Co-op boards and their decisions are not necessarily unassailable due to the business judgement rule by Glassberg

Steven Glassberg, Glassberg & Associates

Co-op boards typically can act how they want, their decisions unassailable due to the business judgment rule. Simply put, the business judgment rule insulates a board from attack on its decisions, if the board acted in good faith, within the scope of its authority and for the purposes of the cooperative.

Recently however, a co-op had its decision challenged and the court found against the co-op board despite the business judgment rule. Despite seeming to act properly, the Court of Appeals upheld the decision of the trial court and the appellate division finding that the co-op board acted improperly when it denied a transfer of the shares and lease in the case of Estate of Del Terzo v 33 Fifth Ave. Owners Corp., 136 A.D.3d 486 (1st Dept. 2016), affirmed Estate of Del Terzo v 33 Fifth Ave. Owners Corp., 2016 N.Y. LEXIS 3810.

In Del Terzo, two sons of a deceased shareholder applied to the cooperative board to have the apartments’ shares transferred to them. Not only were the applicants brothers, their family had lived in the apartment before it converted to a co-op.   

The application to the board was a joint application by the deceased’s children. However, only one of them was going to reside in the apartment. The other had no intention to reside in the apartment and lived out of state. The co-op board rejected the application and gave no reason for the determination. The brothers sued the co-op claiming the board violated the proprietary lease by unreasonably withholding its consent to the assignment of the lease and shares to a member of a lessee’s family.

In general, and in the absence of illegal discrimination, a cooperative corporation is not restricted in withholding its consent to the transfer to an apartment.  However, in cases such as this one, where the board’s decision violated the proprietary lease, and the rights on shareholders under the proprietary lease, the board is not immune to a challenge.

Specifically, the lease in Del Torzo provided additional rights to family member of a deceased shareholder. The paragraph in question stated that “consent shall not be unreasonably withheld to an assignment of the lease and shares to a financially responsible member of the lessee’s family.”   The court found that this paragraph imposed a heightened standard of reasonableness on the board and therefore, the board was not protected by the business judgment rule.

The court also found that the board’s requirement that each applicant be individually financially capable of meeting the carrying costs of the apartment was in error.  One of the Del Torzo brothers was more than capable of meeting the financial requirements imposed by the board. The court determined that no other applicant was then required to demonstrate the financial capability to meet the apartment’s financial obligations. As a joint application between the brothers, their finances should have been considered jointly and not independent of each other.

Lastly, the court determined that the plaintiffs were entitled to legal fees. The court noted where a lease provides that the landlord may recover legal fees incurred in an action against a tenant, Real Property Law § 234 provides a tenant with a reciprocal right against the landlord.

Steven Glassberg is the founder of Glassberg & Associates, LLC, New York, N.Y. and Port Washington, N.Y.