The ‘business judgment rule’ conundrum: Legality vs. reality

Victor M. Metsch is a Senior Litigation/ADR partner at Hartman & Craven LLP.

This article was originally published by Thomson Reuters.

Almost every legal dispute arising from decisions by the boards of directors of cooperatives or the boards of managers of condominiums centers around ritualistic and talismanic references by both sides of the issue to their conflicting reliance on the “business judgment rule.”  The governing bodies and their members claim they acted in good faith, to address a matter of corporate concern, within the scope of their authority. In marked contrast, the unit owners claim that the board acted in bad faith, on a matter outside their realm, for a collateral purpose.  The disputes are often extreme and vitriolic because, for the most part, the issues pit neighbor against neighbor or one board faction against another.

It appears that the rule, as initially fashioned by the Court of Appeals in 1993, and explicated in 2003, was designed to limit the amount of litigation arising out of decisions by the governing boards. To the contrary, however, the subsequently developed caveats and exceptions to the “business judgment rule” have resulted in an explosion in litigation challenging and defending decisions by residential building governing boards.

The Legal Framework

In the seminal case of Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y.2d. 530, 554 N.Y.S.2d 807 (1990), the Court of Appeals declared that the “business judgment rule” is the “standard of review” of the actions of a cooperative or condominium governing boards. Simply put, “the business judgment rule prohibits judicial inquiry into action of corporate directors ‘taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes’.” And, “[s]o long as the corporate directors have not breached their fiduciary obligations to the corporation, ‘the exercise of [their powers] for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient[.]”

In Levandusky , the Court of Appeals  rejected the “reasonableness” standard applied by the Appellate Division.  The rejection of the “reasonableness” standard in favor of the “business judgment rule” dramatically changed the focus of the inquiry.  The “reasonableness” standard “require[d] the board to demonstrate that its decision was reasonable [and required] the court itself to evaluate the merits or wisdom of the board’s decision[.]”; to the contrary, however, under the “business judgment rule”, “[a] primary focus of the inquiry is whether board action is in furtherance of a legitimate purpose of the cooperative or condominium, in which case it will generally be upheld.”

In summary, the Court of Appeals concluded that: “The business judgment rule protects the board’s business decisions and managerial authority from indiscriminate attack. At the same time, it permits review of improper decision, as when the challenger demonstrates that the board’s action has no legitimate relationship to the welfare of the cooperative, deliberately singles out individuals for harmful treatment, is taken without notice or consideration of the relevant facts, or is beyond the scope of the board’s authority.”

The Court of Appeals next reviewed the application of the “business judgment rule” to the action of a residential governing board in 40 West 67th Street v. Pullman,  100 N.Y.2d 147, 760 N.Y.S.2d 745 (2003). In Pullman, the board terminated the proprietary lease of a cooperative unit shareholder based upon the tenant’s “objectionable conduct”.  The tenant argued that the “business judgment” rule conflicted with RPAPL 711(1) which provides that a proceeding to recover possession of real property based upon “objectionable” conduct “shall not be maintained unless the landlord shall by competent evidence establish to the satisfaction of the court that the tenant is objectionable.”

In Pullman, the Court of Appeals held that, “[p]rocedurally, the business judgment standard will be applied across the cases, but the  manner in which it presents itself varies in the form of the lawsuit.” Accordingly, “in [the context of a lease termination], the competent evidence that is the basis of the shareholder vote will be reviewed under the business judgment rule, which means courts normally will defer to the vote and the shareholders’ stated findings as competent evidence that the tenant is indeed objectionable under the statute.” However, the Court of Appeals also noted that, “[d]espite this deferential standard, there are instances when courts should undertake review of board decisions. To trigger further judicial scrutiny, an aggrieved shareholder-tenant must make a showing that the board acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose or (3) in bad faith.”

