Business Judgment Rule Meets Unreasonably Withheld Consent: Did Co-op Board Have Basis to Deny Assignment of Shares?

This was originally posted on the SGR Blog.

It is axiomatic that, as night follows day, the Business Judgment Rules protects the Board of a residential coop from corporate and personal liability for good faith decisions made in the ordinary course of the coop’s affairs. But does it always? As a recent case illustrates, exoneration is not automatic where the proprietary lease expressly sets forth a different and higher standard.

Stuart B. Kotler, as Executor of the Estate of Gail Lowe Haymes, owned 510 shares 979 Corporation, a residential coop, allocated to apartment 2/3… Kotler wanted the co-op to transfer the shares and proprietary lease to the decedent’s daughter, Elizabeth Haymes Hempin. The co-op refused to approve the transfer. Kotler sued. The coop moved to dismiss.

Supreme Court denied the motion and granted the petition to the extent of annulling and vacating the co-op’s refusal to approve the transfer of shares and proprietary lease; ordered the co-op to approve and effect the transfer; ordered Kotler to pay the co-op’s reasonable legal and other expenses in connection with the transfer; awarded Kotler attorneys’ fees incurred in the proceeding; and denied Kotler’srequest for damages. Kotler appealed.

The proprietary lease directed that, if the lessee should die, then the co-op’s Board’s “consent shall not be unreasonably withheld to any assignment or transfer of this lease and the appurtenant stock by bequest or by assignment. . . provided that such legatee or assignee shall be a financially responsible member of the [l]essee’s family.”

The lease’s directive that “consent shall not be unreasonably withheld” triggered the application of the “heightened standard of reasonableness” to be applied in lieu of the usual Business Judgment Rule. The burden thus shifted to the co-op to reasonably show that the proposed transferee, the decedent’s daughter, was not “financially responsible.”

The co-op did not meet that burden. The daughter produced financial statements and other documents showing assets of a magnitude greater than the annual maintenance and other costs associated with the apartment, as well as annual income more than double those costs.

Also unavailing was the co-op’s objection that the estate relied on an unreasonably low appraised value of the apartment in its tax returns in order to minimize estate taxes. Documents submitted by Kotler showed that the estate reached an agreement with the Internal Revenue Service on the valuation. And the IRS had completed its review of the estate’s tax return. The co-op provided no reasonable basis for rejecting that showing.

The co-op had no lawful basis to demand a transfer fee, which was not provided for in the by-laws or the proprietary lease.

Kotler was entitled to damages caused by the co-op’s breach of the proprietary lease in unreasonably withholding consent to the transfer. The measure of those damages was the amounts paid after the co-op unreasonably withheld its consent to the assignment. Those damages were properly recoverable as incidental to the proceeding. [Kotler sought reimbursement of maintenance charges and damages for deprivation of use of the apartment.] In light of the proprietary lease’s provision for attorneys’ fees, as the prevailing party, Kotler was entitled to a reciprocal award of attorneys’ fees.

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