Cooperatives & Condominiums

Claim Against Co-Op Board Survives Motion to Dismiss

85 Fifth Avenue 4^th

Floor LLC v. La Selig, LLC

NYLJ 11/15/07, p. 38, col. 1

AppDiv, First Dept.

(memorandum opinion)

In an action by co-op purchaser against seller, the co-op board, and individual board members, plaintiff purchaser appealed from the Supreme Court's grant of defendants' motion to dismiss. The Appellate Division modified to reinstate purchaser's breach of contract claim against the seller, and a tortious interference claim against individual board members.

Purchaser contracted to purchase the subject co-operative unit. The co-op board subsequently withheld its consent of the sale. In its complaint, purchaser alleged that simultaneously with rejection of purchaser's application to purchase, the co-op board amended its bylaws to provide for the possibility of a residential conversion that would increase the market value of the unit. Seller's principal was a member of the board that made both decisions. Purchaser brought this action, alleging breach of contract against both the seller and the board, and alleging tortious interference with contract by the individual board members. The Supreme Court dismissed the complaint.

In modifying, the Appellate Division reinstated the breach of contract claim against the seller, concluding that the complaint stated a cause of action based on a violation of the covenant of good faith and fair dealing. The court held, however, that purchaser had no breach of contract claim against the co-op board because purchaser had no contractual relationship with the board. The court held, however, that the complaint adequately stated a claim against board members for tortious interference with contract, rejected the board members' argument that a tortious interference claim would not lie because the contract between purchaser and seller was not breached. The court also noted that the tortious interference claim did not allege that the board members intentionally procured breach by the seller, but declined to dismiss the complaint on that ground on the court's own motion.

COMMENT

Because a co-op board owes no fiduciary duty to prospective purchasers of co-op shares, purchasers who seek relief against a board must generally see relief either for tortious interference with contract (unless they can establish violation of an anti-discrimination statute). Thus, in Sinensky v. Rokowsky, 22 AD3d 563, the Appellate Division dismissed contract vendee's breach of fiduciary duty claim, while holding that claims for discrimination on the basis of disability, and for tortious interference, raised questions of fact that precluded dismissal. A board's failure to approve a purchaser does not by itself give rise to a tortious interference claim because the contract between the seller and the purchaser contemplates the possibility that the board will disapprove. See Levine v. Board of Directors, 245 AD2d 138 (dismissing tortious interference claim that alleged only refusal to approve the purchaser's application). At lest one court has suggested that a purchaser's tortious interference claim will not lie unless the co-op board's decision was in bad faith or not in furtherance of the co-op's legitimate purposes. See Woo v. Irving Tenants Corp., 276 AD2d 380. The Woo court imported standards drawn from breach of fiduciary duty claims, and applied them to tortious interference claims, indicating that if the co-op board's denial did not violate the business judgment rule, it could not serve as the basis for a tortious interference claim. Courts have applied the same standard when the prospective purchaser already owns shares associated with another apartment. Thus, in DelPuerto v. Port Royal Owners Corp., 14 Misc.3d 1214(A), the court dismissed purchaser-shareholder's tortious interference claim, concluding that neither a tortious interference claim nor a claim for breach of fiduciary duty would lie when the board rejected a purchaser who had a high debt-to-income ratio, delinquent credit card balances, and accumulated arrears on her existing unit.

When sellers have brought a tortious interference claim against the co-op board, courts have typically held that such claims state a cause of action if seller alleges that the board acted to advance a self-interested objective unrelated to the suitability of the prospective purchaser. In this respect, the standard used to evaluate tortious interference claims resembles the standard used when a shareholder brings an action against the board for breach of fiduciary duty. Thus, in Kravtsov v. Thwaites Terrace House Owners Corp., 267 AD2d 154, the court held that tenant-seller had stated causes of action against the board for both breach of fiduciary duty and for tortious interference with contract when tenant-seller alleged that the board had disapproved a sale in order to secure leverage in a dispute with tenant-seller over water leaks. Similarly, in Black v. Alexander House Residences, Inc., 226 AD2d 186, the court awarded seller damages for tortious interference when the board, as a condition for approval of a proposed sale, had continued to insist that seller reimburse the board for attorneys fees it had incurred in prosecuting a summary proceeding against seller, even after the Appellate Term had vacated a default judgment in favor of the board and against seller. The court held that the board's insistence on payment even after the Appellate Term's decision took the board's action outside the protection of the business judgment rule, and entitled tenant to damages.

