Opinion
06 Civ. 06535 (RLC).
March 20, 2007
Harris N. Cogan, Blank Rome LLP, New York, NY.
Jerry D. Bernstein, Blank Rome LLP, New York, NY.
Stephen James Meyer, Blank Rome LLP, New York, NY.
Scott J. Wenner, Schnader, Harrison, Segal Lewis, New York, NY.
OPINION
In this action, on August 29, 2006, plaintiff, The World Residensea II, LTD. (the "World" or "Ship Owner"), filed a complaint against defendant, Salvador Villaseñor ("Villaseñor"), a 56 year-old resident of the luxury passenger ship M/V The World (the "Ship"). The Ship Owner is seeking declaratory judgment and recovery of expenses arising from defendant's alleged harassment of and inappropriate behavior toward female guests and workers on the Ship. On August 16, 2006, Villaseñor was ordered to leave the Ship while the Ship conducted an investigation into an alleged incident involving a 16 year-old female guest. Since that date, Villaseñor has not been permitted to reside on the Ship.
Presently before the court is defendant's November 2, 2006 order to show cause for a mandatory preliminary injunction requiring plaintiff The World to allow Villaseñor to return to his residence aboard the Ship pending the resolution of the issues raised in this action; or, alternatively ordering that any and all monies due and owing by Villaseñor for maintenance and other fees related to Apartment 730 be held in escrow pending resolution of the issues raised in this action.
Background
The Ship is a private residential community at sea consisting of 165 residences. Owners of residences aboard the Ship purchase shares in the corporation that owns the Ship. The shares equate with "Residency Rights" and provide the owner with certain rights that are embodied in a Residence Agreement. Those rights include exclusive access and use of the owner's apartment as well as voting units in the corporation that owns the Ship. An owner may use the Ship as a full time residence — which the defendant Villaseñor and others have chosen to do — or as a vacation residence, which may be offered for rental when not in use by the owner.
In two separate agreements in December 2003 and February 2005, Villaseñor purchased exclusive Residency Rights including the attendant voting units in two apartments aboard the Ship. Villaseñor purchased Residency Rights in Apartment 706 for the sum of $550,000 and along with his daughter Pamela Villaseñor, purchased Residency Rights in Apartment 723 for the sum of $214,900. In or about October 2005, Villaseñor became a full time resident of the Ship. Thereafter, in January 2006, Villaseñor obtained Residency Rights in a third unit, Apartment 730, through a purchase by Xiang Ware SA DE CV, a company in which Villaseñor has an interest, for the sum of $1,950,000, to use as his primary residence. Owners of residences aboard the Ship are governed primarily by two documents, the Ship Rules and the Residence Agreement.
The day before Villaseñor was ejected from the Ship in Singapore, Thailand, the Ship Manager retained the law firm of Holland Knight, LLP to conduct an independent investigation, in which defendant did not participate, of the incident involving the 16 year-old guest aboard the Ship. Villaseñor was told he could rejoin the Ship in Darwin, Australia once the investigation was completed. However, on August 20, 2006, defendant was informed that he would not be permitted to reboard the Ship until the investigation was complete. On August 22, 2006, Holland Knight submitted a report of its investigation (the "Report") to the Ship's management. On August 24, 2006 defendant commenced an action in Australian court seeking a temporary injunction directing the Ship to allow defendant to board the Ship while it was at port in Australia. On August 29, 2006, Villaseñor was notified that the investigation was complete and that the Ship Captain, the Ship Manager and the Ship Owner had each reached a determination based on the Report that they would not permit him to return to the Ship. That same day, plaintiff Ship Owner filed a complaint in this court, as the Ship's contracts are governed by New York law. On September 1, 2006, the Australian court declined to grant Villaseñor's request for an injunction allowing him to return to the Ship.
On October 30, 2006, the Board of Directors (the "Board") convened a special meeting in San Francisco to hear Villaseñor's response to the accusations against him. The Board thought Villaseñor's testimony corroborated his accusers' stories and lacked any acknowledgement of the inappropriateness of his acts towards them. Thus, the Board adhered to the prior decision that Villaseñor be barred from the Ship. Specifically, the Board unanimously determined that he had violated the Ship Rules by engaging in conduct that threatened the health, safety or well-being of persons on the Ship, and by harassing and abusing persons onboard the Ship. Further, the Board unanimously determined that these violations were of such an egregious nature as to warrant immediate and continued expulsion from the Ship.
