The “business judgment rule” is the “guiding light” for the boards of residential cooperatives and condominiums. While easy to state, application of the rule is a source of constant fact-based/specific litigation. Our examination of the rule begins with the decisions of our Court of Appeals in Levandusky in 1990 and in Pullman in 2003. And almost all subsequent litigation about the business judgment rule stems from arguments about the application of the law as set forth in those two cases.
Levandusky v. One Fifth Ave. Apartment Corp., 554 N.Y.S.2d (Court of Appeals April 5, 1990)
The Court of Appeals summarized the issue presented:
This appeal by a residential cooperative corporation concerning apartment renovations by one of its proprietary lessees, factually centers on a two-inch steam riser and three air conditioners, but fundamentally presents the legal question of what standard of review should apply when a board of directors of a cooperative corporation seeks to enforce a matter of building policy against a tenant-shareholder.
In the main, the parties agree that the operative events transpired as follows. In 1987, respondent (Ronald Levandusky) decided to enlarge the kitchen area of his apartment at One Fifth Avenue in New York City. According to Levandusky, some time after reaching that decision, and while he was president of the cooperative’s board of directors, he told Elliot Glass, the architect retained by the corporation, that he intended to realign or “jog” a steam riser in the kitchen area, and Glass orally approved the alteration. According to Glass, however, the conversation was a general one; Levandusky never specifically told him that he intended to move any particular pipe, and Glass never gave him approval to do so. In any event, Levandusky’s proprietary lease provided that no “alteration of or addition to the water, gas or steam risers or pipes” could be made without appellant’s prior written consent.
Levandusky had his architect prepare plans for the renovation, which were approved by Glass and submitted for approval to the board of directors. Although the plans show details of a number of other proposed structural modifications, including changes in plumbing risers, no change in the steam riser is shown or discussed anywhere in the plans.
The board approved Levandusky’s plans at a meeting held March 14, 1988, and the next day he executed an “Alteration Agreement” with appellant, which incorporated “Renovation Guidelines” that had originally been drafted, in large part, by Levandusky himself. These guidelines, like the proprietary lease, specified that advance written approval was required for any renovation affecting the building’s heating system. Board consideration of the plans — appropriately detailed to indicate all structural changes — was to follow their submission to the corporation’s architect, and the board reserved the power to disapprove any plans, even those that had received the architect’s approval.
In late spring 1988, the building’s managing agent learned from Levandusky that he intended to move the steam riser in his apartment, and so informed the board. Both Levandusky and the board contacted John Flynn, an engineer who had served as consulting agent for the board. In a letter and in a subsequent presentation at a June 13 board meeting, Flynn opined that relocating steam risers was technically feasible and, if carefully done, would not necessarily cause any problem. However, he also advised that any change in an established old piping system risked causing difficulties (“gremlins”). In Flynn’s view, such alterations were to be avoided whenever possible.
At the June 13 meeting, which Levandusky attended, the board enacted a resolution to “reaffirm the policy — no relocation of risers.” At a June 23 meeting, the board voted to deny Levandusky a variance to move his riser, and to modify its previous approval of his renovation plans, conditioning approval upon an acceptable redesign of the kitchen area.
Levandusky nonetheless hired a contractor, who severed and jogged the kitchen steam riser. In August 1988, when the board learned of this, it issued a “stop work” order, pursuant to the “Renovation Guidelines.” Levandusky then commenced this article 78 proceeding, seeking to have the stop work order set aside. The corporation cross-petitioned for an order compelling Levandusky to return the riser to its original position. The board also sought an order compelling him to remove certain air-conditioning units he had installed, which allegedly were not in conformity with the requirements of the Landmarks Preservation Commission.
The decisions of Supreme Court:
Supreme Court initially granted Levandusky’s petition, and annulled the stop work order, on the ground that there was no evidence that the jogged pipe had caused any damage, but on the contrary, the building engineer had inspected it and believed it would likely not have any adverse effect. Therefore, balancing the hardship to Levandusky in redoing the already completed renovations against the harm to the building, the court determined that the board’s decision to stop the renovations was arbitrary and capricious, and should be annulled. Both counterclaims were dismissed, the court ruling that the corporation had no standing to complain of violations of the Landmarks Preservation Law, particularly as the building had not been cited for any violation.
On reargument, however, Supreme Court withdrew its decision, dismissed Levandusky’s petition, and ordered him to restore the riser to its original position and submit redrawn plans to the board, on the ground that the court was precluded by the business judgment rule from reviewing the board’s determination. The court adhered to its original ruling with respect to the branch of the cross motion concerning the air conditioners, notwithstanding that the Landmarks Preservation Commission had in the interim cited them as violations.
The disposition in the Appellate Division:
On Levandusky’s appeal, the Appellate Division…modified the judgment. The court was unanimous in affirming the Supreme Court’s disposition of the air conditioner claim, but divided concerning the stop work order. A majority of the court agreed with Supreme Court’s original decision, while two Justices dissented on the ground that the board’s action was within the scope of its business judgment and hence not subject to judicial review.
Concluding, as to the standard for judicial review, that:
As cooperative and condominium home ownership has grown increasingly popular, courts confronting disputes between tenant-owners and governing boards have fashioned a variety of rules for adjudicating such claims…In the process, several salient characteristics of the governing board homeowner relationship have been identified as relevant to the judicial inquiry.
As courts and commentators have noted, the cooperative or condominium association is a quasi-government — “a little democratic sub society of necessity”…The proprietary lessees or condominium owners consent to be governed, in certain respects, by the decisions of a board. Like a municipal government, such governing boards are responsible for running the day-to-day affairs of the cooperative and to that end, often have broad powers in areas that range from financial decision making to promulgating regulations regarding pets and parking spaces…Authority to approve or disapprove structural alterations, as in this case, is commonly given to the governing board[.]
