40 W 67TH ST v. Pullman

• Decision Date: 13 May 2003
• Citation: 790 N.E.2d 1174,100 N.Y.2d 147,760 N.Y.S.2d 745
• Parties: 40 WEST 67TH STREET, Respondent, v. DAVID PULLMAN, Appellant.
• Court: New York Court of Appeals Court of Appeals

100 N.Y.2d 147

790 N.E.2d 1174

760 N.Y.S.2d 745

TH STREET, Respondent, v. DAVID PULLMAN, Appellant.

Court of Appeals of the State of New York.

Argued April 3, 2003.

Decided May 13, 2003.

Rosenberg & Estis, P.C., New York City (Gary M. Rosenberg and Jeffrey Turkel of counsel), for appellant.

Balber Pickard Battistoni Maldonado & Van Der Tuin, P.C., New York City (John T. Van Der Tuin, David A. Armendariz and Joseph J. Barker of counsel), for respondent.

Chief Judge KAYE and Judges SMITH, CIPARICK, WESLEY, GRAFFEO and READ concur.

OPINION OF THE COURT

ROSENBLATT, J.

In Matter of Levandusky v One Fifth Ave. Apt. Corp. (75 NY2d 530 [1990]) we held that the business judgment rule is the proper standard of judicial review when evaluating decisions made by residential cooperative corporations. In the case before us, defendant is a shareholder-tenant in the plaintiff cooperative building. The relationship between defendant and the cooperative, including the conditions under which a shareholder's tenancy may be terminated, is governed by the shareholder's lease agreement. The cooperative terminated defendant's tenancy in accordance with a provision in the lease that authorized it to do so based on a tenant's "objectionable" conduct.

Defendant has challenged the cooperative's action and asserts, in essence, that his tenancy may not be terminated by the court based on a review of the facts under the standard articulated in Levandusky. He argues that termination may rest only upon a court's independent evaluation of the reasonableness of the cooperative's action. We disagree. In reviewing the cooperative's actions, the business judgment standard governs a cooperative's decision to terminate a tenancy in accordance with the terms of the parties' agreement.

I.

Plaintiff cooperative owns the building located at 40 West 67th Street in Manhattan, which contains 38 apartments. In 1998, defendant bought into the cooperative and acquired 80 shares of stock appurtenant to his proprietary lease for apartment 7B.

Soon after moving in, defendant engaged in a course of behavior that, in the view of the cooperative, began as demanding, grew increasingly disruptive and ultimately became intolerable. After several points of friction between defendant and the cooperative,¹ defendant started complaining about his elderly upstairs neighbors, a retired college professor and his wife who had occupied apartment 8B for over two decades. In a stream of vituperative letters to the cooperative—16 letters in the month of October 1999 alone—he accused the couple of playing their television set and stereo at high volumes late into the night, and claimed they were running a loud and illegal bookbinding business in their apartment. Defendant further charged that the couple stored toxic chemicals in their apartment for use in their "dangerous and illegal" business. Upon investigation, the cooperative's Board determined that the couple did not possess a television set or stereo and that there was no evidence of a bookbinding business or any other commercial enterprise in their apartment.

Hostilities escalated, resulting in a physical altercation between defendant and the retired professor.² Following the altercation, defendant distributed flyers to the cooperative residents in which he referred to the professor, by name, as a potential "psychopath in our midst" and accused him of cutting defendant's telephone lines. In another flyer, defendant described the professor's wife and the wife of the Board president as having close "intimate personal relations." Defendant also claimed that the previous occupants of his apartment revealed that the upstairs couple have "historically made excessive noise." The former occupants, however, submitted an affidavit that denied making any complaints about noise from the upstairs apartment and proclaimed that defendant's assertions to the contrary were "completely false."

Furthermore, defendant made alterations to his apartment without Board approval, had construction work performed on the weekend in violation of house rules, and would not respond to Board requests to correct these conditions or to allow a mutual inspection of his apartment and the upstairs apartment belonging to the elderly couple. Finally, defendant commenced four lawsuits against the upstairs couple, the president of the cooperative and the cooperative management, and tried to commence three more.

