By Adam Leitman Bailey and John M. Desiderio

How is a co-op applicant to know whether a rejection decision was made for legitimate corporate purposes, or because of one or more board members’ unlawful motivations? The first place to look would be the co-op’s minutes of its board meetings. Adam Leitman Bailey and John Desiderio discuss the law surrounding the minimum requirements necessary in the minutes when rejecting a purchase application.

This article will discuss cooperative board’s minimum requirements for what to write in their minutes of meetings when rejecting a Cooperative purchase application and how and why co-op boards decide to accept or reject a purchaser applicant for the shares and proprietary lease of one of the co-op’s apartments.

Co-op boards generally act under the protection of the business general rule which, for the most part, insulates board activity from judicial scrutiny. See Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y.2d 530, 536 (N.Y. 1990); and 40 West 67th Street v. Pullman, 100 NY2d 147 (2003). Nevertheless, both Levandusky and Pullman clearly note that board actions motivated by bad faith, self-dealing, or unlaw discriminatory reasons, are not protected by the business judgment rule.

Nevertheless, co-op board decision-making regarding share/proprietary lease sale/purchase transaction are generally made under by-laws provisions allowing them to be made “for any reason not proscribed by law or for no reason at all.”

In such situations, how is one to know whether a particular rejection decision was made for legitimate corporate purposes, or because of one or more board members’ unlawful motivations? The first place to look would be the co-op’s minutes of its board meetings. What does the law require to be recorded therein?

The Law Regarding Board Minutes

All corporations must by law keep and maintain minutes of all proceedings in which decisions or actions, done or taken in the name of the corporation, are made or authorized by their boards of directors and/or by their shareholders as a whole. Specifically, in New York, a corporation’s duty to keep minutes of its proceedings is prescribed in Business Corporation Law (“BCL”) §624(a):

(a) Each corporation shall keep and maintain correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders, board and executive committee, if any,…. Any of the foregoing books, minutes or records may be in written form or in any other form capable of being converted into written form within a reasonable time. (Emphasis added)

The purpose in keeping minutes is to “clearly and certainly record the transactions and proceedings as they actually occurred,” and to “definitely and positively show what action was taken by the corporation in the matters that they purport to memorialize.” 5A Fletcher, Fletcher Cyclopedia of the Law of Private Corporations, §2190, at 155-156 (2004)(emphasis added), cited in People v. Grasso, 50 AD3d 535 (1st Dept. 2008)(McGuire, J., dissenting). Nevertheless, “although it is hornbook law that board minutes are meant to reflect the board’s actions,” the “secretary is not obligated to include everything that is said in the minutes as long as the secretary actually transcribes what has taken place.” Id. (Emphasis added).

The Secretary’s role in “transcribing what has taken place” is made clear by BCL §624(g) which prescribes that:

(g) The books and records specified in paragraph (a)shall be prima facie evidence of the facts stated therein in favor of the plaintiff in any action or special proceeding against such corporation or any of its officers, directors or shareholders. (Emphasis added).

In addition to requiring that the “facts” of “what has taken place” be recorded in the minutes, BCL §708(a) prescribes that;

(a) Except as otherwise provided in this chapter, any reference in this chapter to corporate action to be taken by the board shall mean such action at a meeting of the board. (Emphasis added).

Rump gatherings of board members, or random phone calls or hallway conversations, at which opinions are exchanged, or unofficial agreements on particular courses of action are made, clearly do not constitute the kind of “meetings” required by BCL §708(a) (nor, indeed, the kind of meetings required by most corporate by-laws). See, e.g., Katz v. Board of Managers of Stirling Cove Condominium, 201 AD3d 634, 640 (2d Dept. 2022) (Held: board’s motion for summary judgment was denied for failing to provide evidence that the board’s decision was “made at a duly noticed meeting voted upon by a quorum of board members in accordance with the bylaws.”); Pello v. 425 E. 50 Owners Corp., 19 Misc.3d 1125(A)(2008 N.Y. Slip Op. 508-49(U)), at *5)(Tolub, J.) (Held: board member’s claim that she personally spoke to all the shareholders prior to the board’s imposition of a flip tax and all including plaintiff were in favor of it, even if true, did not constitute the requisite shareholder meeting and approval.”).

While it is clear that minutes must be kept, it is important for boards of directors to also understand what exactly needs to be recorded in the minutes “of the proceedings of [the corporation’s] shareholders, board and executive committee, if any.” (Emphasis added).

This is especially important for the boards of cooperative apartment corporations, whose boards are called upon to give their consent to the sale and transfer, of co-op shares and their associated proprietary apartment leases, from the current owners of those shares and leases, to prospective purchasers.

