40 West 67th Street Corp. v. Pullman

New York Court of Appeals · Property

PropertyCooperativesBusiness Judgment RuleLease Terminationcooperative housingproprietary leaseobjectionable conductbusiness judgment rule

Facts

Defendant bought into plaintiff cooperative and became the shareholder-tenant of apartment 7B. According to the cooperative, he engaged in escalating disruptive conduct, including repeated false accusations against elderly upstairs neighbors, distribution of defamatory flyers, unauthorized apartment alterations, weekend construction in violation of house rules, refusal to cooperate with inspection requests, and multiple lawsuits against neighbors and cooperative-related parties. The cooperative called a special shareholder meeting under a lease provision allowing termination if two-thirds of shares determine that, because of objectionable conduct, the tenancy is undesirable. After notice to all shareholders and defendant's decision not to attend, shareholders present voted 2,048 shares to 0 to declare his conduct objectionable and directed the board to terminate his lease and cancel his shares.

Issue

When a cooperative terminates a shareholder-tenant's proprietary lease under a lease provision authorizing termination for objectionable conduct, should a court independently determine the reasonableness of that action, or should it review the decision under the business judgment rule? Also, can that standard be applied consistently with RPAPL 711(1)'s requirement of competent evidence that the tenant is objectionable?

Rule

A cooperative's decision to terminate a shareholder-tenant's tenancy for objectionable conduct pursuant to the terms of the proprietary lease is reviewed under the business judgment rule. Courts should defer so long as the cooperative acts for the purposes of the cooperative, within the scope of its authority, and in good faith; further judicial scrutiny is triggered only upon a showing that the board acted outside its authority, did not legitimately further the corporate purpose, or acted in bad faith. In this RPAPL 711(1) context, the competent evidence underlying the shareholder vote is reviewed under that business judgment standard, and the vote and stated findings will normally suffice.

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A residential cooperative in Brooklyn adopts a proprietary lease clause allowing termination if holders of two-thirds of the shares owned by lessees, at a duly called meeting, determine that a shareholder-tenant's conduct is objectionable and the tenancy undesirable. After repeated confrontations with staff and disruptive late-night common-area incidents, the cooperative follows that procedure, and Elena Cruz sues arguing the court must independently decide whether her behavior was actually unreasonable.

What standard should the court apply to review the cooperative's termination decision?

Explanation. The majority held that when a cooperative terminates a shareholder-tenant's tenancy pursuant to an objectionable-conduct provision in the proprietary lease, judicial review is governed by the business judgment rule. The court does not substitute its own reasonableness determination so long as the cooperative acted for cooperative purposes, within the scope of its authority, and in good faith. (Derived from 40 West 67th Street Corp. v. Pullman (n.d.).)