Matter of Schwarz v Dorchester Apt. Corp.

[*1] Matter of Schwarz v Dorchester Apt. Corp. 2005 NY Slip Op 51656(U) [9 Misc 3d 1118(A)] Decided on October 18, 2005 Supreme Court, Kings County Rivera, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on October 18, 2005
Supreme Court, Kings County

In the Matter of Simon Schwarz and Theresa Otto, Petitioners,

against

Dorchester Apt. Corp. and Its Board of Directors, Respondents.



8662/04

Francois A. Rivera, J.

Petitioners' move by order to show cause and pursuant to CPLR Article 78 for a judgment annulling certain determinations of the respondents. In the alternative petitioners seek an order enjoining the respondents from revoking petitioners' license to use two parking spaces and from enforcing a resolution of respondent board preventing any shareholder from having more than one parking space while shareholders are on a waiting list for such a space. Respondents' cross-move for summary judgement denying petitioners' motion and other relief.

On March 16, 2004, petitioners commenced this action by filing a verified petition and the instant order to show cause. By Order dated January 20, 2005, this court denied respondents' cross-motion for summary judgment and enjoined enforcement of the resolution of the respondent Board of Directors (hereinafter the board) pending the resolution of an evidentiary hearing. The injunction was conditioned upon petitioners' payment of use and occupancy of $200.00 monthly for the two parking spaces in question and payment of the sum needed to bring the past payment to $200.00 monthly retroactive to March 23, 2004.

The following facts are undisputed. Since 1979, petitioner Theresa Otto and her mother have resided at the Dorchester located at 3178 Nostrand Avenue, Brooklyn, New York., in apartment 4C. In April of 1988, the Dorchester converted to cooperative ownership and became Dorchester Apt. Corp. (hereinafter DAC). On April 21, 1988, petitioners jointly acquired two hundred and seventy three shares of capital stock of DAC and entered into a proprietary lease for apartment 4C. DAC has one interior garage at the north end of the basement which contains nineteen parking spaces. There are no other on-site parking spaces. There is no provision in the proprietary lease or by-laws pertaining to parking spaces. Since at least 1988, the respondents have not entered into leases for the parking spaces. For at least ten years, petitioners have [*2]lawfully occupied two parking spaces designated number three and twelve.

During the year 2000, petitioners were paying DAC $100.00 monthly for the two parking spaces. In or about 2001, Cooper Square Realty Inc. (hereinafter Cooper) was engaged by the board as its new managing agent. Cooper sent petitioners monthly notices reflecting a monthly rent of $160.00 for the two spaces. Petitioners disputed the $60.00 increase in writing. By letter dated January 24, 2003, Cooper notified petitioners that they were in arrears of $1267.70 and demanded payment under threat of further collection action. By a letter to Cooper dated January 29, 2003, petitioners claimed no arrears and requested an accounting. Cooper responded by mailing another demand for payment which included an account history sheet. The history sheet reflected a monthly rent of $160.00 for the two parking spaces since September 28, 1991. By letter dated January 20, 2004, DAC advised petitioners that they were in default under the terms of their proprietary lease and that if they did not pay their arrears, the board would seek to terminate their proprietary lease and cancel their stock certificate. By letter dated February 3, 2004, the board advised the petitioners that since the arrears were for parking fees and not for maintenance charges, they were not in default under the terms of their proprietary lease.

On November 11, 2003, the board of DAC conducted a special meeting of shareholders to discuss the financial affairs of the cooperative. At that meeting, the membership discussed garage fees. Thereafter, the board unanimously voted, in pertinent part, to increase the monthly garage fees to $100.00 with a provision that those currently paying sixty or seventy dollars would have their fees raised by $10.00 monthly in annual increments until they reached $100.00 monthly. The board also decided that no shareholder would be allowed to rent more than one space if there were shareholders without parking spots on the waiting list.

