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Shareholder’s Suit Against Cooperative for Disapproval of Proposed Sale Dismissed

The shareholder-tenant of a cooperative unit sought to sell his unit, but the cooperative board rejected the prospective purchasers application.The shareholder-tenant then sought to sell the unit to a second purchaser, whom the board approved but only upon conditions.The shareholder-tenants suite against the Cooperative and its board members for breach of fiduciary duty and related claims was dismissed in Silverstein v. Westminster House Owners, Inc., 2008 WL 852005, 2008 N.Y. Slip Op. 2882 (App. Div. 1st Dept Apr. 1, 2008).

In this case, the Appellate Division reaffirmed the now-familiar holding that the business judgment rule applies to decisions by residential cooperative corporations and that the party seeking judicial review of a cooperatives decision has the burden of demonstrating a breach of duty.Here, the plaintiffs allegations as to the reasons that the board had rejected the first application and conditioned its approval of the second were speculative, unsupported by evidence, and therefore insufficient.The court rejected plaintiffs argument that an inference of self-dealing or misconduct could be drawn from the fact that the spouses of two of the board members are real estate brokers and had entered into a short-term exclusive listing agreement with the plaintiff, which had expired several months before defendants alleged misconduct took place.

The court also dismissed plaintiffs claim that the rejection of the first purchasers application breached the covenant of good faith and fair dealing implied in the proprietary lease, for the same reasons as applied to the other claims.In the absence of specific allegations or evidence in support of the allegations of breach, plaintiff was not entitled to conduct discovery based on further speculation that doing so would provide such evidence.

However, the court denied the Cooperatives request for an award of attorneys fees against the former shareholder, because there was no allegation that the shareholder had defaulted under the proprietary lease, which was the only circumstances under which the lease authorized an award of fees.As discussed in the March 2008 issue of this Client Advisory, cooperatives may wish to seek to broaden the scope of attorneys fee provisions of their proprietary leases to cover other situations, such as this one, where the Cooperative prevails in litigation with a shareholder-tenant.

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