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New York’s Highest Court Affirms Decision Overturning A Cooperative Board’s Disapproval of Transfer to Family Members

New York State’s highest court has affirmed a decision requiring a cooperative board of directors to recognize the two sons of a deceased shareholder as the successor owner of the shares corresponding to their mother’s apartment and to allow an assignment of the proprietary lease to them. Estate of Del Terzo v. 33 Fifth Avenue Owners Corp., 2016 N.Y. LEXIS 3810, 2016 N.Y. Slip Op. 8487 (Dec. 20, 2016).

In this case, the two brothers inherited a cooperative apartment from their mother, which had been in the family since the 1950s.   The brothers applied to the Board of Directors for a transfer 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 disfavored 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).

In earlier proceedings in this case, a split panel of the Appellate Division issued a 3-2 decision overturning the Board’s decision.  The panel majority stated, “in 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 Appellate Division found that paragraph 16(b) of 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 thus 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 agreed to be liable for all financial obligations, and there was no non-speculative basis for the concern about overcrowding.  (For coverage of earlier stages in this case, please see the February 2015 and March 2016 issues of this Client Advisory.)

Because of the 3-2 split in the Appellate Division, the case went to New York’s highest court, the Court of Appeals.  The Court of Appeals unanimously agreed with the Appellate Division that the Board lacked valid grounds for disapproving the assignment, given the wording of the applicable proprietary lease provision.  In a one-paragraph, unanimous decision, the Court of Appeals held that “[t]he Appellate Division did not err in holding [that the Cooperative] breached paragraph 16(b) of its proprietary lease by unreasonably withholding consent to transfer shares allocated to an apartment and the lease appurtenant thereto” from the estate to the sons.  The Court further ruled that the Cooperative’s remaining arguments, including that the litigation was time-barred under the four-month statute of limitations for “Article 78 proceedings,” were “unavailing.”