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Cooperative Board’s Rejection Of Prospective Purchaser Upheld

A recent decision by a New York appellate court reaffirms the broad discretion that a Cooperative Board of Director has in determining whether to approve an applicant seeking to acquire shares in the Cooperative. Griffin v. Sherwood Village, Co-Op “C”, Inc., 2015 N.Y. App. Div. LEXIS 5978, 2015 N.Y. Slip Op. 6112 (2d Dep’t July 15, 2015).

In this case, a tenant-shareholder in the Cooperative sought to sell his shares, but the Board rejected the purchaser’s application based on “significant debt the prospective buyer held relating to a separate property.”  The tenant-shareholder’s suit for damages for breach of fiduciary duty was dismissed based on the Business Judgment Rule, which provides that “a court should defer to a cooperative board’s determination so long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith.”  The board’s decision to reject the application based on the applicant’s financial condition satisfied that standard.

The court rejected the tenant-shareholder’s contention that the case presented issues of fact as to whether the applicant had been rejected for unprotected, discriminatory reasons.  The court agreed that “[d]ecision making tainted by discriminatory considerations is not protected by the business judgment rule.”  However, the tenant-shareholder failed to present sufficient evidence to show that the resale application had been denied for a discriminatory or other unprotected reason.