Hidden Harbor Estates Inc v Norman Discussion Paper

2-3 pages, double space. Brief the short case using IRAC method as well as answering 2 notes and questions problem at the end of both cases.

Hidden Harbour Estates, Inc. v. Norman. (pg 7) plus 2 questions at the end

40 West 67th Street v. Pullman. (pg 11) plus 2 questions at the end

Chapter 14: Common-Interest
Communities
A.
In General
As you have already seen, one prevalent application of restrictive covenants is in real
estate development schemes that purport to subject many disparately held parcels
within a community to a common scheme or plan. Neponsit and Bethany Beach are
both communities that were initially developed under such a common scheme. Like
zoning ordinances, the restrictive covenants that burden privately owned land within
such developments may serve to quite comprehensively regulate the uses of land by
members of the community.
Indeed, one major American city—Houston—relies largely (though not exclusively) on
restrictive covenants to do the work that most other municipalities achieve by zoning.
When zoning swept the nation in the 1920s, Houston was a growing, libertarian city,
and sometimes-overheated rhetoric led Houstonians to reject zoning as communistic
government interference with liberty. Later attempts to introduce zoning also failed
due to the persistence of anti-zoning movements. See Barry J. Kaplan, Urban
Development, Economic Growth, and Personal Liberty: The Rhetoric of the Houston Anti-Zoning
Movements, 1947-1962, 84 SOUTHWESTERN H ISTORICAL Q. 133 (1980); see also
Houstonians for Responsible Growth, How Houston “Got It Right”: The World
Takes Notice (n.d) (collecting numerous encomiums to Houston’s freedom and
prosperity as the result of lack of zoning). The absence of zoning doesn’t mean that
land use in Houston is unregulated—the city code imposes minimum lot size and
parking restrictions that have made the city the most sprawling American metropolis,
and the most heavily dependent on privately-owned automobiles for transportation.
But more detailed restrictions are often the work of private covenants.
Private covenants are common in Houston, replicating many of the standard functions
of zoning, particularly separation of uses. Houston encourages covenant creation by
allowing their creation by a majority vote of subdivision residents. Houstonians
separate homes from businesses through restrictive covenants that specify the
1
appropriate use for each lot in a subdivision, and enable every lot owner individually
to sue. This regime works most effectively in wealthy neighborhoods. Houston’s city
code, unlike that of most American cities, also allows the city attorney to sue to enforce
restrictive covenants. The city may seek civil penalties of up to $1000 per day for a
violation, and the city prioritizes enforcement of use restrictions, rather than other
covenants such as aesthetic rules. In essence, the city has recreated “single use zoning”
as covenant enforcement.
Both within and outside of Houston, such uses of restrictive covenants may allow—
like the covenants in Neponsit—for centralized private authority to administer and
enforce the covenants through a corporation or association constituted from among
the property owners in the community. This kind of collective governance of land uses
via restrictive covenants is what the Third Restatement refers to as a common-interest
community. There are three primary types of common-interest community in the
United States: the homeowners association (or “H OA”), the condominium (or
“condo”), and the cooperative (or “co-op”). State statutes provide for the creation
of these legal entities. According to the Community Associations Institute—an
international research, education, and advocacy nonprofit organization that promotes
and supports common-interest communities—there were over 330,000 commoninterest communities in the United States in 2014, encompassing 26.7 million housing
units and 66.7 million residents. COMMUNITY ASSOCIATIONS INSTITUTE STATISTICAL
REVIEW
FOR
2014,
at
1,
available
at
http:/ / www.cairf.org/ research/ factbook/ 2014_statistical_review.pdf.
1.
H omeowners Associations
The homeowners association is the most common type of common-interest
community in the United States—over half of all common interest communities in the
United States are HOAs. Id. In an HOA, the creation of community-wide restrictive
covenants typically happens at the planning stage: a real estate developer plans out a
subdivision of a contiguous parcel of undeveloped or underdeveloped land, and files
with the local clerk or register of deeds a subdivision plat mapping out a survey of
the separate lots of the planned community and a declaration of covenants,
conditions, and restrictions (“CC&Rs”) to bind each of those lots as restrictive
covenants. When the subdivided lots are initially sold, the developer writes the same
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covenants into the deed to every lot, either explicitly or incorporating the CC&Rs of
the declaration by reference. The CC&Rs will typically delegate enforcement to a
homeowners association—a legal entity that is incorporated or otherwise created for
the purpose of managing the common-interest community (as with the property
owners’ association in Neponsit). The association’s membership is comprised of all
owners of real property in the subdivision. These members are entitled to elect a board
of managers to act on behalf of the association, though votes are usually not equally
distributed to all residents; typically votes are allocated according to some proxy for
property value, such as lot size.