On January 22, 2004, DAC conducted a special meeting of shareholders to discuss assessments and other matters. At that meeting, some of the shareholders expressed their willingness to allow the petitioners to keep their two parking spaces. By letter dated February 6, 2004, the respondents notified the shareholders that the opinion expressed by the shareholders at the January 22, 2004 meeting was not binding upon them and that the resolution of the board made on November 11, 2003 limiting parking spaces would remain in effect.

Petitioners claim that the respondents orally agreed to hear the views of the shareholders at the special meeting of January 22, 2004, concerning the respondents' determination to limit the use of parking spaces and on the petitioners' fee dispute over alleged parking fee arrears. They further contend that the respondents agreed to be bound by the shareholders' expressed opinion. Petitioners contend that the majority of shareholders present voted that the one space restriction should not be applied to the petitioners. They also allegedly voted that the petitioners parking fees should not be increased retroactively. Petitioners annexed as exhibit K to the verified petition a letter purportedly signed by sixteen shareholders to buttress these claims. Petitioners submit, inter alia, that the respondents breached the agreement evidencing their bad faith.

The court conducted an evidentiary hearing on March 12, April 7, and April 18, 2005 to resolve the merits of the underlying claim. Petitioners, Simon Schwarz and Theresa Otto testified. The respondents called no witness. By so-ordered stipulation dated April 18, 2005, the court granted respondents' leave to submit a memorandum of law on the issue of respondents' rights to attorney's fees if they prevailed on the Article 78 petition.

On April 15, 1990, the Court of Appeals issued its decision in Matter of Levandusky v. [*3]One Fifth Ave., Apt. Corp., 75 NY2d 530 setting forth the business judgment rule as the standard of judicial review when evaluating decisions made by residential cooperative corporations. On May 13, 2003, the Court of Appeals reaffirmed this principle in it holding of 40 West 67th Street Corp.v. Pullman,100 NY2d 147. Quoting from the Pullman decision: The very concept of cooperative living entails a voluntary, shared control over rules, maintenance and the composition of the community. Indeed, as we observed in Levandusky, a shareholder-tenant voluntarily agrees to submit to the authority of a cooperative board, and consequently the board "may significantly restrict the bundle of rights a property owner normally enjoys (75 NY2d at 536)."

The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings. In the context of cooperative dwellings, the business judgment rule provides that a court should defer to a cooperative board's determination "[s]o long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith" (Matter of Levandusky v. One Fifth Ave., Apt. Corp., 75 NY2d 530 at 538) The Pullman court held that courts should scrutinize the facts underlying a board's decision if a shareholder-tenant can show that the cooperative acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose, or (3) in bad faith (40 West 67th Street Corp.v. Pullman,100 NY2d 147 at 155. These three exceptions to the business judgment rule balance protecting the interests of the entire cooperative community and the judiciary's interest in protecting against the board's possible abuse of its broad powers. The Pullman case established a two-phase process of reviewing a cooperative's decision. In the first phase, the court must determine whether the cooperative's action is entitled to business judgment deference. It is the shareholder-tenant's burden to show that the board vote is not entitled to deference. The shareholder-tenant will satisfy that burden by showing that the board's actions were outside the scope of its authority, that the board's actions did not further the cooperative's corporate purpose, or that the board's decision was made in bad faith.

After considering the hearing evidence, the pleadings, oral argument and memorandum of law of the respective parties, the court finds as follows. The petitioners did not meet their burden to show that the respondents acted in bad faith or outside of the scope of their authority, or in a way that did not legitimately further the corporate purpose. While the petitioners may have reasonable perceived that the respondents' decision to limit parking spaces was peculiarly directed against them since they are the only shareholders which currently occupy two parking spaces, this alone does not support a finding of bad faith. It is in the cooperatives' interest to increase the number of parking spaces available to its tenant shareholders, especially when there is more demand than supply. With a waiting list in existence, the determination to limit spaces to one per shareholder is objectively reasonable and clearly within the board's business judgment prerogatives.

