Cooperatives & Condominiums

Supreme Ct., N.Y. Cty.

(Gische, J.)

In an action by co-op shareholder against the co-op corporation, its board, the board's individual members, the property manage, the managing agent, and the lawyers for the defendants, the defendants moved to dismiss a variety of shareholder's claims for failure to state a cause of action. The court denied many of the motions, holding that accepting the facts as true, plaintiff shareholder had adequately stated claims for breach of the warranty of habitability, breach of fiduciary duty, and nuisance.

Unit owner contends that the co-op board and its members failed to properly line the chimney in a line of apartments, and encouraged owners in that line to use their fireplaces, causing smoke, fumes, and soot to seep into her apartment, and placing her in danger. The complaint alleges that the board had made significant expenditures on engineers and other professionals, but ultimately rejected their advice and instead installed an illegal fan system to deal with the problem. The complainant further alleged that when she complained about these conditions, the board brought a baseless lawsuit against her, alleging falsely that her rooftop garden was causing leaks into the unit below hers. Defendants moved to dismiss various causes of action.

The court first held that the complaint adequately stated causes of action for breach of the warranty of habitability and partial constructive eviction. The court then turned to the breach of fiduciary duty claims, and held that the co-op corporation itself owes no breach of fiduciary duty to its shareholders, although its officers and directors do owe such a duty. The court therefore granted the motion to dismiss the fiduciary duty claims against the corporation, but denied the motion with respect to the board. The court also held, however, that individual members of the board cannot be held liable for breach of fiduciary duty unless they were acting outside their official capacity or engaged in tortious conduct. Here, because the complaint attributed no independent tortious conduct to any officer or director, the court dismissed the breach of fiduciary duty claim against the board members as individuals. Finally, the court dismissed the claim against the law firm that had represented the co-op, concluding that making unfounded allegations in a pleading does not provide a basis for liability under section 487 of the Judiciary Law.

COMMENT

Generally, when the business judgment rule insulates a co-op board decision from judicial second-guessing, it also insulates individual directors from liability. Thus, in Pelton v. 77 Park Ave., 38 AD 3d 1, the First Department dismissed shareholder's claim that the board had discriminated against him based on his disability, and simultaneously dismissed shareholder's claim against individual board members for money damages. The court indicated that board members should always be protected from liability in cases where the business judgment rule shields the board's decision from judicial review, and noted that plaintiff must plead discriminatory treatment or wrongdoing with some specificity to overcome the business judgment rule's protection of both board decisions and board members.

However, when a claim of unequal treatment survives a dismissal or summary judgment motion by the board, a claim for damages against individual board members may not survive dismissal or summary judgment. Thus, in Konrad v. 136 East 64th Street Corp. 246 A.D.2d 324, the First Department refused to permit a shareholder to amend its complaint to add a claim against the individual directors, noting that even if shareholder's claim of discriminatory treatment would be sufficient to overcome the business judgment rule in a claim against the corporation, the claim could not survive against the individual directors because the shareholder failed to allege specific facts suggesting that that the directors committed a separate tortious act.

To rise to the level of separate tortious conduct, a plaintiff must allege, for example, that the director engaged in self-dealing or acted in bad faith by knowingly violating a statute. Kravtsov v. Thwaites Terrace House Owners Corp., 267 AD 2d 154. In Kravstov, while the court dismissed the claims imposing liability on most of the directors, it allowed the claim to survive against one director, because the complaint alleged specific instances of self-interested behavior by that director. In particular, the complaint alleged that the director required the plaintiff to discontinue another unrelated lawsuit against him, and to provide him with the broker's commission, in order to obtain his necessary approval for the sale. The court held that these allegations constituted separate tortious conduct. Similarly, in Broome v. Biondi 17 F.Supp.2d 211, plaintiffs alleged that the board members denied the tenant's application because he was an African-American. In upholding the jury's verdict of punitive damages against the board members in their individual capacity, the court held that board members could be held personally liable when actions were taken in bad faith.

A director who is found individually liable to a shareholder is not entitled to indemnification from the cooperative for the damages if the director's acts “were committed in bad faith” or were taken for “personal gain.” See Business Corporation Law section 721. Thus, in Biondi, supra, the Court of Appeals held that director could not seek indemnification from the cooperative for his racially motivated conduct. Therefore, it appears that the very conduct that triggers personal liability of directors (self-dealing and statutory violations) is the conduct for which section 721 generally precludes indemnification.