The Business Judgment Rule

It is generally held that, where a proprietary lease so provides, co-op boards are free to reject purchaser application packages “for any reason or no reason at all.” DeSoignies v. Cornasek House Tenant’s Corp., 21 AD3d 679 (1st Dept. 2005); see also Honig v. St. George Tower & Grill Owners Corp., 217 AD2d 572 (2d Dept. 1995)(Held: “the proprietary lease in question contains a provision that allows the corporation to withhold its consent…for any reason not proscribed by law or for no reason at all,” and “[t]hus, the Supreme Court properly found in favor of the defendant.”).

Pursuant to the business judgment rule, a court will 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 good faith.” Levandusky v. One Fifth Avenue Apartment Corp., supra.

However, in Pullman, supra, the Court of Appeals explained that the business judgment rule is inapplicable where a cooperative board acts outside the scope of its authority, in a manner that does not legitimately further the corporate purpose, or in bad faith.

The court stressed that the “broad powers of cooperative governance carry the potential for abuse when a board singles out a person for harmful treatment or engages in unlawful discrimination, vendetta, arbitrary decision making or favoritism” and “that those types of abuses are incompatible with good faith and the exercise of honest judgment.”

Accordingly, there is an inherent tension, in the application of the business judgment rule, between (a) board decisions made in the ordinary course of business, regarding house rules, alteration agreements, imposition of flip taxes, assessments, or fines, for which (barring acts beyond the board’s authority, unlawful discrimination, bad faith, or self-dealing) there is no judicial oversight, and (b) board decisions granting or withholding consent to share/proprietary lease purchase/sale transactions “for any reason not proscribed by law or no reason at all,” but which nevertheless (i) must be made at a meeting of the board (BCL §708(a)), and (ii) recorded in minutes of that meeting (BCL §624(a)), (iii) as “prima facie evidence of the facts stated therein” (BCL §624(g)).

Given a cooperative board’s ability to withhold its consent to a prospective sale and transfer of a shareholder’s shares and proprietary lease “for any reason or no reason at all,” what exactly must a cooperative board record in its minutes when withholding consent from a particular purchase/sale transaction? Although, the minutes need not contain a detailed discussion of the board’s reasoning, the minutes must at least record the board’s “determination.” See Katz, supra.

Nevertheless, unless the minutes of a board’s review of a prospective purchaser of corporate shares include the board’s reasons, for either consenting to or rejecting the transaction, the only way, by which the selling shareholder or the applicant purchaser can know the “why” of the board’s decision, must necessarily be determined through litigation. See, e.g., Wirth v. Chambers-Greenwich Tenants Corp., 87 AD3d 470 (1st Dept. 2011)(“Plaintiffs raised triable issues of fact whether defendants withheld their consent due to malice or vendetta and whether they discriminated against plaintiffs”).

Nevertheless, a board’s failure to keep minutes, as required by BCL §§264(a) and (g), and BCL §708(a), or as separately required by the corporation’s by-laws, will be fatal to the defense of a board decision withholding consent to a purchase application. The business judgment rule will not protect such board action when the minutes do not record any of the board’s approval or rejection decisions. See Cohan v. Board of Directors of 700 Shore Road Waters Edge, Inc., 108 AD3d 697, 699 (2d Dept. 2013) (Held: the business judgment rule does not protect board action that violates corporate by-laws).

Moreover, it does not matter whether failure to keep the minutes resulted from careless and cavalier conduct of the board’s corporate governance, or from a deliberate policy adopted to shield board members from potential liability. Such conduct exemplifies the type of board action denounced in Pello, supra:

Since the board’s secretary is required by the by-laws to give all required notices and to keep minutes of all shareholder meetings…, the court must conclude that…the officers of the cooperative are so derelict in their duties and dismissive of their obligations under the by-laws that any action taken by them is meaningless. (Emphasis added)

Furthermore, even if the minutes do properly reflect and record the board’s decision rejecting a purchaser, where sufficient facts and circumstances are alleged from which to infer a board’s pattern of unlawful conduct, consisting in “singl[ing] out a person for harmful treatment or engaging in unlawful discrimination, vendetta, arbitrary decision making or favoritism,” such facts and circumstances will support a cause of action against the board by the purchaser or the seller. See Pullman, supra; see also Stalker v. Stewart Tenants Corporation, 93 AD3d 550 (1st Dept. 2012) (Held: plaintiff seller stated a cause of action against the board, for housing age discrimination against the prospective purchaser and housing national origin discrimination against the seller, under New York Human Rights Law §296(5)(a)(2), which makes it an unlawful discriminatory practice “to discriminate against any person” on the basis of, inter alia, their national origin or age.) (Emphasis in original)

Conclusion

It is incumbent upon cooperative boards to ensure they are fully aware of the laws which govern board deliberations, including that each rejection of a purchase application must be noted and written in the minutes of the meetings drafted at each board meeting.

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. John M. Desiderio is chair of the firm’s Real Estate Litigation Group. Zoe Tsicalos, an associate of the firm, and Max Richardson, a Hofstra University law student and extern of the firm, assisted in the preparation of this article.