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BLOG / 10.17.19 /Eric P. Blaha

Are Boards Always Protected by the “Business Judgment” Rule?

New board  members  in New York quickly learn that most of their decisions are protected under the “business judgment rule,” which states a court should defer to a co-op [or condo] board’s determination so long as the board is acting “for the purposes of the cooperative, within the scope of its authority, and in good faith.” [1]  Thus, the business judgment rule under Levandusky affords board decisions wide latitude.

However, the “business judgment rule” is not a “Get Out of Jail Free” card. In certain circumstances, proprietary leases impose a heightened “reasonableness” standard for Board action. The “reasonableness” standard requires that the Board’s decision be considered “reasonable” by a hypothetical third party (who could be a judge or a jury).  In other words, a court can look over the Board’s shoulder to evaluate the correctness of its decision. Typical lease provisions where the reasonableness standard may apply include approval of transfers of an apartment after a shareholder’s death, or certain types of apartment alterations.

For example, in Perrault v. Village Dunes Apt. Corp., the proprietary lease required that consent to alterations not be unreasonably withheld. [2]  The appellate court found that the actions of a co-op board were reasonable when they were “legitimately related to the welfare of the cooperative” and upheld the Board’s refusal to consent to a shareholder’s alteration application seeking to raise an apartment ceiling. In contrast, New York’s highest court held that another board unreasonably withheld consent when it refused to allow the transfer of an apartment of a deceased shareholder to a “financially responsible member” of the decedent’s family, as required under the lease.  [3]

Nor are Boards protected when they violate civil rights laws or act in bad faith. For example, the Appellate Court allowed an African-American shareholder to make a discrimination claim when the Board denied his application to purchase another apartment at The Dakota (where he already resided), even though approvals of purchases are typically deemed matters for the Board’s business judgment.  [4] Another court invalidated the termination of a shareholder’s lease for “objectionable conduct” (which also usually falls within the business judgment of the Board) because the Board refused to allow the shareholder to “plead his cause to the Board after expressly inviting him to a meeting.” [5]

In short, understanding the correct legal standard for issuance of your Board’s consent may help avoid an unwanted trip to the courthouse.

[1] Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y.2d 530 (1990)
[2] Perrault v. Village Dunes Apt. Corp., 164 A.D.3d 847 (2d Dep’t 2018)
[3] Estate of Del Terzo v. 33 Fifth Ave Owners Corp., 28 N.Y.3d 1114 (2016)
[4] Fletcher v. Dakota,  99 A.D.3d 43 (1st Dep’t 2012)
[5] 13315 Owners Corp. v. Kennedy, 4 Misc.2d 931 (Civ Ct , NY County 2004)