighbors.

In the Pullman case, Pullman was characterized in the decision as demanding, disruptive and ultimately intolerable. Pullman complained that the elderly upstairs neighbors played a television and stereo too loud, ran an illegal and loud bookbinding business and were storing toxic chemicals in their apartment. The board determined that the couple did not possess a stereo or television and that there was no evidence of a bookbinding business or other commercial enterprise in their apartment.

Hostilities thereafter escalated between Pullman and his elderly neighbor into a physical altercation. Following the altercation, Pullman distributed flyers to the cooperative residents in which he referred to the elderly neighbor as a "potential psychopath" and accused him of cutting his telephone lines. In another flyer, Pullman described one of the elderly neighbors as having "close intimate personal relations with the board president." Pullman's complaint against his elderly upstairs neighbors resulted in a stream of vituperative letters to the cooperative, 16 letters in the month of October 1999 alone.

Pullman commenced four lawsuits against the upstairs elderly neighbor, the president of the cooperative and the cooperative management and attempted to commence three additional lawsuits thereafter.

The proprietary lease contained a provision providing for the termination of the tenancy of a tenant-shareholder if the cooperative shareholders, by a two-thirds vote, determined that

"Because of objectionable conduct on the part of the Lessee...the tenancy of the Lessee is undesirable."

The cooperative board of directors convened a special meeting pursuant to the provision of the proprietary lease and gave timely notice to Pullman of said meeting. At this special meeting the owners of more than 75% of the outstanding shares of the cooperative were present and voted, unanimously, to declare Pullman's conduct objectionable.

The Court of Appeals applied the business judgment of the tenant-shareholders of the cooperative applying the rule of a previous court decision known as Levandusky vs. One Fifth Avenue Corp., a 1990 case which held that there would be no judicial scrutiny of actions of cooperative board's "taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes."

Pullman argued that the Levandusky rule should not be applied in this case but that the court should apply Civil Practice Law and Rules, Section 711, which requires a court to make its own evaluation of the board's conduct based on a judicial standard of reasonableness. The court ruled that the business judgment rule is consistent with Section 711 in that the shareholder's vote, in finding Pullman objectionable, is consistent with the statute in that it was competent evidence of the tenant being objectionable. In addition if the proprietary lease did not contain a termination provision for objectionable conduct, Section 711 would apply and proof would have to be presented to the court of objectionable conduct by competent evidence.

The court in the Pullman case recognized that a cooperative board's broad powers to terminate a tenancy could lead to abuse through arbitrary or malicious decision making, unlawful discrimination or the like. However the court recognized that "the purposes for which the residential community and its governing structures were formed were such that they should protect the interest of the entire community of residents and in an environment managed by the board for the common benefit."

The court concluded that the business judgment rule best balances these competing interests and also noted that the limited review afforded by the rule protects the cooperative against judicial second-guessing.

It is important to note that a cooperative cannot terminate the tenancy of a tenant-shareholder if the proprietary lease does not specifically grant that power to the cooperative. This is not a termination of lease pursuant to a resolution of the Board of Directors but a termination of lease pursuant to a vote of the tenant-shareholders by a super majority (a two-thirds vote).

Therefore, 40 West 67h Street Corporation was acting within the scope of its authority in that the proprietary lease specifically provided for a tenant-shareholder's termination due to objectionable conduct. The defendant had notice and an opportunity to be heard in this case, but Pullman chose not to appear or challenge the basis for his termination at the tenant-shareholder's meeting called for that express purpose.

The court next reviewed a second provision of the Levandusky business judgment rule with regard to the board acting in furtherance of the corporate purpose. Specifically there must be a legitimate relationship between the board's action and the welfare of the cooperative. The purpose of the termination of the tenancy must be closely related to legitimacy of purpose and in good faith.

The Levandusky rule further provides that the board must act in the exercise of honest judgment. Levandusky further cautions that the board of a cooperative in its governance carries the potential for abuse when a board singles out a person for harmful treatment or engages in unlawful discrimination, vendetta, arbitrary decision making or favoritism which can be determined to be abuses and are incompatible with good faith and the exercise of honest judgment. The court went on to state that Levandusky, while deferential, should not serve as a rubber stamp for cooperative board actions, particularly those involving tenancy terminations.

The court concluded with affirming the right of the cooperative to terminate the tenancy of Pullman pursuant to the terms and conditions of the proprietary lease wherein his conduct was declared to be objectionable, but cited certain cases where cooperative decisions for termination were not upheld:

* A tenant raised genuine issues of material fact as to whether board action was in bad faith in imposing a sublet fee solely to impact one tenant;

* An injunction was issued against a board as they acted outside the scope of their authority by prohibiting a tenant from erecting a succah on a balcony (a succah is a tent like-structure erected by persons of the Jewish faith);

* Business judgment does not protect the cooperative board from its own breach of contract;

* The cooperative was determined to have acted in bad faith in prohibiting a tenant from displaying a religious statue in the yard;

* A board vote amending by-laws to declare plaintiff tenant ineligible to sit on a cooperative board was not shielded by the business judgment rule.

In closing, while a cooperative would have and does have powers to terminate a tenant-shareholder's tenancy for objectionable conduct, the power to do so must be set forth clearly in the proprietary lease, the tenant-shareholder must be given proper notice of the charges and the basis for the termination that her/his conduct is objectionable, the action must be exercised by the cooperative in good faith and the exercise of honest judgment in furtherance of the corporate purposes must be upheld.