Can a cooperative's board of directors reject a sale because it believes the purchase price is too low? Can it set a price below which an apartment cannot be sold? An appellate court ruled, in Singh v. Turtle Bay Towers Corp., that a board's denial of a purchase application because the purchase price was significantly below market value was okay. A case decided by a trial-level court, Graham v. 420 East 72nd Tenants Corp., dealt with another aspect of this issue.
Sharie Graham owned an apartment at 420 East 72nd Street. She applied to purchase another apartment within the building, and the board expressed an interest in buying her apartment to create a gym. When Graham did not hear from the board, she placed her apartment on the market with a broker for $499,000. The board offered $400,000 for the apartment, which Graham rejected as being below market value.
Two weeks after that, Graham received an all-cash offer of $495,000, and the purchaser submitted an application to the board. Roughly two months later, the managing agent called Graham's broker and stated that the sale would not be approved because the sale price was below market. The agent said that the board would reconsider the application if the purchase price were $535,000. Shortly thereafter, Graham and her purchaser agreed to amend the contract so that the purchase price would be $535,000. The application was resubmitted with the amended contract. One week later, the apartment was appraised at $525,000.
The board's lawyer then sent a letter to Graham's lawyer requesting that Graham and the purchaser increase the sale price to $610,00. The price was not increased, and Graham sued the board and its individual members for breach of fiduciary duty, tortious interference with a prospective contract, and breach of contract. She sought, among other things, that the sale of the apartment be approved according to the amended contract.
Five months after the case began, the court ordered that the board provide a written decision approving or denying the purchase. Two days after the court's order, the purchaser's application of $535,000 was denied.
The board then moved for a summary judgment to dismiss the complaint, stating that there were no issues of fact that would permit Graham to succeed. The basis of the board's motion was that its decision to reject the purchase because the price was too low was protected by the Business Judgment Rule (BJR). The rule requires that when challenging a board's decision, a plaintiff must demonstrate that the board's decision was not made in good faith, with honest judgment, or in line with a corporate purpose.
In this case, the board contended that its rejection was based upon statistics provided by the managing agent, which showed that purchase prices for other apartments dictated that Graham's apartment should have been sold for between $560,000 and $610,000.
The court noted that boards of directors are presumed to be acting in good faith if they do not engage in discrimination, self-dealing, or misconduct. It quoted a Court of Appeals case decided in 1912 that set out the general rule that judicial inquiry into the actions of corporate directors is prohibited even where the "results show that what [the directors] did was unwise or inexpedient." The Levandusky vs. One Fifth Avenue Apartment Corp. case from 1990 specifically applied that principle to cooperatives. Thus, board members are given wide latitude in determining what is best.
But, the court noted, that latitude is not unfettered. The board had submitted only the statement concerning the sales of comparable apartments. Graham, on the other hand, raised issues of fact – not the least of which is that the board wanted to purchase the apartment for $400,000, more than $100,000 less than what Graham's purchaser was willing to pay and more than $200,000 less than what the board was now demanding.
The court determined that there were issues of fact as to whether the board had engaged in self-dealing because of its interest in purchasing the apartment. Accordingly, the court denied the coop's motion to dismiss, and it directed that discovery take place.
The Business Judgment Rule is an important tool. It allows boards to operate their cooperatives or condominiums without excessive interference – unless there are acts of wrongdoing or self-dealing, or if there is a contractual obligation to the contrary. But courts will question a board's actions if those actions defy common sense. It appears that this board offered nothing to explain how it could assert that the purchase price was too low while at the same time offering substantially less money to purchase the apartment itself.
The question of whether boards can require a floor price to enhance apartment values in the building has been controversial. The most obvious reason is that some apartments may be newly renovated while others are not. One hopes that in those situations, boards will use their judgment and, where warranted, make exceptions to their own rules. The decision in this case does not address whether this was the first time this board had rejected an application because the sale price was too low, or whether it had adopted a formula to determine acceptable prices. Nor does it address why the board was apparently not influenced by the appraisal.
The board in this case may genuinely believe that the purchase price is too low. However, if that were the case, it would have been bound to offer more when it sought to purchase the apartment. Boards can't have it two ways.
Originally published in Habitat Magazine, December, 2016.
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