If you have a co-op and cannot resolve a dispute with the Board of Directors, knowing who to sue is important. Co-ops are run by a Board of Directors elected by the co-op’s shareholders. In the event of a lawsuit, shareholders often look to bring an action against the co-op, the Board and/or individual board members. Which parties can be sued was the issue determined in a recent New York appellate court case.

Co-ops are a more restricted type of property ownership than a condominium. Co-op owners do not technically own their apartment; they own shares of the co-operative corporation. Share ownership is accompanied by a “proprietary lease” entered into between the shareholder and the corporation, which allows the shareholder to occupy an apartment in the building.

A co-op Board of Directors has extensive abilities to restrict the activities of shareholders and the operations of the co-op even after shareholders purchase their shares. This can occasionally lead to litigation when shareholders aren’t happy with a Board decision.

In bringing a lawsuit, a co-op shareholder must sue the proper party, as highlighted in the recent Appellate Division, First Department decision in Tahari v. 860 Fifth Ave. Corp. This action involved a dispute between a shareholder and the co-op regarding the shareholder’s combination and renovation of two penthouse apartments.

The shareholder initially sued the co-op and many of the individual board members, asserting they breached their fiduciary duties. Many of these claims were dismissed, although a few claims against individual board members survived.

The shareholder then filed an amended complaint, adding a new claim against the Board of Directors as a collective for breach of its fiduciary duty. The Board moved to dismiss the action on the grounds that a Board of Directors is not an entity that can be sued under New York law.

The trial court denied the motion, finding that prior precedent of the Appellate Division First Department had held that a Board could, in fact, be sued. The Appellate Division reversed, holding that the trial court had misinterpreted its precedent.

The Court relied upon the fact that while New York’s Business Corporation Law provides for a corporation’s business to be conducted by the Board, it does not contain a provision allowing the Board itself to sue or be sued.

Further, the Court pointed out that in the prior appellate decision cited by the trial court, the Defendant Board had never raised the issue of whether it could properly be sued, so the issue was not before the Court.

Notably, the decision did clarify that breach of fiduciary duty claims can be asserted against specific Board members individually.

If you have a dispute involving a co-op, contact our firm to learn how we can help.