With respect to “scope of authority”, the Pullman Court  concluded that “[t]he cooperative unfailingly followed the procedures contained in the lease when acting to terminate defendant’s tenancy.” As to “furthering the corporate purpose”, the Court of Appeals  held that “there must be a legitimate relationship between the Board’s action and the welfare of the cooperative[;]” found that “by the unanimous vote of everyone present at the [shareholders] meeting, the cooperative resoundingly expressed its collective will, directing the Board to terminate defendant’s tenancy after finding that his behavior was more than its shareholders could bear[;]” and concluded that “the Board was under a fiduciary duty to further the collective interests of the cooperative” by terminating the tenancy, an action that “bore an obvious and legitimate relation to the cooperative’s avowed ends.”  And, as to the exercise of good faith, the court concluded that “defendant has not shown the slightest indication of any bad faith, arbitrariness, favoritism, discrimination or malice on the cooperative’s part, and the record reveals none.”

In closing, the Court of Appeals in Pullman admonished courts to “exercise heightened vigilance in lease termination cases”; and  cautioned that “the broad powers of cooperative governance [enunciated in Levandusky] carry the potential for abuse when a board singles out a person for harmful treatment or engages in unlawful discrimination, vendetta, arbitrary decision making or favoritism [–] types of abuses [that] are incompatible with good faith and the exercise of honest judgment.”

Subsequent Developments

Like corollary principals deduced from a primary scientific or mathematic theorem, post-Levadusky/Pullman, the Courts have enunciated a series of rules for the conduct of  a “business judgment”  legal review. Some examples follow:

  • “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.”  Lemle v. Lemle, 939 N.Y.S.2d 15, 2012 NY Slip Op 01106 (1st Dept. 2012); 534 E. 11th St. House. Dev. Fund Corp. v. Hendrick, 90 A.D.3d 541, 935 N.Y.S. 2d 23 (1st Dept. 2011).
  • In order to avoid summary judgment, the person invoking the “business judgment rule” must raise a factual issue “as to whether [in respect of the action as to which complaint is made], the cooperative board did not act for the purposes of the cooperative, within the scope of its authority, and in good faith[.]” Trump Plaza Owners, Inc. v. Weitzner,  61 A.D.3d 480, 877 N.Y.S.2d 271 (1st Dept. 2009).
  • To hold individual board members personally liable, the complaint must specifically allege independent tortious acts.  Pelton v. 77 Park Avenue Condominium, 38 A.D.3d 1, 825 N.Y.S.2d 28 (1st Dept. 2006).
  • Unequal treatment of shareholders may be sufficient to hurdle the bar of the “business judgment rule”; however,  in order to avoid dismissal the complaint must assert separate tortious acts against individual shareholders.  DeCastro v. Bhokar, 201 A.D.2d 382, 607 N.Y.S.2d 348 (1st Dept. 1994).
  •  The “business judgment rule” permits judicial inquiry into claims of fraud or self-dealing by board members, but only where sufficient evidence is submitted that the claims have a basis.  See Simpson v. Berkley Owner’s Corp, 213 A.D.2d 207, 623 N.Y.S.2d 583 (1st Dept. 1995).
  • Whether or not the “business judgment rule” protects the actions of a board of directors is a question of fact of whether sufficient facts are alleged to support a finding that the defendant did not act in good faith.  Ackerman v. 305 East 40th Street Owners Corp., 189 A.D.2d 665, 592 N.Y.S. 2d 365 (1st Dept. 1993).

Recent Applications of the Rule

GPS Global Parking Solutions v. 151 West 17th Street Condominium, 2012 NY Slip Op 01748 (1st Dept. 2012):  The Court found that “the complaint sufficiently states a claim against the Condominium Board and its individual members for trespass and misappropriation of property [because] plaintiff asserts that defendants directed employees of the condominium to continue to trespass on plaintiff’s personal property and disrupt its business in bad faith and in furtherance of their personal ‘grudge’ against plaintiff or its principal.”  The First Department found that the “allegation of bad faith and a breach of fiduciary duty, not protected by the business judgment rule, is sufficient to withstand a motion to dismiss.”

