Levandusky v. One Fifth Avenue Apartment Corp.
553 N.E.2d 1317, 554 N.Y.S.2d 807, 75 N.Y.2d 530 (1990)
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Rule of Law:
The business judgment rule is the proper standard for judicial review of decisions made by the board of directors of a residential cooperative corporation.
Facts:
- In 1987, Ronald Levandusky, a proprietary lessee and then-president of the cooperative board at One Fifth Avenue, decided to renovate his kitchen.
- Levandusky's proprietary lease and the building's renovation guidelines, which he had helped draft, required prior written consent for any alteration to steam risers.
- Levandusky submitted renovation plans that were approved by the board, but these plans did not show or mention his intent to relocate a kitchen steam riser.
- After the plans were approved, the board learned of Levandusky's intention to move the riser and consulted an engineer, who advised that such alterations were risky and should be avoided.
- The board then passed a resolution reaffirming its policy against relocating risers and formally denied Levandusky's request for a variance to move the pipe.
- Despite the board's explicit denial, Levandusky proceeded to hire a contractor who severed and relocated the steam riser in his apartment.
- The board also sought to compel Levandusky to remove air-conditioning units that allegedly did not conform with Landmarks Preservation Commission requirements.
Procedural Posture:
- The cooperative board issued a 'stop work' order after discovering Levandusky had moved the riser.
- Levandusky initiated an article 78 proceeding in the New York Supreme Court (trial court) to annul the stop work order.
- The corporation cross-petitioned for an order compelling Levandusky to restore the riser to its original position.
- The Supreme Court first ruled for Levandusky, finding the board's decision arbitrary, but on reargument, it reversed and dismissed his petition, applying the business judgment rule.
- Levandusky, as appellant, appealed to the Appellate Division (intermediate appellate court).
- The Appellate Division modified the trial court's order, siding with Levandusky and holding that the board's action was unreasonable, with two justices dissenting.
- The cooperative corporation, as 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 judicial review of decisions made by a residential cooperative corporation's board of directors when enforcing building policy?
Opinions:
Majority - Kaye, J.
Yes, the business judgment rule governs judicial review of decisions made by a residential cooperative corporation's board of directors. So long as the board acts for the purposes of the cooperative, within the scope of its authority, and in good faith, courts will not substitute their judgment for the board’s. The court rejected a 'reasonableness' standard, reasoning that it would require courts to improperly second-guess the board's decisions and undermine the stability of the cooperative living arrangement. Cooperative boards possess experience with the building's specific needs that courts lack. The business judgment rule correctly balances the need to protect residents from a board's abusive exercise of power with the need to protect the board's authority to manage the property for the common benefit. Here, Levandusky failed to demonstrate that the board breached its fiduciary duty; the board's decision was based on an engineer's advice and a uniformly applied policy, and Levandusky's claims of personal animosity were conclusory.
Concurring - Titone, J.
No, the more appropriate standard is the 'arbitrary and capricious' test found in CPLR article 78, not the business judgment rule, though the board's decision should still be upheld. The business judgment rule is ill-suited for reviewing administrative enforcement of bylaws and is better applied to actual business decisions involving corporate assets. The 'arbitrary and capricious' standard, which asks whether a rational basis exists for the board's decision, provides sufficient deference without inviting messy judicial inquiries into the subjective motives and potential 'bad faith' of board members, which the majority's rule would permit. In this case, the engineer's report provided a clear rational basis for the board's decision to deny the alteration, and the judicial inquiry should end there.
Analysis:
This decision established the business judgment rule as the controlling standard for judicial review of residential cooperative board actions in New York, significantly strengthening board authority. It shifts the burden to the challenging shareholder to prove bad faith, self-dealing, or that the board acted outside its scope of authority. The ruling makes it substantially more difficult for residents to successfully challenge board decisions they merely disagree with, thereby reducing litigation and promoting stability and deference to the decisions of these governing bodies.
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