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Council of New York Cooperatives & Condominiums
CNYC
CNYC
Published: Winter 1997

CNYC thanks Marc J. Luxemburg, Esq., for this column. A partner in the law firm of Snow Becker Krauss, Mr. Luxemburg was a founder of CNYC and serves as its president. At CNYC's 16th Annual Cooperative Housing Conference, Mr. Luxemburg presented an analysis of court cases decided during 1996 that involved New York cooperatives and condominiums. The following summary is abstracted from his seminar.

LEGAL SCORECARD FOR 1996: NOT A WINNING SEASON

The year 1996 wasn't the worst of times, but it certainly wasn't the best of times either-at least in terms of winning court battles for cooperatives and condominiums. More often than not, boards came out on the losing side of litigation over matters such as attorneys fees and noisy neighbors. The reasons for these decisions were as varied as the facts in the cases.

DISREGARDING CASE LAW,
COURT REINTERPRETS PROPRIETARY LEASE

In Black v. Alexander House Residences, Inc., 640 N. Y. S. 2d 528 (1st Dept. 4/11/96), the board refused to allow the plaintiff to close the sale of his apartment until he paid certain attorneys' fees, which the cooperative had previously incurred in prosecuting a summary proceeding against the plaintiff for non-payment of maintenance. The cooperative had obtained a default judgment, but this had been subsequently vacated on appeal for lack of jurisdiction.

The court held that the cooperative acted in bad faith by continuing to withhold approval because of the attorneys' fees after the summary proceeding was dismissed, and that therefore the board was not protected by the business judgment rule. According to the court, the cooperative's conduct constituted "tortious interference" with the contract of sale.

The court awarded the plaintiff the difference between the original contract price and the price for which the unit was subsequently sold, plus legal fees for the plaintiff in overturning the summary proceeding, plus restoration of maintenance for the period during which the sale was refused -- a total of nearly $32,000.

To reach this decision, the court very narrowly construed the proprietary lease, and appears to have ignored relevant precedent. The lease provides that the cooperative should be compensated for its legal fees in bringing an action against a shareholder by reason of a default. It says nothing about whether or not the action has to be successful. The court reinterpreted the proprietary lease to restrict the board's right to receive attorney's fees to actions with successful outcomes.

Secondly, it is well established law that a breach of contract does not constitute a tort unless there is some independent duty breached. In this case, it is difficult to conceive of what duty to the shareholder the board breached, independent of the rights and obligations under the proprietary lease. Finally, the First Department has, in prior cases, established that it is the shareholder's duty to mitigate its damages, and that if an erroneous fee is claimed, as a condition of approval, the shareholder should pay the fee and then sue for a refund. In this case, the court seems to have overlooked the necessity to mitigate damages.

NOISE MAKER BYPASSED AS COURT PUNISHES THE COOPERATIVE

Equally disturbing is Nostrand Gardens Co-op v. Howard, 634 N.Y.S. 2nd 505 (2d Dept 11/27/95). The court found that there was "excessive noise emanating from an apartment that neighbored the respondents' apartment throughout the late night and early morning hours," and held that the cooperative, despite having had notice of the noise, failed to take any "effective steps" to abate the nuisance. The court found that the shareholder was entitled to a 50% abatement of maintenance.

This case is disturbing because it once again demonstrates the judicial tendency towards misplaced liability; i.e., a victim of wrongdoing, and not the actual wrongdoer, is made to pay. In this case, the wrongdoer was the neighbor who was causing the noise. There is not even a suggestion, much less a requirement, that this person either be subject to an injunction or be required to pay damages to the cooperative or to the wronged tenant.

FLOOD SOURCE IGNORED AS COURT PUNISHES THE COOPERATIVE

Another peculiar case in this regard is Silverman v. 145 Tenants Corp. , Sup. Ct. , N. Y. Co. Index No. 102913/94, decision of 10/7/96. This was an action against an upstairs neighbor and the cooperative for water damage, which was caused by overflows from the upstairs neighbor's apartment. The case was dismissed against the upstairs neighbor who caused the floods, but continued against the cooperative. The reason: the fact that water was coming from the upstairs apartment was insufficient to warrant a trail against the upstairs neighbor, but was enough for a trial against the cooperative.

