First Department Overrules Decision on Claims Against Condo/Co-op Directors

The defendants submitted a motion to dismiss all of Fletcher's claims. The trial court granted the motion in part, but declined to dismiss claims against Barnes for breach of fiduciary duty based in part on discrimination, discrimination
and retaliation under the New York State Human Rights Law (“NYSHRL”) and the New York City Human Rights Law (“NYCHRL”), discrimination under New York Civil Rights Law (“NYCRL”) ' 19, and tortious interference with contract. The trial court also declined to dismiss claims against Nitze for breach of fiduciary duty based in part on discrimination and defamation.

The Appeal and the Decision

On appeal, Barnes and Nitze argued that the trial court erred in failing to dismiss all the claims against them under the First Department's decision in Pelton v. 77 Park Ave. Condominium, 38 A.D.3d 1. In that case, the plaintiff unit owner alleged that condominium board members discriminated against him by failing to make the building handicap-accessible. The First Department granted the defendant board members' motion to dismiss because the plaintiff failed to allege that they engaged in “acts of discrimination separate and apart from the actions taken by the board members collectively on behalf of the condominium (i.e., the “Pelton Pleading Rule”).” Pelton, 38 A.D.3d at 10. In Fletcher, the First Department overruled the Pelton Pleading Rule. The court held that in Pelton it had erroneously applied the standard for a claim against a director deriving from a corporation's breach of contract, which requires the plaintiff to demonstrate that an individual director committed an independent tort or predatory act in order to assess liability against the director. Thus, Pelton erroneously “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.” Fletcher, 2012 WL 2532149, at *3.

To further clarify its rejection of the Pelton Pleading Standard, the First Department turned to general principles of director liability, and held “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 corporation veil is pierced.'” Fletcher, 2012 WL 2532149, at *2 (citations omitted).

In addition, The First Department rejected the directors' contention that their decision to deny Fletcher's application was protected by the business judgment rule based on the Court of Appeals' seminal decision in Levandusky v. One Fifth Ave. Apt. Corp., which established that discriminatory conduct by a director is not protected by that rule. See 75 N.Y.2d 530.

Directly addressing the viability of Fletcher's claims under the NYSHRL and NYCHRL, the First Department found that there are no exemptions in either statute for directors or officers of a cooperative corporation or any other corporation, and that the Pelton Pleading Rule conflicts with the Court of Appeals' determination that the NYCHRL should be construed broadly in favor of discrimination plaintiffs. See Albunio v. City of New York, 16 N.Y.3d 472, 477-78.

Based on all of this reasoning, the First Department rejected Barnes' and Nitze's contention that the remaining claims against them personally should be dismissed under Pelton.

Analysis

Fletcher did not create new law; it merely overruled a prior decision, Pelton, that had misapplied the law of director liability with respect to a claim against condominium board members. The decision did, however, elaborate on the law concerning discrimination claims against cooperative directors and condominium board members to make it clear that they when they act with discriminatory effect, they are not shielded from claims of liability just because they are acting within the scope of their responsibilities on behalf of the cooperative or condominium. By allowing the plaintiff's claims against the individual directors to go forward, the decision exposed Board members to a potential judgment against them individually if the collective action of the Board was ruled to be illegal. However, the court has not decided what standards would apply for an actual finding of liability against those individual (volunteer) directors. It may be that no judgment would be entered against individual Board members in the absence of independent evidence of personal discriminatory intent. That determination would be made by the finders of fact at trial.

On a practical level, we suggest that corporate defendants reexamine their directors and officers liability to verify whether: 1) discrimination claims are covered; 2) defense costs are covered; and 3) the coverage extends to claims by current or former board members against the current board.

Kenneth R. Jacobs and Jack J. Malley are partners in the firm of Smith, Buss & Jacobs.

The First Department's recent decision (the “Decision”) in Fletcher v. The Dakota, Inc., et al., 2012 WL 2532149, overrules a prior decision that set forth an overly onerous pleading standard for discrimination claims against cooperative directors and condominium board members. Although Fletcher addresses other claims, in this article we focus on the portion of the opinion that addresses the legal standards for making claims of discrimination against individual cooperative directors, and provides guidance to attorneys alleging or defending such claims going forward.

