Mowatt v. 1540 Lake Shore Drive Corporation

• Citation: 385 F.2d 135
• Decision Date: 13 November 1967
• Docket Number: No. 15825.,15825.
• Parties: Victoria MOWATT, Plaintiff-Appellant, v. 1540 LAKE SHORE DRIVE CORPORATION et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

385 F.2d 135 (1967)

Victoria MOWATT, Plaintiff-Appellant, v. 1540 LAKE SHORE DRIVE CORPORATION et al., Defendants-Appellees.

No. 15825.

United States Court of Appeals Seventh Circuit.

September 28, 1967.

Rehearing Denied November 13, 1967.

James A. Dunkin, Chicago, Ill., for appellant.

Roger W. Barrett, Robert L. Stern, Jacob M. Shapiro, George W. Hamman, Chicago, Ill., for defendants-appellees, Mayer, Friedlich, Spiess, Tierney, Brown & Platt, Chicago, Ill., of counsel.

D'Ancona, Pflaum, Wyatt & Riskind, Chicago, Ill., of counsel, for Maurice A. Riskind.

Before SCHNACKENBERG, KNOCH and FAIRCHILD, Circuit Judges.

FAIRCHILD, Circuit Judge.

Plaintiff Victoria Mowatt is a stockholder-lessee of defendant 1540 Lake Shore Drive Corporation. The other defendants are or have been directors.¹

Defendant corporation owns a multistory residential apartment building in Chicago. Stockholders must be lessees, and vice versa. Shares are transferable only to such assignee as may be permitted by the lease. The lease provides that the lessee shall not assign the lease nor sublet his apartment without consent in writing pursuant to a resolution of a majority of the entire board of directors. The lessee must pay a share of current operating expenses, as assessed by the board, and a substantial sum is ordinarily paid for an assignment, presumably representing a share in the equity. In 1948 Mrs. Mowatt purchased stock and a 98 year lease of an apartment for $13,500.

Mrs. Mowatt has made a number of attempts to sell her interest or to sublet her apartment. The board has consented to several subleases, but has refused consent on other occasions.

She brought this action, alleging in the first count that defendants, in violation of a promise implied in the lease, had unreasonably refused consent, and seeking damages for assessments paid while the apartment has been vacant, and other items. In the third count she sought a declaration that the requirement of consent is void as an unreasonable restraint on alienation. A second count, alleging conspiracy and seeking exemplary as well as compensatory damages has not been debated on appeal.

The district court gave judgment for defendants, including recovery of unpaid assessments as sought by counterclaim. Mrs. Mowatt appealed.

Validity of the restriction.

Defendants contend that they have the same full and arbitrary power to withhold consent which a landlord has under a provision of a lease against assigning or subletting without his consent, and that such provision is valid. They cite New York and Massachusetts cases so holding in similar cooperative arrangements.² The public policy which controls this case, however, is that of Illinois.

In 1960, the Supreme Court of Illinois decided Gale v. York Center Community Cooperative, Inc.³ That case involved a subdivision for 72 family homes. The land was owned by a not-for-profit corporation. Each member had the right to perpetual use and occupancy of his home. Each member built his own home, and was permitted to effect a first mortgage lien for that purpose. When a member desired to sell, the corporation had twelve months in which to buy at an impartially determined or mutually agreed upon price. If the corporation did not buy within the twelve months, the member was free to sell elsewhere, except that the association could still redeem within 90 days after the sale.

These provisions were attacked as a void restraint on alienation of property. The court upheld them.

The court stated that although as a general rule restraints on alienation are void, such a restraint "may be sustained, however, when it is reasonably designed to attain or encourage accepted social or economic ends."

The analysis to be made in each case was described as follows:

"From the authorities here mentioned and many others examined, it would appear that the crucial inquiry should be directed at the utility of the restraint as compared with the injurious consequences that will flow from its enforcement. If accepted social and economic considerations dictate that a partial restraint is reasonably necessary for their fulfillment, such a restraint should be sustained. No restraint should be sustained simply because it is limited in time, or the class of persons excluded is not total, or all modes of alienation are not prohibited. These qualifications lessen the degree to which restraints violate general public policy against restraining alienation of property and should be considered to that extent; but they are not, in themselves, sufficient to overcome it. In short, the law of property, like other areas of the law, is not a mathematical science but takes shape at the direction of social and economic forces in an ever changing society, and decisions should be made to turn on these considerations."⁴

We do not read the Gale decision as holding that all restrictions in cooperative housing arrangements are void unless they approximate the first refusal device which was held valid there. But we do understand that any such restriction must be subjected to the "crucial inquiry" referred to in Gale.

Generally two reasons are given for the inclusion of such restraints in the transfer of cooperative apartments. The basic economic reason is that ultimately the tenant-shareholders must bear all the costs of the operation. If one tenant-shareholder fails to pay his share, the others must, as a practical matter, make up the difference. There is therefore a direct and substantial economic interest in the choice of new tenant-shareholders who are financially responsible.

In addition the basic social reason is that the tenant-shareholders will be living in close proximity to one another so that they have an interest in seeing that their neighbors are friendly and like minded about matters of common concern,...