Shareholder Claim for Breach Of Warranty of Habitability Adequately Stated

Hubschman v. 1010 Tenants Corp.

NYLJ 11/15/11

Supreme Ct., N.Y. Cty.

(Gische, J.)

In an action by co-op shareholder against the co-op corporation, its board, the board's individual members, the property manage, the managing agent, and the lawyers for the defendants, the defendants moved to dismiss a variety of shareholder's claims for failure to state a cause of action. The court denied many of the motions, holding that accepting the facts as true, plaintiff shareholder had adequately stated claims for breach of the warranty of habitability, breach of fiduciary duty, and nuisance.

Unit owner contends that the co-op board and its members failed to properly line the chimney in a line of apartments, and encouraged owners in that line to use their fireplaces, causing smoke, fumes, and soot to seep into her apartment, and placing her in danger. The complaint alleges that the board had made significant expenditures on engineers and other professionals, but ultimately rejected their advice and instead installed an illegal fan system to deal with the problem. The complainant further alleged that when she complained about these conditions, the board brought a baseless lawsuit against her, alleging falsely that her rooftop garden was causing leaks into the unit below hers. Defendants moved to dismiss various causes of action.

The court first held that the complaint adequately stated causes of action for breach of the warranty of habitability and partial constructive eviction. The court then turned to the breach of fiduciary duty claims, and held that the co-op corporation itself owes no breach of fiduciary duty to its shareholders, although its officers and directors do owe such a duty. The court therefore granted the motion to dismiss the fiduciary duty claims against the corporation, but denied the motion with respect to the board. The court also held, however, that individual members of the board cannot be held liable for breach of fiduciary duty unless they were acting outside their official capacity or engaged in tortious conduct. Here, because the complaint attributed no independent tortious conduct to any officer or director, the court dismissed the breach of fiduciary duty claim against the board members as individuals. Finally, the court dismissed the claim against the law firm that had represented the co-op, concluding that making unfounded allegations in a pleading does not provide a basis for liability under section 487 of the Judiciary Law.

COMMENT

Generally, when the business judgment rule insulates a co-op board decision from judicial second-guessing, it also insulates individual directors from liability. Thus, in Pelton v. 77 Park Ave., 38 AD 3d 1, the First Department dismissed shareholder's claim that the board had discriminated against him based on his disability, and simultaneously dismissed shareholder's claim against individual board members for money damages. The court indicated that board members should always be protected from liability in cases where the business judgment rule shields the board's decision from judicial review, and noted that plaintiff must plead discriminatory treatment or wrongdoing with some specificity to overcome the business judgment rule's protection of both board decisions and board members.

However, when a claim of unequal treatment survives a dismissal or summary judgment motion by the board, a claim for damages against individual board members may not survive dismissal or summary judgment. Thus, in Konrad v. 136 East 64th Street Corp. 246 A.D.2d 324, the First Department refused to permit a shareholder to amend its complaint to add a claim against the individual directors, noting that even if shareholder's claim of discriminatory treatment would be sufficient to overcome the business judgment rule in a claim against the corporation, the claim could not survive against the individual directors because the shareholder failed to allege specific facts suggesting that that the directors committed a separate tortious act.

To rise to the level of separate tortious conduct, a plaintiff must allege, for example, that the director engaged in self-dealing or acted in bad faith by knowingly violating a statute. Kravtsov v. Thwaites Terrace House Owners Corp., 267 AD 2d 154. In Kravstov, while the court dismissed the claims imposing liability on most of the directors, it allowed the claim to survive against one director, because the complaint alleged specific instances of self-interested behavior by that director. In particular, the complaint alleged that the director required the plaintiff to discontinue another unrelated lawsuit against him, and to provide him with the broker's commission, in order to obtain his necessary approval for the sale. The court held that these allegations constituted separate tortious conduct. Similarly, in Broome v. Biondi 17 F.Supp.2d 211, plaintiffs alleged that the board members denied the tenant's application because he was an African-American. In upholding the jury's verdict of punitive damages against the board members in their individual capacity, the court held that board members could be held personally liable when actions were taken in bad faith.

A director who is found individually liable to a shareholder is not entitled to indemnification from the cooperative for the damages if the director's acts “were committed in bad faith” or were taken for “personal gain.” See Business Corporation Law section 721. Thus, in Biondi, supra, the Court of Appeals held that director could not seek indemnification from the cooperative for his racially motivated conduct. Therefore, it appears that the very conduct that triggers personal liability of directors (self-dealing and statutory violations) is the conduct for which section 721 generally precludes indemnification.