It is noted that petitioners claims a fee dispute regarding past parking fees. In particular, they alleged that Cooper, respondents managing agent, unilaterally chose to raise their parking fees for their two parking spaces from $100.00 to $160.00 retroactive to September 1991 and by [*4]doing so created previously non-existent arrears. Petitioners attached to their verified petition as exhibit H, a letter from Cooper pertaining to the arrears. This exhibit supports their contention.

In the absence of any evidence to rebut this claim either in the pleadings or in the hearing, the court finds that petitioner has proven their claim that there are no parking fee arrears for the period of September 1991 through and including April 1, 2003. The court finds that Cooper, the respondents' managing agent, made a claim for parking fee arrears which it created by unilaterally and retroactively increasing petitioners' fees from $100.00 to $160.00 monthly retroactive to September 1991. It is noted that the respondents, by their letter to the petitioners dated February 3, 2004, partially corrected their error by conceding that the alleged arrears did not support a notice of default under the proprietary lease agreement. They did not, however, set aside the determination of arrears. Although Cooper had the authority to take this action on respondents' behalf, the issue is in substance a billing error unrelated to petitioner's proprietary lease rights. The court, nevertheless, finds respondents' determination through Cooper to unilaterally increase parking fees retroactively to be arbitrary and capricious. This action is improper and annulled.

With regard to petitioners' claim that respondents breached an agreement to abide by the expressed opinion of the shareholders at the special meeting of January 24, 2004, the court finds this claim to be unsupported. There is no evidence that shareholders were notified that the special meeting was to be considered a binding referendum on the respondents. Furthermore, the terms of this alleged agreement, even if true, are too indefinite and uncertain to be binding or enforceable under a contract theory (Dillon v. Peretti, 176 AD2d 497 [1st Dept 1991]). The court, however, does not find the claim to be credible. Rather, the court finds much more plausible and persuasive that the respondents agreed to hear the shareholders' views regarding the petitioners' disputes and to take the shareholders' opinion under consideration. This is consistent with the respondents' letter to the shareholders dated February 26, 2004. Once again, it was within the scope of the respondents' authority to listen to the shareholders, and notwithstanding the shareholders expression of disapproval, to make a decision to adhere to its prior determination so long as they deemed it to legitimately further the cooperative interest. The court finds that this is what occurred. The respondents' decision to limit parking spaces to one per shareholder while a waiting list for spaces exist is entitled to deference under the business judgment rule and was neither arbitrary nor capricious. Petitioners request to enjoin enforcement of this decision is, therefore, denied.

Respondents seek to recover reasonable attorney's fees associated with their defense against petitioners' Article 78 proceeding. It is well settled in New York that a prevailing party may not recover attorney's fees from a losing party except where authorized by statute, agreement or court rule (U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 3 NY3d 592 at 597 [2004]). Respondents do not claim a right to attorney's fees based on a statutory right or court rule. Rather, they rely on paragraph thirty seven (37) of the proprietary lease agreement as authority for their request for attorney's fees. That provision pertains to default by the lessee and provides as follows: "If the Lessee shall at any time be in default hereunder and the Lessor shall incur any expense in performing acts which the Lessee is required to perform, or in instituting any [*5]action or proceeding based on such default, or defending or asserting a counterclaim in, any action or proceeding brought by the Lessee, the expenses thereof to the Lessor, including reasonable attorney's fees and disbursements, shall be paid by the Lessee to the Lessor , on demand as additional rent."

There is no dispute that the petitioners are not in default of any provision of their proprietary lease agreement. In fact, the respondents corrected themselves and advised the petitioners by letter dated February 3, 2004, that their dispute over parking fee arrears was not a default of their lease agreement. Inasmuch as attorney's fees are only authorized when the lessee is in default of the lease agreement, there is no authority or basis to award attorney's fees to the respondents. In summary, respondents may not terminate petitioners' occupancy of two parking spaces based on the improper determination of arrears. Respondents' resolution limiting parking spaces to one per shareholder is not reviewable. Respondents' request for attorney's fees is denied.

The foregoing constitutes the decision and order of the court.

______________________

J.S.C.