As New York cooperative and common interest community home ownership has grown, disputes between tenants-owners and governing boards have landed in the court system. Courts have noted that cooperative or common interest community associations are quasi-governmental and “a little democratic sub society of necessity”. Like a municipal government, governing boards are responsible for running the day-to-day affairs of the cooperative and condominium and to that end, often have broad powers in the areas that range from financial decision making to promulgating rules and regulations regarding pets and parking spaces. See Levandusky v. One Fifth Ave. Apt. Corp 75 N.Y.2d 530 (App. Div. 1990).
The court in Levandusky determined that to best balance the individual and collective interests at stake, the proper standard of review concerning board decisions is the business judgment rule. This rule prohibits judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.
The prospect that each board decision may be subjected to full judicial review hampers the effectiveness of the board’s managing authority. The business judgment rule protects a board’s decision and managerial authority from indiscriminate attack. At the same time, it permits review of improper decisions when the challenger demonstrates that the board’s action had no legitimate relationship to the welfare of the common interest community association or acted outside the scope of its authority.
A party challenging board action must demonstrate a genuine and material issue as to whether a board acted outside the scope of its authority, in bad faith, or other than in furtherance of the welfare of the common interest community. Courts have upheld decisions of boards when it related to handicap accommodations, alterations and repairs of construction defects, objectionable conduct, financial issues, and issues relating to the adoption of house rules. The standard for judicial review as determined by Levandusy has remained the standard. All a board is required to do is demonstrate that they acted in good faith and in the best interests of the community. The board does not have to prove its reasonableness or prove that it was the right decision but rather a board need only show that it made a decision based upon relevant facts, acted within the scope of its authority and acted in furtherance of the common interest community’s purpose.
As long as the board acts in accordance with its scope of authority, acts in good faith and makes its decisions in furtherance of the welfare of the Association, the court will give deference to the board when one of its actions is challenged.