The association itself may hold title to real property in common areas of the
subdivision—such as private roads, parks and other recreational facilities, and common
utilities. It may also contract on behalf of the community for common services, such
as professional security guards. But its main function is to administer, modify as
necessary, and enforce the restrictive covenants that bind the real property in the
subdivision. This includes the collection of HOA dues—such as the fees that were at
issue in Neponsit—that go toward the maintenance of the subdivision and other
expenses incurred by the association (for example, professional fees for attorneys,
accountants, etc.). The association is typically also empowered to levy special
assessments against property owners in the subdivision as it deems necessary. See
RESTATEMENT, § 6.5. The authority of the association to act is governed both by the
CC&Rs and by a set of bylaws—like the bylaws of any other corporation—that set
forth in detail what actions the managers may take according to what procedures, what
actions require a vote of all members of the association, and whether there is any
supermajority requirement for certain actions. As we will see, the association may also
enact regulations regarding use and maintenance of privately owned property in the
subdivision that go beyond the CC&Rs.
2.
Condominiums
A condominium is very similar to a homeowners association, except it typically covers
either a single multi-unit structure or several structures comprising attached residences
on a single contiguous lot. Like a homeowners association, a condominium is
established by filing with the appropriate public official a condominium declaration,
which like the homeowners association declaration will contain the CC&Rs that will
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govern the condominium, and will provide for a condominium association to
administer the CC&Rs and otherwise act on behalf of the community. State statutes
typically impose a bit more regulation on condominiums than on subdivision HOAs,
sometimes setting forth substantive rules limiting the powers of condominium
associations or subjecting them to certain procedural requirements. But condominium
associations typically have the same types of powers as HOAs, including the power to
assess dues and special assessments from individual owner/ members.
One important distinction between condominiums and homeowners associations has
to do with how title to property is held in each. In a condominium, each unit owner
holds title to their individual unit in fee simple, but the individual unit owners
collectively own all common areas of the condominium property (hallways, common
outdoor spaces, lobbies, recreation areas, etc.) as tenants in common. State statutes
prohibit condominium owners from seeking partition of these commonly owned
spaces. As with voting rights in the condominium association, each owner’s fractional
share in this tenancy in common is typically determined by some proxy for the value
of the owner’s particular unit, such as square footage.
3.
Cooperatives
By far the least common form of common-interest community is the cooperative. In
a cooperative, title to all real property in the community (typically an apartment
building) is held by a cooperative corporation, whose shareholders are the residents of
individual units. As with the other common-interest communities, the number of
shares each individual unit owner holds is typically proportional to some proxy for the
value of their residence—such as square footage. Each resident’s shares are
“appurtenant” (i.e., connected) to a proprietary lease for a particular unit—a lease
whose term is tied to the resident’s ownership of their shares in the cooperative. Coop owners therefore have a dual relationship with their common-interest community:
they are formally tenants, but at the same time they are shareholders of the (corporate)
landlord. The proprietary lease typically plays the role that CC&Rs serve in HOAs and
condominiums: it contains the covenants restricting residents’ use of their own unit
and any common spaces, and in lieu of rent it obliges residents to pay maintenance
fees—which typically represent a fractional share of both operating expenses and
carrying costs of the entire property (such as mortgage payments and property taxes).
Page 4 of 19
The board of directors of a cooperative corporation typically wields significant power
over the property and its residents. In addition to administering and enforcing the
terms of the proprietary lease and managing the property on behalf of all the residents,
co-op boards are typically empowered to create and enforce additional rules to govern
the community via their own by-laws and, sometimes, separate and potentially quite
intrusive “house rules.” Beyond this, the governing documents of most co-operatives
reserve to the board a right to withhold consent to any transfer of shares in the
corporation (and, thus, of the proprietary lease to any unit in the cooperative). Absent
violation of the anti-discrimination laws, boards are generally free to arbitrarily
withhold such consent. One justification for this power is that residents of a cooperative depend on one another for the financial stability of their homes: a
shareholder who fails to pay maintenance on time could threaten not only themselves
but the entire community with foreclosure of a mortgage or a tax lien, and the board
therefore has an interest in screening new shareholders for financial wherewithal and
reliability. But another theory justifying such power is that a cooperative is, as its name
implies, a form of collective governance of an intimate residential community, which
limits the appropriate degree of outside legal interference. As the New York Court of
Appeals put it: “there is no reason why the owners of the co-operative apartment house
could not decide for themselves with whom they wish to share their elevators, their
common halls and facilities, their stockholders’ meetings, their management problems
and responsibilities and their homes.” Weisner v. 791 Park Ave. Corp., 160 N.E.2d
720, 724 (N.Y. 1959).
