Court Bounces Books-and-Records Petition in Feud Over Park Avenue Co-op Board’s Rejection of Prospective Purchasers
October 12, 2020
Interview with Bob Ambrogi on This Week In Legal Blogging
Last week I had the pleasure of being interviewed for a live webcast by blogging pioneer, legal journalist, and LexBlog publisher and editor-in-chief Bob Ambrogi on his program, This Week in Legal Blogging. The webcast (available on YouTube here and available as a podcast here) is the latest in a series of interviews by Bob of veteran law bloggers. During the half-hour interview, among other topics, Bob and I chat about how I gravitated to starting New York Business Divorce back in 2007; the nature of a business divorce law practice; my “value added” approach to writing about business divorce cases; and the power of niche law blogging in building reputation and attracting clients. Hope you like it!
The white glove, prewar cooperative apartment building at 510 Park Avenue and 61st Street in Manhattan is, for those who reside there, an address that shouts out, “I’ve made it to the top!” Located amidst the headquarters of some of the largest banks, private equity funds, multi-national corporations, and law firms, apartments at 510 Park, when they occasionally come to market, go for the many millions. Pets allowed, if you’re interested.
For one of its corporate-titan residents named James Cayne, the former CEO of Bear Stearns, however, the shouting is more along the lines, “I’m being screwed by the co-op’s board!” Or, at least, that’s what Cayne alleged in a lawsuit styled as a books-and-records proceeding seeking co-op records relating to the board’s rejection of a series of prospective purchasers of Cayne’s 5-bedroom, 6-bath apartment.
At its core, Cayne’s unusual books-and-records petition pleaded that the board President’s “personal animus” toward him — the alleged result of a grudge dating from 1999 when the two were involved in litigation and a bidding war over a pair of maid’s rooms in the building — led him and the rest of the board at his behest to turn down a succession of proposed buyers of Cayne’s apartment between 2016 and 2019, and to deny him the ability to sublet the apartment while trying to sell it.
In a decision filed late last month by Manhattan Supreme Court Justice Nancy M. Bannon in Matter of Cayne v 510 Park Avenue Corp., the court dismissed Cayne’s petition on the grounds that his “overly broad” demand for records was “supported only by speculation” of mismanagement by the co-op’s board. The board’s rejection of Cayne’s proposed purchasers did not alone establish a “proper purpose” for the demand under either the books-and-records statute (Business Corporation Law § 624) or under the shareholder’s common-law right of inspection.
Cayne’s Pre-Suit Demand and Petition
Cayne’s petition tells a back story that I imagine few can relate to, describing a spat in 1999 between himself and another co-op resident named Lawrence Friedland who, reportedly, is the owner of a multi-billion dollar real estate empire. The spat was over the right to purchase from the co-op two maid’s rooms in the building, one of which was being rented by Cayne who brought suit after he objected to the proposed sealed bidding.
As a result of the lawsuit, the co-op instead held a live auction at which Cayne and Friedland waged a “bidding war.” At the end of the auction, each of them bought one of the rooms for $75,000 each which, according to Cayne’s petition, was “far more than [Friedland] otherwise would have had to pay if the auction had not been public.” Ever since, the petition alleges, Friedland has held a “personal animus” against Cayne, including after Friedland became board President. (I have an opinion whether a billionaire would bat an eyelash over paying an extra ten or twenty thousand for a maid’s room, but maybe that’s just my middle class upbringing speaking so I’ll keep it to myself.)
Cayne moved out of his apartment in 2013 and listed it for sale for $15 million. After several years without a sale and lowering the price to $10 million, in March 2016 a prospective purchaser made a $9 million offer and submitted an application to the board which, under the co-op’s proprietary lease, can withhold its consent to a proposed sale “for any reason or for no reason, absent unlawful discrimination or other act prohibited by law.” Cayne’s petition alleged that, not only did the board turn down without justification the first prospective buyer in 2016, but it also turned down two successive, highly qualified purchasers who submitted applications in May 2016 and May 2019.
Cayne’s petition also alleged that the board refused to allow Cayne to sublet his apartment while trying to sell it, and that as a result of his inability to sell or sublet, since moving out of the unit he paid over $700,000 in maintenance and special assessments.
In July 2019, for the stated purpose of investigating “potential wrongdoing, mismanagement and breaches of fiduciary duty” by the board members, Cayne’s counsel served a books-and-records demand on the co-op seeking to inspect eight categories of documents, only two of which fell within the scope of inspection authorized by BCL § 624, namely, the shareholder roster and meeting minutes. The remaining categories included “all books and records” concerning:
- Cayne’s apartment
- the board’s consideration and rejection of the prospective purchasers of Cayne’s apartment
- the board’s consideration, approval, or rejection of prospective purchasers of all other apartments in the building
- the rental of any apartment in the building
- the market value of the co-op corporation and each of its units
- the recusal of any board member from any board deliberations
- the proprietary lease and any proposed or adopted modification
The co-op corporation allegedly failed to respond to the demand in any manner, prompting Cayne to file his petition.
The Co-Op Opposes the Petition
The co-op primarily argued that Cayne’s petition failed to demonstrate the requisite “proper purpose” under either BCL § 624 or common law by failing to allege any mismanagement by the board. Putting a finer point on it, the co-op contended that Cayne “cannot actually make out a viable claim that the Board is mismanaging the Co-Op” because the board’s determinations to reject Cayne’s prospective buyers were protected by the business judgment rule and were within the board’s authority as expressly stated in its governing documents.