Through the exercise of this authority, to which would-be apartment owners must generally acquiesce, a governing board may significantly restrict the bundle of rights a property owner normally enjoys. Moreover, as with any authority to govern, the broad powers of a cooperative board hold potential for abuse through arbitrary and malicious decision-making, favoritism, discrimination and the like.
On the other hand, agreement to submit to the decision making authority of a cooperative board is voluntary in a sense that submission to government authority is not; there is always the freedom not to purchase the apartment. The stability offered by community control, through a board, has its own economic and social benefits, and purchase of a cooperative apartment represents a voluntary choice to cede certain of the privileges of single ownership to a governing body, often made up of fellow tenants who volunteer their time, without compensation. The board, in return, takes on the burden of managing the property for the benefit of the proprietary lessees. As one court observed: “Every man may justly consider his home his castle and himself as the king thereof; nonetheless his sovereign fiat to use his property as he pleases must yield, at least in degree, where ownership is in common or cooperation with others. The benefits of condominium living and ownership demand no less[.]
It is apparent, then, that a standard for judicial review of the actions of a cooperative or condominium governing board must be sensitive to a variety of concerns — sometimes competing concerns. Even when the governing board acts within the scope of its authority, some check on its potential powers to regulate residents’ conduct, life-style and property rights is necessary to protect individual residents from abusive exercise, notwithstanding that the residents have, to an extent, consented to be regulated and even selected their representatives…At the same time, the chosen standard of review should not undermine the purposes for which the residential community and its governing structure were formed: protection of the interest of the entire community of residents in an environment managed by the board for the common benefit.
We conclude that these goals are best served by a standard of review that is analogous to the business judgment rule applied by courts to determine challenges to decisions made by corporate directors…A number of courts in this and other states have applied such a standard in reviewing the decisions of cooperative and condominium boards…We agree with those courts that such a test best balances the individual and collective interests at stake.
Developed in the context of commercial enterprises, the business judgment rule prohibits judicial inquiry 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.”…So long as the corporation’s directors have not breached their fiduciary obligation 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.”
Application of a similar doctrine is appropriate because a cooperative corporation is — in fact and function — a corporation, acting through the management of its board of directors, and subject to the Business Corporation Law. There is no cause to create a special new category in law for corporate actions by coop boards.
We emphasize that reference to the business judgment rule is for the purpose of analogy only. Clearly, in light of the doctrine’s origins in the quite different world of commerce, the fiduciary principles identified in the existing case law — primarily emphasizing avoidance of self-dealing and financial self-aggrandizement — will of necessity be adapted over time in order to apply to directors of not-for-profit homeowners’ cooperative corporations…For present purposes, we need not, nor should we determine the entire range of the fiduciary obligations of a cooperative board, other than to note that the board owes its duty of loyalty to the cooperative — that is, it must act for the benefit of the residents collectively. So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the board’s. Stated somewhat differently, unless a resident challenging the board’s action is able to demonstrate a breach of this duty, judicial review is not available.
* * *
The more limited judicial review embodied in the business judgment rule is preferable [to an inquiry into the reasonableness of the board’s action]. In the context of the decisions of a for-profit corporation, “courts are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments * * * by definition the responsibility for business judgments must rest with the corporate directors; their individual capabilities and experience peculiarly qualify them for the discharge of that responsibility.”…Even if decisions of a cooperative board do not generally involve expertise beyond the usual ken of the judiciary, at the least board members will possess experience of the peculiar needs of their building and its residents not shared by the court.
Several related concerns persuade us that such a rule should apply here. As this case exemplifies, board decisions concerning what residents may or may not do with their living space may be highly charged and emotional. A cooperative or condominium is by nature a myriad of often competing views regarding personal living space, and decisions taken to benefit the collective interest may be unpalatable to one resident or another, creating the prospect that board decisions will be subjected to undue court involvement and judicial second-guessing. Allowing an owner who is simply dissatisfied with particular board action a second opportunity to reopen the matter completely before a court, which — generally without knowing the property — may or may not agree with the reasonableness of the board’s determination, threatens the stability of the common living arrangement.
Moreover, the prospect that each board decision may be subjected to full judicial review hampers the effectiveness of the board’s managing authority. 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 decisions, 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.
And, as to the facts presented, holding that:
Levandusky failed to meet this burden, and Supreme Court properly dismissed his petition. His argument that having once granted its approval, the board was powerless to rescind its decision after he had spent considerable sums on the renovations is without merit. There is no dispute that Levandusky failed to comply with the provisions of the “Alteration Agreement” or “Renovation Guidelines” designed to give the board explicit written notice before it approved a change in the building’s heating system. Once made aware of Levandusky’s intent, the board promptly consulted its engineer, and notified Levandusky that it would not depart from a policy of refusing to permit the movement of pipes. That he then went ahead and moved the pipe hardly allows him to claim reliance on the board’s initial approval of his plans. Indeed, recognition of such an argument would frustrate any systematic effort to enforce uniform policies.
Levandusky’s additional allegations that the board’s decision was motivated by the personal animosity of another board member toward him, and that the board had in fact permitted other residents to jog their steam risers, are wholly conclusory. The board submitted evidence — unrefuted by Levandusky — that it was acting pursuant to the advice of its engineer, and that it had not previously approved such jogging. Finally, the fact that allowing Levandusky an exception to the policy might not have resulted in harm to the building does not require that the exception be allowed. Under the rule we articulate today, we decline to review the merits of the board’s determination that it was preferable to adhere to a uniform policy regarding the building’s piping system.
40 West 67th Street Corp. v. Pullman, 100 N.Y.2d 147 (Court of Appeals May 13, 2003)
The Court of Appeals summarized the dispute:
In Matter of Levandusky v One Fifth Ave. Apt. Corp.…we held that the business judgment rule is the proper standard of judicial review when evaluating decisions made by residential cooperative corporations. In the case before us, defendant is a shareholder-tenant in the plaintiff cooperative building. The relationship between defendant and the cooperative, including the conditions under which a shareholder’s tenancy may be terminated, is governed by the shareholder’s lease agreement. The cooperative terminated defendant’s tenancy in accordance with a provision in the lease that authorized it to do so based on a tenant’s “objectionable” conduct.
