Whether Co-op Boards Can Reject a Sale Because the Purchase Price Is ‘Too Low’
“Courts have mostly rejected anti-free market tactics of the board of directors but other cases have given boards discretion to allow such rejections.” Adam Leitman Bailey and John Desiderio discuss these cases and offer that “New York needs the Appellate Division to settle this quarrel.”
Financially qualified cooperative buyer’s applications are being rejected by boards of directors solely on the basis that the purchase price is too low. Besides causing wasted time, money and distress between the individual parties, the buyer and seller and the real estate brokers, these rejections adversely affect and create an artificial market, as the seller is forced to put the unit on the market at a price that does not reflect its true value.
The inflated board-demanded prices will appear as the first entry of a Google search for building comparables or past sales, which can adversely affect prices throughout the building. Brokers fail to show, and buyers fail to view, any lower priced selling units. This artificial market may work when a market is hot and a unit has been priced poorly, but that has not been the experience in the several cases we have been involved in.
Courts have mostly rejected these anti-free market tactics of the board of directors but other cases have given boards discretion to allow such rejections. The cases and reasoning are discussed below but New York needs the Appellate Division to settle this quarrel. Board disapproval of the sale price can kill the sale and upset the shareholder’s immediate living plans and needs. A board may have a legitimate corporate purpose for evaluating the sale price, but that interest is not unlimited.
By-Laws Authorizing Boards To Set Price
It is well established that it is not unlawful for co-ops to adopt governing by-laws that require their shareholders to first offer their shares for sale to the co-op, at book value, before offering them to non-shareholders.
As the Court of Appeals explained in Allen v. Biltmore Tissue Corp., supra, 2 NY2d at 541:
The courts have almost uniformly held valid and enforceable the first option provision, in charter or by-law, whereby a shareholder desirous of selling his stock is required to afford the corporation, his fellow shareholders or both an opportunity to buy it before he is free to offer it to outsiders…[T]his first option provision is in the nature of a contract between the corporation and its stockholders and, as such, binding upon them…[A] by-law provision against transfer by any stockholder…of any shares until they [have] first been offered for sale to other stockholders at book value, was sustained as reasonable and valid. (Internal citations omitted) (Emphasis added).
In Jones v. Surrey Cooperative Apartments, 263 AD2d 33, 36, 700 NYS2d 118 (1st Dept. 1999), the plaintiff cooperative tenant failed to raise an issue of fact as to whether defendant cooperative corporation’s exercise of an option contained in the corporation’s by-laws to repurchase her shares at book value, as opposed to market value, was “unjust and unconscionable,” and thus beyond the scope of protection afforded by the business judgment rule.
The court directed dismissal of the plaintiff’s complaint and judgment for the corporation, holding that plaintiff “bore the burden of making the requisite showing that the board of directors breached its fiduciary duty,” and that “absent a showing of discrimination, self-dealing or misconduct by board members, corporate directors are presumed to be acting ‘in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.”
In Buttitta v. Greenwich House Co-op Apartments, Inc., 11 AD3d 250, 251 783 NYS2d 26, 27 (1st Dept. 2004), the court upheld a board’s right to enforce a bylaw that prevented plaintiffs from selling their shares in the co-op on the open market and requiring them to offer the stock first to the co-op at a below-market price.
The court noted that documentary evidence, consisting of minutes of shareholder and board meetings, “conclusively establish[ed] that plaintiffs, who are husband and wife and joint tenants of the unit in question, [had] ratified the bylaw in issue by their votes at meetings where the cooperative’s right of redemption was either exercised or waived with the specific proviso that the waiver was without prejudice, and [they were] therefore precluded from challenging it.”
In such cases, “specific performance of an agreement to convey will not be refused merely because the price is inadequate or excessive. The difference must be so great as to lead to a reasonable conclusion of fraud, mistake, or concealment in the nature of fraud and to render it plain inequitable and against conscience that the contract should be enforced.” Palmer v. Chamberlin, 191 F2d 532, 540-541 (5th Cir. 1951) (cited with approval in Allen v. Biltmore Tissue Corp., supra, 2 NY2d at 541).
Where Sales Are Not Restricted
When corporate charters or by-laws do not require shareholders to sell their shares to the co-op or other shareholders at either book value or some other set price, board review of the sale prices of proposed transfers is generally subject to the business judgment rule. Nevertheless, where a co-op’s proprietary lease directs that consent to a sale or transfer of shares “shall not be unreasonably withheld,” a “’heightened standard of reasonableness’ is to be applied in lieu of the usual business judgment rule.” Matter of Kotler v. 979 Corporation, 191 AD3d 473, 474, 142 NYS3d 495 (1st Dept. 2021).
Most decisions of New York trial courts, which have adjudicated cases involving claims of board rejection of “too low” sale prices, have, ruled that the plaintiffs have sufficiently alleged causes of action against the co-op board defendants for unreasonable restraint on alienation in violation of the business judgment rule. Nevertheless, at least one case, citing the business judgment rule, has held that, in the absence of any non-speculative discriminatory, self-dealing, or bad faith motive, the sale rejection is within the purview of the board’s authority to deny its consent “for any reason or no reason.”
In Hershkowitz v. White House Owners Corp., 2010 WL 1416206 (N.Y. Sur.) (Surrogate’s Court, Nassau County, 2010), a decedent purchased a co-op unit for $425,000 with a mortgage. Upon death, following a foreclosure proceeding, the administrator executed a contract of sale for a purchase price of $141,000, which received lender approval for a “short sale.”
The corporation moved for summary judgment contending, in part, that it had a right to reject the sale on the grounds that an inadequate price would diminish the value of other apartments. The estate contended that the corporation’s authority was not unlimited, that the corporation had not acted in good faith, and that the corporation’s rejection of the sale constituted an unreasonable restraint on alienation.
The Surrogate’s Court held that, “[w]here a lease gives the board of directors of a cooperative apartment unlimited discretion to withhold consent to a sale, the business judgment rule prohibits judicial inquiry into a decision made by the board taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes,” but, nevertheless, “whether or not the corporation acted in good faith, and [was] therefore entitled to protection of the business judgment rule, [could not] be determined on a motion for summary judgment.