Summary
holding that the fact that the tenants were permitted to maintain their appliances with the apparent knowledge of various building employees did not preclude the cooperative's board from establishing and enforcing a specific house rule prohibiting the installation of washers and dryers in individual apartments
Summary of this case from 280-290 Collins Owners Corp. v. McCaskillOpinion
November 29, 1993
Appeal from the Civil Court of the City of New York, New York County, James R. Grayshaw, J.
Gulielmetti Gesmer, P.C., New York City (Ellen Gesmer, Robert M. Petrucci and Lisa Weiner of counsel), for appellants.
Law Offices of Michael A. Richman, New York City (Michael A. Richman and David L. Fingerhut of counsel), for respondent.
Final judgment dated November 4, 1992 affirmed, with $25 costs.
In determining the enforceability of petitioner's house rule regarding the installation of washing machines and dryers in individual cooperators' apartments, Civil Court properly applied the business judgment rule as adopted by the Court of Appeals in Matter of Levandusky v One Fifth Ave. Apt. Corp. ( 75 N.Y.2d 530). As there stated, "[s]o long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith * * * judicial review is not available" (supra, at 538). Respondents herein failed to establish bad faith on the part of the cooperative or that its action had "no legitimate relationship to the welfare of the cooperative" (Matter of Levandusky v One Fifth Ave. Apt. Corp., supra, at 540). To the contrary, the record supports a finding that the rule was promulgated because of concerns that the installation of numerous washer/dryers would adversely impact upon the building's plumbing and electrical systems, as confirmed by the testimony of petitioner's electrical engineer. Nor was there any showing of selective enforcement of the house rule. The overwhelming majority of cooperators do not maintain the appliances at issue, and the respondents in these proceedings comprise those few lessees who are in violation of the cooperative's expressed policy.
We further agree that the defense of waiver is unavailing under the circumstances presented. As noted by Civil Court, the proprietary leases contain a comprehensive nowaiver clause and the house rules in question require tenant owners to request exceptions by written petition to the cooperative. Respondents can point to no writing where authorization for the installation of washer/dryers was granted. Indeed, many of the respondents expressly acknowledged in writing that "Installation of laundry machines and laundry dryers are not permitted under any circumstances and I agree I will not install same. If a laundry machine does exist, I agree to remove same prior to occupancy of the apartment". The fact that respondents were permitted to maintain their appliances with the apparent knowledge of various building employees did not preclude petitioner's board of directors from establishing and enforcing a specific house rule addressed to this subject. Pursuant to the proprietary leases, the board at any time could "alter, amend and repeal" the house rules, and it cannot be reasonably argued that respondents had somehow acquired vested rights in the continued maintenance of these machines. "Having chosen the cooperative form of ownership [respondents are] bound to abide by the rules and regulations governing its operation" (Hoffman v 343 E. 73rd St. Owners Corp., 186 A.D.2d 507, 509).
The proprietary lease in this case contains language requiring that all rules made by the cooperative board be "reasonable"; from this clause appellants argue that the board's actions should be judged in accordance with the contractually imposed standard of "reasonableness," rather than under the more lenient business judgment rule adopted by the Court of Appeals in Matter of Levandusky v One Fifth Ave. Apt. Corp. ( 75 N.Y.2d 530).
As the Levandusky decision (supra) itself made clear, the business judgment rule need not preclude review in all cases. In a case decided shortly after Levandusky, the Second Department held that the business judgment rule does not apply to decisions and actions of a co-op board which violate the express terms of a proprietary lease requiring that decisions be made on a reasonable basis (Ludwig v 25 Plaza Tenants Corp., 184 A.D.2d 623 [2d Dept 1992]). As the Court wrote there: "Where * * * the Board's actions clearly violate the express terms of the proprietary lease, the 'business judgment rule' is inapplicable (see, Fe Bland v Two Trees Mgt. Co., 66 N.Y.2d 556, 563, 565)." (Supra, at 624-625.)
As the Court wrote, "For present purposes, we need not, nor should we determine the entire range of the fiduciary obligations of a cooperative board, other than to note that the board owes its duty of loyalty to the cooperative — that is, it must act for the benefit of the residents collectively. So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgments for the board's. Stated somewhat differently, unless a resident challenging a board's action is able to establish a breach of this duty, judicial review is not available." (Supra, at 538.)
In Ludwig (supra), the proprietary lease provided that the board could not "unreasonably withhold" its consent to a sublease for less than 12 months. Despite the board's contention that the propriety of its actions should be determined in accordance with the business judgment rule which had recently been announced by the Court of Appeals in Levandusky (supra), the Second Department held that the express requirement of "reasonableness" in the proprietary lease trumped the business judgment rule.
Were this case presented as a tabula rasa, I would find, pursuant to Ludwig (supra), that the board's actions here must be judged under a reasonableness standard. However, in a pre- Levandusky case (supra), Allen v Murray House Owners' Corp. ( 174 A.D.2d 400 [1st Dept 1991]), the First Department applied the business judgment rule to a co-op board decision to delay issuance of stock certificates to tenants on the basis of unpaid late charges. The Court there noted in passing that the proprietary lease contained a reasonableness clause, similar to that in the instant case. Accordingly, I believe that we are constrained to apply Levandusky.
The difference between review under a reasonableness standard and the applicability of the business judgment rule is significant. As the Levandusky opinion (supra) noted, the former assigns to the board the burden of proof of demonstrating that its actions were reasonable, a burden which it might well not meet in this case.
However, on review of the appellate record it does not appear that the effect of the reasonableness requirement was briefed or argued by the parties in the Allen case (supra). Thus, this case may present an opportunity for the Appellate Division to more fully consider the applicability or nonapplicability of the business judgment rule in the face of a specific contractual provision requiring that a co-op board act "reasonably" in promulgating those rules by which the tenant shareholders will be bound.
PARNESS, J.P., and MILLER, J., concur; GLEN, J., concurs in a separate memorandum.