Defendant has challenged the cooperative’s action and asserts, in essence, that his tenancy may not be terminated by the court based on a review of the facts under the standard articulated in Levandusky. He argues that termination may rest only upon a court’s independent evaluation of the reasonableness of the cooperative’s action. We disagree. In reviewing the cooperative’s actions, the business judgment standard governs a cooperative’s decision to terminate a tenancy in accordance with the terms of the parties’ agreement.
Outlined the facts:
Plaintiff cooperative owns the building located at 40 West 67th Street in Manhattan, which contains 38 apartments. In 1998, defendant bought into the cooperative and acquired 80 shares of stock appurtenant to his proprietary lease for apartment 7B.
Soon after moving in, defendant engaged in a course of behavior that, in the view of the cooperative, began as demanding, grew increasingly disruptive and ultimately became intolerable. After several points of friction between defendant and the cooperative, defendant started complaining about his elderly upstairs neighbors, a retired college professor and his wife who had occupied apartment 8B for over two decades. In a stream of vituperative letters to the cooperative—16 letters in the month of October 1999 alone—he accused the couple of playing their television set and stereo at high volumes late into the night, and claimed they were running a loud and illegal bookbinding business in their apartment. Defendant further charged that the couple stored toxic chemicals in their apartment for use in their “dangerous and illegal” business. Upon investigation, the cooperative’s Board determined that the couple did not possess a television set or stereo and that there was no evidence of a bookbinding business or any other commercial enterprise in their apartment.
Hostilities escalated, resulting in a physical altercation between defendant and the retired professor. Following the altercation, defendant distributed flyers to the cooperative residents in which he referred to the professor, by name, as a potential “psychopath in our midst” and accused him of cutting defendant’s telephone lines. In another flyer, defendant described the professor’s wife and the wife of the Board president as having close “intimate personal relations.” Defendant also claimed that the previous occupants of his apartment revealed that the upstairs couple have “historically made excessive noise.” The former occupants, however, submitted an affidavit that denied making any complaints about noise from the upstairs apartment and proclaimed that defendant’s assertions to the contrary were “completely false.”
Furthermore, defendant made alterations to his apartment without Board approval, had construction work performed on the weekend in violation of house rules, and would not respond to Board requests to correct these conditions or to allow a mutual inspection of his apartment and the upstairs apartment belonging to the elderly couple. Finally, defendant commenced four lawsuits against the upstairs couple, the president of the cooperative and the cooperative management, and tried to commence three more.
In reaction to defendant’s behavior, the cooperative called a special meeting pursuant to…the [proprietary] lease agreement, which provides for termination of the tenancy if the cooperative by a two-thirds vote determines that “because of objectionable conduct on the part of the Lessee * * * the tenancy of the Lessee is undesirable.” The cooperative informed the shareholders that the purpose of the meeting was to determine whether defendant “engaged in repeated actions inimical to cooperative living and objectionable to the Corporation and its stockholders that make his continued tenancy undesirable.”
Timely notice of the meeting was sent to all shareholders in the cooperative, including defendant. At the ensuing meeting, held in June 2000, owners of more than 75% of the outstanding shares in the cooperative were present. Defendant chose not attend. By a vote of 2,048 shares to 0, the shareholders in attendance passed a resolution declaring defendant’s conduct “objectionable” and directing the Board to terminate his proprietary lease and cancel his shares. The resolution contained the findings upon which the shareholders concluded that defendant’s behavior was inimical to cooperative living. Pursuant to the resolution, the Board sent defendant a notice of termination requiring him to vacate his apartment by August 31, 2000. Ignoring the notice, defendant remained in the apartment, prompting the cooperative to bring this suit for possession and ejectment, a declaratory judgment cancelling defendant’s stock, and a money judgment for use and occupancy, along with attorneys’ fees and costs.
Proceedings in Supreme Court:
Supreme Court denied the cooperative’s motion for summary judgment and dismissed its cause of action that premised ejectment solely on the shareholders’ vote and the notice of termination. The court declined to apply the business judgment rule to sustain the shareholders’ vote and the Board’s issuance of the notice of termination. Instead, the court invoked RPAPL 711 (1) and held that to terminate a tenancy, a cooperative must prove its claim of objectionable conduct by competent evidence to the satisfaction of the court.
And in the Appellate Division:
Disagreeing with Supreme Court, a divided Appellate Division granted the cooperative summary judgment on its causes of action for ejectment and the cancellation of defendant’s stock. It modified Supreme Court’s order accordingly and remanded the case for a hearing on use and occupancy, legal fees and costs. The majority held that Levandusky prohibited judicial scrutiny of actions of cooperative boards “taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes”[.]
Discussed the standard of review:
The heart of this dispute is the parties’ disagreement over the proper standard of review to be applied when a cooperative exercises its agreed-upon right to terminate a tenancy based on a shareholder-tenant’s objectionable conduct. In the agreement establishing the rights and duties of the parties, the cooperative reserved to itself the authority to determine whether a member’s conduct was objectionable and to terminate the tenancy on that basis. The cooperative argues that its decision to do so should be reviewed in accordance with Levandusky’s business judgment rule. Defendant contends that the business judgment rule has no application under these circumstances and that RPAPL 711 requires a court to make its own evaluation of the Board’s conduct based on a judicial standard of reasonableness.
Levandusky established a standard of review analogous to the corporate business judgment rule for a shareholder-tenant challenge to a decision of a residential cooperative corporation. The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings…In Levandusky, the cooperative board issued a stop work order for a shareholder-tenant’s renovations that violated the proprietary lease. The shareholder-tenant brought a CPLR article 78 proceeding to set aside the stop work order. The Court upheld the Board’s action, and concluded that the business judgment rule “best balances the individual and collective interests at stake” in the residential cooperative setting[.]