Caldwell v. Two Columbus Ave. Condominium, 2012 NY Slip Op 817 (1st Dept. 2012):  Dismissal of certain claims affirmed because “[t]he Condominium defendants established their prima facie entitlement to summary judgment as a matter of law by demonstrating that the action they took to remedy water infiltration problems in plaintiff’s condominium were taken ‘in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes'[.]”

Katz v. Board of Managers, 83 A.D.2d 501 921 N.Y.S.2d 228 (1st Dept. 2011):  Supreme Court granted defendant condominium board’s motion for summary judgment dismissing the complaint. The First Department affirmed. “The record demonstrat[ed] that defendant acted within the scope of its authority  pursuant to [Section] 6.3-1 of the bylaws to plan and arrange for the restoration of plaintiff’s fire-damaged units, that its actions were undertaken pursuant to a legitimate corporate purpose to restore the building’s living spaces, and that it acted in good faith in fulfilling its obligations.”

Kleinerman v. 245 East 87 Tenants Corp., 74 A.D.3d 448, 903 N.Y.S.2d 356 (1st Dept. 2010): The owners of shares in a cooperative apartment sued the corporation, the seven members of the board of directors and the building superintendent and managing agent for, among other things, breach of fiduciary duty. Plaintiffs alleged that they were ordered to stop work on renovations that had been approved by the board and the Department of Buildings. “Plaintiffs alleged that the board’s stop-work order, predicated supposedly on undertaking unapproved alterations, constituted retaliation for plaintiffs’ unwillingness to acquiesce to the superintendent’s extortionate demands.”  Defendants made a motion to dismiss; Supreme Court denied the motion; and the Appellate Division modified. “Plaintiff sufficiently alleged a cause of action for breach of fiduciary duty against the coop board, its officers and individual members, with assertions that indicated actual knowledge of their superintendent’s purported extortionate demands from plaintiffs, and substantially assisting those demands by issuing the stop-work order once plaintiffs discontinued payments to the superintendent.”

Molander v Pepperidge Lake Homeowners Association, 82 A.D.3d 1180, 920 N.Y.S.2d 201 (2d Dept. 2011):  Plaintiffs, members of the Pepperidge Lake Homeowners Association, Inc., and owners of a unit at the Pepperidge Lake condominium complex, decided to construct a third-story dormer on their unit  A neighboring unit, owned by two of the defendants had a similar dormer.  The State required plaintiffs to install a sprinkler system of the attic in their unit as a condition to the construction of the dormer.  The neighboring unit allegedly did not have a sprinkler system installed in the attic.  The Town’s Building Division issued a building permit requiring plaintiffs to install a sprinkler system.  Plaintiffs constructed the dormer without the approval of the Board; the Board imposed a fine of $2,500; and plaintiffs sued, among other things, challenging the imposition of the fine.  Supreme Court denied the motion to declare the fine imposed to be null and void.  The Appellate Division, applying the “business judgment rule”, reversed finding that:  “The Board defendants demonstrated that the challenged determinations were ‘authorized and…taken in good faith and in furtherance of the legitimate interests of the condominium’.”

 The Big Four LLC v. The Bond Street Lofts Condominium, 2012 NY Slip Op 02421 (1st Dep’t 2012):  The owner of the commercial unit sued the condominium for refusing to consent to a lease to a 7-Eleven “on the ground that the proposed use of the unit included on-premises cooking in violation of the condominium bylaws”.  Supreme Court dismissed the complaint in its entirety, including the second cause of action “sounding in breach of contract (i.e., breach of the Board’s duties under the condominium’s declaration and bylaws)[.]”.  Citing Levandusky, the First Department held that:

“Similarly, the second cause of action – asserting a bad faith breach of contract by defendant – was properly dismissed.  The defendant condominium established its prima facie entitlement to judgment as a matter of law by demonstrating that the actions it took by objecting to the proposed intended use of the commercial space by 7-Eleven were taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes[.]  Aside from some conclusory, unsupported and self-serving conjecture, plaintiff has failed to raise any triable issues regarding defendant’s alleged bad faith in objecting to 7-Eleven’s use of the commercial space.…defendant condominium has established that its decision bears a “legitimate relationship to the welfare of the [condominium]”…Heating hot dogs, sausages and other food products were among the uses of the premises set forth under plaintiff’s lease with 7-Eleven.  The definition of the word “cook” encompasses the preparation of food for eating by means of heat…Therefore, there is a rational basis for defendant’s conclusion that 7-Eleven planned to use the premises for cooking, a prohibited use.  Indeed, a clearly articulated and rational purpose behind the “no cooking” provision set forth in the bylaws is for the benefit of the condominium and the unit owners to the extent it is intended to “prevent vermin and rodent infestation and odors permeating the property.”

