Application of Business Judgment Rule: Was Business Judgment Implicated?

This was originally posted on the SGR Blog.

The Business Judgment Rule is familiar legal scripture that is often ritually invoked as a defense to claims by residential condo/coop unit owners against their boards of managers/directors. But, as a recent case illustrates, the Rule only applies if, in fact, a “business” judgment is involved.

Ayoka Foster sued 219-229 W.144th St. HDFC and members of the Board to receive the shares of stock to apartment six, as a beneficiary of Margie McCray, her mother, through decedent McCray’s Last Will and Testament.

W.144th and the members of the board made a motion to dismiss the complaint on the ground of “documentary evidence” and failure to state a cause of action.

W.144th stated that the coop’s Proprietary Lease and governing documents allowed the Board to evaluate and determine requests to transfer shares. And alleged that, due to Foster’s unwillingness to provide crucial probate documentation, the Board was unable to fully conduct their due diligence and ascertain whether transferring such shares to Foster would be economically prudent and in the best interests of the coop and its shareholders.

W.144th cited the Business Judgment Rule which prohibited judicial inquiry into actions of coop directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes. As applied in condo and coop cases, review of a board’s decision under a reasonableness standard is limited to whether board action is in furtherance of a legitimate purpose of the coop or condo in which case it will generally be upheld.

Section V, paragraph 5.01(b)(ii)(B), of the Proprietary Lease, which deals with lease assignments and share transfers stated:

The Directors or Shareholders, as the case may be, may not grant or unreasonably withhold consent to an assignment of the lease and a transfer of the Shares to a financially responsible member of the Shareholder’s family (other than the Shareholder’s spouse, as to whom no consent is required) who shall have accepted all the terms and conditions of this lease.

W.144th asserted that Foster was attempting to expedite the share transfer approval process despite her failure to provide the Board with critical probate documents that would otherwise display her rightful claim to the shares. The Board had no reason to believe that Foster would be a financially responsible shareholder if the shares were transferred to her. Particularly, Foster, in her capacity as Executor of the McCray Estate, had a duty to manage and oversee the McCray Estate and act with its best interests in mind. Such a duty extended to tending to the financial obligation of the McCray Estate. Despite that duty, Foster had a far-reaching history of failing to make maintenance payments on the unit owned by the McCray Estate. The neglect raised a strong inference that Foster might very well be financially irresponsible, and such irresponsibility might also extend to her payments for the unit and conduct towards the coop if she was ever to become a shareholder.

In her affidavit, Foster affirmed: “I have repeatedly requested the transfer, … [t]he Court will note the most recent letter from Mr. Donaldson… once again gives no specific reason for denying the transfer, but only claims — falsely — that the requested papers were not provided. Notably, I continued to pay the maintenance for nine years and one month from my own funds. The subject apartment was damaged by a broken water pipe, which has resulted in a pervasive mold condition. The [Board] continues to demand maintenance payments from me personally, when it has never effectuated the transfer of the shares that would allow me to take possession. I believe that the [coop] is responsible for the cost of repairs, and that this is an issue for the Court to determine on all the evidence, which is not yet before the Court”.

The individually named members of the Board sought dismissal of the complaint. Unequal treatment of shareholders was sufficient to overcome the directors’ insulation from liability under the Business Judgment Rule. But individual directors and officers were not subject to liability absent the allegation that they committed separate tortious acts. That the Board may have taken action that deliberately singles out individuals for harmful treatment did not, ipso facto, expose the individual members to liability. The individual members of the Board made decisions and conducted themselves in their capacity as officers of the coop, and not as individuals.

Foster presented the death certificate of Margie McCray. The Board cited the Business Judgment Rule, but the Court could not determine what business judgment confronted the Board with regard to the unit. It was over ten years since the death of Margie McCray and questions remained about why the apartment had not been transferred. Foster provided probate material to the Board along with emails requesting what additional information remained outstanding.

The motion of W.144th to dismiss the complaint was denied. The motion to dismiss of the individual members of the Board was granted.

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