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Divided Appeals Court Affirms Decision Overturning Cooperative Board’s Rejection Of Transfer To Family Members

An appeals court has affirmed a lower-court decision requiring a cooperative board 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., 2016 N.Y. App. Div. LEXIS 1031, 2016 N.Y. Slip Op. 1039 (1st Dep’t Feb. 11, 2016).


            In this case, the two brothers inherited from their mother a cooperative apartment that had been in the family since the 1950s.  The brothers applied to the Board of Directors for an assignment of shares to the two of them jointly.  They stated that one of the brothers, Robert, would continue to reside in the apartment with his family, while the other brother, Michael, would continue to reside in Pennsylvania.  The Board of Directors denied the brothers’ application because Robert did not meet the Board’s standard of financial responsibility.  Michael did meet the requirement, but he was not going to reside in the apartment, and the Board disfavors nonresident shareholders.  The Board also asserted that the occupancy by both brothers’ families would overcrowd the apartment (even though Michael was not going to be in occupancy).


Agreeing with a lower court’s decision (discussed in the February 2015 issue of this Client Advisory), the appeals court overturned the Board’s decision by a 3-2 vote.  “[I]n general, and in the absence of illegal discrimination, a cooperative corporation is not restricted in withholding its consent to the transfer of an apartment.”  In this case, however, the proprietary lease “extend[ed] more favorable rights to a family member of a deceased lessee,” providing that “consent shall not be unreasonably withheld to an assignment of the lease and shares to a financially responsible member of the Lessee’s family.”  The Business Judgment Rule did not apply because the lease “imposes a heightened standard of reasonableness on the board,” which was not satisfied because Michael admittedly was financially responsible and would be liable for all financial obligations, and there was no nonspeculative basis for the concern about overcrowding.


The court rejected the Board’s contention that the litigation was time-barred, holding that the applicable statute of limitations on a claim for breach of a proprietary lease is six years (not the four-month period for “Article 78 proceedings”).  The court also granted plaintiffs their reasonable legal fees, because the proprietary lease provided for the Cooperative to recover legal fees if it had prevailed, and Real Property Law § 234 provides for such provisions in residential leases to be applied reciprocally.