Board of Managers of White Sands Condominium v. Cooper, 2012 NY Slip Op 22041 (App. T. 2d Dept. 2012):   Plaintiff contended  that “the Board’s assessment and collection of common charges were protected under the business judgment rule”. The Court, citing Levandusky, affirmed the denial of plaintiff’s motion for summary judgment because, in opposition thereto, defendants submitted substantial evidence which showed that a material issue of fact existed as to whether the Board was “legitimately constituted or had authority to assess and collect common charges.” The Court concluded that “[t]he issue of whether a condominium has authority to act is not protected from judicial inquiry under the business judgment rule[.]”

Silverman v. Nicholson, 2012 NY Slip Op 30602(U) (Sup. Ct. Suffolk Co. 2012):  Plaintiffs (the Silvermans) previously sued to assert ownership and control over a dock bellowing to the Wells Creek Homeowners Association Inc.  After the suit, and as a condition to permit sale of their one-fifth interest in Wells Creek, the condominium association assessed the Silvermans more than $40,000 to cover the costs for the prior litigation.  The Silvermans then brought a second action against the officers and directors of the association challenging the assessment for legal fees.  Defendants moved to dismiss.  Supreme Court granted the motion.  The Court (Cohalan, J.) dismissed the first cause of action for breach of contract, the second cause of action for unjust enrichment, the third cause of action for conversion and the fourth cause of action for breach of fiduciary duty.

Supreme Court stated that:  “A review of the Silvermans’ complaint shows that they seek relief not as against Wells Creek or its officers or directors for an assessment as against them to which they now object but against the individuals who comprise Wells Creek of which the Silvermans were members.  A review of the minutes of the Wells Creek meeting on March 12, 2009 shows that a vote was taken to assess against the Silvermans’ legal fees incurred by Wells Creek in its successful defense of both the Silvermans’ claim to exclusive ownership to the Wells Creek dock and the Town’s Code violations based upon Silvermans’ attempted control of ownership of the dock and their violations in bringing, inter alia, electricity onto the dock.  Interestingly, the Silvermans (both husband and wife) attended the March 12, 2009 meeting at which the assessments were made against them and rather than voice an objection they merely abstained in voting on the assessment.”

And Justice Cohalan found:  “The business judgment rule shields Wells Creek as a homeowners association in the enactment of rules and regulations governing the use and maintenance of its common areas, i.e. the dock…In reviewing the exercise of its authority to impose certain assessments as to its dock, absent claims of fraud, self dealing, unconscionability and/or other misconduct, the Court’s review is limited as to an inquiry as to whether the action taken was reasonable and in furtherance of Wells Creek’s legitimate interests…Its resolution imposing attorney’s fees as against the Silvermans for Wells Creek’s defense of its dock from alleged claims of exclusive ownership by the Silvermans was a proper exercise of its authority…It seems odd to the Court that the Silvermans failed to voice objection to the assessment of attorneys’ fees as against them for the lawsuit seeking to seize Wells Creek’s property, i.e. the dock, and that they abstained in the voting on this assessment but now complain about such actions not as against Wells Creek, but as against the individual voting members constituting Wells Creek of which the Silvermans were members.  Clearly, if the Silvermans felt aggrieved by the imposition of attorneys’ fees on them for the defense of the dock from the Silvermans’ attempt to seize it, they could have voiced their objection at the time of imposition of such fees, yet they did not object as voting member of Wells Creek and instead merely abstained from voting.”