Cooperatives exist almost exclusively in New York City, where they account for the
majority of owner-occupied apartments in Manhattan. Given the tremendous power
co-operative boards can exercise over admission of new shareholders, it is perhaps
unsurprising that co-ops constitute the form of ownership for many of the city’s most
exclusive residential apartment buildings. Tom Wolfe famously profiled these co-ops
in the heady days of the 1980s bull market:
These so-called Good Buildings are forty-two cooperative apartment houses
built more than half a century ago. Thirty-seven of them are located in a small
wedge of Manhattan’s Upper East Side known as the Triangle[,]… an area
defined by Fifty-seventh Street from Sutton Place to Fifth Avenue on the south,
Fifth [Avenue] to Ninety-eighth Street on the west, and a diagonal back down
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to Sutton on the east…. The term Good Building was originally uttered sotto
voce. Before the First World War it was code for “restricted to Protestants of
northern European stock”…. Today Good certainly doesn’t mean democratic,
but it does pertain to attributes that are at least more broadly available than
Protestant grandparents: namely, decorous demeanor, dignified behavior,
business and social connections, and sheer wealth. In short, bourgeois
respectability. The co-op boards want quiet, conservatively dressed families,
although not with too many children. Children tie up the elevators and make
noise in the lobby…. The boards raise and lower their financial requirements,
as well as their social requirements, with the temperature of the market…. The
first requirement is that the buyer be able to pay for the apartment in cash….
The second, in many buildings, is that he not be dependent on his job or
profession to pay for his monthly maintenance fees and keep up appearances….
The prospects and their families are also expected to drop by the building for
“cocktails,” which is an inspection of dress and deportment…. The stiffest
known financial requirements are at a Good Building on Park Avenue in the
seventies, where the board asks that a purchaser of an apartment demonstrate
a net worth of at least $30 million.*
Tom Wolfe, Proper Places, E SQUIRE (June 1985), at 194, 196-200.
B.
Rulemaking Authority
As noted above, the governing documents of a common-interest community can
significantly regulate the lives of its residents, and the governing bodies of the
community are usually empowered to impose additional regulations. How expansive is
this rulemaking authority?
*
[Eds.—This would be over $70 million in 2019 dollars.]
Page 6 of 19
H idden H arbour E states, Inc. v. N orman
309 So. 2d 180 (Fla. Dist. Ct. App. 1975)
DOWNEY, Judge.
The question presented on this appeal is whether the board of directors of a
condominium association may adopt a rule or regulation prohibiting the use of
alcoholic beverages in certain areas of the common elements of the condominium.
Appellant is the condominium association formed, pursuant to a Declaration of
Condominium, to operate a 202 unit condominium known as Hidden Harbour. Article
3.3(f) of appellant’s articles of incorporation provides, inter alia, that the association
shall have the power ‘to make and amend reasonable rules and regulations respecting
the use of the condominium property.’ A similar provision is contained in the
Declaration of Condominium.
Among the common elements of the condominium is a club house used for social
occasions. Pursuant to the association’s rule making power the directors of the
association adopted a rule prohibiting the use of alcoholic beverages in the club house
and adjacent areas. Appellees, as the owners of one condominium unit, objected to the
rule, which incidentally had been approved by the condominium owners voting by a
margin of 2 to 1 (126 to 63). Being dissatisfied with the association’s action, appellees
brought this injunction suit to prohibit the enforcement of the rule. After a trial on the
merits at which appellees showed there had been no untoward incidents occurring in
the club house during social events when alcoholic beverages were consumed, the trial
court granted a permanent injunction against enforcement of said rule. The trial court
was of the view that rules and regulations adopted in pursuance of the management
and operation of the condominium ‘must have some reasonable relationship to the
protection of life, property or the general welfare of the residents of the condominium
in order for it to be valid and enforceable.’ In its final judgment the trial court further
held that any resident of the condominium might engage in any lawful action in the
club house or on any common condominium property unless such action was engaged
in or carried on in such a manner as to constitute a nuisance.