Claim Against Co-Op Board Survives Motion to Dismiss

85 Fifth Avenue 4^th

Floor LLC v. La Selig, LLC

NYLJ 11/15/07, p. 38, col. 1

AppDiv, First Dept.

(memorandum opinion)

In an action by co-op purchaser against seller, the co-op board, and individual board members, plaintiff purchaser appealed from the Supreme Court's grant of defendants' motion to dismiss. The Appellate Division modified to reinstate purchaser's breach of contract claim against the seller, and a tortious interference claim against individual board members.

Purchaser contracted to purchase the subject co-operative unit. The co-op board subsequently withheld its consent of the sale. In its complaint, purchaser alleged that simultaneously with rejection of purchaser's application to purchase, the co-op board amended its bylaws to provide for the possibility of a residential conversion that would increase the market value of the unit. Seller's principal was a member of the board that made both decisions. Purchaser brought this action, alleging breach of contract against both the seller and the board, and alleging tortious interference with contract by the individual board members. The Supreme Court dismissed the complaint.

In modifying, the Appellate Division reinstated the breach of contract claim against the seller, concluding that the complaint stated a cause of action based on a violation of the covenant of good faith and fair dealing. The court held, however, that purchaser had no breach of contract claim against the co-op board because purchaser had no contractual relationship with the board. The court held, however, that the complaint adequately stated a claim against board members for tortious interference with contract, rejected the board members' argument that a tortious interference claim would not lie because the contract between purchaser and seller was not breached. The court also noted that the tortious interference claim did not allege that the board members intentionally procured breach by the seller, but declined to dismiss the complaint on that ground on the court's own motion.

COMMENT

Because a co-op board owes no fiduciary duty to prospective purchasers of co-op shares, purchasers who seek relief against a board must generally see relief either for tortious interference with contract (unless they can establish violation of an anti-discrimination statute). Thus, in Sinensky v. Rokowsky, 22 AD3d 563, the Appellate Division dismissed contract vendee's breach of fiduciary duty claim, while holding that claims for discrimination on the basis of disability, and for tortious interference, raised questions of fact that precluded dismissal. A board's failure to approve a purchaser does not by itself give rise to a tortious interference claim because the contract between the seller and the purchaser contemplates the possibility that the board will disapprove. See Levine v. Board of Directors, 245 AD2d 138 (dismissing tortious interference claim that alleged only refusal to approve the purchaser's application). At lest one court has suggested that a purchaser's tortious interference claim will not lie unless the co-op board's decision was in bad faith or not in furtherance of the co-op's legitimate purposes. See Woo v. Irving Tenants Corp., 276 AD2d 380. The Woo court imported standards drawn from breach of fiduciary duty claims, and applied them to tortious interference claims, indicating that if the co-op board's denial did not violate the business judgment rule, it could not serve as the basis for a tortious interference claim. Courts have applied the same standard when the prospective purchaser already owns shares associated with another apartment. Thus, in DelPuerto v. Port Royal Owners Corp., 14 Misc.3d 1214(A), the court dismissed purchaser-shareholder's tortious interference claim, concluding that neither a tortious interference claim nor a claim for breach of fiduciary duty would lie when the board rejected a purchaser who had a high debt-to-income ratio, delinquent credit card balances, and accumulated arrears on her existing unit.

When sellers have brought a tortious interference claim against the co-op board, courts have typically held that such claims state a cause of action if seller alleges that the board acted to advance a self-interested objective unrelated to the suitability of the prospective purchaser. In this respect, the standard used to evaluate tortious interference claims resembles the standard used when a shareholder brings an action against the board for breach of fiduciary duty. Thus, in Kravtsov v. Thwaites Terrace House Owners Corp., 267 AD2d 154, the court held that tenant-seller had stated causes of action against the board for both breach of fiduciary duty and for tortious interference with contract when tenant-seller alleged that the board had disapproved a sale in order to secure leverage in a dispute with tenant-seller over water leaks. Similarly, in Black v. Alexander House Residences, Inc., 226 AD2d 186, the court awarded seller damages for tortious interference when the board, as a condition for approval of a proposed sale, had continued to insist that seller reimburse the board for attorneys fees it had incurred in prosecuting a summary proceeding against seller, even after the Appellate Term had vacated a default judgment in favor of the board and against seller. The court held that the board's insistence on payment even after the Appellate Term's decision took the board's action outside the protection of the business judgment rule, and entitled tenant to damages.