A lawyer discusses what co-op boards need to know about disputes with shareholders

Shareholders in co-ops often find themselves butting heads with the boards of directors of the co-op buildings they live in. Often these disputes involve things they want to do, but the boards will not allow them. A common area for these kinds of disputes involves anything to do with renovations. A shareholder may want to undertake an extensive renovation and the board may not approve all or part of what has been proposed. Often this involves the concept of "wet over dry"construction, where shareholders want to change the layout of their apartment and have their kitchen or bathroom (a "wet" area) over someone else's bedroom or living room (a "dry" area). This can and often does lead to much controversy and often to litigation. Another example would be situations where shareholders want to have extensive gardens with plumbing on their terraces or penthouses. The plans they present may not be approved as presented and this can lead to controversy. There are many other possible examples, which can involve completely different topics, such as home equity loans. Generally, the standard of review in most disputes with co-op boards is considered to be the "business judgment rule." The business judgment doctrine "bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporation purposes." Levandusky v. One Fifth Avenue, Apt. Corp., 75 N.Y.2d 530, 538 (1990); Auerbach v. Bennett, 47 N.Y.2d 619 (1979). However, most proprietary leases have provisions stating that the board's consent to such alterations cannot be "unreasonably" withheld. The "reasonableness" of the board's refusal to consent to proposed alterations is subject to review by the court. The general standard is that a board action or decision that is not arbitrary or capricious and which bears some relationship to the legitimate purposes of the cooperative corporation is not unreasonable as a matter of law. On a practical level, once a shareholder has sued the board of directors, there will be depositions and discovery in order to determine what may or may not have been "reasonable" activity or due diligence by the board of directors. Thus, the co-op's policy on banning wet-over-dry construction will likely be upheld if it was imposed after the board's careful consideration of the advice given to it by its professionals. The shareholders will often try to show that the board went about the decision-making process in the "wrong" way. The shareholders will have their own experts and try to create a "battle of the experts." However, if the decision by the board was not arbitrary and capricious, that type of argument will not likely prevail. If you consider that the purpose of a cooperative apartment corporation has been described by some as "to provide safe, trouble-free premises to its shareholders" or for " the care, cleanliness, safety, and general good order of the building," it is hard to contradict the board's decision-making process. The board will argue that the possibility of water damage is a legitimate concern of the building. What the board may or may not have to do to show their "due diligence" is open to debate. In other words they might have to show that they consulted with an expert with knowledge of wet over dry construction or an engineer concerning weight loads on the terrace. Merely consulting with the corporation's general attorney may not be enough. I have worked with boards of directors and shareholders as legal counsel on these issues, and I can say that it is a "process." Both sides need to be open to changing the plans from what may have been originally proposed. If the board and its professionals can offer less intrusive suggestions, a workable compromise may be reached and both sides will then have a "win-win situation." C. Jaye Berger, Esq., is the principal at Law Offices C. Jaye Berger, New York, N.Y.