The co-op also contended that the petition contained no facts supporting Cayne’s allegation that Friedlander or other board members at his behest were influenced in their decision-making by personal animus against Cayne based on the maid’s-room incident 20 years earlier. Cayne’s overbroad demands for books and records, the co-op argued, would violate the legitimate privacy expectations of the prospective purchasers (and the other 510 Park residents whose apartments were the subject of some of Cayne’s demands) not to release their sensitive financial and personal information.
Cayne replied that under New York case law,
- his demand for information concerning the sale and rental of units at 510 Park, the value of the corporation and its units, board decision-making processes, the proprietary lease, and shareholders’ identities “falls squarely within the contours of the common-law inspection rights”;
- obtaining information in aid of legitimate, prospective litigation is a proper purpose supporting a books-and-records demand;
- whether he ultimately can assert a cause of action against the board members has no bearing on his statutory and common-law rights to inspect books and records; and
- the privacy rights of prospective purchasers and other shareholders can be protected adequately by a confidentiality agreement.
Justice Bannon’s Ruling
Justice Bannon’s opinion first addressed Cayne’s demand under BCL § 624, finding that Cayne “seeks considerably more than the minutes, roster, and financial statements that are authorized to be inspected” under the statute, and that as such, Cayne’s demand “is overbroad and not supported under BCL § 624.”
Next, she found that Cayne’s demand was “not relevant for a proper purpose under BCL § 624” in that it “fails to allege that the [co-op] is being mismanaged” and that “[c]ontrary to [Cayne’s] contention, the board’s rejection of proposed purchasers does not alone demonstrate a proper purpose justifying the inspection of books and records.” In what may be the opinion’s key passage, she then wrote:
The fact that a cooperative board has denied a shareholder permission to sell their shares does not alone justify a shareholder’s attempt to litigate around the sound exercise of the board’s judgment. [¶] Consistent with the foregoing, the [co-op’s] governing documents, by which all shareholders are bound, expressly reserve the board’s “right to grant or withhold consent, for any or no reason, absent unlawful discrimination” any purchase application. . . . As such, the petitioner has not established a proper purpose to support his petition to access the respondent’s books and records.
Justice Bannon also found that Cayne’s reasons for demanding inspection rights based on the maid’s-room incident 20 years earlier “are speculative and seemingly without factual basis.” The allegedly higher winning bids paid both by Cayne and Friedland for the two rooms, she wrote, made it equally likely that “[Cayne] himself may harbor ill will toward Friedland for inflating the price of the maid’s quarters purchased by [Cayne] for the same price.”
As to Cayne’s common-law basis for access to books and record, Justice Bannon noted that, “[u]nlike a request made pursuant to BCL § 624, under the common law, it is the requesting shareholder’s burden to plead and prove that the request is proper” and that “such a request must also be shown to be made in good faith.” The court concluded that Cayne did not carry his burden and therefore denied the petition in its entirety, writing:
The petitioner does not make that showing. Rather, the submissions demonstrate that the nature and extent of the petitioner’s requests are not for a proper purpose. Even under the liberal discovery standard, a shareholder may not engage in “an intrusive probe into the confidential financial records” of other shareholders, let alone attempt to delve into a prospective purchaser’s finances well beyond the contemplated scope of BCL § 624.
Wrong Weapon for a Doomed Claim?
A hallmark feature of residential co-ops, unlike condominiums, is the co-op board’s broad authority to approve or reject proposed unit sales. After all, co-op owners are not just shareholders; they’re neighbors living under the same roof. New York case precedent — most notably, the Court of Appeals’ 1990 Levandusky decision — supports the board’s authority over resales via application of the business judgment rule, other than in cases involving unlawful discrimination.
The legal framework generally works to protect shareholder interests both financial and non-financial. After all, the board members, usually resident-shareholders themselves, have a strong interest in supporting the market value and, hence, the marketability, of all shareholder units. Approval of sales can also be incentivized at the board level by so-called “flip” taxes that many co-ops, including 510 Park, collect on unit sales.
Likely because they would be futile, Cayne’s lawsuit did not assert any claims directly challenging and seeking to remedy the board’s rejection of the three, prospective purchasers or its denial of his request to sublet. Nonetheless, his demand to inspect co-op books-and-records based on those self-same rejections and denial has the look and feel of a collateral attack on the lawfulness of the board’s decision-making protected by the business judgment rule. That probably is what Justice Bannon had in mind when she characterized the suit as an “attempt to litigate around the sound exercise of the board’s judgment.”
Cayne is an interesting case for another reason, namely, the parties’ and the decision’s focus on whether Cayne’s demand’s primary stated purpose, to investigate board mismanagement, sufficed under BCL § 624 and common law. In one of the leading appellate cases on the subject, Retirement Plan for General Employees v McGraw-Hill Companies, Inc., which I wrote about here and which Cayne cited in his brief, the court held that “investigating alleged misconduct by management and obtaining information that may aid legitimate litigation are, in fact, proper purposes for a BCL § 624 request, even if the inspection ultimately establishes that the board had engaged in no wrongdoing.” Cayne apparently took the “even if” part of McGraw-Hill‘s holding as eliminating the burden on him to allege facts raising at least a credible inference of board mismanagement. Justice Bannon’s decision, while not citing McGraw-Hill, implicitly rejected any such reading of the case.