Baker v. 16 Sutton Place Apt. Corp., 72 A.D.3d 500, 898 N.Y.S.2d 131 (1st Dep’t 2010) Plaintiffs were the owners of a penthouse apartment, located under the roof of the building and including a large wraparound terrace.  The unit owners sued the corporation to prevent the cooperative from constructing a garden on the roof, claiming that an amendment to the form of proprietary lease, that authorized the roof garden, constituted harassment and was discriminatory.  In determining whether or not the claims asserted a legally-cognizable cause of action, the Court responded to the allegation that the board action violated the “business judgment rule”. The Court (Kapnick, J.) found  that “plaintiffs fail[ed]to allege that defendant breached the duty of loyalty owed to the Cooperative and their conclusory and speculative allegations of discrimination ‘[were] insufficient to deprive [the defendant] of the protection of the rule precluding judicial scrutiny of board decisions’.”

Murphy v. 14 Sutton Tenants Corp, 2011 NY Slip Op 33114(U) (Sup. Ct. N.Y. Co. 2011): A unit owner sued a cooperative’s  board of directors and the members for breach of fiduciary duty and intentional infliction of emotion distress “based on a building mandate that Murphy, when accompanied by her dog, must use the service elevator although other dog- owners (except one other)  use the passenger elevator”. In turn, the board asserted that “its action was based on its belief that Theo is an unruly, ill-behaved dog.”  Defendants made a motion to dismiss. The Court (Goodman, J.) granted the motion to dismiss as against the individual defendants noting that “board members are not insulated from individual liability under the business judgment rule as a result of their bad faith[;]” however, the plaintiff was required to but failed “to plead with specificity independent tortious acts by each individual defendant[.]”

Carroll v. Radoniqi, 33 Misc.3d 1214(A) (Sup. Ct. N.Y. Co. 2011): Plaintiff/shareholder (Carroll) filed suit, individually and on behalf of the cooperative, against  the board of managers and defendant/building superintendent (Radoniqi) to compel the board to commence suit against Radoniqi. Carroll alleged, inter alia, that Radoniqi breached his duty of loyalty  by permitting unauthorized renovations in several apartments; and sought to have Radoniqi terminated and ordered to disgorge his pay and any profits from the work.  The Court (Gische, J.) granted the condominium’s motion for summary judgment and dismissed the first (derivative) cause of action. Reviewing the record according to the business judgment rule, the Court found that the board had conducted an investigation and “Plaintiff has not raised any factual issue about whether the Board’s decision [not to terminate Radoniqui] was based upon something other than the exercise of reasonable discretion.” The Court also rejected, as insufficient “speculation and innuendo”, Carroll’s assertion that “the Board’s actions ‘may’ have been tainted because individual members derived personal benefit by having Radoniqi renovate their apartments.”

Cannings v. East Midtown Plaza Housing Corp., 33 Misc.3d 1216(A), 2011 NY Slip Op 51947(U) (Sup. Ct. N,Y. Co. 2011): The New York City Housing Development Corporation  (which oversaw the Mitchell-Lama cooperative) conducted an inspection and determined that the windows in the building “were ‘beyond the end of their useful lives’ and ‘strongly”‘ recommended “total replacement.” The board of directors “decided that [it] was  in the best interest of the Cooperative to replace the windows’ and ‘the Cooperative set about engaging a vendor to  perform the work and obtaining the appropriate financing’.” Plaintiff sued for declaratory and injunctive relief to stay the window replacement project. The Court (Madden, J.), citing Levandusky and invoking the “business judgment” rule, granted defendants’ motion for summary judgment and dismissed the complaint. “The record establish[ed] that defendant [corporation] through its Board of Directors acted within the scope of its authority to plan and arrange for the replacement of the windows in the development, to finance the project through a loan from Amalgamated Bank, and to provide for repayment of the loan through the imposition of an assessment paid by the shareholders over a five-year period.  The record further establish[ed] that defendants’ actions were undertaken pursuant to a legitimate corporate purpose to maintain the structure of the buildings, and that it acted in good faith in fulfilling its obligations.”

