Judicial activism in the service of privilege: New York's First Department makes special rules for special defendants.

• Author: Gurian, Craig

Cooperatives and condominiums comprise a prominent feature of New York City's housing marketplace; there are more than 350,000 housing units in co-op and condo buildings, slightly more than half of which are located outside of Manhattan. (1) Federal and local law prohibit these housing providers, like all others, from engaging in discriminatory practices, including those based on a person's disability. (2) New York City's Human Rights Law is particularly distinctive on the disability front, with a variety of provisions more protective than those of the Fair Housing Act. (3) Among these are provisions that eliminate collateral litigation on the question of whether a person "qualifies" as having a disability, that more broadly cover discrimination on the basis of perceived disability, and that impose a sweeping requirement to make--and in most cases, pay for--reasonable accommodations to enable a person with a disability to enjoy the use of the premises sought or lived in. (4)

As difficult as it has been to police co-op compliance with the proscriptions against status-based discrimination, (5) reasonable accommodation cases have proceeded more straightforwardly. The traditional discrimination inquiry is obliged to try to determine what factor or factors motivated a covered entity. The reasonable accommodation inquiry deals with facts that are externally verifiable. What need arose from the disability? What physical modification or rule change was plausible for the covered entity to perform? Did the covered entity make the accommodation? Though this author believes that lack of serious enforcement by institutional prosecutors has resulted in many covered entities not feeling the need to comply proactively, the law has meant that people with disabilities do have a real tool to achieve needed accommodations, even in co-ops and condos.

Late in 2006, a panel of New York's Appellate Division, First Department decided to change that legal landscape. Pelton v. 77 Park Avenue Condominium (6) is in some measure a classic instance of bad facts making bad law: it appears that, over time, the defendant had taken significant steps to meet the needs created by the plaintiffs disability, and even someone in sympathy with the struggle for disability rights could easily question why the plaintiff was suing for $23.5 million. (7) But Pelton is more. It is the story of a panel that had one thing on its mind--protecting co-ops, condos, and their boards from being exposed to the obligations of New York City's Human Rights Law. The panel was prepared to ignore the provisions of that law, ignore a recently given legislative caution from New York's City Council against judicial overreaching, and ignore clear precedent from the Court of Appeals, New York's highest court. (8)

Specifically, the panel decided to stretch the "business judgment" rule to ensure deferential review of the potentially discriminatory conduct of the co-op or condo board members. (9) It decided to write in special pleading and proof requirements to make it difficult to sue members of co-op and condo boards for participating in discriminatory torts against members of the public. (10) And, it invented a complete "good faith" defense to any liability for failure to make reasonable accommodation. (11) Though written in the context of a motion to dismiss brought only by board members and the building's managing agent (and not the condo itself), the reasoning of the ruling is clearly intended to provide shelter from the consequences of violating the Human Rights Law to co-op and condo corporations as well. (12)

Those privileged few for whom the panel legislated were delighted with the gift. Indeed, the beneficiaries were so tickled that they freely acknowledged that Pelton had set a precedent, rather than pretending, as the First Department panel had done, that the decision was foreordained by existing law:

Prior to the Pelton case, once a claimant satisfied the above minimum requirements to make a claim for reasonable accommodation, known as the prima facie case, a housing association could not simply rely on the business judgment rule to defend against the claim.... It was generally presumed, however, that the business judgment rule did not apply in these types of cases. Rather, conventional belief--and practice--was that once a claimant stated a prima facie discrimination case, the respondent, (i.e. the board), would then have the burden of proving the legitimacy and non-discriminatory bases of their decisions in order to avoid monetary damages, fines, and injunctive remedies. (13) Counsel from the firm that represents the Real Estate Board of New York, writing in the New York Law Journal, concurred that Pelton was a "precedent-setting decision." (14)

This Article demonstrates that Pelton's application of the business judgment rule was unwarranted and unsupportable. It then shows that Pelton ignored the plain language of the City Human Rights Law, and explains how Pelton confused director liability arising from contract with that arising from tort. The Article continues by establishing that Pelton's introduction of a heightened pleading standard was without basis in law. Finally, the Article makes clear that Pelton defied the legislative mandate set forth by New York City's recent Local Civil Rights Restoration Act. (15) That mandate insists that judges not substitute their own public policy choices for those the City has made; in other words, that they allow the City Human Rights Law to achieve its "uniquely broad and remedial purposes." (16) Instead, the Pelton panel encouraged noncompliance with the law. Pelton, the Article concludes, represents exactly what the Restoration Act is designed to prevent: judicial activism in the service of privilege.

1. THE PROPER CONFINES OF THE "BUSINESS JUDGMENT" RULE

   The contemporary application of the "business judgment" rule in the context of some types of co-op action flows from Levandusky v. One Fifth Avenue Apartment Corp., decided by New York's Court of Appeals in 1990. (17) At its most protective, the rule requires courts to give deference to board actions "taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." (18) Levandusky, which was not a discrimination case, involved a shareholder who had made an unauthorized structural alteration (moving a kitchen steam riser), and who had, contrary to the co-op's rules, installed air conditioning equipment. (19) The Court was confronted with what it saw as a quintessentially internal building matter. (20) No particular public interest was implicated; the question--correctly perceived to be one that would recur--was how to handle disputes that arose within the confines of the day-to-day governance of a self-contained residential community. (21)

   To reach its decision in Levandusky, the Court invoked a series of analogies, all of which underline the fact that the court was crafting a rule akin to the business judgment rule in the context of private, voluntary association. (22) In the Court's view, for example, the "purchase of a cooperative apartment represents a voluntary choice to cede certain of the privileges of single ownership to a governing body.... The board, in return, takes on the burden of managing the property for the benefit of the proprietary lessees." (23) The Court saw a cooperative or condominium as being "by nature a myriad of often competing views regarding personal living space," a place where many board decisions would invariably generate dissatisfaction among some shareholders. (24)

   The Court explicitly envisioned co-ops and condos as little self-contained societies that had, "[l]ike a municipal government ... broad powers [in day-to-day affairs] in areas that range from financial decisionmaking to promulgating regulations regarding pets and parking spaces." (25) A court would not be well-equipped to oversee these kind of internal decisions because the court would not share the experience of board members to "the peculiar needs of their building and its residents." (26) It was in these circumstances that the Court in Levandusky decided that the judiciary should not substitute its judgment for a board's. (27)

   It is immediately apparent that the rationale for according deference to boards disappears entirely when the matter is not one of community self-government but rather one of enforcing adherence to fundamental public policy embodied in law. (28) Levandusky, while analogizing co-ops to municipal governments, did not, after all, set forth a rule that co-ops and condos are actually sovereign entities. They, like other corporations, are ultimately part of a larger society, and obliged to follow the laws that are applicable to them. (29) Regardless of how much experience their board members have of "the peculiar needs of their building and its residents," (30) that fact does not make those board members better than a court at determining whether the law has been followed, or mean that their form of corporate organization exempts them from the law. (31) Thus, it would be most fair to say that the business judgment rule simply has no application in the discrimination context. The judicial task involved remains the same as it would be in respect of any covered entity charged with violating the City Human Rights Law (or any other law): was the law violated?

   The same result is commanded even if one operates within the confines of the business judgment rule as adapted by the Court of Appeals. Though the phrase "business judgment rule" is used colloquially to connote deference to a decision of a co-op or condo board, in fact the Court of Appeals has made clear that there are real limits as to where and how the rule operates. In 40 West 67th Street v. Pullman, (32) another business judgment case that arose in what the court clearly saw as a private, internal dispute, the subject of the...