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Perspectives

Court Rejects Demand for Books and Records Relating to Cooperative’s Disapproval of Purchase Application

A tenant-shareholder’s broad request for access to all of a Cooperative’s documents relating to purchase and sublease applications throughout the building was rejected by the court in Matter of Cayne v. 510 Park Avenue Corp., No. 654916/2019 (Sup. Ct. N.Y. Co. 2020).

The facts summarized in the court’s decision reflect bad blood between shareholders in the cooperative going back to the 1990s, when two shareholders found themselves in a bidding war to purchase two “maid’s rooms” apartments. Twenty years later, one of these shareholders sought to sell his apartment and the other was now the Board President. The petition alleged that the Board President caused the Board to disapprove petitioner’s applications to sell or sublet his apartment based upon a “perceived bias and vendetta.” Petitioner submitted a demand for books and records seeking access to all records concerning his apartment, transfers and subleases of other apartments, and appraisals of apartments in the building. The Cooperative denied access to these documents and the petitioning shareholder asked the court to require the Cooperative to provide them.

The court, taking a narrow view of shareholders’ inspection rights, rejected the petition. Under Section 624 of the Business Corporation Law, shareholders have a statutory right of access to minutes of shareholder and board meetings, the roster of shareholders, and the corporation’s financial statements. The corporation may refuse access when it is “desired for a purpose … other than the business of the corporation.” “A bona fide claim of corporate mismanagement supports [a] shareholder’s demand for access,” but “there is no right to conduct an overly broad inspection supported only by speculation.” Here, the requested documents went far beyond those specified in BCL 624 and the court concluded that the request was “not relevant for a proper purpose” because “the petitioner fails to allege that the [Cooperative] is being mismanaged.”

The court also stated that “the board’s rejection of proposed purchasers does not alone demonstrate a proper purpose justifying the inspection of books and records,” because the Board’s denial of approval for a purchase is protected by the Business Judgment Rule and generally does not justify litigation. Moreover, the Cooperative’s governing documents state that subleasing of units is strongly discouraged and will be approved, in the Board’s discretion, only in extraordinary circumstances. The court concluded that petitioner’s reasons for seeking access to the records were “speculative and seemingly without factual basis.”

Petitioner also claimed the right to inspect the records under the common law. The common-law 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.” The requesting shareholder has the burden of proving that the request is proper and made in good faith. Here, the petitioner had not made that showing, because the requested documents constituted “an intrusive probe into the confidential records” of other shareholders and of prospective purchasers of units in the Cooperative.

In recent years, the courts have generally seemed receptive to shareholders’ and unit owners’ demands for access to documents. (For an example, please see the December 2018 issue of this Client Advisory.) It remains to be seen whether this decision presages a narrower view of the right of access.