In the context of cooperative dwellings, the business judgment rule provides that a 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”…In adopting this rule, we recognized that a cooperative board’s broad powers could lead to abuse through arbitrary or malicious decision making, unlawful discrimination or the like. However, we also aimed to avoid impairing “the purposes for which the residential community and its governing structure were formed: protection of the interest of the entire community of residents in an environment managed by the board for the common benefit”…The Court concluded that the business judgment rule best balances these competing interests and also noted that the limited judicial review afforded by the rule protects the cooperative’s decisions against “undue court involvement and judicial second-guessing”[.]
As to the RPAPL, stating that:
Although we applied the business judgment rule in Levandusky, we did not attempt to fix its boundaries, recognizing that this corporate concept may not necessarily comport with every situation encountered by a cooperative and its shareholder-tenants. Defendant argues that when it comes to terminations, the business judgment rule conflicts with RPAPL 711 (1) and is therefore inoperative. We see no such conflict. In the realm of cooperative governance and in the lease provision before us, the cooperative’s determination as to the tenant’s objectionable behavior stands as competent evidence necessary to sustain the cooperative’s determination. If that were not so, the contract provision for termination of the lease—to which defendant agreed—would be meaningless.
We reject the cooperative’s argument that RPAPL 711 (1) is irrelevant to these proceedings, but conclude that the business judgment rule may be applied consistently with the statute. Procedurally, the business judgment standard will be applied across the cases, but the manner in which it presents itself varies with the form of the lawsuit. Levandusky, for example, was framed as a CPLR article 78 proceeding, but we applied the business judgment rule as a concurrent form of “rationality” and “reasonableness” to determine whether the decision was “arbitrary and capricious” pursuant to CPLR 7803 (3)[.]
Similarly, the procedural vehicle driving this case is RPAPL 711 (1), which requires “competent evidence” to show that a tenant is objectionable. Thus, in this context, the competent evidence that is the basis for the shareholder vote will be reviewed under the business judgment rule, which means courts will normally defer to that vote and the shareholders’ stated findings as competent evidence that the tenant is indeed objectionable under the statute. As we stated in Levandusky, a single standard of review for cooperatives is preferable, and “we see no purpose in allowing the form of the action to dictate the substance of the standard by which the legitimacy of corporate action is to be measured”[.]
Summarized the burden of proof:
Despite 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.
And applied the business judgment rule to the facts of the case:
Pursuant to its bylaws, the cooperative was authorized (through its Board) to adopt a form of proprietary lease to be used for all shareholder-tenants. Based on this authorization, defendant and other members of the cooperative voluntarily entered into lease agreements containing the termination provision before us. The cooperative does not contend that it has the power to terminate the lease absent the termination provision. Indeed, it recognizes, correctly, that if there were no such provision, termination could proceed only pursuant to RPAPL 711 (1).
The cooperative unfailingly followed the procedures contained in the lease when acting to terminate defendant’s tenancy. In accordance with the bylaws, the Board called a special meeting, and notified all shareholder-tenants of its time, place and purpose. Defendant thus had notice and the opportunity to be heard. In accordance with the agreement, the cooperative acted on a supermajority vote after properly fashioning the issue and the question to be addressed by resolution. The resolution specified the basis for the action, setting forth a list of specific findings as to defendant’s objectionable behavior. By not appearing or presenting evidence personally or by counsel, defendant failed to challenge the findings and has not otherwise satisfied us that the Board has in any way acted ultra vires. In all, defendant has failed to demonstrate that the cooperative acted outside the scope of its authority in terminating the tenancy.
Levandusky also recognizes that the business judgment rule prohibits judicial inquiry into Board actions that, presupposing good faith, are taken in legitimate furtherance of corporate purposes. Specifically, there must be a legitimate relationship between the Board’s action and the welfare of the cooperative. Here, by the unanimous vote of everyone present at the 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. The Board was under a fiduciary duty to further the collective interests of the cooperative. By terminating the tenancy, the Board’s action thus bore an obvious and legitimate relation to the cooperative’s avowed ends.
There is, however, an additional dimension to corporate purpose that Levandusky contemplates, notably, the legitimacy of purpose—a feature closely related to good faith. Put differently, all the shareholders of a cooperative may agree on an objective, and the Board may pursue that objective zealously, but that does not necessarily mean the objective is lawful or legitimate. Defendant, however, has not shown that the Board’s purpose was anything other than furthering the overall welfare of a cooperative that found it could no longer abide defendant’s behavior.
Finally, 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. Though defendant contends that he raised sufficient facts in this regard, we agree with the Appellate Division majority that defendant has provided no factual support for his conclusory assertions that he was evicted based upon illegal or impermissible considerations. Moreover, as the Appellate Division noted, the cooperative emphasized that upon the sale of the apartment it “will ‘turn over [to the defendant] all proceeds after deduction of unpaid use and occupancy, costs of sale and litigation expenses incurred in this dispute’”…Defendant does not contend otherwise.
With the admonition that:
Levandusky cautions that the broad powers of cooperative governance 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. We reaffirm that admonition and stress that those types of abuses are incompatible with good faith and the exercise of honest judgment. While deferential, the Levandusky standard should not serve as a rubber stamp for cooperative board actions, particularly those involving tenancy terminations. We note that since Levandusky was decided, the lower courts have in most instances deferred to the business judgment of cooperative boards but in a number of cases have withheld deference in the face of evidence that the board acted illegitimately.
The very concept of cooperative living entails a voluntary, shared control over rules, maintenance and the composition of the community. Indeed, as we observed in Levandusky, a shareholder-tenant voluntarily agrees to submit to the authority of a cooperative board, and consequently the board “may significantly restrict the bundle of rights a property owner normally enjoys”…When dealing, however, with termination, courts must exercise a heightened vigilance in examining whether the board’s action meets the Levandusky test.
