GANFER & SHORE, LLP
MEMBERS OF COOPERATIVE BOARD OF DIRECTORS HELD
LIABLE TO COOPERATIVE FOR UNAUTHORIZED PAYMENTS
Members of a cooperative board of directors who accepted unauthorized payments from their cooperative are liable for breach of fiduciary duty, according to the recent decision in SantiEsteban v. Crowder, 2012 WL 541546, 2012 N.Y. Slip Op. 1327 (App. Div. 1st Dep’t Feb. 21, 2012).
In this case, residents of a cooperative brought a derivative suit on the cooperative’s behalf against the members of the board of directors. They alleged that the directors paid themselves and their children “management fees” and “salaries” totaling more than $200,000. Plaintiffs alleged that the payments had never been authorized by board resolution, even though the cooperative’s by-laws provided that the directors were to receive no remuneration “unless a resolution authorizing such remuneration is unanimously adopted by the Board before the services are undertaken.”
The board members admitted that they each received 4% of the cooperative’s monthly revenues but contended that they were entitled to the payments as compensation for acting as the cooperative’s managers, and in one case, an additional $150 per week for acting as superintendent. The court held, however, that the directors had “unquestionably failed to comply with the bylaws.” The court rejected defendants’ argument that a provision of the offering plan, which permitted the building to be self-managed, authorized the payments to the directors as managers. There was no contradiction, the court found, between the offering plan’s authorization of self-management and the by-law provision that unanimous advance approval was required for payments to board members.
The court also rejected the directors’ contention that the shareholders had ratified the payments. In support of this contention, defendants relied on a by-law provision under which self-interested contracts or transactions between directors and the cooperative can be “authorized” by the shareholders. The defendants submitted affidavits from other shareholders indicating that they knew the directors were being paid to manage and maintain the building, approved of the arrangement, and believed the payments to the directors were comparable to the amounts third-parties would charge for the same services. The court found the affidavits to be insufficient to constitute shareholder authorization or ratification, because the by-law “provision contemplates authorization by a vote cast at a duly held shareholders’ meeting, which never occurred.”
The court concluded that “[s]ince defendants’ payments to themselves were unauthorized, as a matter of law, they are liable for breach of fiduciary duty.” The court did not, however, direct that the directors return the full amount of the money they had received. It appeared that the directors had performed valuable services for the cooperative. Therefore, a trial was required to assess the damages the cooperative had suffered by making the unauthorized payments. A trial was also required on plaintiffs’ claims for corporate waste and conversion, because the directors had “raise[d] issues of fact as to whether the payments they received, even if unauthorized, were made in good faith for the legitimate purpose of fairly compensating them for their services to the cooperative.”
ESCROW AGENT MAY BE LIABLE FOR RELEASING
DEPOSIT BASED ON FORGED SIGNATURE
After the proposed sale of a condominium unit fell through, the prospective purchaser demanded that the escrow agent return her deposit. The escrow agent responded to the demand with surprise: It had already returned the purchaser’s deposit several months earlier, after it was provided with a termination agreement bearing the signatures of both the buyer and the seller. The buyer asserted that the termination agreement was a forgery and sued the escrow agent, a law firm, for breach of fiduciary duty. Reversing a lower-court decision, the Appellate Division held that the law firm may be liable to the purchaser. Greenapple v. Capital One, N.A., 2012 WL 541547, 2012 N.Y. Slip Op. 1329 (App. Div. 1st Dep’t Feb. 21, 2012).
The parties in this case had executed an escrow agreement which contained standard provisions providing that the escrow agent would not be liable except for its own “gross negligence or willful misconduct.” Nonetheless, the court held that an escrow agent owes the parties to a transaction a fiduciary duty and a strict obligation to protect the rights of the parties for which it acts as escrowee. Moreover, an escrow agent has a duty not to deliver the monies in escrow except upon strict compliance with the conditions imposed by the controlling agreement.
Here, the court found that the escrow agent had failed to protect the purchaser’s rights because it released her deposit, not to the purchaser herself, but to the seller’s agent. The purported termination agreement contemplated that the agent would then transmit the funds to the purchaser, but instead, the agent deposited the money into its own bank account. Moreover, the documents submitted by the escrow agent reflected that the purchaser’s purported signature on the termination agreement “varied greatly” from her genuine signature on the purchase agreement.
OWNERSHIP OF MECHANICAL ROOM RESOLVED AFTER
TRIAL WHERE OFFERING DOCUMENTS WERE AMBIGUOUS
One of the functions of offering documents when units are offered for sale under condominium or cooperative ownership is to delineate the specific portions of the premises belong to each of the units and which are common elements. Contentious disputes between adjoining unit owners or tenant-shareholders, or between a unit owner or tenant-shareholder and the condominium or cooperative itself, frequently result when offering documents are unclear about the ownership of part of the premises or when they contain contradictions.
In Ainetchi v. 500 West End LLC, 2012 WL 573079, 2012 N.Y. Slip Op. 1358 (App. Div. 1st Dep’t Feb. 23, 2012), a trial was necessary to determine which of two owners of adjoining penthouse units in a residential condominium owned a mechanical room situated between the two units. According to the court, the Offering Plan Floor Plans and the Tax Lot Floor Plans provided that the mechanical room was part of the “Penthouse East” Unit. The plans prepared by the Condominium’s architect were contradictory, in that they designated the mechanical room “W212,” suggesting that it belonged to Penthouse West, but also included a “Door and Finish Schedule” designating the mechanical room as part of Penthouse East.
The trial court held that the mechanical room was part of Penthouse West, but the Appellate Division reversed the decision. The appellate court held that the weight of the evidence supported awarding ownership of the mechanical room to the owner of Penthouse East, and that the designation of the room as “W212” appeared to be a typographical error that did not outweigh the other evidence.