Black v. 22321 Owners Corp., 31 Misc.3d 1204(A), 929 N.Y.S.2d 198 (Sup. Ct. N.Y. Co. 2011):  Plaintiff/cooperative unit owners sued defendants, Board of Directors, individual board members and management company for allegedly breaching their obligations under the proprietary lease by holding consent and improper and unreasonable demands and fees upon plaintiff in connection with plaintiff’s obligations for renovations in their apartment.  Supreme Court (Goodman, J.) dismissed the action against the individual Board members:  “The Plaintiffs fail to demonstrate in their pleadings that Defendants acted in a way that was outside the scope of their authority or in bad faith and as a result, they should be protected by the business judgment rule.”

 Sherlock v. 20 East 9th Street Owners Corp., 2011 NY Slip Op 30750(U) (Sup. Ct. N.Y. Co. 2011):  Plaintiff/shareholder sued the cooperative, members of the Board and the managing agent for failing to resolve issue of noise plaintiff claimed emanated from the apartment above their own.

 The Court (Rakower, J) dismissed the “nuisance claim”:  “The board is presumed to act in good faith, and plaintiff bears the burden of showing that the co-op board breached its fiduciary duty.  Without such a showing, judicial inquiry into the actions of the co-op board is prohibited, even though the results may show that what the co-op did was “unwise or inexpedient.”  (Id. at 36).  Where there is an allegation of nuisance created by noises emanating from a co-tenant’s apartment, the cooperative cannot be held liable if “it did not create the nuisance and had surrendered control of the premises to [the]…tenant.…Here, there is no allegation that the Owner either created the nuisance, or regained control of the subject apartment.”

 Kikis v. 1045 Owners Corp., 2011 NY Slip Op 31007(U)(Sup. Ct. N.Y. Co. 2011)Kikis sought to use his apartment as collateral for a home equity line of credit.  The board of directors denied Kikis’ application for a so-called “Recognition Agreement”  without which the bank would not approve the loan. Kikis also alleged that the board failed to approve his planned terrace irrigation system.  Kikis sued the board and the president of the cooperative for breach of fiduciary duty. The Court (Goodman, J.) entertained cross-motions for summary judgment stating: “Primarily this case is about the Board’s decisions being within the ‘business judgment rule’.” The Court found for defendants: “There is no evidence of the Board’s action being discriminatory, or of Kikis receiving disparate treatment… Since there is no evidence that others in the building have been granting permission [to use their apartments as collateral].” The claim against the president was dismissed for failure to plead “with specificity [an] independent tortious act[.]”

Craig Fishman v. Charles H. Greenthal Management Corp., 2010 NY Slip Op. 20115(U) (Sup. Ct. N.Y. Co. 2010):  Plaintiff sought to sell his apartment and allegedly was advised that parents could purchase an apartment for their children.  Plaintiff sold the apartment for a lower price after the Board rejected a sale to parents for their children.  The former shareholder of an apartment in a cooperative building sued the cooperative, the cooperative’s managing agent and its board of directors based upon the allegation that the cooperative would not permit parents to purchase an apartment for their children unless the parents were a co-purchaser.

The Court (Madden, J.) stated as a threshold matter that:  “The Board’s decision to reject the Taylors’ purchase application is protected by the business judgment rule, which provides that the court should defer to a cooperative board’s determination “[s]o long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith…”

And the Court concluded that:  “Under the business judgment rule, the court will not inquire as to the reasonableness of the Board’s determination, and under the express terms of the proprietary lease, the Board had the right to withhold its approval of the Taylors as prospective purchasers of plaintiff’s apartment, for any reason or no reasons[.]”

However, the Court also noted that:  “The business judgment rule, however, is not an insuperable barrier…as further judicial scrutiny is triggered in instances of breach of fiduciary duty, as evidenced by fraud, self-dealing, unlawful discrimination, bad faith or other misconduct by the Board.”