Kallop v. Board of Directors of Edgewater Park Owners’ Coop Inc., 155 A.D.3d 49 (First Department November 21, 2017)
The Appellate Division summarized the facts and prior proceedings in Supreme Court:
Plaintiffs’ application to purchase a unit in defendants’ cooperative residential complex was approved by defendant Board of Directors, and then rescinded two weeks later, based upon a Board member’s erroneous report that plaintiff Richard Kallop told her he did not intend to reside in the complex, as required by the purchase contract. Plaintiffs filed a complaint seeking, inter alia, to compel defendants to permit the sale to go forward. After defendants filed their answer, plaintiffs, by order to show cause, sought an order permitting the sale to close. An evidentiary hearing was held, at which the reporting Board member’s testimony revealed that Richard Kallop had not, as she claimed, informed her he intended to reside outside the cooperative complex. For his part, Richard testified that it had always been his plan to reside in the cooperative unit with his elderly mother, co-plaintiff Joan Kallop.
And summarily concluded:
Under these facts, we conclude that defendants’ decision to rescind its approval of plaintiffs’ purchase application, being without any basis in reason and without regard to the facts, was wholly arbitrary, and thus not entitled to the protections generally provided to cooperative boards by the business judgment rule[.]
Having reviewed the record, we conclude that, in these unique circumstances, Supreme Court properly afforded relief sought in the complaint. Supreme Court conducted a full evidentiary hearing which revealed the absence of any disputed material facts, and which established that in the absence of relief, it was highly likely that plaintiffs would suffer irreparable harm…Having been approved by the Board to purchase the co-op unit, plaintiffs gave notice of an intention to vacate their rented home, which then went into contract with a third party. Having nowhere to go when the Board rescinded its approval, plaintiffs failed to vacate, and a holdover proceeding was commenced against them, the outcome of which was unclear at the time of the hearing. Moreover, plaintiff Joan Kallop is in poor health, and the uncertainty of her living situation had led to further illness, including severe depression.
Fernholz v. Hart, 55 A.D.3d 520 (First Department November 21, 2017)
The Appellate Division summarized the facts:
Plaintiffs and defendants Craig Hart and Rebecca Barber, the owners of the apartment directly above plaintiffs’ apartment, challenge the Board’s 2004 decision not to require the former owner of the Hart and Barber apartments to rebuild an interior wall she had demolished without authorization. They contend that the absence of the wall created a condition that amplified noises from the Hart and Barber apartment.
And summarily concluded that:
The Board established prima facie its entitlement to summary dismissal of the complaint and cross claims on the ground that its decision was protected by the business judgment rule…The record shows that the Board engaged an independent expert who opined that the removal of the wall did not affect the structural integrity of the building and did not cause the noise.
In opposition, plaintiffs and Hart and Barber failed to raise a triable issue of fact whether the Board’s decision not to require rebuilding of the wall and its handling of plaintiffs’ noise complaint were in breach of its fiduciary duty to the condominium…They submitted no evidence that the Board’s actions were not taken in furtherance of a corporate purpose or that the Board acted in bad faith, arbitrarily, or out of favoritism, discrimination or malice[.]
Beach Point Partners v. Beachcomber, Ltd., 144 A.D.3d 719 (Second Department November 9, 2016)
The Appellate Division summarized the facts:
The plaintiffs, shareholder-tenants of the defendant Beachcomber, Ltd.…commenced this action for a judgment declaring that the cooperative’s board of directors, who were individually named as defendants, breached their fiduciary duty. They alleged that the defendants acted in bad faith and discriminated against them by prohibiting parking on the grass behind the building where their cooperative apartment unit was located. The plaintiffs claimed that when they purchased their shares in the unit, they had been granted a right to park in that location since the only entry to the unit is in the rear of the building. They also claimed that since they are the only shareholders with a rearfacing unit, the defendants’ action was specifically targeted at them.
The prior proceedings:
The defendants moved for summary judgment dismissing the complaint. While that motion was pending, the plaintiffs moved for a preliminary injunction. The Supreme Court granted the plaintiffs a temporary restraining order pending determination of their motion. The court subsequently granted the defendants’ motion for summary judgment dismissing the complaint and denied the plaintiffs’ motion as academic.
“In the context of cooperative dwellings, the business judgment rule provides that a 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’“[.]
Here, the defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the complaint by establishing that the decision to enforce parking rules and prohibit parking in the grass area behind one of the cooperative buildings was protected by the business judgment rule…In particular, the defendants demonstrated that they were acting in the best interests of the cooperative after making a number of capital improvements that added to the aesthetics and value of the property. The evidence the plaintiffs submitted in opposition to this showing was insufficient to raise a triable issue of fact as to whether the defendants’ decision was discriminatory, or based on any other reason not protected by the business judgment rule[.]
Gonzalez v. Been, 145 A.D.3d 431 (First Department December 1, 2016)
The Appellate Division summarized the facts:
Plaintiffs and other shareholders initiated a petition under [the] Lindsay Park’s bylaws calling for a special meeting to amend the bylaws to require the use of only directed proxies in election of directors and limit any one individual to holding no more than 91 proxies, and to discuss the maintenance increase that took place in 2014 and the one scheduled for 2015. Plaintiffs commenced this action alleging, inter alia, that by refusing to call the special meeting demanded by the petition, based on the results of the signature verification by an independent company, the board acted in bad faith.
Plaintiffs failed to raise a triable issue of fact as to whether the Lindsay Park defendants acted in bad faith, so as to preclude application of the business judgment rule…Even though the use of an independent verification company was not authorized by the bylaws, it was also not prohibited by the bylaws, and the remaining correspondence plaintiffs rely upon to show bad faith is insufficient to satisfy their burden[.]