This court held an evidentiary hearing on December 21, 2006 regarding the defendant's November 2, 2006 order to show cause for a mandatory preliminary injunction, the court heard from two of Villaseñor's accusers, Maritess Panergo, a stewardess aboard the Ship, and the 16 year-old guest, as well as James St. John, president of the Ship's management company, and Villaseñor himself. At the hearing, the two young women testified to the following.
In December 2004, Ms. Panergo alleges that Villaseñor approached her from behind and rubbed his penis against her bottom while she ironed his shirt after being called to his unit to retrieve laundry. According to Ms. Panergo, even after she moved to the other side of the table on which she was she was ironing, Villaseñor continued to follow her around the table pressing himself up against her. In August 2006, the 16 year-old guest alleges that Villaseñor physically blocked her passage through a Ship hallway and forcibly kissed her on the mouth.
On January 16, 2007, the parties each submitted post-hearing papers. The court granted both the defendant's and plaintiff's request to submit replies, which were timely filed on February 21st, 2007.
Ship Rules and Residence Agreement
At issue is whether or not The World was within its rights under the Ship Rules and Residence Agreement to expel the defendant from the Ship indefinitely.
According to The World, the Residence Agreement specifies the parties' contractual rights and obligations while the Ship Rules designates the standards of conduct for persons traveling on the Ship. The World argues that Villaseñor breached the Ship Rules and Residence Agreement by jeopardizing the comfort and well being of those on the Ship and engaging in behavior that the Captain deemed objectionable and is therefore not entitled to any of the protections afforded under the Residence Agreement, such as a notice period and an opportunity to cure prior to being ejected from the Ship. Plaintiff further argues that the Residents, including Villaseñor, expressly agreed to give the Ship Owner, acting through a Board elected by the Residents, the authority to enforce breaches of the Ship Rules.
Specifically, plaintiff argues that Ship Rules, at Section 10, expressly prohibit any Resident or guest from engaging in activity, which "will unnecessarily or unreasonably interfere with the rights, comforts and conveniences of others on board the Ship as determined by the Ship Owner." In addition, under Section 10(d) of the Ship Rules, the Ship Owner has the right to expel from the Ship any Resident at any port of call, if, in the sole discretion of the Ship Owner, such Resident has violated Section 10 of the Ship Rules.
Paragraph 10 of the Ship Rules, entitled "Standards of Conduct on the Ship," provides in pertinent part:
Notwithstanding the foregoing, the Ship Owner shall have the right to expel a Resident or guest from the Ship at any port of call immediately and without providing the Resident or guest with any written warning(s) or notice whatsoever if the Violation committed by the Resident or guest is incapable of being cured or is of such an egregious or time-sensitive nature, as determined by the Ship Owner in its sole discretion, as determined by the Ship Owner in its sole discretion, as to warrant immediate expulsion from the Ship. (Pl.'s Ex. 3 at C-3, C-4).
Plaintiff also argues that under the Residence Agreement, at Section 33 and 66, in the event of any action by a Resident or which the Captain of the Ship deems to be sufficiently objectionable so as to jeopardize the comfort and well being of the Ship, its crew, any other Resident, or any other passenger, the Ship Captain may take such action, with or without notice, as he in his sole and absolute discretion shall determine to be necessary and appropriate.
Paragraph 33 of the Residence Agreement provides, in pertinent part:
Subject only to the performance by the Resident of all of its obligations and duties under this Residence Agreement, the Resident shall, at all times have, hold and enjoy quiet and peaceful occupancy of the Apartment without any let, suit, trouble or hinderance from the Ship Owner, subject however, at all times to the Ship Rules and to Ship Owner's and the ship's captain's overriding obligations to operate and safeguard the Ship. (Pl.'s Ex. 2 at 24).
Paragraph 66 of the Residence Agreement provides, in pertinent part:
The Resident also expressly acknowledges the authority of the Ship Owner and the Ship's captain and submits to the lawful directions and requests of the Ship Owner, the Ship's captain and those who are delegated to act on their respective behalves. In particular, with respect to any condition or actions of the Resident which the captain of the Ship deems to be a hazard to the Ship or sufficiently objectionable so as to jeopardize the comfort and well being of the Ship, its crew, any other Resident, or any other passenger, the captain of the Ship may take such action as he in his sole and absolute discretion shall determine to be necessary or appropriate, with or without notice to the Resident. (Pl.'s Ex. 2 at 42-43).
As a result, plaintiff claims that Villaseñor has violated the Ship Rules and the Residence Agreement and is obligated to pay expenses as set forth in Section 44 of the Residence Agreement, which requires unit owners to reimburse the Ship Owner or Trustee for expenses, such as legal fees and costs of investigations triggered by a default by that owner under the contract terms.
