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40 W. 67th St. Corp. v. Pullman: Co-op Corporate Decisions Evaluated under Business Judgment Rule

New York's highest court has considered whether a co-op corporation properly terminated shareholder's proprietary lease for "objectionable" conduct.

In 1998, David Pullman ("Shareholder") purchased 80 shares in a housing cooperative, which entitled him to a proprietary lease in the building located at 40 West 67th Street in New York City ("Co-op"). A co-op building is usually structured as a corporation where each shareholder receives shares which entitle them to an exclusive lease for a particular unit, and so a conveyance of an interest in a co-op typically involves a transfer of stock.

Shortly after moving onto the premises, the Shareholder began engaging in disruptive behavior. He originally sought changes in the Co-op's common areas, but he then began a dispute with his upstairs neighbors, a couple ("Couple") who had lived in their apartment for over 20 years. The Shareholder accused the Couple of playing their television and music loud late into the night, running an illegal bookbinding business in their unit, and storing toxic chemicals in their unit. The Co-op's board investigated the allegations, finding that the Couple did not own a television or stereo and there was no evidence of a business being run on the premises. The dispute between the Couple and the Shareholder continued to escalate, with the Shareholder filing charges against the husband causing his arrest (later dismissed). The Shareholder also posted flyers in the building which suggested that the wife and the Co-op's president's wife were having "intimate personal relations." He also filed lawsuits against the Couple as well as the Co-op's president and management company.

The Co-op responded to the Shareholder's conduct by holding a special meeting to vote on terminating the Shareholder's proprietary lease, as outlined in the Co-op's bylaws ("Bylaws"). The Bylaws provided that the Co-op could terminate a lease if two-thirds of a Shareholders vote determined that the leaseholder had engaged in "objectionable conduct" that made the individual's continued tenancy "undesirable." Holders of more than 75% of the outstanding Co-op shares participated in the vote, and the vote was 2,048 to 0 in favor of a resolution stating that the Shareholder's conduct was "objectionable" and directing the Co-op's board to terminate his lease and cancel his shares. The Shareholder ignored the lease termination notice he received from the Co-op's board. The Co-op filed a lawsuit seeking possession of the apartment. The trial court ruled that the Co-op did not follow the New York statutory rules for ejectment, and so dismissed the Co-op's lawsuit. The appellate court reversed the trial court, determining that the Co-op did have the power to eject the Shareholder, so long as it followed its own rules and acted in good faith while furthering its corporate purpose. The Shareholder appealed.

The Court of Appeals of New York affirmed the ruling of the appellate court. The issue before the court was the proper standard of review that a court would use to review the Co-op's decision to terminate the Shareholder's tenancy. An earlier decision by the court had applied the "business judgment rule" to another residential co-op corporation's decision making process. The "business judgment rule" is a standard commonly used by courts to evaluate the decisions made by a corporation's board of directors, which is a deferential standard under which courts defer to the good faith decisions made by a corporate board of directors related to the company's operations. The trial court had declined to apply this standard, instead applying the statutory requirements which a landlord must comply with when it attempts to eject a tenant from its premises, finding that the business judgment rule did not apply when it was in conflict with other state statutes.

The court determined that it was appropriate to apply the business judgment rule to the Co-op's decision to eject the Shareholder, finding no conflict between the ejectment statutes and the business judgment rule. The court found that a vote to eject a fellow shareholder in a co-operative for objectionable conduct met the statutory "competent evidence" standard necessary for a landlord to eject a tenant from their premises. Thus, the court upheld the Co-op's vote to terminate the Shareholder's lease, using the business judgment rule.

The court also stated that there were a few instances in which a shareholder could trigger further judicial review of a co-operative's decision making process. These are: first, that the board acted outside the scope of its authority set forth in the bylaws; second, the action did not further the corporate purpose of the co-operative; or third, the board acted in bad faith. The Shareholder did not successfully offer evidence in support of any of these grounds, and so the court found that there was no reason for further judicial review of the Co-op's decision making process. Thus, the court upheld the appellate court's ruling in favor of the Co-op.

40 W. 67th St. Corp. v. Pullman, 790 N.E.2d 1174 (N.Y. 2003).