Appellate Rulings Endorse Courts’ Broad Remedial Powers Over Condo and Co-op Board Elections
March 28, 2022
Serving dual roles as urban homestead and non-profit business operation, residential condominiums and co-ops occupy a special niche in the arena of dispute resolution among co-owners of joint enterprises.
As discussed in greater detail here, New York co-ops are governed by the same organizational requirements and management rules of traditional business corporations under the Business Corporation Law including an elected board of directors and appointed officers, with the additional overlay of proprietary leases. New York condominiums, organized as unincorporated associations governed by the Condominium Act codified in the Real Property Law, have no shareholders but nonetheless are required to adopt by-laws providing for the election of a board of managers and officers.
Co-op and condo boards are sometimes perceived as entrenched bodies exercising dictatorial powers over building issues affecting finances, unit re-sales, and quality of life, sometimes pitting neighbor against neighbor and ego against ego which, as you might imagine, can generate emotionally charged controversies and litigation over issues that can’t always be measured in dollars, including contested board elections.
We’ve previously written here, here, and here about some of the relatively few reported court decisions in co-op and condo disputes involving access to books and records as well as board representation. Last week, in two separate appeals, Appellate Division panels in the First and Second Departments handed down significant decisions upholding a co-op owner’s common-law right to an unredacted copy of the shareholder list for the purpose of campaigning for a board seat, and affirming a lower court’s post-trial order banning the condominium sponsor and members of her family from holding more than two of six seats on the board of managers for the next six board elections. Let’s take a closer look.
Co-op Owner Campaigning for Board Seat Wins Access to Unredacted Shareholder List
The Second Department’s decision last week in Matter of O’Donnell v Fleetwood Park Corp. involves a residential co-op with 478 units in Yonkers, New York. The petitioner-shareholder submitted a written request to the co-op’s property manager for a list of the co-op’s shareholders in order to campaign for a position on the co-op’s board of directors. He also requested various financial records for the prior three years including invoices, sundry expenses, parking charges, financial reports, and records provided to the co-op’s accountant who prepared the co-op’s financial statements.
The petitioner accompanied his request with an affidavit stating that he is a shareholder of the corporation; that he is “running to represent the Corporation by occupying a seat on the Board of Directors”; that he is “exercising [his] rights [under BCL § 624] to obtain a current copy of the Master List of Shareholders”; that he “will only use the information present in the Master List to communicate with shareholders in regard to [his] campaign for the Board”; and that he “will not sell or use the information provided in the Master List for commercial purposes.”
The property manager permitted him to view financial records at its office but without allowing him to copy or photograph them which, according to the petitioner, due to the volume and complexity of the materials rendered the inspection futile. As to the shareholder list — which shareholders are entitled to inspect as of right under § 624(b) upon providing the requisite affidavit — the petitioner was allowed to view but not copy (other than creating his own, handwritten list) an out-of-date list from which the names and addresses of some number of shareholders were redacted because, he was told, they wanted their information kept private.
The petitioner subsequently filed a petition demanding the right under BCL § 624 and common law to inspect and be provided with copies of the requested financial data and the current, unredacted shareholder list. The co-op moved to dismiss the petition, arguing that petitioner had already been provided with sufficient access to books and records; that his § 624 affidavit did not comply with the statute; and that he did not adequately establish a good faith basis and proper purpose for demanding additional access to the financial records.
In its Decision and Order, the lower court observed that § 624 “is to be liberally construed to enable communications between shareholders regarding corporate affairs and includes the disclosure of, not only the list of shareholders’ names, but addresses as well.” The court proceeded to order the co-op to provide the petitioner with a copy of the unredacted and updated list of all the shareholders and their addresses, but not under § 624. Rather, after agreeing with the co-op that the petitioner’s § 624 affidavit did not contain all of the representations required by the statute, the court found that “under the common-law right of inspection” the petitioner “has asserted a proper purpose for his request and has done so in good faith.” Not so for the financial records, the request for which the court found was based on “unspecified concerns,” “speculation,” and “curiosity.”
The co-op appealed the order insofar as it required supplemental disclosure of the unredacted shareholder list, asserting that its board’s decision to respect shareholder requests to keep their information confidential was protected by the business judgment rule, and that the petitioner’s non-compliant § 624 affidavit — it did not mirror the statutory language concerning the purpose for inspection or that petitioner had not sold, offered to sell, or aided any other person seeking to sell the shareholder list within the past five years — was fatal to his inspection demand under both § 624 and the common-law.
