40 West 67th Street Corp. v. Pullman
790 N.E.2d 1174, 100 N.Y.2d 147 (2003)
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Rule of Law:
Judicial review of a residential cooperative's decision to terminate a shareholder-tenant's proprietary lease for objectionable conduct is governed by the business judgment rule, which limits judicial inquiry to whether the cooperative acted for the purposes of the cooperative, within the scope of its authority, and in good faith.
Facts:
- In 1998, David Pullman purchased shares in the 40 West 67th Street cooperative (the cooperative) and became a shareholder-tenant.
- Pullman engaged in a course of disruptive behavior, beginning with a series of accusatory letters against his elderly upstairs neighbors, alleging they were running a loud, illegal bookbinding business with toxic chemicals.
- The cooperative's board investigated and found Pullman's claims about his neighbors to be baseless.
- Following a physical altercation between Pullman and his neighbor, Pullman distributed flyers calling the neighbor a 'psychopath' and making personal accusations against the neighbor's wife and the wife of the board president.
- Pullman also performed unapproved alterations to his apartment, violated house rules with weekend construction, and commenced four lawsuits against his neighbors, the cooperative president, and management.
- The proprietary lease signed by all shareholder-tenants, including Pullman, contained a provision allowing for termination of a tenancy for 'objectionable conduct' upon a two-thirds vote of the shareholders.
Procedural Posture:
- The cooperative, 40 W. 67th St. Corp., brought an action for possession and ejectment against the shareholder-tenant, Pullman, in New York Supreme Court (the trial court of first instance).
- The Supreme Court denied the cooperative's motion for summary judgment, holding that the court must make its own finding of objectionable conduct.
- The cooperative appealed to the Appellate Division of the Supreme Court (an intermediate appellate court).
- A divided Appellate Division reversed the trial court's order, granting summary judgment to the cooperative and holding that the business judgment rule was the correct standard of review.
- Pullman, the defendant-appellant, appealed to the Court of Appeals of New York (the state's highest court).
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Issue:
Does the business judgment rule govern a residential cooperative's decision to terminate a shareholder-tenant's proprietary lease for 'objectionable conduct' pursuant to a provision in that lease?
Opinions:
Majority - Rosenblatt, J.
Yes. The business judgment rule governs a residential cooperative's decision to terminate a tenancy for objectionable conduct made in accordance with its governing documents. The court extended the rule from Matter of Levandusky, reasoning that it best balances the individual and collective interests at stake in a cooperative living environment. While a statute, RPAPL 711(1), requires 'competent evidence' that a tenant is objectionable, the court held that a shareholder vote, reviewed under the business judgment rule, satisfies this standard. This approach prevents 'undue court involvement and judicial second-guessing' and gives effect to the contractual terms to which the shareholder-tenant voluntarily agreed. To overcome this deferential standard, a tenant must demonstrate that the board acted outside the scope of its authority, in a way that did not legitimately further the corporate purpose, or in bad faith.
Analysis:
This decision significantly reinforces the authority of cooperative boards by extending the deferential business judgment rule to the context of tenancy terminations, one of the most severe actions a board can take. By holding that a shareholder vote constitutes the 'competent evidence' required by statute, the court effectively shields board decisions from de novo judicial review of the underlying facts of the tenant's conduct. This ruling raises the bar for shareholder-tenants challenging such terminations, forcing them to prove bad faith or ultra vires acts rather than simply arguing the merits of their behavior. It solidifies the legal view of cooperatives as self-governing entities whose internal decisions, made in good faith and according to their own rules, warrant great deference from the judiciary.
