Jones v. O'Connell

• Decision Date: 05 April 1983
• Citation: 458 A.2d 355,189 Conn. 648
• Court: Connecticut Supreme Court
• Parties: Conrad JONES et al. v. Walter F. O'CONNELL et al.

Page 355

458 A.2d 355

189 Conn. 648

Conrad JONES et al. v. Walter F. O'CONNELL et al.

Supreme Court of Connecticut.

Argued Jan. 12, 1983.

Decided April 5, 1983.

Dennis N. Garvey, New Haven, with whom were Andre L. Nagy, Bridgeport, and, on the brief, Barbara L. Cox, law student intern, New Haven, for appellants (plaintiffs).

William T. Cahill, Greenwich, with whom, on the brief, was Cuyler M. Overholt, Greenwich, for appellees (defendants).

Before SPEZIALE, C.J., and PETERS, HEALEY, SHEA and GRILLO, JJ.

PETERS, Associate Justice.

This case concerns the right of owners of a cooperative apartment building to impose restraints on the right to alienate one of the cooperative apartments. The plaintiffs, Conrad Jones and Florence McNulty, who had entered into a contract of sale for a cooperative apartment, brought suit against the defendants, Walter F. O'Connell, Pauline F. O'Connell, Margaret Cavanaugh, Christopher H. Smith and Harbor House, Inc., to enjoin the defendants' disapproval of the contemplated sale. The plaintiffs also sought monetary damages from the individual defendants for their tortious interference with the plaintiffs' contract. After a trial to the court, judgment was rendered for the defendants and the plaintiffs have appealed.

The underlying facts are undisputed. In 1975, the defendant Walter F. O'Connell transferred property at 252-58 Main Street, Southport, to a newly formed Connecticut corporation, the defendant Harbor House, Inc., so that Harbor House might hold the property as a cooperative residential apartment house. The defendant Christopher H. Smith, an attorney, prepared the appropriate documentation, consisting of a memorandum of offering for the stock, proprietary leases for the individual apartments, and by-laws for the corporation. From the time of the first meeting of the corporation, the Harbor House directors have been the individually named defendants, Walter and Pauline O'Connell, Christopher Smith, and Margaret Cavanaugh.

In 1979, just before the present controversy arose, the leasehold interests in Harbor House, manifested by ownership of stock and assignments of proprietary leases, were distributed among the defendants and the plaintiffs as follows: The plaintiff Florence McNulty owned 11.2 percent of the stock and was the lessee of apartment 1A. The plaintiff Conrad Jones owned 25.5 percent of the stock and was the lessee of apartment 2. The defendant Margaret Cavanaugh owned 25.5 percent of the stock and was the lessee of apartment 3. The defendant Walter O'Connell owned 37.8 percent of the stock and was the lessee of apartments 1B, 1C and 4.

On November 5, 1979, the plaintiffs entered into a written contract for Florence McNulty to sell her stock in Harbor House and to assign her proprietary lease in apartment 1A to Conrad Jones. This contract of sale was expressly made "subject to the approval of the directors or shareholders of the Corporation as provided in the Lease or the corporate by-laws." Had the transfer to Jones been approved, he would have become the owner of 36.7 percent of the Harbor House stock and the lessee of two apartments, one underneath the other. Jones was interested in acquiring additional living space for his family because in 1979, one year after his acquisition of apartment 2, he had remarried and become the stepfather of two daughters, aged 9 and 13.

Any lessee's right to sell shares and to assign a proprietary lease in Harbor House is expressly made conditional upon the consent of the Harbor House board of directors, or of at least 65 percent of the corporation's outstanding shares, by virtue of separate and somewhat inconsistent provisions in the Harbor House documentation. Under the memorandum of offering, assignments are to be approved only for persons of suitable "character and financial responsibility." Under the proprietary lease, however, consent to assignments can be granted or withheld "for any reason or for no reason." The corporate by-laws are silent as to what may constitute an adequate basis for withholding consent to an assignment.

The plaintiffs were unable to procure the requisite consent for their contemplated transfer. First the board of directors and later the stockholders of Harbor House refused to approve their contract of sale. Subsequent to this disapproval, Walter O'Connell and Margaret Cavanaugh offered to purchase the stock and the lease of apartment 1A from Florence McNulty, an offer she refused because of her commitment to Conrad Jones. The present litigation then ensued.

In the trial court, after an exhaustive examination of the plaintiffs' claims, judgment was rendered for the defendants. The court found that the defendants had acted reasonably and in good faith, and that the plaintiffs had failed to prove their various claims of wrongful interference with their contract. Each of these conclusions is challenged on this appeal. ¹ We find no error.

I

The plaintiffs' principal claim of error asserts that the evidence presented at trial fails to support the trial court's conclusion and finding that the defendants acted reasonably in disapproving the transfer of the stock and the leasehold interest appurtenant to apartment 1A. Before we reach that issue, however, we must first determine the standard by which the propriety of the defendants' withholding of their consent is to be measured.