In contrast, Villaseñor argues that under Paragraph 43(A) of the Residence Agreement that he should have been provided with written notice and a thirty (30) day opportunity to cure any objectionable behavior, and if necessary, a second notice and thirty (30) day cure period. Furthermore, Paragraph 43 entitled "Ship Owner's Remedies," addresses the forms of adverse action that can be taken by The World when a resident is in default under Paragraph 42. According to the defendant, this provision requires that residents will receive "due process" rights in connection with any efforts by The World to enforce its remedies under the contract.
Discussion
The Ship is a unique residential community. Unlike a cruise ship, The World is owned by its residents and populated by them, their guests, their renters and the Ship's staff. The ownership structure can be analogized to a cooperative apartment building or residential development. However, the court acknowledges that the Ship unlike a cooperative building or development, poses additional challenges for the Ship's Captain, management and Board in ensuring the health and safety of all those onboard the Ship given that residents are confined together in a closed space while the Ship travels between ports.
In his papers, defendant Villaseñor analogizes his situation to that of an owner of a New York City cooperative apartment, where the residents own shares in a corporation that own the building, who is accused of wrongdoing by other tenants. (Def.'s Mot. for Prelim. Injunc. doc. # 11 at 8 FN 2).
Mandatory Preliminary Injunction
A party moving for a mandatory injunction that alters the status quo by commanding a positive act must meet a higher standard than that for a prohibitory preliminary injunction; that is, in addition to demonstrating irreparable harm, "[t]he moving party must make a clear or substantial showing of a likelihood of success" on the merits. Here, the defendant must meet this higher standard because the injunction sought by defendant would alter the status quo by requiring plaintiffs to allow Villaseñor to re-board the Ship.
See Tom Doherty Assocs., Inc. v. Saban Entm't, Inc., 60 F.3d 27, 33-34 (2d Cir. 1995).
Jolly v. Coughlin, 76 F.3d 468, 473 (2d Cir. 1996) (internal quotation marks omitted); see Mastrovincenzo v. City of New York, 435 F.3d 78, 89 (2d Cir. 2006).
The court looks to 40 West 67th Street v. Pullman, 760 N.Y.S.2d 745 (N.Y.App. Div. 2003) for guidance on the likelihood of success on the merits prong of this test. Under Pullman, the business judgment rule, a common-law doctrine, is applied to decisions by cooperative boards of directors and requires the courts to "exercise restraint and defer to good faith decisions made by boards of directors in business settings." Thus, the defendant is not likely to succeed on the merits if a valid board vote has taken place. Therefore, a finding of a valid board vote by the court is sufficient grounds to deny defendant's motion for mandatory preliminary injunction.
Pullman, 760 N.Y.S.2d at 750.
Pullman Standard
Under New York law, N.Y. McKinney's RPAPL § 711(1), a landlord is entitled to terminate the lease of a tenant if the tenant partakes in objectionable conduct and the landlord can establish by "competent evidence" to the court's satisfaction that the tenant is objectionable. In the case of a cooperative corporation though, courts apply the business judgment rule and defer to the board of directors or shareholders' determination of whether the tenant's actions are objectionable.
See id.; see also London Terrace Towers, Inc. v. Davis, 790 N.Y.S.2d 813 (N.Y. Civ. Ct. 2004) (applying the Pullman standard to a board's vote, finding that a board's vote to terminate respondent's proprietary lease was dispositive).
In Pullman, a cooperative sought to recover possession fromPullman, a shareholder-tenant who engaged in objectionable conduct that eventually led to the termination of his tenancy. The shareholders held a meeting to decide whether to pass a resolution ordering the board of directors to terminate Pullman's tenancy. At the meeting, shareholders representing a supermajority of the shares were present; Pullman did not attend. The shareholders voted 2048 shares to 0 to terminatePullman's tenancy.
Pullman, 760 N.Y.S.2d at 748.
Id. at 749.
Id. at 752.
Id. at 749, 752.
To trigger further judicial scrutiny, an aggrieved shareholder-tenant must make a showing that the board acted: (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose, or (3) in bad faith. These three exceptions to the business-judgment rule balance the interests of the entire cooperative community with the judiciary's interest in guarding against the board's possible abuse of its powers to terminate a shareholder-tenant's proprietary lease. Absent proof of one or more of the three exceptions, a board vote to terminate a tenancy because of the shareholder-tenant's objectionable conduct constitutes "competent evidence" under RPAPL § 711(1).