19 Pond, Inc. v. Goldens Bridge Community Assn., Inc., 142 A.D.3d 969 (Second Department September 14, 2016)
The Appellate Division summarized the facts:
On March 13, 2012, Tina Moreau Jones…as seller, and 19 Pond, Inc.…as purchaser, entered into a contract for the sale of certain real property located within a homeowner’s association known as Goldens Bridge Association, Inc.…A rider to the contract provided that the purchaser acknowledged that the transaction was “subject to the waiver, or deemed waiver, of the right of first refusal” held by the association, as set forth in article 10 of the association’s Declaration and Restrictive Covenants…On March 13, 2012, Jones advised the association of the contract of sale and requested that it waive its right of first refusal. By letter dated March 27, 2012, the association exercised its right of first refusal to purchase the property. Thereafter, Jones informed 19 Pond of the association’s exercise of its right of first refusal and returned 19 Pond’s down payment. On April 18, 2012, Jones and the association entered into a contract for the sale of the property. The association assigned its rights under the contract to Leslie Klainberg, who purchased the property on May 10, 2012.
The prior proceedings:
19 Pond and Neal Hicks, its sole shareholder, then commenced this action, inter alia, for specific performance, against Klainberg and Jones, and the association and the members of the association’s Board of Directors…The plaintiffs alleged that the association’s exercise of the right of first refusal and assignment of the sales contract was void and unenforceable. The plaintiffs moved for summary judgment on the issue of liability on the first, second, and sixth causes of action in the complaint and dismissing the defendants’ affirmative defenses. Klainberg and Jones cross-moved, inter alia, for summary judgment dismissing the complaint insofar as asserted against them, and the association defendants separately cross-moved for summary judgment dismissing the complaint insofar as asserted against them. The Supreme Court denied the plaintiffs’ motion and awarded summary judgment to Klainberg and Jones and the association defendants dismissing the complaint insofar as asserted against them.
The legal standard:
In reviewing the actions of a homeowners’ association, a court should apply the business judgment rule and should limit its inquiry to whether the action was authorized and whether it was taken in good faith and in furtherance of the legitimate interests of the association…The business judgment doctrine does not apply when a board acts outside the scope of its authority[.]
Here, the declaration provides that, in the event an owner desires to sell his or her property: (a) the owner must first give written notice to the association, (b) the association has 30 days in which to agree to purchase the property, and (c) such option must be exercised by the association in writing. If the association exercises its option to buy, a contract must be entered into within two weeks after such acceptance, providing for a closing no later than 60 days from such acceptance.
The contract entered into by 19 Pond and Jones specifically provided that the purchaser acknowledged that the transaction was subject to the waiver, or deemed waiver, of the right of first refusal held by the association as set forth in the declaration. Further, the board, on behalf of the association, exercised the right of first refusal within the time period set forth in the declaration.
The plaintiffs’ contention that the board did not have the authority to exercise the association’s right of first refusal because the board’s actions violated the association’s governing documents is without merit. Moreover, the defendants established that the board’s actions on behalf of the association were taken in good faith and in furtherance of the legitimate interests of the association.
While the plaintiffs correctly contend that an initial email vote by the members of the board authorizing the exercise of the association’s right of first refusal did not constitute a valid act of the Board…the email vote, and the board’s exercise of the association’s right of first refusal, was subsequently ratified by a majority of the members of the Board voting in person…Accordingly, the plaintiffs’ objections to the board’s voting process failed to provide a basis for invalidating the association’s right of first refusal. Moreover, the association’s brief delay in entering into a sales contract with Jones did not provide a basis for invalidating the association’s actions. Contrary to the plaintiffs’ contentions, the board’s actions did not violate any other provisions of the association’s governing documents.
In sum, the defendants established their prima facie entitlement to judgment as a matter of law by demonstrating that the board’s actions were authorized and lawful pursuant to the association’s governing documents and were in furtherance of a legitimate interest of the association, and that the contract between 19 Pond and Jones was properly cancelled pursuant to its terms. In opposition, the plaintiffs failed to raise a triable issue of fact[.]
Fletcher v. Dakota, Inc., 99 A.D.3d 43 (First Department July 3, 2012)
First Department briefly summarized the facts:
Plaintiff Alphonse Fletcher, Jr., an African-American resident of defendant coop the Dakota, alleges that the Dakota and, as relevant to this appeal, two of its directors (defendants Barnes and Nitze) discriminated against him, inter alia, on the basis of race in refusing to approve his purchase of an apartment adjacent to one he owns for the purpose of combining the two. According to Fletcher, the case is about retaliation against him for sticking up for the rights of others, including minority and Jewish shareholders and applicants at the Dakota, and then to further defame him when he brought the discriminatory conduct to light.
Addressed the claims against the individual board members:
Prior to discussing the relevant causes of action, we address individual board member liability in the context of discriminatory acts, and clear up an element of possible confusion in this area of law that may arise out of this Court’s decision in Pelton v 77 Park Ave. Condominium…In short, although participation in a breach of contract will typically not give rise to individual director liability, the participation of an individual director in a corporation’s tort is sufficient to give rise to individual liability.
Turning to the contentions on appeal, defendants argue that all claims should be dismissed as against Nitze and Barnes because the complaint fails to allege that they engaged in any acts separate and distinct from actions they took as board members. The claims that remain as against Nitze that we must address are breach of fiduciary duty (first cause of action) insofar as it is based on allegations of defamation, and defamation (fifth cause of action). As to Barnes, the remaining causes of action are the first insofar as it is based on defamation, the sixth and eighth, which allege discrimination under the New York State and City Human Rights Laws, the seventh and ninth, which allege retaliation in violation of the State and City Human Rights Laws, respectively, the tenth, which alleges a violation of the Civil Rights Law, and the eleventh, which alleges tortious interference with contract. Since defendants are not challenging the motion court’s ruling that the discrimination-based claims (the sixth, eighth and tenth) otherwise fail to state a cause of action, but only that they fail to allege independent conduct on Barnes’s part, we begin with those claims.
