This was originally posted on the SGR Blog.
Was the Request Reasonable? And Serving a Legitimate Corporate Purpose?
Unit owners at residential coops have both statutory and common law right rights to inspect corporate books and records. But, as a recent case illustrates, that right is not without limits. And that right may be abrogated where the demand is improperly motivated, on the one hand, and/or otherwise unreasonable, on the other.
James E. Cayne sought to compel 510 Park Avenue Corporation, a residential cooperative, to comply with his demand to inspect the coop’s books and records pursuant to New York Business Corporation Law § 624 and the common law of the State of New York.
Cayne became a shareholder of the coop in 1981 when he and his wife purchased the shares associated with Unit 6A of the building, a luxury residential building, and entered into a proprietary lease.
Shortly thereafter, the Caynes also began renting a maid’s room, a single room, in the building. In 1999, approximately 18 years after Cayne moved into the building, the board of directors decided to auction that and another maid’s room in the building. The board planned to hold the auctions by sealed bid. Claiming that the sealed bid auctions would unfairly prejudice those not on the board, Cayne filed an emergency petition with the court seeking injunctive relief. As a result of the emergency petition, the auctions were ultimately held live. Cayne and his wife purchased one maid’s room for $75,000, and one member of the board, Lawrence Friedland, similarly paid $75,000 for the other maid’s room.
Cayne alleged that, due to the bidding war, Friedland paid significantly more than he anticipated. According to Cayne, Friedland blamed him for the inflated price and thereafter maintained a bias and vendetta toward him. Some 20 years after that sale, Cayne filed a petition alleging that Friedland, now president of the board, was acting on this perceived bias and vendetta and preventing him from selling Unit 6A by causing the entire board to reject the applications of potential purchasers, and also causing the board to refuse permission for him to sublet Unit 6A.
Upon those allegations, Cayne sought “all books and records” pertaining to: (a) the Apartment; (b) transfer of shares for the Apartment; (c) transfers of shares for other apartments; (d) subleasing of apartments; and (e) market valuations of apartments.”
Under the New York Business Corporation Law, shareholders have a statutory right to a corporation’s: (a) minutes of shareholder or board meetings; (b) a shareholder roster; and (c) financial statements. A corporation may refuse a shareholder access to those books and records where the request is desired for a purpose other than the business of the corporation. A bona fide claim of corporate mismanagement supports shareholder’s demand for access to a corporation’s books and records. However, there is no right to conduct an overly broad inspection supported only by speculation.
Cayne sought considerably more than the minutes, roster, and financial statements that are authorized to be inspected under the Business Corporation Law. Instead, Cayne requested “all books and records” pertaining to: (a) the Apartment; (b) transfer of shares for the Apartment; (c) transfers of shares for other apartments; (d) subleasing of apartments; and (e) market valuations of apartments.” As such, his demand was overbroad and not supported by law.
Moreover, the demand was not relevant for a proper purpose under law. Cayne failed to allege that the coop was being mismanaged. Contrary to Cayne’s contention, the board’s rejection of proposed purchasers did not alone demonstrate a proper purpose justifying the inspection of books and records. A cooperative board’s decision to deny approval for a sale of shares was protected by the business judgment rule. The fact that the board denied Cayne permission to sell their shares did not alone justify his attempt to litigate around the sound exercise of the board’s business judgment. And consistent with the foregoing, the coop’s governing documents, by which all shareholders were bound, expressly reserved the board’s “right to grant or withhold consent, for any reason or for no reason, absent unlawful discrimination” any purchase application. Likewise, the governing documents addressing subleasing stated that it was “strongly discouraged” and “will only be considered by the [board] under extraordinary circumstances,” and approval to sublet may be denied or conditioned at the sole discretion of the board. As such, Cayne did not establish a proper purpose to support his petition to access the coop’s books and records.
The reasons proffered by Cayne for seeking relief were speculative and seemingly without factual basis. Indeed, his petition was premised upon his presumption that the entire board was acting purely at the behest of Friedland who Cayne believed had, for decades, maintained a bias and vendetta against him arising from the 1999 sale of a two maid’s quarters, small spaces within the building. In light of Cayne’s allegations that the 1999 auction price of $75,000 paid by Friedland was inflated due to a bidding war between him and Friedland, logic dictated that Cayne himself may have harbored ill will toward Friedland for inflating the price of the maid’s quarters purchased by Cayne and his wife, for the same price.
Cayne also sought a judgment providing for inspection of the coop’s books and records under the common law. At common law, a shareholder’s right of inspection is qualified and can only be asserted where the shareholder is acting in good faith and has established that the inspection is for a proper purpose. Unlike a request made under the Business Corporation Law, under the common law, the requesting shareholder has the burden to plead and prove that the request was proper. Such a request must also be shown to be made in good faith.
Cayne did not make that showing. Rather, the submissions demonstrated that the nature and extent of his requests were not for a proper purpose. Even under the liberal discovery standard, a shareholder may not engage in an intrusive probe into the confidential financial records of other shareholders, let alone attempt to delve into a prospective purchaser’s finances well beyond that contemplated by law. The Court denied Cayne’s petition.