Cooperatives & Condominiums

(memorandum opinion)

In an action by former shareholder alleging that the co-op corporation had converted funds, shareholder appealed from Supreme Court's denial of his summary judgment motion with respect to various claims, and from Supreme Court's staying entry of judgment on another claim as a litigation reserve. The Appellate Division modified to delete the stay imposed by Supreme Court, and, in searching the record, awarded summary judgment to the co-op corporation dismissing the remainder of former shareholder's claims.

After years of litigation between former shareholders and the co-op corporation, the corporation's shareholder voted to evict former shareholders on May 24, 2005. After more litigation, the sheriff finally ejected former shareholders on Oct. 12, 2007, and the co-op corporation resold the shares for $4.2 million. The corporation then sent former shareholders a check for just over $2.4 million, reflecting deductions for amounts due the corporation. Former shareholders then brought this action alleging that the co-op corporation had converted more than $900,000 by improperly withholding proceeds from the sale. Former shareholders moved for summary judgment. Supreme Court granted summary judgment to former shareholders on their claim that the co-op had wrongfully withheld $250,000 as a litigation reserve, but stayed entry of that judgment pending resolution of former shareholders' other claims. The court then denied the summary judgment motion on those other claims. Former shareholders appealed.

In modifying, the Appellate Division started by agreeing with Supreme Court that the co-op corporation had improperly withheld the $250,000, but concluded that Supreme Court had no basis for staying entry of judgment on that amount. The court indicated that the record provided no support for the conclusion that the co-op corporation might be prejudiced if entry of the judgment were not stayed. The court then turned to former shareholders' claims that the co-op corporation had wrongfully withheld funds for payment of attorneys' fees, unpaid maintenance, and flip taxes. Searching the record, the court concluded that the co-op corporation was entitled to summary judgment on these claims because former shareholders were contractually obligated to pay those amounts.

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Derivative Action Dismissed

Goldstein v. Bass

NYLJ 4/22/16, p. 22, col. 1

AppDiv, First Dept.

(3-1 decision; memorandum opinion; dissenting memorandum by Manzanet-Daniels, J.)

In a shareholder derivative action brought on behalf of a co-op corporation, plaintiff shareholder appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that the complaint failed to allege facts that would excuse plaintiff shareholders' failure to make a demand on the board to bring the action.

When the sponsor of the co-op conversion defaulted in 1995, the co-op corporation became the owner of more than 300 units in the 617-unit co-op. The co-op corporation sold units at prices ranging from $25,000 to $50,000 per unit. In this derivative action, plaintiff shareholder alleged that board members breached their fiduciary duty by selling the units at below-market price, and by awarding the management company a 10-year non-cancellable contract at an above-market rate. Supreme Court dismissed the complaint because plaintiff shareholder had failed to plead demand futility, and plaintiff shareholder appealed.

In affirming, the Appellate Division majority started by noting that in a derivative action, the complaint must set forth either the efforts of plaintiff to secure initiation of the action by the board, or the reasons for not making the effort. To establish that making the effort would be futile, the plaintiff must show that a majority of the directors are interested in the transaction, or the directors failed to inform themselves adequately about the transaction or the directors failed to exercise their business judgment. In this case, the complaint did not allege that a majority of directors were interested, and the assertion that board members merely rubber-stamped the transaction was conclusory. Finally, the complaint failed to establish facts that would establish that the challenged sales were not the product of sound business judgment.

Justice Manzanet-Daniels, dissenting, concluded that plaintiff shareholder had satisfied the futility requirement by alleging that the board members had approved below-market sales of 27 units to an entity owner by the managing agent's principal, sale of one unit for $25,000 to a board member, and a long-term non-cancellable contract with the managing agent.