40 West 67th Street Corporation, Respondent,
2003 NY Int. 67
In Levandusky v One Fifth Ave Corp. (75 2 530 ) 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.
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,
defendant started complaining about his
Hostilities escalated, resulting in a physical
altercation between defendant and the retired professor.
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
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, section (1) (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 * * * ."
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 zero, 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
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 2 120, 124 [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
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,
Jr., Once More, the Business Judgment Rule, 2000 Wis L Rev 573
). The rule has been long recognized in New York ( see e.g.
Flynn v Brooklyn City R.R. Co., 158 NY 493, 507 ; Pollitz v
Wabash R.R. Co., 207 NY 113, 124 ). 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
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).
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 community and
its governing structures were formed: protection of the interest
of the entire community of residents in an environment managed by
the board for the common benefit ( id. at 537). The Court
concluded that the business judgment rule best balances these
competing interests and also noted that the limited judicial
review afforded by the rule protects the cooperative's decisions
against undue court involvement and judicial second-guessing
Although we applied the business judgment rule in Levandusky, we did not attempt to fix its boundaries, recognizing that this corporate concept may not necessarily comport with every situation encountered by a cooperative and its shareholder- tenants. Defendant argues that when it comes to terminations the business judgment rule conflicts with RPAPL 711 (1) and is therefore inoperative. We see no such conflict. In the realm of cooperative governance and in the lease provision before us, the cooperative's determination as to the tenant's objectionable behavior stands as competent evidence necessary to sustain the cooperative's determination. If that were not so, the contract provision for termination of the lease -- to which defendant agreed -- would be meaningless.
We reject the cooperative's argument that RPAPL 711 (1)
is irrelevant to these proceedings, but conclude that the
business judgment rule may be applied consistently with the
statute. Procedurally, the business judgment standard will be
applied across the cases, but the manner in which it presents
itself varies with the form of the lawsuit. Levandusky, for
Similarly, the procedural vehicle driving this case is RPAPL 711 (1), which requires "competent evidence" to show that a tenant is objectionable. Thus, in this context, the competent evidence that is the basis for the shareholder vote will be reviewed under the business judgment rule, which means courts will normally defer to that vote and the shareholders' stated findings as competent evidence that the tenant is indeed objectionable under the statute. As we stated in Levandusky, a single standard of review for cooperatives is preferable, and "we see no purpose in allowing the form of the action to dictate the substance of the standard by which the legitimacy of corporate action is to be measured" ( id. at 541).
In addition, RPAPL 711 was derived from former Civil
Practice Act § 1410 (6), which was enacted in 1920 (L 1920, ch
133). Before that, a landlord could evict a tenant based on the
landlord's sole and unfettered determination that the tenant was
objectionable ( see e.g. Manhattan Life Ins. Co. v Gosford, 3 Misc
509 ; Waitt Constr. Co. v Loraine, 109 Misc 527 1919]).
By enacting former CPA 1410 (6), the legislature imposed on the
landlord the burden of proving that the tenant was objectionable.
Despite this deferential standard, there are instances when courts should undertake review of board decisions. In order to trigger further judicial scrutiny, an aggrieved shareholder- tenant must make a showing that the Board acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose or (3) in bad faith. We next consider the lack of these elements.
A. The Cooperative's Scope of Authority
Pursuant to its bylaws, the cooperative was authorized
(through its Board) to adopt a form of proprietary lease to be
used for all shareholder-tenants. Based on this authorization,
defendant and other members of the cooperative voluntarily
entered into lease agreements containing the termination
provision before us. The cooperative does not contend that it
has the power to terminate the lease absent the termination
provision. Indeed, it recognizes, correctly, that if there were
no such provision, termination could proceed only pursuant to
The cooperative unfailingly followed the procedures contained in the lease when acting to terminate defendant's tenancy. In accordance with the bylaws, the Board called a special meeting, and notified all shareholder-tenants of its time, place and purpose. Defendant thus had notice and the opportunity to be heard. In accordance with the agreement, the cooperative acted on a supermajority vote after properly fashioning the issue and the question to be addressed by resolution. The resolution specified the basis for the action, setting forth a list of specific findings as to defendant's objectionable behavior. By not appearing or presenting evidence personally or by counsel, defendant failed to challenge the findings and has not otherwise satisfied us that the Board has in any way acted ultra vires. In all, defendant has failed to demonstrate that the cooperative acted outside the scope of its authority in terminating the tenancy.
B. Furthering the Corporate Purpose
Levandusky also recognizes that the business judgment
rule prohibits judicial inquiry into Board actions that,
presupposing good faith, are taken in legitimate furtherance of
corporate purposes. Specifically, there must be a legitimate
relationship between the Board's action and the welfare of the
cooperative. Here, by the unanimous vote of everyone present at
There is, however, an additional dimension to corporate purpose that Levandusky contemplates, notably, the legitimacy of purpose -- a feature closely related to good faith. Put differently, all the shareholders of a cooperative may agree on an objective, and the Board may pursue that objective zealously, but that does not necessarily mean that the objective is lawful or legitimate. Defendant, however, has not shown that the Board's purpose was anything other than furthering the overall welfare of a cooperative that found it could no longer abide defendant's behavior.
