May Court “Second Guess” Board’s Decision? or Did Business Judgment Rule Apply ?

Proprietary leases for residential coop units often permit the Board to terminate a lease for “objectionable conduct”—an arguably subjective cause. In a recent case, the Judge in the Landlord & Tenant Part concluded that the “business judgment rule” did not apply to the facts before the Court. That determination was the subject of an appeal.

111-15 75th Ave. Owners Corp, a residential cooperative corporation, commenced a holdover proceeding against Min Fan and Thomas Pellegrino after the Board terminated their proprietary lease on the ground the tenants had engaged in objectionable conduct. Civil Court denied Owners’ motion for summary judgment, rejecting the argument that the business judgment rule applied to the coop board’s determination to terminate the lease, and finding that the determination was not entitled to deference because Owners had not acted in good faith. The Board appealed.

When scrutinizing a coops conduct in terminating a tenancy, the Courts will examine whether the Board acted in good faith and in the corporate interest to terminate the tenancy for the reasons alleged. Here, the appeals court found that the record reflected that the Board acted “for the purposes of the cooperative, within the scope of its authority and in good faith” and therefore the business judgment rule applied. Under those circumstances, the evidence provided by Owners in support of its summary judgment motion was “competent evidence” that the tenancy was terminated because tenants engaged in “objectionable” conduct. And no further judicial scrutiny of the propriety of the Board’s determination that the tenants’ conduct was objectionable within the contemplation of the proprietary lease was warranted.

There was no basis on this record for the Civil Court’s finding that Owners lacked good faith. The Board sent the tenants three notices and held a special meeting, at which neighboring tenants provided their accounts of the objectionable conduct, before terminating the lease. Fan and Pellegrino failed to assert any nonconclusory allegations as to the Board’s alleged lack of good faith. And, contrary to the determination of the Civil Court, there was no requirement that the coops’ Board provides tenants with written or oral responses to their alleged defenses or deliberate on the record.