The Court nevertheless dismissed the action:  “The record further reveals the absence of a materially false statement of fact, as the undisputed documentary evidence shows that the Coop did in fact permit parents to purchase an apartment for their children, if the children satisfied certain income requirements…The uncontroverted record shows that the coop permitted parents to co-purchase an apartment for their children, and that plaintiff knew, from Aiosa’s e-mail, that the Coop permitted such co-purchase only if the children satisfied specific income requirements that they have sufficient income to afford the housing and living expenses on their own.”

Wood v. 139 East 33rd Street Corp, 2012 NY Slip Op 30757(U) [Sup. Ct. N.Y. Co. 3/23/12]:  Plaintiff/ cooperative unit owner sued the residential cooperative and its managing agent on various grounds after the issuance of a stop work order with respect to alteration work in the plaintiff’s apartment that allegedly violated the New York City Building Code. The alteration agreement gave the cooperative the right to inspect the work in progress to insure that the construction conformed to the previously approved plans and did not create conditions that violated the building code. “Defendants contend[ed] that they never opposed plaintiff’s resumption of work, provided that she adhered to her agreements to stick to the approved plans and to follow all appropriate laws. Defendants asserted that “plaintiff failed to meet these two requirements.” And Defendants also asserted that the “decision to stop plaintiff’s work [was] protected by the business judgment rule and, regardless, there is no evidence that the [cooperative corporation] acted improperly or in any way other than the building’s best interests.”

In Wood, the Court  (York, J.)  noted that ‘[t]he alteration agreement granted defendants the right to stop work if the renovations did not conform to the submitted plans, which is what they did.”   And Supreme Court, citing Levandusky,  held that “[t]he decision by defendants to stop work on plaintiff’s apartment because of potential structural changes to the building [was] well within the business judgment rule, which shields them from liability absent any evidence of bad faith.”

100 Colfax Associates v. The Board of Managers of Grant Terrace Condominium, 2012 NY Slip Op 30760(U) [ Sup. Ct. Queens Co. 3/22/12]:  Plaintiff/unit owner sued the board of managers of a residential condominium for breach of fiduciary duty. Plaintiff asserted that, based upon misrepresentations, unit owners were convinced to adopt a resolution authorizing  Local Law facade work that cost $850,000.  The work was financed by a loan that allegedly increased per unit maintenance by $87,360  over a ten year period. The work was authorized after the board hired an architect who determined that Local Law 11 applied to the building.

In 100 Colfac Associates, the Court (Elliot, J.) granted defendants’ motion for summary judgment and dismissed the complaint. Citing both Levandusky and Pullman, the Court  characterized the “business judgment rule” as the “deferential standard” and concluded that “[t]he business judgment rule protects a board from being held liable for decisions, such as those concerning the manner and extent of repairs, that were within the scope of their authority [and that a]bsent a showing of discrimination, self-dealing or misconduct, the Board, like corporate directors, is presumed to act in good faith and in the exercise of honest judgment in the legitimate furtherance of corporate purposes[.]”

Lemle v. Lemle, 939 N.Y.S.2d 15, 2012 NY Slip Op 01106 (1st Dept. 2012):  Defendant/corporate minority shareholders sued their siblings (shareholders, directors and officers of the corporation) for, among other things, breach of fiduciary duty.  Plaintiffs claimed that defendants took improper compensation and received improper loans, from the corporation.

Supreme Court dismissed the complaint; and the First Department reinstated the breach of fiduciary duty claim stating:

At this early stage of the litigation, it cannot be said that those parts of the complaint alleging excessive compensation are barred as a matter of law by the business judgment rule.  The business judgment rule prevents courts from inquiring into “actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes”…However, “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”…

Lessons Learned

The simplicity of stating that a governing board’s conduct  comported with  the “business judgment rule” — within the scope of authority, for a legitimate purpose and in good faith– is easily  and regularly belied by a carefully-crafted complaint that states the elements in the converse– outside the scope of authority, for a collateral purpose and in bad faith.

The viability of the “defense” is more apparent than real.   Deference by the Courts to the “business judgment” of directors/managers as often as not yields to the reluctance of the judiciary , pre-discovery, to dismiss a well-pleaded complaint.

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