Id. at 751.
Id.
Id. (finding that "relationships among shareholders in cooperatives are sufficiently distinct from traditional landlord-tenant relationships" and that courts should not look behind proper board votes).
Here, under the likelihood of success on the merits prong, there is strong evidence that a properly elected board acted within its authority and in accordance with their understanding of the Ship Rules and Residence Agreement. The Board provided defendant with a forum to dispute the alleged objectionable behavior. Also, the Board gave defendant an opportunity to be heard; defendant appeared and defended himself against the Board's allegations. The Board heard Villaseñor's testimony but was unpersuaded by his argument. The decision of the Ship's Board to bar Villaseñor from the Ship was based on the sum total of all of the evidence of his misconduct, and was a reasonable exercise of the Board's discretion. Therefore, the decision is entitled to deference under Pullman.
The court has also considered Villaseñor's claim that the decision to expel him from the Ship was motivated by prejudice against him, as a Mexican national. In order to overcome public policy that supports according deference to the business judgment rule, defendant must present the court with specific independent tortious acts of discrimination or similar wrongdoing committed by those involved in the decision to expel Villaseñor from the Ship. At this time, Villaseñor has not shown that it is likely he was "deliberately single[d] out individuals for harmful treatment" by the Ship's Captain, the Ship's management or the Board based on his national origin.
See Pelton v. 77 Park Ave. Condominium, 825 N.Y.S.2d 28, 34 (N.Y.Sup.Ct. 2006).
See Matter of Levandusky v. One Fifth Ave. Apt. Corp., 554 N.Y.S.2d 807, 813 (N.Y.App.Div. 1990); see also Pelton, 825 N.Y.S.2d at 35 (citing Konrad v. 136 E. 64th St. Corp., 667 N.Y.S.2d 354, 356 (N.Y.App.Div. 1998)).
Additionally, even if the Board's decision had triggered further judicial scrutiny under Pullman, the court held an evidentiary hearing on December 21, 2006; and based on the testimony at the hearing, the court finds that the Ship Captain, the Ship's management and the Board acted within their authority to further the corporate purpose in good faith.
Even so, despite a valid board vote, Villaseñor is entitled to compensation for his Residential Rights in the units aboard the Ship as long as he, himself, is personally excluded from residing aboard the Ship indefinitely. It would be inequitable for Villaseñor to be permanently excluded from personal enjoyment of his property and not be provided with immediate compensation for his Residential Rights in his units aboard the Ship. The Ship argues that it "has never suggested that Villaseñor has forfeited his other rights of ownership of his apartments, or the right to realize their economic value, by renting, selling and/or holding them for investment." (Pl.'s Post Hr'g Opp. Br. at 31). However, the Ship also acknowledges that "[w]hile Villaseñor is under no obligation to sell his apartments, the Ship Owner recognizes that he is likely to do so under these circumstances." (Id.). In his papers, Villaseñor has indicated to the court that he has not received sufficient rental income during his expulsion to cover maintenance fees and other fees owed to the Ship during his expulsion. (Def.'s Post Hr'g Reply Letter Br. at 2-3). In addition, he notes that he listed one apartment for sale two-years ago and to date the only offer he has received was from a fellow resident and was twenty-five (25) percent below his asking price. (Id. at 3 FN6). It is understandable, given that the Ship is often at sea for extended periods of time, it may be difficult for potential buyers or renters to view units. Therefore, it is unreasonable for the Ship Owner to hold the value of defendant's Residential Rights hostage for an indeterminate amount of time while excluding him from the Ship.
A District Court has discretion to evaluate a situation in its entirety to reach a fundamentally just outcome:
The essence of equity jurisdiction has been the power of the Chancellor to do equity and rather than rigidity has distinguished it. The qualities of mercy and practicality have made equity the instrument for nice adjustment and reconciliation between the public interest and private needs as well as between competing private claims.Hecht Co. v. Bowles, 321 U.S. 321, 329-330 (1944).
Conclusion
For the aforementioned reasons, defendant's motion for mandatory preliminary injunction is denied. Additionally, within ninety (90) days of this order, the World is directed to pay Villaseñor the value of his Residential Rights at the date of his expulsion from the Ship (including maintenance and other fees paid by Villaseñor since his expulsion minus any rental income received). If the parties cannot come to an agreement on the value and payment for Villaseñor's Residential Rights in his units aboard the Ship, the court will consider appraisals submitted by both parties within thirty (30) days of this order, and the court will determine the value of Villaseñor's Residential Rights in his units aboard the Ship.