C. Good Faith, in the Exercise of Honest Judgment
Finally, defendant has not shown the slightest
indication of any bad faith, arbitrariness, favoritism,
Levandusky cautions that the broad powers of
cooperative governance carry the potential for abuse when a Board
singles out a person for harmful treatment or engages in unlawful
discrimination, vendetta, arbitrary decisionmaking or favoritism.
We reaffirm that admonition and stress that those types of abuses
are incompatible with good faith and the exercise of honest
judgment. While deferential, the Levandusky standard should not
serve as a rubber stamp for cooperative board actions,
particularly those involving tenancy terminations. We note that
since Levandusky was decided, the lower courts have in most
instances deferred to the business judgment of cooperative boards
( see e.g. Hochman v 35 Park West Corp., 293 AD2d 650 [2nd Dept
2002]; Sirianni v Rafaloff, 284 AD2d 447 [2nd Dept 2001]; Cooper
v 6 West 20th St. Tenants Corp., 258 AD2d 362 [1st Dept 1999]).
The very concept of cooperative living entails a voluntary, shared control over rules, maintenance and the composition of the community. Indeed, as we observed in Levandusky, a shareholder-tenant voluntarily agrees to submit to the authority of a cooperative board, and consequently the board may significantly restrict the bundle of rights a property owner normally enjoys ( id. at 536). When dealing, however, with termination, courts must exercise a heightened vigilance in examining whether the Board's action meets the Levandusky test.
We have considered defendant's remaining contentions, and find them without merit. Accordingly, the order of the Appellate Division should be affirmed, with costs.
1 Initially, defendant sought changes in the building services, such as the installation of video surveillance, 24-hour door service and replacement of the lobby mailboxes. After investigation, the Board deemed these proposed changes inadvisable or infeasible.
2 Defendant brought charges against the professor which resulted in the professor's arrest. Eventually, the charges were adjourned in contemplation of dismissal.
3 The full provision authorizes termination if at any time the Lessor shall determine, upon the affirmative vote of the holders of the record of at least two-thirds of that part of its capital stock which is then owned by Lessees under proprietary leases then in force, at a meeting of such stockholders duly called to take action on the subject, that because of objectionable conduct on the part of the Lessee, or of a person dwelling in or visiting the apartment, the tenancy of the Lessee is undesirable * * *.
4 See generally Franzese, Common Interest Communities: Standards of Review and Review of Standards, 3 Wash U J of L & Pol'y 663, 667 (2000); Hyatt, Common Interest Communities: Evolution and Reinvention, 31 J Marshall L Rev 303, 343 (1998); Kim, Involuntary Sale: Banishing an Owner From the Cooperative Community, 31 J Marshall L Rev 429, 438 (1998); Kress, Beyond Nahrstedt: Reviewing Restrictions Governing Life in a Property Owner Association, 42 UCLA L Rev 837, 863 (1995).
5 RPAPL 711 (1), in pertinent part, states: * * * A proceeding seeking to recover possession of real property by reason of the termination of the term fixed in the lease pursuant to a provision contained therein giving the landlord the right to terminate the time fixed for occupancy under such agreement if he deem the tenant objectionable, shall not be maintainable unless the landlord shall by competent evidence establish to the satisfaction of the court that the tenant is objectionable.
6 Indeed, the Appellate Division majority stated that in its own evaluation of defendant's conduct, the record amply supported the Board's determination, where defendant's actions had a negative effect on all of the other 37 leaseholders including making them responsible for the payment of thousands of dollars in unnecessary legal fees.
7 See e.g. Abrons Found. Inc. v 29 East 64th St. Corp. (297 2 258 [1st Dept 2002] [tenant raised genuine issues of material fact as to whether board acted in bad faith in imposing sublet fee meant solely to impact one tenant]); Greenberg v Bd. of Mgrs. of Parkridge Condominiums (294 2 467 [2nd Dept 2002] [affirming injunction against board because it acted outside scope of authority in prohibiting tenant from erecting a Succah on balcony]); Dinicu v Groff Studios Corp. (257 2 218 [1st Dept 1999] [business judgment rule does not protect cooperative board from its own breach of contract]); Matter of Vacca v Bd. of Mgrs. of Primrose Lane Condominium (251 2 674 [2nd Dept 1998] [board acted in bad faith in prohibiting tenant from displaying religious statute in yard]); Johar v 82-04 Lefferts Tenants Corp. (234 2 516 [2nd Dept 1996] [board vote amending bylaws to declare plaintiff-tenant ineligible to sit on cooperative board not shielded by business judgment rule]). While we do not undertake to address the correctness of the rulings in all of these cases, we list them as illustrative.