Limiting The Autonomy Of Cooperative Apartment Corporation Governing Boards

• Author: John L. Barone
• Pages: 179-188

Page 179

Introduction

Cooperative housing has become an integral part of New York's real estate market. One of the factors contributing to the growth of cooperative housing is the ability for resident shareholders to govern their own living environment through the board of directors of the cooperative apartment corporation. Included in the board's powers is the authority to decide whether to accept prospective purchasers into the cooperative community. Such authority also enables the board to refuse to provide a written statement of explanation to the applicants who were denied the opportunity to purchase a unit in the building. The broad powers of cooperative governing boards and, specifically, the process for refusing prospective purchasers, has been a highly debated issue among New York State legislators. Most recently, on April 1, 2003, New York State Senator Michael Balboni reintroduced a bill for the third consecutive year that proposes to amend Section 19-a of the New York State Civil Rights Law to require cooperative governing boards to provide prospective purchasers with a written statement of explanation when withholding consent to the purchase of a unit in the cooperative apartment building.¹ Furthermore, the New York State legislators are not alone in questioning whether the autonomy of cooperative boards should be limited. On September 5, 2002, Andrew Spano, Westchester County Executive, proposed an amendment of Section 700.05 (h) of the laws of Westchester County, which, like Senator Balboni's bill, proposes to require the governing board of a cooperative apartment corporation to issue a written statement of explanation to denied applicants delineating the reasons why the board withheld its consent.²

This Comment reviews whether the proposed amendment to Section 19-a of the New York State Civil Rights Law and the amendmentPage 180to Section 700.05(h) of the laws of Westchester County violate the business judgment rule by limiting the autonomy of cooperative apartment corporation governing boards. Part I of this Comment provides an overview of the business judgment rule and how New York courts and legislators have used the business judgment rule to broaden the discretion of cooperative governing boards. Part II of the Comment discusses the necessity for a board's autonomy and the negative consequences which may result from the newly proposed legislation.

I The Influence of Levandusky v. One Fifth Avenue

Apartment Corporation,³ and the Business Judgment Rule on Protecting the Autonomy of Cooperative Governing Boards

The proposed New York State and Westchester County legislation has ignited a debate as to whether such proposals will violate the right of a cooperative apartment corporation to self-govern and maintain control of its living environment. If passed, the new legislation will require a cooperative corporation which withholds its consent to the sale of a unit, shares in a cooperative corporation, or other evidence of ownership, to issue a written statement to the prospective purchaser outlining the reasons for withholding its consent.⁴ A reasonable analysis of the proposed legislation supports the view that such legislation will impact the decision-making rights and powers of the corporate directors. Currently, due to the Court of Appeals decision in Levandusky v. One Fifth Avenue Apartment Corporation, and subsequent supporting New York court decisions, the managerial authority of a cooperative governing board has been protected from judicial scrutiny by the business judgment rule.⁵ Absent a showing of bad faith, discriminatory conduct, or illegality, the responsibility of decisions affecting the corporations rests within the broad discretion of corporate directors.⁶ If passed, the subject legislation will directly conflict with Levandusky and twelve years of subsequent New York caselaw that has established the autonomy of cooperative apartment corporations.⁷ Furthermore, such legislation will usurp the business judgment rule which originated through the New Page 181York Court of Appeals decision in Pollitz v. Wabash,⁸ and has since been reinforced and expanded by cases such as Shlensky v. Wrigley,⁹ and Auerbach v. Bennett¹⁰ and has been incorporated by reference to its principles, in Section 717 of the New York Business Corporation Law.¹¹

A The business judgment rule

The business judgment rule must be analyzed to determine whether the New York State and Westchester County legislators are entitled to enforce the proposed legislation on cooperative apartment corporations. The directors of corporations, in fulfilling their responsibilities of management, are under a duty to exercise due care and to act in good faith.¹² Aware of their duties, directors have always been concerned by the possibility of directorial liability even in the absence of bad faith.¹³ In order to address such concerns, various court opinions developed the business judgment rule, which states that corporate directors who act in good faith and in the furtherance of legitimate corporate purposes are protected from scrutiny and liability.¹⁴ In Pollitz, one of the earliest cases regarding the business judgment rule, the Court stated that questions of policy of management and the advancements of other corporate interests are left to the decision of the directors, "without limitation and free from restraint," and the exercise of their powers for the interests of the corporation may not be questioned.¹⁵ In Auerbach, a more recent opinion by the New York Court of Appeals, the Court provided a detailed explanation of the business judgment rule:

It appears to us that the business judgment doctrine, at least in part, is grounded in the prudent recognition that courts are ill equipped . . . to evaluate what are and must be essentially business judgments. The authority and responsibilities vested in corporate directors both by statute and decisional proceed on the assumption that inescapably there can be no available objective standard by which the correctness of every corporate decision may be measured, by the courts or otherPage 182 wise. Even if that were not the case, by definition the responsibility for business judgments must rest with the corporate directors.¹⁶

B Applying the business judgment rule to cooperative apartment corporations

Although well established, the business judgment rule was not uniformly applied to all cases involving cooperative apartment corporations until the landmark case of Levandusky v. One Fifth Avenue¹⁷ Advocates of directorial scrutiny claim that the decisions of cooperative apartment corporate directors differed from the decisions of directors for typical corporations.¹⁸ They argue that due to the unique nature of cooperative apartment corporations in which governing boards are making decisions that affect living environments, cooperative directorial decisions need to be scrutinized because such decisions directly impact the personal lives of shareholders and owners.¹⁹ However, in Levandusky, the New York Court of Appeals held that the prospect that each board decision may be subjected to full judicial review hampers the effectiveness of the board's business decisions and managerial authority.²⁰ The court further stated that the more limited judicial review embodied in the business judgment rule is preferable.²¹ Nevertheless, the court recognized that "the chosen standard of review should not undermine the purposes for which the residential community and its governing structure were formed;" and therefore, the court stated that board decisions should be reviewed if evidence...