Although this court has not previously confronted the question of restraints on alienation of property interests in cooperative residential apartments, we have addressed the legality of such restraints on alienation in related contexts. On the one hand, in cases involving the construction of wills involving the devise of both real and personal property, we have noted that "[t]he law does not favor restraints on alienation and will not recognize them unless they are stated 'in unequivocal terms'; Williams v. Robinson, 16 Conn. 517, 523 [1844]"; Romme v. Ostheimer, 128 Conn. 31, 34, 20 A.2d 406 (1941); and that "[i]t is the policy of the law not to uphold restrictions upon the free and unrestricted alienation of property unless they serve a legal and useful purpose." Peiter v. Degenring, 136 Conn. 331, 336, 71 A.2d 87 (1949); Colonial Trust Co. v. Brown, 105 Conn. 261, 278-81, 135 A. 555 (1926). See generally Manning, "The Development of Restraints on Alienation Since Gray," 48 Harv.L.Rev. 373, 401-406 (1935), and Schnebly, "Restraints Upon the Alienation of Legal Interests," 44 Yale L.J. 961, 1186, 1380 (1935). On the other hand, in a case involving a lease provision requiring that a lessor consent in writing to the assignment of a commercial lease, we have cited with approval the majority rule that "the lessor may refuse consent and his reason is immaterial." Robinson v. Weitz, 171 Conn. 545, 549, 370 A.2d 1066 (1976), relying on Segre v. Ring, 103 N.H. 278, 279, 170 A.2d 265 (1961). See also B & R Oil Company, Inc. v. Ray's Mobile Homes, Inc., 139 Vt. 122, 123, 422 A.2d 1267 (1980); 1 Friedman on Leases § 7.304a (1974). But see 2 Restatement (Second), Property (Landlord and Tenant) § 15.2(2) (1977); 1 Am.Law of Property § 3.58 (Lezar, 1952).

An assessment of how to apply these competing principles to restraints on the alienation of cooperative apartments must take account of the reality that cooperative ownership is in many ways sui generis, a legal hybrid. For some purposes, the "owner" of such an apartment has legal title and an interest in real property, while for other purposes his rights as a tenant of the corporation and a holder of its stock more closely resemble an interest in personal property. Alexy v. Kennedy House, Inc., 507 F.Supp. 690, 697 (E.D.Pa.1981); Sanders v. The Tropicana, 31 N.C.App. 276, 281, 229 S.E.2d 304 (1976); see also 2 Tiffany, The Law of Real Property (3d Ed.) §§ 483.75, 483.76 and 483.78 (1982 Cum.Sup.); Bratt, "Cooperative Apartments: A Survey of Legal Treatment and an Argument for Homestead Protection," 1978 U.Ill.L.F. 759, 770-78 (1978).

As did the trial court, we deem it appropriate to take a middle road in enforcing provisions that impose conditions upon the transfer of the hybrid cooperative apartment. Provisions conditioning transfers upon the consent of the cooperative corporation are neither automatically void nor automatically valid. If the provisions are stated unequivocally, and serve a legal and useful function, i.e., the reasonable protection of the financial and social integrity of the cooperative as a whole, they are not barred by our policy disfavoring restraints on alienation. Such provisions are permissible, however, only insofar as they are limited to the purpose for which they are designed. Unlimited consent clauses, permitting disapproval of transfers for any reason whatsoever, or for no reason, constitute illegal restraints because they fail sufficiently to recognize the legitimate interest of the holder of a leasehold to enjoy reasonable access to a resale market. These distinctions are consistent with the holdings of the majority of courts in other jurisdictions that have addressed this issue. See, e.g., Mowatt v. 1540 Lake Shore Drive Corporation, 385 F.2d 135, 136-37 (7th Cir.1967); Alexy v. Kennedy House, Inc., 507 F.Supp. 690, 699 (E.D.Pa.1981); Logan v. 3750 North Lake Shore Drive, Inc., 17 Ill.App.3d 584, 589-91, 308 N.E.2d 278 (1974); 68 Beacon Street, Inc. v. Sohier, 289 Mass. 354, 360-62, 194 N.E. 303 (1935); Sanders v. The Tropicana, 31 N.C.App. 276, 282, 229 S.E.2d 304 (1976). Contra, in part, Weisner v. 791 Park Avenue Corporation, 6 N.Y.2d 426, 434, 190 N.Y.S.2d 70, 160 N.E.2d 720 (1959); see also Bratt, supra, 783-85; note, "Co-operative Apartment Housing," 61 Harv.L.Rev. 1407, 1416-20 (1948); Tiffany, supra, § 483.79.

Applying these principles to the provisions of the Harbor House documentation, we agree, for two reasons, with the trial court's conclusion invalidating the clause in the proprietary lease purporting to permit consent...