When is a Decision of a Cooperative or Condominium Board of Directors Reasonable06/07/2015 | By: Marc J. Luxemburg, Esq. | Summer 2015 Newsletter
In a recent case the Appellate Division First Department provided a standard for judging the reasonableness of the conduct of a Board of Directors, specifically that actions of the Board are reasonable if they are "legitimately related to the welfare of the cooperative."The standard was set forth in the case of Silver v. Murray House Owners Corp. decided this March. The issue in the case was whether the Board had unreasonably withheld consent to an alteration. In this case, the proprietary lease stated that consent to an alteration "shall not be unreasonably withheld or delayed." Because this language was contained in the lease, the Board's actions were not protected from scrutiny by the traditional doctrine known as the "Business Judgment Rule" and instead the Board was required to demonstrate reasons why it withheld consent to the alteration. The plaintiff claimed that all he desired to do was to replace previously approved HVAC units. The coop's motion for summary judgment dismissing the complaint was denied because there were issues of fact as to whether defendant's rejection was in fact reasonable.
We note that even in the case where the Business Judgment Rule applies, the Board must show that its determination was reasonably related to the welfare of the cooperative. This, it seems that in practice the distinction between the application of a reasonableness standard and the application of the Business Judgment Rule is of diminishing significance.
Notwithstanding, we have been recommending that if the proprietary lease contains a "not unreasonably withheld" standard for Board approvals, the Board should propose to the shareholders to amend the lease to provide the more relaxed business judgment standard – namely that the Board may reject for any reason or no reason – instead of the reasonableness standard.
There was an additional issue in the Silver case, specifically, that the shareholder had sought to add a cause of action against the coop for "selective enforcement" of the rules. The Appellate Division held that selective enforcement only applies to the conduct of law enforcement offers who selectively enforce laws, and does not lie against a private party such as a coop. Accordingly, the plaintiff could not add a claim to sue the coop for selective enforcement.
About the author: Marc J. Luxemburg, Esq. is a partner at Gallet Dreyer & Berkey LLP. His practice focuses on real estate transactions, cooperative and condominium law, and real estate litigation. Mr. Luxemburg represents numerous buildings and sponsors in the New York City area. He is the President of the Council of New York Cooperatives and Condominiums, a non-profit membership organization with more than 2300 cooperative and condominium members, which provides educational activities and monitors legislation which affect its members. He has taught numerous seminars on the legal aspects of operating cooperatives and on the role of the Board of Directors. Mr. Luxemburg can be reached at email@example.com.