The Second Department’s decision last week affirmed the lower court’s order based on the petitioner’s common-law right to inspect. Here’s what little it said:
“Under New York law, shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose” (Retirement Plan for Gen. Empls. of the City of N. Miami Beach v McGraw-Hill Cos., Inc., 120 AD3d 1052, 1055; see World Ambulette Transp., Inc. v Lee, 161 AD3d 1028; Matter of Pokoik v 575 Realties, Inc., 143 AD3d 487). Here, the Supreme Court properly held that the petitioner established his common-law right to the information he sought from the appellant since he pleaded and proved that he had a proper purpose for seeking the information, and a hearing was not required since no substantial question of fact existed as to the petitioner’s good faith and proper purpose (see Matter of Goldstein v Acropolis Gardens Realty Corp., 116 AD3d 776; Matter of Troccoli v L & B Contr., 259 AD2d 754; cf. JAS Family Trust v Oceana Holding Corp., 109 AD3d 639; Matter of Niggli v Richlin Mach., 257 AD2d 623; Matter of Marcato, 102 AD2d 826).
The cases cited in the court’s opinion either do not involve demands to inspect a shareholder list, or deny inspection of the shareholder list based on a non-compliant § 624 affidavit without reaching the question whether the right to inspect the list nonetheless exists under common law. To that extent, the Second Department’s ruling in O’Donnell appears to break new ground by broadening the court’s discretionary authority to compel inspection of the corporation’s shareholder records. On the other hand, it’s hardly a difficult task to provide a § 624 affidavit that mimics the statute’s language and thereby avoid any dispute over proper purpose and good faith.
Condo Owners Win Injunction Limiting Sponsor’s Board Representation
The First Department’s decision last week in Tsui v Chou involves a six-floor condominium formed in 1986 and located in Manhattan’s Nolita district. The case pits the sponsor, Katherine Chou, and her family members, all of whom also own units in the building, against a group of unrelated unit owners who sued primarily to enforce the offering plan and bylaws requiring the sponsor to relinquish control of the six-member board the earlier of five years after the first closing or after the closing of title of 75% of the units, and also prohibiting the sponsor from casting her votes to elect a board majority. The plaintiffs also challenged the defendants’ engagement of a property management company owned by the sponsor’s husband.
Manhattan Commercial Division Justice Joel M. Cohen conducted a bench trial and issued a post-trial decision finding that the sponsor and her family improperly maintained board control by failing to conduct board elections when required for seats held by the sponsor’s family members, and otherwise failing to conduct staggered board elections in compliance with the procedures set forth in the offering plan and bylaws.
Justice Cohen entered judgment enjoining the sponsor from casting votes for board seats representing the interest attributable to her unsold units unless and until the offering plan is amended to identify which units are withheld from sale; ordering a reset election for all board seats; and most controversially, ordering that for the six annual elections following the reset election, no more than two of the sponsor, her husband, and other family members may sit on the six-member board at any time. He also ordered that the management agreement with the husband’s company be abrogated and that the new board determine whether to continue with the husband’s company or another.
The defendants appealed from portions of the judgment including what their appellate brief called “the punitive disenfranchisement of the Chou Family Defendants” exceeding the court’s remedial powers under BCL § 619 to confirm or to order a new board election. The First Department responded with a triple-barreled rejection of the defendants’ argument:
- First, it broadly read § 619’s provision authorizing courts to decide “any matters” pertaining to an election’s outcome, including voting rights, to apply not only to disputes over past elections but to future elections as well.
- Second, it held that because the action also asserted claims for breach of fiduciary duty and breach of contract, “the trial court was not limited to granting relief within the confines of Business Corporation Law § 619.”
- Third, it upheld the trial court’s authority “to grant relief prohibiting a sponsor from ‘frustrat[ing] its obligations under the offering plan . . . by transferring its shares to puppet entities to s[i]phon votes away from resident shareholder candidates in order to control the board well beyond the period contemplated by the Attorney General’” (quoting Matter of Tiemann Place Realty, LLC v 55 Tiemann Owners Corp., 141 AD3d 56, 62 [1st Dept 2016]).
As the court summed up:
The trial court’s limitation of allowing defendants to hold a maximum of two seats on the board for six elections simply enforces the bylaws, thus precluding the sponsor’s domination of the board and breaking the years-long deadlock that was the result of the sponsor’s and Robert Chou’s refusal to stand for election long after their three-year terms had expired. Defendants are not prohibited from voting their respective interests appurtenant to the units they own; rather, they are prohibited only from voting for seats that would give the sponsor control over the board, as expressly foreclosed by both the offering plan and the bylaws article III, section 1.
Arguably, the court’s expansive reading of the court’s remedial authority under § 619, to dictate voting procedure for future elections, is dicta in light of the court’s alternative reliance on the court’s common-law authority to remediate breaches of fiduciary duty and/or contract. Practitioners also need to be aware that challenges to board elections under § 619 generally must be brought as CPLR Article 78 proceedings within the applicable four-month statute of limitations.