With all due respect to the veteran trial judge, we disagree. It appears to us that inherent
in the condominium concept is the principle that to promote the health, happiness,
and peace of mind of the majority of the unit owners since they are living in such close
Page 7 of 19
proximity and using facilities in common, each unit owner must give up a certain degree
of freedom of choice which he might otherwise enjoy in separate, privately owned
property. Condominium unit owners comprise a little democratic sub society of
necessity more restrictive as it pertains to use of condominium property than may be
existent outside the condominium organization. The Declaration of Condominium
involved herein is replete with examples of the curtailment of individual rights usually
associated with the private ownership of property. It provides, for example, that no
sale may be effectuated without approval; no minors may be permanent residents; no
pets are allowed.
Certainly, the association is not at liberty to adopt arbitrary or capricious rules bearing
no relationship to the health, happiness and enjoyment of life of the various unit
owners. On the contrary, we believe the test is reasonableness. If a rule is reasonable
the association can adopt it; if not, it cannot. It is not necessary that conduct be so
offensive as to constitute a nuisance in order to justify regulation thereof. Of course,
this means that each case must be considered upon the peculiar facts and circumstances
thereto appertaining.
Finally, restrictions on the use of alcoholic beverages are widespread throughout both
governmental and private sectors; there is nothing unreasonable or unusual about a
group of people electing to prohibit their use in commonly owned areas.
Accordingly, the judgment appealed from is reversed and the cause is remanded with
directions to enter judgment for the appellant.
N otes and Questions
1. What is the difference between the standard applied by the trial judge and that
applied by the Court of Appeal in Norman? Don’t both merely require rules
promulgated by an association to be “reasonable”?
2. The Hidden Harbour development was back before the Florida District Court
of Appeal six years later over a different dispute involving a resident’s private
well. In Hidden Harbour Estates, Inc. v. Basso, 393 So.2d 637 (Fla. Dist. Ct. App.
1981), the court opined:
Page 8 of 19
There are essentially two categories of cases in which a condominium
association attempts to enforce rules of restrictive uses. The first
category is that dealing with the validity of restrictions found in the
declaration of condominium itself. The second category of cases
involves the validity of rules promulgated by the association’s board of
directors or the refusal of the board of directors to allow a particular use
when the board is invested with the power to grant or deny a particular
use.
In the first category, the restrictions are clothed with a very strong
presumption of validity which arises from the fact that each individual
unit owner purchases his unit knowing of and accepting the restrictions
to be imposed. Such restrictions are very much in the nature of
covenants running with the land and they will not be invalidated absent
a showing that they are wholly arbitrary in their application, in violation
of public policy, or that they abrogate some fundamental constitutional
right. Thus, although case law has applied the word “reasonable” to
determine whether such restrictions are valid, this is not the appropriate
test….
The rule to be applied in the second category of cases, however, is
different. In those cases where a use restriction is not mandated by the
declaration of condominium per se, but is instead created by the board
of directors of the condominium association, the rule of reasonableness
comes into vogue. The requirement of “reasonableness” in these
instances is designed to somewhat fetter the discretion of the board of
directors. By imposing such a standard, the board is required to enact
rules and make decisions that are reasonably related to the promotion of
the health, happiness and peace of mind of the unit owners. In cases like
the present one where the decision to allow a particular use is within the
discretion of the board, the board must allow the use unless the use is
demonstrably antagonistic to the legitimate objectives of the
condominium association, i.e., the health, happiness and peace of mind
of the individual unit owners.
Page 9 of 19
The Restatement draws the same distinction between the standard for validity
of covenants set forth in the CC&Rs of a declaration and the standard for
validity of rules enacted by the governing body of a common-interest
community. Thus, restrictions in a condominium declaration are valid—even if
unreasonable—unless they are illegal, unconstitutional, or against public policy,
(RESTATEMENT § 3.1), while house rules and their enforcement are subject to a
reasonableness standard (RESTATEMENT § 6.7 & Reporter’s Note).
Does this distinction make sense? The court in Basso notes that “house rules,”
unlike CC&Rs, may be adopted after a resident acquires their property and thus
without the notice that recording of the declaration provides before a resident
invests in the community.* Does that distinction justify the diverging standards
for validity? Is such a justification consistent with the reasoning of Norman?
***
C. Enforcement of Rules and Covenants by Common-Interest
Communities
What happens if a resident of a common interest community breaches a covenant?
