This was originally published on the SGR Blog.
Board Members Challenge Termination in Court
Did the Board of Directors of a residential coop have the right to terminate two directors? Were the dismissals subject to Court review under the business judgment rule?
Esplanade Gardens, Inc. is a six- building 1,872-apartment Mitchell-Lama coop on West 145th St. in Harlem (est.1967).
Robyn Tolliver and William Ross alleged that they were wrongfully removed from their positions as members on the Board of Esplanade.
Tolliver had been on the Board at Esplanade since February 2020 and an owner/shareholder of her premises since approximately 2002. Ross was on the Board since October of 2020 and an owner/shareholder of his premises since 2002. Ross was also a member of the Board from 2003 to 2009.
On March 4, 2021 Tolliver and Ross sent a letter to the New York City Department of Housing Preservation and Development on Esplanade letterhead inquiring into the status of succession rights of a shareholder as well as an inquiry as to the addition of a non-Board member’s addition to a stock certificate. Further, the e-mail address from which they sent the March 4 letter, “email@example.com” was an e-mail address that was never used or authorized by Esplanade or the Board. Counsel for the Board was subsequently informed of that correspondence and, as a result, the Board held a meeting on March 16, 2021, at which both Tolliver and Ross were present. At the meeting a resolution was adopted to give the them a 14-day notice regarding their possible removal.
On March 19, 2021, Tolliver and Ross were given a 14-day notice of discussion of their possible removal from the Board. The notice specifically advised that a Board meeting would be held on April 6, 2021 to discuss the possible removal of both of them based upon their discussion and dissemination of personal and confidential information. Tolliver and Ross were terminated by the Board on April 7, 2021.
There were also allegations by the Board that Tolliver and Ross disseminated confidential information to Madison Security Group prior to the termination of Madison as the security contractor for Esplanade in April 2021.
There was no dispute that the business judgment rule applied to the proceeding. That rule applied to decisions of residential-cooperative boards and requires a Court to defer to board determinations so long as the board acted for the purpose of the cooperative, within the scope of its authority, and in good faith. As such, the Court’s role was limited to determining whether the Board’s actions, specifically removing Tolliver and Ross as directors, were made in good faith, for a corporate purpose, and within the scope of its authority.
The Court found that the Board demonstrated the good faith and corporate purpose required. It was undisputed that on July 29, 2020, the President of the Board of Directors informed the Board members that they could not use the corporate letterhead without permission of the Board. Nevertheless, Tolliver and Ross used the letterhead, without the permission of the Board, and wrote to HPD inquiring about the status of the succession rights of another member of the Board. In that letter, which listed the officers of the Board with neither knowledge nor authorization from the Board, Tolliver and Ross identified themselves as Board members. The letter also included information that identified individuals other than the Board member.
There was some question of whether Tolliver and Ross further disseminated confidential information through communications with Madison–which was not proven. But the Board’s actions of removing Tolliver and Ross for their surreptitious and unauthorized use of letterhead of the Board, as well as confidential information regarding the succession rights of a Board member shareholder, satisfied the good faith and corporate purpose as required under the business judgment rule.
There did not appear to be any dispute that the procedures followed by the Board were consistent with the by-laws of Esplanade. As such, there did not appear to be any dispute that removing Board members was within the scope of the Board’s authority.