The Facts and Procedural History

Fletcher was an African-American owner of shares of the well-known cooperative, The Dakota, who had resided in the Dakota building since 1992. Fletcher served several terms on the Dakota Board of Directors (the “Board”), including two terms as the Board's president. The suit arose from the unanimous decision by the Board in 2010 to deny Fletcher's application to purchase an apartment (the “Apartment”) adjacent to one he owned for the purpose of combining them. Fletcher claimed that The Dakota and several its directors, including Barnes and Nitze, discriminated against him on the basis of race by refusing to approve the purchase; that the denial of the application was a retaliation against Fletcher because he had previously stood up against the Board to protect the rights of a Jewish couple who applied to purchase an apartment, and an African-American woman who sought permission from the Board to alter her apartment; and that Board members defamed him after he raised their discriminatory conduct. The Board alleged that it denied Fletcher's application because he was not financially qualified to make the proposed purchase, and not because of his race or in retaliation for his comments.

The defendants submitted a motion to dismiss all of Fletcher's claims. The trial court granted the motion in part, but declined to dismiss claims against Barnes for breach of fiduciary duty based in part on discrimination, discrimination
and retaliation under the New York State Human Rights Law (“NYSHRL”) and the New York City Human Rights Law (“NYCHRL”), discrimination under New York Civil Rights Law (“NYCRL”) ' 19, and tortious interference with contract. The trial court also declined to dismiss claims against Nitze for breach of fiduciary duty based in part on discrimination and defamation.

The Appeal and the Decision

On appeal, Barnes and Nitze argued that the trial court erred in failing to dismiss all the claims against them under the First Department's decision in Pelton v. 77 Park Ave. Condominium, 38 A.D.3d 1. In that case, the plaintiff unit owner alleged that condominium board members discriminated against him by failing to make the building handicap-accessible. The First Department granted the defendant board members' motion to dismiss because the plaintiff failed to allege that they engaged in “acts of discrimination separate and apart from the actions taken by the board members collectively on behalf of the condominium (i.e., the “Pelton Pleading Rule”).” Pelton, 38 A.D.3d at 10. In Fletcher, the First Department overruled the Pelton Pleading Rule. The court held that in Pelton it had erroneously applied the standard for a claim against a director deriving from a corporation's breach of contract, which requires the plaintiff to demonstrate that an individual director committed an independent tort or predatory act in order to assess liability against the director. Thus, Pelton erroneously “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.” Fletcher, 2012 WL 2532149, at *3.

To further clarify its rejection of the Pelton Pleading Standard, the First Department turned to general principles of director liability, and held “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 corporation veil is pierced.'” Fletcher, 2012 WL 2532149, at *2 (citations omitted).

In addition, The First Department rejected the directors' contention that their decision to deny Fletcher's application was protected by the business judgment rule based on the Court of Appeals' seminal decision in Levandusky v. One Fifth Ave. Apt. Corp., which established that discriminatory conduct by a director is not protected by that rule. See 75 N.Y.2d 530.

Directly addressing the viability of Fletcher's claims under the NYSHRL and NYCHRL, the First Department found that there are no exemptions in either statute for directors or officers of a cooperative corporation or any other corporation, and that the Pelton Pleading Rule conflicts with the Court of Appeals' determination that the NYCHRL should be construed broadly in favor of discrimination plaintiffs. See Albunio v. City of New York , 16 N.Y.3d 472, 477-78.

Based on all of this reasoning, the First Department rejected Barnes' and Nitze's contention that the remaining claims against them personally should be dismissed under Pelton.

Analysis

Fletcher did not create new law; it merely overruled a prior decision, Pelton, that had misapplied the law of director liability with respect to a claim against condominium board members. The decision did, however, elaborate on the law concerning discrimination claims against cooperative directors and condominium board members to make it clear that they when they act with discriminatory effect, they are not shielded from claims of liability just because they are acting within the scope of their responsibilities on behalf of the cooperative or condominium. By allowing the plaintiff's claims against the individual directors to go forward, the decision exposed Board members to a potential judgment against them individually if the collective action of the Board was ruled to be illegal. However, the court has not decided what standards would apply for an actual finding of liability against those individual (volunteer) directors. It may be that no judgment would be entered against individual Board members in the absence of independent evidence of personal discriminatory intent. That determination would be made by the finders of fact at trial.

On a practical level, we suggest that corporate defendants reexamine their directors and officers liability to verify whether: 1) discrimination claims are covered; 2) defense costs are covered; and 3) the coverage extends to claims by current or former board members against the current board.

Kenneth R. Jacobs and Jack J. Malley are partners in the firm of Smith, Buss & Jacobs.