SPONSOR'S RIGHT TO VOTE CANNOT BE CURTAILED CONTRACTUALLY

In Madison v. Striggles, 644 N. Y. S. 2d 6 (1st Dept. 6/4/96), the offering plan said the sponsor must vote its shares so that "unsold shares will not elect the majority of the board of directors." The court held that this does not prohibit the sponsor from combining votes with those of resident shareholders to elect a majority. It explained that to hold otherwise would deprive the sponsor of the right to vote, and any restriction on the right to vote must be set forth in the Certificate of Incorporation. According to the court, contractual restrictions imposed by reason of the provisions of the offering plan cannot be enforced unless they are also specifically set forth in the Certificate of Incorporation.

EXTREME CONDUCT CURTAILED BY COURT

Not all cases went against cooperatives and condominiums in 1996. On the good side of the ledger was Phoenix Owners Corp. v. Weitzner, 648 N. Y. S. 2d 2 (1st Dept. 9/17/96). Alan Fried, attorney for Phoenix Owners Corp. and a partner in the law firm of Schwarzfeld Ganfer & Shore, provided details on this case, where a shareholder's unacceptable conduct, including screaming and yelling at all hours of the day and night, pounding on the ceiling and banging on pipes and other actions, had seriously affected this shareholder's neighbors. The cooperative sought an injunction in the State Supreme Court enjoining the offending shareholder from violating the House Rules and Proprietary Lease and from interfering with other tenants' rights to quiet enjoyment of their apartments.

After the lawsuit began, the shareholder began to threaten to burn down the building and to cause physical harm to employees and building residents. In response, the cooperative applied to the court for a preliminary injunction, directing that the shareholder be removed from the building and not be permitted to return before being so authorized subsequent to a psychiatric evaluation.

At the hearing, the shareholder argued that the cooperative corporation's remedy was limited to terminating the proprietary lease and commencing an eviction proceeding in housing court. The Supreme Court ruled that such remedy was inadequate in the face of the type of conduct alleged in the action and in light of the time-consuming process involved in terminating the lease.

The court concluded that the cooperative corporation had demonstrated the urgency of the situation, and it issued an injunction enjoining the shareholder from continuing verbal abuse, requiring that a responsible individual live with and restrain the shareholder's conduct. It also required that the shareholder undergo psychiatric treatment. The shareholder appealed to the Appellate Division, which affirmed the Supreme Court's use of a preliminary injunction in this situation.

JUDGE PREVENTS CO-OP BOARD FROM BLOCKING ESTATE SALE

The year 1997 dawned with another disturbing decision eroding the rights of cooperatives, Cavanagh v. 133-2nd Street Jackson Heights, Inc. Sup. Ct. Queens Co. 1A Part 13, which was reported in the New York Law Journal of 1/3/97. In the decision, Justice Dye granted summary judgment to the executrix for an estate, who had asked for an order declaring that the co-op's consent was not necessary for the assignment of the decedent's proprietary lease and shares of stock in the cooperative. She claimed that she had presented potential buyers to the board and it had rejected all of them. The judge concluded that the executrix was not bound by the provisions of the lease. He wrote: "To hold otherwise would create potential obstacles without redress that are inconsistent with an executor's obligation to administer and settle an estate with due diligence."

The terms of this cooperative's proprietary lease stated that "all provisions. . . shall be binding upon or enure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns or their successors in interest." The judge did not interpret this seemingly exhaustive list to apply to an executor.

REVIEW PROPRIETARY LEASE

CNYC members are advised to check their own proprietary leases to ensure that adequate language is included to prevent this problem. The rules applicable to the transfer of a decedent's stock and proprietary lease vary considerably from one proprietary lease to another. The "assignment" and "transfer" provision of each co-op's proprietary lease (generally paragraphs 16(e), 17 or 18) should be carefully scrutinized to determine if the word "executor" has been included in the string of words cited by the court ("heirs, legal representatives, successors and assigns"). Most proprietary leases contain the reference to the "executor", which the court found missing in this case.

Most of the newer proprietary leases which cover executors in their requirements for board approval of transfers also contain a provision which prohibits the co-op from "unreasonably" withholding its consent to transfers to family members or from withholding its consent to a transfer to a spouse (a term which under current law includes "life partners"). It is probable that the multiple rejections in the reported case "poisoned the well" for this co-op and provided an incentive for this bad decision.

If your proprietary lease does not contain all references, it should be amended with the help of your attorney. Amendments to proprietary leases usually require the consent of two-thirds of the lessees, but in most cases this may be done by written consent over a reasonable period of time. The written consent can be as simple as the following: "The undersigned proprietary lessee does hereby consent to the following amendment to the proprietary lease of the ABC Cooperative Corporation: Section 16 (e) is amended by the addition of the words 'nor his executor, nor his administrator' after the word 'Lessee' in the second line thereof." BUT see your attorney before amending your proprietary lease.

 
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