Adam Leitman Bailey, P.C., On Behalf of Board, Defeats Preliminary Injunction by Self-Dealing Owner in Complicated Litigation
SHAREHOLDERS’ DEMAND FOR PRELIMINARY INJUNCTION
New York City’s extremely high density, especially in Manhattan, can yield high-stakes battles for even small spaces. When disputes about such spaces cannot easily be consensually resolved, legal “street fights” often develop rapidly, generating expedited proceedings. Successfully navigating these circumstances invokes an aphorism by British politician Charles Buxton: “In life, as in chess, forethought wins.” A recent matter handled by Adam Leitman Bailey, P.C. exemplifies Buxton’s advice.
TWO UNHAPPY SHAREHOLDERS
The building in dispute is a co-op exclusively for commercial tenants. The tenants include, among others, artists and craftsperson’s, and is located in a busy location not far from a major Hudson River crossing. One of the tenant-shareholders, who acquired their shares and unit in the mid -1990s and was a former Board director and officer, owned a unit abutting a loading dock and a modest portion of the building’s parking area. This shareholder was an artist who created very large sculptures that often had to be shipped out in pieces. Another shareholder operated a studio on a higher floor. Both had been members of the Board, with the artist having served as an officer as well. They were no longer on the Board in 2023 and resented certain new directors. The artist had also used the portion of their unit that comprised a section of the parking area as their own private lot, and from time to time rented the space to third parties, keeping the monies for themselves. Both shareholders had also become accustomed to unfettered year-round 24-hour 7-days-a-week access to loading docks and elevators.
The new Board believed the situation was too chaotic, presented safety issues, and would be a financial burden on the Corporation. The Board, therefore, passed several new “House Rules,” which, among other things, prohibited using the loading docks for loading and unloading, making clear there was no parking or standing at the building, regulated use of elevators (including requiring coordination with the building’s management), and detailing fines that would be imposed for violating the House Rules or proprietary lease.
A LAWSUIT IS FILED
The two shareholders were incensed at these new requirements. Adam Leitman Bailey, P.C. representing the Corporation and its Board, attempted to consensually resolve the dispute but the negotiations were unsuccessful. The two shareholders commenced a special lawsuit, known as an “Article 78 proceeding”, which is a legal process used to challenge actions or inaction by, among others, co-op boards. The shareholders claimed the Board had acted beyond its authority in enacting the new rules (known in legal parlance as an “ultra vires” act). Specifically, the shareholders asserted that the Board was not permitted to enact these new House Rules without first amending the proprietary lease, which, if correct, required obtaining over 66% of shareholders to approve the amendments. The artist also claimed entitlement to use the parking area as they saw fit based on the governing documents that they had received when they purchased their unit, and both claimed the Board had no right to regulate their elevator or loading dock access. They further contended that the Board had acted in bad faith, noting that prior to the lawsuit, a Board member had instructed building staff to lock a gate which later resulted in a citation from the City for preventing ingress and egress.
Additionally, the Petition claimed that even if the governing documents did not grant the artist unfettered use of the section of the parking area that was included in their unit, the shareholder was nonetheless entitled to use it as they desired under a doctrine called “adverse possession” (which, if certain conditions are met, permits a trespasser to claim title and ownership rights of a piece of real estate that they otherwise do not own). The shareholders also accused the Board of breaching its obligations to the Corporation when it refunded a deposit to a counterparty to an air-rights development deal, with the counterparty being a company managed by the Board’s new President.
The shareholders launched their attack by accompanying their Article 78 petition with a request for a temporary restraining order (TRO) and preliminary injunction which, if granted, would prohibit the Board from enforcing the newly enacted House Rules. The Court, without requesting an appearance or opposition papers, denied the TRO. However, it scheduled an expedited hearing to address the petitioners’ preliminary injunction application. The hearing would not address the shareholders’ adverse possession theory or their complaint about the deposit refund, but as a practical matter, those issues had already been presented to the Court and had to be kept in mind. With less than a week to prepare a response, Adam Leitman Bailey, P.C. snapped into action.
THE BOARD RESPONDS
It was clear at the outset that the petitioners faced a daunting hurdle. The shareholders were challenging the Board’s business judgment regarding how to manage the corporation. Under New York law the “business judgment rule” provides that so long as corporate directors have not breached their fiduciary obligations to the corporation they serve, a court may not question their judgment, even if the results demonstrated that the directors’ decision were unwise. Another obstacle was that the petitioners had not demonstrated that, even if they were correct, their grievances warranted injunctive relief, rather than monetary damages. Nor did it appear that the shareholders could demonstrate they would be irreparably harmed if they complied with the House Rules.
