Art Students League at 215 West 57th Street
Art Students League at 215 West 57th Street (NYLJ/Rick Kopstein)

A Manhattan Supreme Court justice declined to block a transfer of air rights over the Art Students League of New York’s historic building on West 57th Street, enabling construction of a 1,440 foot-high luxury residential tower.

More than 200 members of the non-profit organization had challenged the $31.8 million deal, in which the league’s board of directors sold 6,000 square feet of additional air rights to Extell Development to build the tower, which would cantilever over the adjacent landmark American Fine Arts Building owned by the league.

The cantilever transaction adds to Extell’s existing plans, secured by the 2005 purchase of air rights from the league, to build an 88-story building anchored by a Nordstrom’s department store. The cantilever section would begin at the 30th floor.

The 249 plaintiff members argued that the cantilever’s value was worth at least $400 million and sought to enjoin the transfer of rights. Their derivative lawsuit against the league’s board and Extell argued that thedeal was invalid because the number of votes cast didn’t reflect a majority of the voting membership and that the board made misrepresentations in a packet distributed to members prior to the vote.

Justice Melvin Schweitzer (See Profile), who sits in the Commercial Division, in an April 14 decision in Richard Caraballo v. The Art Students League of New York, 650522/2014, declined to grant a preliminary injunction. He held that the board exercised reasonable business judgment when relying on an appraisal by Jerome Haims Realty and taking precautions to avoid missing out on a $31 million business opportunity.

The league’s board of directors approved the cantilever transaction on Dec. 18, 2013. The members’ vote was held Feb. 12, 2014, just two days before Extell’s approval deadline.

Among 1,569 members who cast a vote, 1,342 voted in favor while 227 opposed. While the defendants argued this 64 percent share represented a “clear majority” of the voting membership, the plaintiffs argued that both active and inactive members should have been allowed to vote, thus requiring 1,974 votes to reflect a majority.

The judge held hearings on March 24 and April 4 to hear testimony where the defendants presented witnesses to explain the differences between voting rights of active and inactive members under 2001 amendments to the league’s bylaws.

In his ruling, Schweitzer said he agreed with a defense expert’s finding that the league’s bylaws on this point were “less than clear,” and therefore, the business judgment rule applied. Schweitzer concluded the board did not act “outside the scope of its authority or in bad faith in interpreting the league’s bylaws” in differentiating between active and inactive members’ voting power.

In addition, the judge found no merit to the plaintiffs’ argument that a clause in the ballot package informing members that they were making “an all or nothing decision,” and that if they did not approve the deal, they should “assume that the league will get nothing” was misleading.

“The court does not credit plaintiffs’ convoluted theory,” Schweitzer stated. “Rather, the court views the board’s action as a legitimate message to the league’s voting members regarding the consequences of a failure to have their vote registered. The board’s purpose appears to have been a straight-forward effort to mobilize league members to vote on an extremely important opportunity for the league, not to mislead them.”

Had the league’s board of directors put themselves in the position of losing “this unique $31 million opportunity, their business judgment may very well have been called into question,” Schweitzer said.

The judge also said the board was entitled to rely on expert opinions on the topic of fair appraisal.

Schweitzer cited Auerbach v. Bennet, 47 NY2d 619, 629 (1979), which said the business judgment rule “bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment.

Michael Volpe, a partner at Venable, and lead counsel for the Art Students League, said he was “very happy” with the judge’s ruling. “The factual analysis and reasoning are consistent with the careful decisions that were made by the board and its administration and we’re very happy we’ll able to move forward.”

Moshe Mortner, counsel for the plaintiffs, did not return a call for comment.