Opposition to Reasons Bills

Written By: Marc J. Luxemburg

legal counsel with clipboard of papers

The legislative proposals to require the directors of cooperatives to give a written statement of reasons for rejecting a prospective purchaser are promoted to counter possible discrimination. In fact, only a small percentage of purchasers are rejected, and there is a very low level of discrimination, so there is no real need for this legislation. However, the requirement of reasons in every case will be very destructive to the ability of cooperatives to have control over the admissions process.

The Court of Appeals held over 60 years ago that so long as there is no claim of discrimination,  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 common halls and facilities, their stockholders' meetings, their management problems and responsibilities and their homes.

Since that time, very powerful anti-discrimination laws have been passed by the federal, state, and local governments, and in each case, there is an agency or commission to enforce these laws. These laws are effective. Statistics show that not many complaints are filed. In addition, a rejected buyer can go directly to court and bring suit. If there is even a minimal showing of potential discrimination, the law requires the Board to give reasons for their action, which are judged very critically by the agencies and the courts. There is no need for any more laws to control discrimination. 

The proposed laws are not well thought out. They state the requirement for giving a reason, but don’t deal with what is an acceptable reason. Are subjective reasons allowed – such as the purchaser was rude to the board members at the interview? And with respect to financial rejections, such as the amount of the buyer’s income, who gets to decide how much income should be required? 

Nor do the laws deal with what happens if the buyer is not satisfied with the reason. Must the buyer show that the reason is merely a cover for discrimination before being allowed to challenge it or can the buyer challenge in court every rejection. If so, does this mean that a judge in every instance will get to decide if the reason is a “reasonable” reason. This would mean that admissions decisions will be made by judges and not the board elected by the shareholders.

The Court of Appeals held 30 years ago that the courts should not undermine the purposes for the formation of cooperatives namely protection of the interests of the entire cooperative community managed by the board for their common benefit. Accordingly, the Court rejected the notion that the decisions of a coop board should be judged by a standard of reasonableness and held instead that the business judgment rule should govern. The Court held that the business judgment rule should apply because it protects boards from indiscriminate attack which would otherwise hamper their effectiveness. The current proposals do not deal with the standard that courts are to apply to cases concerning rejections.

It is evident that a likely result of these proposed laws will be that almost every rejection will be challenged in court. Most Boards can not afford the time or the money to litigate, and the result, indeed the intended result, will be to seriously deter boards from acting in what they believe to be the best interest of the coop community. This is not a desirable result. An unintended consequence of the law would be to hike insurance premiums for both general liability and D & O coverage for all cooperatives due to the incentive the law gives to bring suit.

Since no additional laws are needed to deter discrimination, and the laws will seriously damage cooperatives, one must ask who is really pushing these laws, and why. It is no secret that the principal interest group backing these laws is the real estate brokers, who don’t want boards to be able to reject their deals, and thus cost them a commission. 

The reasons bills should be rejected as there are insufficient reasons for passing them.

about the authors

Marc J. Luxemburg

Of Counsel

Mr. Luxemburg specializes in real estate law, cooperative and condominium law. A recognized authority on the legal needs of cooperatives and condominiums, Mr. Luxemburg is the President of the Council of New York Cooperatives & Condominiums, and has drafted the revised form of proprietary lease that was promulgated by the Council.

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