One major challenge the Adam Leitman Bailey, P.C. team faced was locating important documents, which had to be collected from a series of different entities, given that the dispute required rapidly understanding the history of the building and amendments to the governing documents, and nearly three decades had passed since the Corporation had first issued an offering plan. Nonetheless, Adam Leitman Bailey, P.C. quickly tracked down the materials and analyzed them.
The investigation revealed that the Corporation’s offering plan had expressly disclosed that units did not come with parking or driveway access. One might think that ended the story, but the situation was more complicated. An amendment to the proprietary lease stated that the artist’s unit included a portion of the parking area and permitted the owner to install appropriate fencing. However, the litigation team also uncovered earlier House Rules that expressly reserved the Board’s right to control access to the building, and restricted parking and loading/unloading. In addition, research revealed that the way the shareholder was using the parking spaces exposed the Corporation to civil and even criminal liability, because the number of vehicles the area was capable of holding was at least five, thus requiring approval and licensing from city agencies. In the space of a few days, the Adam Leitman Bailey, P.C. team drafted and finalized opposition papers, and prepared for oral argument.
THE COURT HEARS ARGUMENT, AND RULES FROM THE BENCH FOR THE BOARD
The oral argument was held only a few days after the opposition was filed, with Mr. Glatter arguing for the Corporation and the Board. The shareholders’ attorney, a highly experienced and competent real estate litigator, presented her case to the Court, arguing that the Board had acted beyond its remit in enacting the new house rules, claiming that the Board was allegedly persecuting the shareholders for ulterior motives, and argued that the nature of the shareholders’ work purportedly necessitated 24/7/365 access on demand to the building’s elevators and loading areas. The shareholders further complained that they had been “ousted” from the Board and they insisted that the area in question was not capable of holding five vehicles.
Mr. Glatter next addressed the Court and walked in the provision of the governing documents, explaining that adopting the petitioners’ arguments would effectively eliminate contractual provisions that had been disclosed to the owners and that they had agreed to years earlier which restricted their parking rights. Pointing out the demanding standards that governed the petitioners’ request – one of “clear and convincing evidence,” the highest possible standard in a civil lawsuit – once stripped of its caustic rhetoric, the shareholders’ argument reduced to complaints about convenience, noting that very few businesses, including large, august institutions, did not require scheduling and coordination with building management in respect to sending and receiving deliveries. And not only was the evidentiary standard high, but the shareholders’ complaint attacked the board’s business judgment, and whatever subjective criticisms the shareholders had, they did not come close to overcoming the hurdle the business judgment rule imposed.
Mr. Glatter also explained to the Court how the litigation team had calculated the number of cars the area could hold and noted that for all their accusations of having been unfairly “ousted” from the Board, the shareholders had not, and could not, demonstrate that the current Board had been elected illegitimately. Furthermore, even if one incorrectly assumed the shareholders’ claims had merit, the claimed harm was not a candidate for injunctive relief. Mr. Glatter summarized why all the evidence the petitioners identified – including temporary certificates of occupancy, the governing documents, and past citations – failed to support the shareholders’ demands. Finally, he observed that if anyone had the right to exploit the parking area section for profit, it was the Corporation, not the shareholder, and in fact, the shareholder was not only violating the law in operating an unlicensed parking facility, but had usurped an opportunity belonging to the Corporation, and had done so even as a Board director and officer.
It is unusual for a Court to rule from the bench, but in this case, once the argument was completed, the Court announced it was prepared to rule. It was evident the Court had carefully reviewed the papers, recognized the issues, and had closely followed the arguments. The Court concluded that the shareholders had failed to satisfy their demanding burden, observing that ultimately, their grievances summed up to complaining about some inconveniences. The Court agreed that injunctive relief was inappropriate, and also held that the petitioners failed to demonstrate that the governing documents unambiguously supported their proffered interpretation. The ruling was a resounding victory for the Corporation, the Board, and Adam Leitman Bailey, P.C.
The dispute is not over, and the shareholders have since filed an amended petition that notably no longer includes any claims regarding the deposit refund, and now asserts claims for “prescriptive easement,” a doctrine similar to adverse possession but focusing on use, rather than ownership. Adam Leitman Bailey, P.C.’s work is not done. But in defeating the shareholders’ efforts to be awarded injunctive relief at the lawsuit’s genesis, Adam Leitman Bailey, P.C. protected its clients from very negative outcomes for the case’s pendency. As legendary grandmaster David Bronstein once stated: “the most powerful weapon in chess is to have the next move.”
The clients are represented by Adam Leitman Bailey, John M. Desiderio, with assistance from Stuart A. Klein, all attorneys at Adam Leitman Bailey, P.C. Mr. Glatter argued before the Court on behalf of the clients.