## Facts

- A Manhattan residential cooperative owned and operated a 38-unit building and leased units to shareholder-tenants under proprietary leases.
- A shareholder-tenant purchased shares appurtenant to a proprietary lease for an apartment in the building.
- The proprietary lease authorized termination on 30 days’ notice if, after a duly called meeting, at least two-thirds of the shareholders voted that a lessee was “undesirable” due to “objectionable” conduct.
- After moving in, the shareholder-tenant repeatedly accused upstairs neighbors of disruptive and unlawful activity and sent numerous hostile communications to the cooperative.
- The cooperative investigated and concluded the accusations were unsupported.
- Disputes escalated to a physical altercation and the distribution of flyers disparaging a neighbor to other residents.
- The shareholder-tenant also made unauthorized alterations, did not cooperate in correcting them, and initiated or attempted multiple lawsuits involving building residents or building-related matters.
- The cooperative convened a special shareholders’ meeting with notice; the shareholder-tenant did not attend, and the shareholders approved termination by the required supermajority.
- The cooperative served a notice of termination, the shareholder-tenant refused to vacate, and the cooperative sued for possession/ejectment and cancellation of the shares and proprietary lease.

## Issues

1. Whether judicial review of a cooperative’s termination of a proprietary lease for “objectionable conduct” is governed by the business judgment rule.
2. Whether RPAPL § 711(1) requires a court to independently determine, based on competent evidence, that the tenant’s conduct was objectionable before a cooperative may terminate under an objectionable-conduct lease clause.

## Decision

- The Court of Appeals affirmed the order applying the business judgment rule to the cooperative’s decision.
- The court held that, when a cooperative terminates a tenancy pursuant to the parties’ agreement, the business judgment standard governs judicial review.
- The court rejected a requirement that courts independently re-try whether the conduct was objectionable so long as the cooperative acted within its authority, in good faith, and in furtherance of legitimate corporate purposes.
- The cooperative could proceed based on its internal determination made under the lease’s termination procedure, subject to the limits of business-judgment review.

## Legal Principles

- Cooperative board and shareholder decisions are reviewed under the business judgment rule when undertaken within the scope of authority, in good faith, and for legitimate corporate purposes.
- The proprietary lease is the primary source defining the cooperative–shareholder relationship, including agreed procedures and standards for termination based on objectionable conduct.
- RPAPL § 711(1) does not displace business-judgment deference where a cooperative terminates under a valid lease provision and the cooperative’s action satisfies business-judgment criteria.
- Courts may intervene where a cooperative acts outside its authority or where the decision is tainted by bad faith, discrimination, self-dealing, or lacks a legitimate corporate purpose.

## Conclusion

The court held that a cooperative’s termination of a shareholder-tenant’s proprietary lease for objectionable conduct is reviewed under the business judgment rule, and courts will not independently decide whether the conduct was objectionable if the cooperative acted within its contractual authority, in good faith, and to advance legitimate corporate objectives.


40 W. 67th St. Corp. v. Pullman, 100 N.Y.2d 147 (N.Y. 2003)