The provisions of the State Human Rights Law…that proscribe discrimination in housing apply not only to the “owner” of the housing, but also to a “lessee, sub-lessee, assignee, or managing agent of, or other person having the right to sell, rent or lease a housing accommodation … or any agent or employee thereof”…similarly provides for individual liability…Although both statutes contain exceptions to their housing coverage…there are no exemptions in either statute for directors or officers of a coop or any other corporation. The anti-retaliation sections of both statutes also provide for individual liability with no exemption for corporate directors or officers…Individual director and officer liability is also consistent with the limitations on the “business judgment” rule as enunciated by the Court of Appeals.
Adverted to Levandusky and Pullman:
In Matter of Levandusky v One Fifth Ave. Apt. Corp.… the Court of Appeals held that the “business judgment” rule was the correct standard of judicial review of the actions of the directors of a cooperative corporation. That “rule prohibits judicial inquiry into [the] actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes”…The Court, however, cautioned that “the broad powers of a cooperative board hold potential for abuse through arbitrary and malicious decisionmaking, favoritism, discrimination and the like”…the Court of Appeals “reaffirm[ed] [Levandusky’s] admonition and stress[ed] that those types of abuses are incompatible with good faith and the exercise of honest judgment. While deferential, the Levandusky standard should not serve as a rubber stamp for cooperative board actions”…Thus, arbitrary or malicious decision making or decision making tainted by discriminatory considerations is not protected by the business judgment rule.
Nothing in the holding or reasoning of either Levandusky or Pullman suggests that there is a safe harbor from judicial inquiry for directors who are alleged to have engaged in conduct not protected by the business judgment rule. Moreover, there is no principle of corporate law that director liability arises only where the director commits a tort independent of the tort committed by the corporation itself. On the contrary, it has long been held by this Court that “a corporate officer who participates in the commission of a tort may be held individually liable,… regardless of whether the corporate veil is pierced”…”In actions for fraud, corporate officers and directors may be held individually liable if they participated in or had knowledge of the fraud, even if they did not stand to gain personally”…[which noted, even then, that “a long list of cases … ha(d) … held that the officers, directors and agents of a corporation are jointly and severally liable for torts committed on behalf of a corporation and the fact that they also acted on behalf of the corporation does not relieve them from personal liability”]).
A leading treatise on corporations states that a director may be held individually liable to third parties for a corporate tort if he either participated in the tort or else “directed, controlled, approved, or ratified the decision that led to the plaintiff’s injury”…This rule protects individual board members who did not participate or aid and abet the tortfeasors from being held vicariously liable for the tortfeasors’ action.
Addressing defendant’s contention:
Nevertheless, defendants contend that this Court’s decision in Pelton v 77 Park Ave. Condominium…requires that the discrimination claims be dismissed as against Barnes. In Pelton, the plaintiff brought a disability discrimination claim, under the City HRL, against his condominium and the individual members of the board of managers based on their alleged failure to properly accommodate his disability. This Court granted summary judgment dismissing the action against the individual board members, reasoning that (1) the Levandusky standard was not satisfied, and (2) the plaintiff failed to allege “independent tortious conduct” by the individual defendants “in order to overcome the public policy that supports the business judgment rule”…However, there are two problems with this reasoning. First, as discussed above, the Levandusky rule will not protect a board member where he engages in discriminatory conduct. Second, Pelton takes a rule that applies where a cooperative or condominium board is alleged to have breached a contractual obligation, and incorrectly applies it where a board allegedly engaged in the intentional tort of discrimination. That is, Pelton failed to disentangle the principles of individual corporate director liability in the breach of contract context (understood to provide a shield against liability) from the principles applicable to tort cases (where there is no such shield)[.]
Outlined the elements of a retaliation claim:
Defendants contend that the retaliation claims (the seventh and ninth causes of action) should be dismissed as against the Dakota and Barnes for failure to state a cause of action. The State HRL provides, in pertinent part, that “[i]t shall be … unlawful … to retaliate … against any person because he or she has opposed any practices forbidden under this article”…To make out a claim of retaliation under the State HRL, the complaint must allege that (1) Fletcher engaged in a protected activity by opposing conduct prohibited thereunder; (2) defendants were aware of that activity; (3) he was subject to an adverse action; and (4) there was a causal connection between the protected activity and the adverse action[.]
And applied the facts to the law:
The complaint alleges that Fletcher began to oppose discrimination (or conduct that he perceived as discriminatory) after he was elected president of the coop board in May 2007. In or about September 2007, he complained to defendant Nitze that another board member’s reference to certain applicants as “Jewish mafia” was “not appropriate.” The applicants were initially rejected, although plaintiff and one other board member voted to approve. He further alleged that, “[a]lthough defendant Nitze tried to persuade Fletcher not to raise the issue again, Fletcher urged the Board to reconsider the couple’s application `on the record.’“ The board granted the couple an interview, after which it approved the application.
Fletcher’s protest that the “Jewish mafia” comment and the general tenor of the discussion about the Jewish couple’s “ethnicity and religion” were inappropriate constitutes the kind of activity that is protected under the State HRL. Thus, the first element of a retaliation claim was alleged.
The second element was alleged with respect to defendant the Dakota. Since defendant Nitze was a director, his knowledge of Fletcher’s activity is imputed to the Dakota…However, Barnes did not become a member of the board until May 2009, and plaintiffs do not allege that he was aware of Fletcher’s protected activity. Thus, the seventh and ninth causes of action should be dismissed as against Barnes. However, since discovery may reveal that he was aware of Fletcher’s protected activity, the dismissal as against Barnes should be without prejudice.
