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Renegade Shareholders Challenge to Financial Decision of Cooperative’s Board of Directors Rejected by the Courts

The bylaws and the proprietary leases of the shareholders of a cooperative vested broad financial management authority with the board of directors. The board determined that an $800,000 special assessment was required to fund Local Law 11 façade work to the cooperative’s buildings. However, the money ended up actually being spent to cure a budgetary shortfall associated with ongoing façade repairs.

A group of shareholders refused to pay the assessment claiming, among other things, that the board’s representations regarding the need for the assessment constituted fraud and that the façade work was just a pretext to balance the operating budget. More than fifty summary non-payment proceedings were commenced. The civil court granted the cooperative summary judgment and the shareholders appealed.

The Appellate Term affirmed the grant of summary judgment. Employing the business judgment rule, the Appellate Term noted that “whatever tenants’ claims as to the wisdom of the board’s decisions, they are clearly authorized by the bylaws and proprietary leases.” Accordingly, the court found that the tenants “failed to overcome the presumption that the directors exercised their honest judgment to promote the lawful and legitimate interest of the cooperative.”

Adam Leitman Bailey and Christopher Halligan represented the cooperative at the civil court, and Jeffrey R. Metz successfully defended the order on appeal.

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