How can the governing body of the community—the HOA managers, the condo
board, or the co-op board—enforce the rules laid down in the restrictive covenants
against breaching community members? Neponsit provides one answer: the breach of a
covenant to pay money—such as dues and assessments—will serve as an equitable lien
on the breaching resident’s property in the community. This lien could be foreclosed,
or more commonly the threat of foreclosure and the encumbrance of the lien can be
used to leverage payment if and when the resident ever tries to sell her home. The
governing body could also sue to recover unpaid sums, but because this involves
significant additional expense it is typically an unattractive option reserved as a last
resort.
But what about covenants that restrict use of property in the community—or rules that
govern the conduct of residents on the community’s property? The Restatement
Typically, either under state law or by a declaration’s own terms (or both), the CC&Rs in a declaration may only
be amended by a supermajority vote of all members of the association.
*
Page 10 of 19
suggests that the governing bodies of common-interest communities enjoy wide
latitude to enforce the restrictions in governing documents. Section 6.8 provides: “In
addition to seeking court enforcement, the association may adopt reasonable rules and
procedures to encourage compliance and deter violations, including the imposition of
fines, penalties, late fees, and the withdrawal of privileges to use common recreational
and social facilities.” Typically the governing documents will empower the association
or board to levy fines against residents for their breach of such rules of conduct or use.
Those fines, like unpaid dues or assessments, can also become an equitable lien on the
resident’s property if state law and/ or the declaration so provide.
How should we assess the “reasonableness” of any particular enforcement action? And
how searching a review should courts take of such actions if and when they are
challenged by aggrieved members of the common-interest community?
40 West 67th Street v. Pullman
790 N.E.2d 1174 (N.Y. 2003)
ROSENBLATT, J.
In Matter of Levandusky v. One Fifth Ave. Apt. Corp., 75 N.Y.2d 530, 554 N.Y.S.2d 807,
553 N.E.2d 1317 [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….
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
Page 11 of 19
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.
Initially, defendant sought changes in the building services, such as the installation of video surveillance, 24hour 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.
1
Page 12 of 19
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….
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
The full provision authorizes termination “if at any time the Lessor shall determine, upon the affirmative vote
of the holders of 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.”
3
Page 13 of 19
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. The rule has been long recognized in New York. 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 N.Y.2d at 537, 554 N.Y.S.2d 807, 553 N.E.2d 1317).
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, 554 N.Y.S.2d 807, 553 N.E.2d 1317). 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
structure 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, 554
N.Y.S.2d 807, 553 N.E.2d 1317). 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” (id. at 540, 554 N.Y.S.2d 807, 553 N.E.2d
1317).
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
Page 14 of 19
conflicts with RPAPL 711(1) and is therefore inoperative.5 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 agreedwould 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 example, was framed as a CPLR article 78 proceeding, but we applied
the business judgment rule as a concurrent form of “rationality” and “reasonableness”
to determine whether the decision was “arbitrary and capricious” pursuant to CPLR
7803(3).
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, 554 N.Y.S.2d 807, 553 N.E.2d 1317).
Despite this deferential standard, there are instances when courts should undertake
review of board decisions. To trigger further judicial scrutiny, an aggrieved shareholdertenant 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.
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.”
Page 15 of 19
III.
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 RPAPL 711(1).
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 the meeting, the cooperative resoundingly expressed its collective
will, directing the Board to terminate defendant’s tenancy after finding that his behavior
was more than its shareholders could bear. The Board was under a fiduciary duty to
further the collective interests of the cooperative. By terminating the tenancy, the
Board’s action thus bore an obvious and legitimate relation to the cooperative’s avowed
ends.
Page 16 of 19
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
the objective is lawful or legitimate. Defendant, however, has not shown that the
Board’s purpose was anything other than furthering the over-all 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, discrimination or malice on the cooperative’s part, and the record reveals
none. Though defendant contends that he raised sufficient facts in this regard, we agree
with the Appellate Division majority that defendant has provided no factual support
for his conclusory assertions that he was evicted based upon illegal or impermissible
considerations. Moreover, as the Appellate Division noted, the cooperative
emphasized that upon the sale of the apartment it “will ‘turn over [to the defendant]
all proceeds after deduction of unpaid use and occupancy, costs of sale and litigation
expenses incurred in this dispute’”. Defendant does not contend otherwise.
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 but in a number of cases have withheld deference in the face of evidence that
the board acted illegitimately.8
See e.g. Abrons Found. v. 29 E. 64th St. Corp., 297 A.D.2d 258, 746 N.Y.S.2d 482 [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 Board of Mgrs. of Parkridge Condominiums, 294 A.D.2d 467, 742 N.Y.S.2d 560 [2d
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 A.D.2d 218, 690 N.Y.S.2d 220 [1st Dept.1999]
8
Page 17 of 19
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” (75 N.Y.2d at 536, 554 N.Y.S.2d 807, 553
N.E.2d 1317). When dealing, however, with termination, courts must exercise a
heightened vigilance in examining whether the board’s action meets the Levandusky
test….
