GANFER & SHORE, LLP
COURT ALLOWS SUIT AGAINST COOPERATIVE BOARD
TO PROCEED GIVEN ALLEGATIONS OF BAD FAITH
Decisions by a cooperative board of directors will generally enjoy broad protection under the business judgment rule, so long as the board acts for the purposes of the cooperative, within the scope of its authority, and in good faith. A recent Appellate Division decision in 534 East 11th Street Housing Development Fund Corporation v. Hendrick, 90 A.D.3d 541, 935 N.Y.S.2d 23 (1st Dep't Dec. 20, 2011), addresses what type of allegations of bad faith will permit a plaintiff to get past the motion-to-dismiss stage of a litigation and proceed to discovery.
In this case, a cooperative sued a tenant-shareholder for breach of an agreement that required the tenant-shareholder to sell his cooperative unit to a specific purchaser under certain circumstances. The tenant-shareholder counterclaimed against the cooperative for tortious interference with his contract to sell to another purchaser. The counterclaim alleged that the board, which “knew [the tenant-shareholder] had a contract to sell his apartment, interfered with that relationship by refusing, in bad faith, to approve his buyer after [the tenant-shareholder] refused to take part in a fraudulent scheme to lower [another] buyer’s tax burden so the apartment could be purchased by a shareholder’s son.” The cooperative moved to dismiss the counterclaim under the business judgment rule, but the court denied the motion to dismiss, holding that “pre-discovery dismissal of pleadings in the name of the business judgment rule is inappropriate where those pleadings suggest that the directors did not act in good faith.”
The court did, however, dismiss a portion of the counterclaim that sought an award of attorneys’ fees under the proprietary lease. The court observed that the proprietary lease provision authorized a fee award only in cases based on alleged breaches of the lease, which was not the basis for either the cooperative’s claim or the tenant-shareholder’s counterclaim.
BOARD MEMBERS MAY BE SUED PERSONALLY
FOR MISREPRESENTING FACTS, COURT HOLDS
In numerous cases involving challenges to actions by condominiums or cooperatives, courts have dismissed claims filed against individual members of the board of directors or board of managers, on the ground that the actions complained of were those of the Board as a whole. The recent decision in Grubin v. Gotham Condominium, 2011 WL 6756068, 2011 N.Y. Slip Op. 52332(U) (Sup. Ct. N.Y. Co. Dec. 21, 2011), illustrates both this general rule and the types of circumstances under which board members may be sued personally.
This case involves a suit by the owners of a condominium unit against the condominium and the members of its board of managers. The unit owners alleged that since 2004, their units have suffered from numerous and serious defects. They also alleged that board members, seeking to avoid litigation, falsely told them that repairs were being made or would be made in the future, though neither was true. At the time of the suit, none of the damaged areas had been fully repaired.
The court dismissed all claims against most of the individual members of the Board of Managers. The court discussed the high burden imposed on a plaintiff who wishes to pursue such a claim, observing that “to hold an individual board member liable, the complaint must specifically plead independent tortious acts” committed by that board member. The court noted that allowing lawsuits against board members would deter people from participating in the governance of their condominiums. Thus, “only individual and separate acts of self dealing or other personally corrupt activities should burden [board members] with liability.”
Applying this standard, the court held that the unit owners had properly pleaded individual claims against two board members, both of whom had allegedly made false statements to the unit owners concerning the status of the repairs to their unit. For example, one of the board members had stated that certain railings for the unit had been ordered, paid for, and delivered; it was shown, however, that the railings had actually never been ordered at all. The other board member, it was alleged, falsely told the unit owners that certain companies no longer manufactured the type of flooring that needed replacement in the unit. The court held that this type of false representation to a unit owner, if proved, could support claims for fraud or breach of fiduciary duty.
With respect to the claims against the Board as an entity, the court held that “the board will be upheld when it acts in good faith in accordance with its powers and its actions set aside when it does not do so.” Based on the allegations before it, including “out-and-out misrepresentations . . . that certain items were on order when they weren’t and promises to replace the floorboards and then reneging because the type of planks needed [was] no longer commercially available, when they were available,” the court found that the unit owners had sufficiently pleaded claims for fraud, breach of fiduciary duty, and breach of contract against the Condominium
CONDOMINIUM ENTITLED TO ATTORNEYS’ FEES
IN ACTION TO ENFORCE CONDOMINIUM LIEN
A condominium was entitled to recover the attorneys’ fees it incurred in foreclosing on a condominium unit to enforce a lien for unpaid common charges, according to the Appellate Division decision in Glenridge Mews Condominium v. Kavi, 933 N.Y.S.2d 730 (2d Dep’t 2011).
In this case, the condominium sued one of its unit owners for nonpayment of common charges, and was granted a judgment foreclosing on the unit. Following the sale, the condominium asserted that in addition to recovering the unpaid common charges from the sale proceeds, it was also entitled to an award of its attorneys’ fees incurred in the foreclosure litigation. The Condominium relied on a provision of its By-Laws, which provided that “in the event of default by any Unit Owner in paying to the Board of Managers the Common Charges or any assessment as determined by the Board of Managers, such Unit Owner Shall be obligated to pay . . . all expenses, including attorney’s fees, incurred by the Board of Managers in any proceeding brought to collect such unpaid Common Charges or assessments.”
The Appellate Division held that this clear language mandated an award of attorneys’ fees to the Condominium. Based on detailed invoices submitted by the Condominium’s lawyers, the court further found that the Condominium should be awarded the full amount of its attorneys’ fees, in excess of $35,000, rather than the much smaller amount that a lower court had allowed.