In reaction to defendant's behavior, the cooperative called a special meeting pursuant to article III (First) (f) of the lease agreement, which provides for termination of the tenancy if the cooperative by a two-thirds vote determines that "because of objectionable conduct on the part of the Lessee * * * the tenancy of the Lessee is undesirable."³ The cooperative informed the shareholders that the purpose of the meeting was to determine whether defendant "engaged in repeated actions inimical to cooperative living and objectionable to the Corporation and its stockholders that make his continued tenancy undesirable."

Timely notice of the meeting was sent to all shareholders in the cooperative, including defendant. At the ensuing meeting, held in June 2000, owners of more than 75% of the outstanding shares in the cooperative were present. Defendant chose not attend. By a vote of 2,048 shares to 0, the shareholders in attendance passed a resolution declaring defendant's conduct "objectionable" and directing the Board to terminate his proprietary lease and cancel his shares. The resolution contained the findings upon which the shareholders concluded that defendant's behavior was inimical to cooperative living. Pursuant to the resolution, the Board sent defendant a notice of termination requiring him to vacate his apartment by August 31, 2000. Ignoring the notice, defendant remained in the apartment, prompting the cooperative to bring this suit for possession and ejectment, a declaratory judgment cancelling defendant's stock, and a money judgment for use and occupancy, along with attorneys' fees and costs.

Supreme Court denied the cooperative's motion for summary judgment and dismissed its cause of action that premised ejectment solely on the shareholders' vote and the notice of termination. The court declined to apply the business judgment rule to sustain the shareholders' vote and the Board's issuance of the notice of termination. Instead, the court invoked RPAPL 711 (1) and held that to terminate a tenancy, a cooperative must prove its claim of objectionable conduct by competent evidence to the satisfaction of the court.

Disagreeing with Supreme Court, a divided Appellate Division granted the cooperative summary judgment on its causes of action for ejectment and the cancellation of defendant's stock. It modified Supreme Court's order accordingly and remanded the case for a hearing on use and occupancy, legal fees and costs. The majority held that Levandusky prohibited judicial scrutiny of actions of cooperative boards "taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes" (296 AD2d 120, 124 [2002] [quoting Auerbach v Bennett, 47 NY2d 619, 629 (1979)]). The two dissenting Justices would have required the cooperative to prove defendant's objectionable conduct to the satisfaction of the court. Defendant appealed to this Court as of right pursuant to CPLR 5601 (a). We agree with the Appellate Division majority that the business judgment rule applies and therefore affirm.

II. The Levandusky Business Judgment Rule

The heart of this dispute is the parties' disagreement over the proper standard of review to be applied when a cooperative exercises its agreed-upon right to terminate a tenancy based on a shareholder-tenant's objectionable conduct. In the agreement establishing the rights and duties of the parties, the cooperative reserved to itself the authority to determine whether a member's conduct was objectionable and to terminate the tenancy on that basis. The cooperative argues that its decision to do so should be reviewed in accordance with Levandusky's business judgment rule. Defendant contends that the business judgment rule has no application under these circumstances and that RPAPL 711 requires a court to make its own evaluation of the Board's conduct based on a judicial standard of reasonableness.

Levandusky established a standard of review analogous to the corporate business judgment rule for a shareholder-tenant challenge to a decision of a residential cooperative corporation. The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings (see generally Davis, Once More, The Business Judgment Rule, 2000 Wis L Rev 573 [2000]). The rule has been long recognized in New York (see e.g. Flynn v Brooklyn City R.R. Co., 158 NY 493, 507 [1899]; Pollitz v Wabash R.R. Co., 207 NY 113, 124 [1912]). In Levandusky, the cooperative board issued a stop work order for a shareholder-tenant's renovations that violated the proprietary lease. The shareholder-tenant brought a CPLR article 78 proceeding to set aside the stop work order. The Court upheld the Board's action, and concluded that the business judgment rule "best balances the individual and collective interests at stake" in the residential cooperative setting (Levandusky, 75 NY2d at 537).

In the context of cooperative dwellings, the business judgment rule provides that a court should defer to a cooperative board's determination "[s]o long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith" (id. at 538).⁴ In adopting this rule, we recognized that a cooperative board's broad powers could lead to abuse through arbitrary or malicious decisionmaking, unlawful discrimination or the like. However, we also aimed to avoid impairing "the purposes for which the residential...