N otes and Questions
1. For further background on this dispute, including quotes from David Pullman
himself, see Dan Barry, Sleepless and Litigious in 7B: A Co-op War Ends in Court,
N.Y. TIMES (June 7, 2003), available at https:/ / nyti.ms/ 2leMd9c.
2. What aspect of the Court of Appeals’ analysis constitutes “heightened
vigilance”?
3. The Restatement does not adopt the business judgment rule for review of board
actions, instead applying a “reasonableness” standard. The Reporter’s
comments suggest that the reasonableness of an enforcement action will
depend on any number of factors, including its proportionality to the resident’s
offensive conduct (e.g., no $1,000 fines for a single instance of failing to sort an
aluminum can for recycling), the logical relationship between the offensive
conduct and the remedy (e.g., no revocation of parking privileges for breach of
a pet restriction), and whether the resident was provided with sufficient notice
and opportunity to respond to the managers’ complaint before any enforcement
action was taken. See RESTATEMENT § 6.8 & cmt. b. Elsewhere the Restatement
states that board members and officers have duties of care, prudence, and
[business judgment rule does not protect cooperative board from its own breach of contract]; Matter of Vacca v
Board of Mgrs. of Primrose Lane Condominium, 251 A.D.2d 674, 676 N.Y.S.2d 188 [2d Dept.1998] [board acted in
bad faith in prohibiting tenant from displaying religious statue in yard]; Johar v 82-04 Lefferts Tenants Corp., 234
A.D.2d 516, 651 N.Y.S.2d 914 [2d 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.
Page 18 of 19
fairness toward members of the community. Id. § 6.13 & cmt. b. Is the
Restatement position consistent with Pullman? If not, how does it differ?
4. The Court of Appeals did not consider the question whether the provision in
Pullman’s proprietary lease allowing the cooperative to kick him out on grounds
that he was “objectionable” should be enforceable as a general matter. If it had,
what do you think would have been the result? Does it matter which standard—
reasonableness or the more permissive standard applicable to CC&Rs—applies?
Which do you think ought to apply to the covenants in the proprietary leases of
a cooperative?
5. Say you live in a residential neighborhood unencumbered by any restrictive
covenants. Could you and your neighbors come together and decide to sell an
unfriendly neighbor’s house over his objection? If not, what additional facts
make it possible for the residents of 40 West 67th Street (a tudor-style luxury
pre-war apartment building half a tree-lined block from Central Park) to vote
Pullman out of the apartment he bought in their building?
6. Common-interest communities are sometimes likened to miniature private
governments. (Recall Norman’s description of condominium owners as “a little
democratic sub society.”) The analogy holds up somewhat: they hold elections,
the elected leaders can pass rules that all are bound to follow; they can assess
fines for breaking the rules; they can levy the equivalent of taxes to fund
common services. There are, of course, important differences—not least failure
to adhere to the principle of one-person-one-vote. But Pullman suggests another
distinction: could any government officer or entity in the United States do to
one of its citizens what Pullman’s neighbors did to him? If not, what are the
limits on government authority that would prevent such action, and what are
the justifications for those limits? Do these justifications carry less force in the
context of the enforcement of servitudes by the managers of a commoninterest-community?
Page 19 of 19
How to Brief or IRAC a case:
Issue:
A good issue statement includes the party names, the name of the rule
of law the brief is analyzing, and a key fact. What is the issue before the court?
What Problem is the court trying to solve? The issue should be one or two
sentences, state the party names and the relevant legal terms.
Rule:
The rule is the law that governs the outcome of the case. It should be
stated as a general principle and not include any party names or facts. The
rule should be stated as a list or an outline- not in paragraph form.
Application:
The application is a discussion of how the rule applies to the facts of a case.
The application shows how you can analyze arguments on both sides and
is the most important skill you will learn. The application is normally paragraphs long.
It should be a written debate – not simply a statement of the conclusion. Whenever possible,
present both sides of any issue.
Conclusion:
What was the result of the case? Did the appellate or supreme court affirm,
reverse or reverse and remand the lower court’s decision? The case gives you a background
of the facts along with the judge’s reasoning and conclusion. When you brief cases,
you are summarizing the judge’s opinion.