A cooperative board was directed to recognize the two sons of a deceased shareholder as the successor owners of the shares corresponding to their mother’s apartment and to allow an assignment of the shares to their names. Estate of Del Terzo v. 33 Fifth Avenue Owners Corp., 2014 N.Y. Slip Op. 32534(U) (Sup. Ct. N.Y. Co. Sept. 30, 2014).

In this case, the two brothers inherited from their mother the cooperative apartment in which they grew up fifty years ago.  In recent years, one brother, Robert, had been residing there with his mother and with his wife and two college-age children. The other brother, Michael, resided in Pennsylvania, where he had a “thriving” medical practice.  Upon the mother’s death, her estate assets paid for the apartment’s maintenance and utilities and Robert and his family remained there.

 

The brothers applied to the cooperative Board for assignment of shares from the mother’s estate to the two of them jointly. However, only the non-occupant brother, Michael, had sufficient income to pay the $3,500 monthly maintenance.  Relying on a proprietary lease provision stating that there “shall be no limitation” on the Board’s right to grant or withhold consent to an assignment, the Board rejected the brothers’ application.  It reasoned that the proprietary lease precluded more than one family from living in an apartment, and that if only Robert and his family resided there, the application should be rejected because Robert was not financially capable of becoming a shareholder.

 

The brothers sued the Board, alleging that its denial of the assignment to them as heirs violated a separate proprietary lease provision governing consents to assignments to successor family members.  That lease provision stated that “[i]f the Lessee shall die, consent [of the board of directors] shall not be unreasonably withheld to an assignment of the lease and shares to a financially responsible member of the Lessee’s family….”  The court agreed with the brothers and found the Board had unreasonably withheld its consent.

 

At the outset of its decision, the court rejected the Board’s argument that the brothers’ lawsuit was untimely under the four-month statute of limitations governing “Article 78 proceedings” against a body or officer.  The court reasoned that the lawsuit alleged a breach of the proprietary lease, which is a contract, so that New York’s six-year statute of limitations on contract claims applied.

 

The court ruled that the Board could not rely on the Business Judgment Rule in defending its decision, because that rule does not apply where a contract, such as the proprietary lease, imposes a different standard. Here, the proprietary lease provision relied on by the brothers was specifically intended to address ownership transfers made necessary by a shareholder’s death.  The language on which the Board relied, conferring unlimited discretion on the Board in approving or disapproving assignment of shares, was contained within a separate, more general provision.  Thus, the proprietary lease accorded “different and more favorable rights” to successor family members’ applications, and the Board was constrained to act reasonably in considering such applications.

 

The court determined that the lease’s requirement of single-family occupancy was not a valid basis for denying the assignment.  It was clear that non-occupant Michael would not be relocating to New York or occupying the apartment.  The court said that the real issue was whether the Board could rely on the fact that the occupant shareholder, by himself, was not financially capable of maintaining the unit.  The court held that it could not.  Although the lease imposed limits on out-of-possession shareholders, here, “at least one of the owners … would make the apartment his primary residence.”  Moreover, Robert’s family had lived in the apartment without incident prior to the mother’s death, maintenance fees had been timely paid, and, the Board had periodically granted exceptions to the primary occupancy rule to other shareholders.

 

Moreover, the proprietary lease did not condition assignment of shares to successor family members upon their intending to occupy the apartment, but only on financial responsibility. The brothers satisfied that condition, and the court granted summary judgment in their favor.