Plaintiffs’ allegations that defendants “denied Fletcher the benefit of having the Transfer Disclosure Policy govern his application to purchase Apartment 50; (b) denied Fletcher the impartial, fair, and unbiased review of his financial disclosures; [and] (c) recommended rejection of Fletcher’s application” are sufficient to establish that Fletcher was subjected to an adverse action, and satisfy the third prong of a retaliation claim.
The fourth prong is satisfied by plaintiffs’ allegation that defendants took the above mentioned adverse action in retaliation for his efforts to defend victims of discrimination by them…The fact that the alleged retaliation commenced a substantial period of time after the protected activity was engaged in does not defeat the claim: Fletcher’s application for approval to purchase apartment 50 in the early part of 2010 represented the first opportunity for retaliation[.]
Thus, we decline to dismiss as against the Dakota Fletcher’s retaliation claims under the State and City HRLs to the extent they are based on his conduct with respect to the Jewish couple.
The complaint also alleges that Fletcher “made it clear” to the rest of the board that jokes about the number of times a certain shareholder would have to apply to fix her bathroom were inappropriate. Although the shareholder was African-American, the complaint does not allege that Fletcher made any reference to her race. Thus, it fails to state a cause of action under the State HRL for retaliation on the basis of Fletcher’s conduct with respect to this shareholder…Thus, the seventh and ninth causes of action should have been dismissed against the Dakota insofar as they are based on Fletcher’s conduct with respect to the African-American shareholder. However, the dismissal is without prejudice, because following discovery, plaintiffs may be able to plead further details that would show that Fletcher was engaged in protected activity.
We note that under the City HRL, a jury may infer from other evidence that a plaintiff’s activity is in fact opposition to discrimination even where the plaintiff does “not say [so] in so many words”…However, even under the City HRL, a complaint drafted by counsel that contains 269 numbered paragraphs without alleging even on information and belief that defendants knew or should have known that Fletcher was opposing discrimination when he spoke to them about the African-American shareholder who intended to renovate her bathroom fails to state a cause of action for retaliation.
Because the Dakota is a corporation, it owes no fiduciary duty to its shareholders…Thus, although the Dakota sought to dismiss the first cause of action only to the extent it is based on defamation, we dismiss both the first and second causes of action in their entirety as against the Dakota, because the defectiveness of these claims is “apparent on the face of the record”…Moreover, the dismissal is with prejudice.
As to Barnes and Nitze, they correctly argue that the first cause of action should be dismissed as against them because it fails to adequately plead violations of the individual directors’ fiduciary duty…However, since discovery may reveal such violations, the dismissal of the first cause of action as against them should be without prejudice.
The fifth cause of action alleges defamation and the first cause of action, which alleges breach of fiduciary duty, is based, in part, on allegations of defamation. To the extent these causes of action rely on statements contained in affidavits submitted in opposition to plaintiffs’ preliminary injunction motion, they should be dismissed, with prejudice, because the statements are protected by both the judicial proceedings and fair report privileges…However, the first cause of action alleges that defendants breached their fiduciary duty to Fletcher by “knowingly and maliciously spreading false statements and rumors to third parties, including the media, concerning Fletcher’s financial condition” and the fifth cause of action refers to statements made “[b]egining in April 2010,” i.e., long before this action was commenced. Thus, these causes of action do not rely exclusively on statements contained in affidavits.
Contrary to defendants’ contention, the following allegedly defamatory statements are pleaded with sufficient particularity (CPLR 3016 [a]):
[At an April 14, 2010 board meeting,] one or more of the Individual Defendants told the other members of the Board that Fletcher had not fulfilled binding charitable commitments and pledges, that Fletcher’s assets were all illiquid and difficult to value, and that FAM’s business loans left it over-extended and at risk of collapse …
[On or before May 7, 2010, Nitze told Dakota shareholder Craig Hatkoff that Fletcher] had not actually given the money he had promised to give [to charity] and `he owes it’…
[At some point between June 24, 2010 and September 2010] one or more of the Individual Defendants falsely and maliciously stated to Hatkoff that Fletcher had `checked out of his business’ and was living on `borrowed money’…
On September 14, 2010, … the Board sent a letter to certain Dakota shareholders … [It stated, inter alia,] ‘[b]ased on the financial information submitted by Fletcher, the Board concluded that approving such a purchase would not be in the best interest of The Dakota’ … [The letter] also contained the false and misleading statement that Fletcher had declined the Board’s request to provide additional financial information.
While some of these allegations do not specify exactly which of the defendants made a particular statement, that is not a fatal defect[.]
Defendants further contend that the above-quoted statements are covered by a qualified privilege and that the complaint fails to allege malice sufficient to defeat the privilege…Contrary to the latter contention, the complaint alleges malice. But, in any event, we would not “give conclusive effect to defendants’ position of qualified privilege before any affirmative defense to that effect was raised in a responsive pleading”…Thus, we decline to dismiss as against the Dakota the fifth cause of action and so much of the first cause of action as it is based on allegations of defamation to the extent they do not rely on statements contained in affidavits.
As to Barnes and Nitze, since we are dismissing the first cause of action in its entirety as against them, we need not address the defamation-based part of the claim. We also decline to dismiss the fifth cause of action as against Nitze since he is alleged to have made defamatory statements about Fletcher to Hatkoff.
Contrary to defendants’ contention, the tortious interference with contract claim states a cause of action by alleging tortious interference with Fletcher’s contract to purchase apartment 50 from Ruth Proskauer Smith’s estate…Thus, we decline to dismiss the eleventh cause of action as against the Dakota. However, it should be dismissed as against Barnes, because the complaint does not allege that Barnes committed independent tortious conduct outside of his role as a board member…The dismissal is without prejudice since discovery may reveal evidence that would support a claim against Barnes in his individual capacity.
Business judgment rule checklist: Was the challenged action by the Board: (1) outside the scope of its authority; (2) in a manner that did not legitimately further the corporate purpose; or (3) in bad faith?