A recent New York case brought by a co-op shareholder against a co-op board and its members has important lessons for those considering similar lawsuits or concerned about defending their actions. While the case is still in its early stages, the decision discusses the duties of board members and when they may be liable for their actions to co-op shareholders.
The dispute in Tahari v. 860 Fifth Avenue Corporation, et al. arose when the plaintiff sought approval to combine two penthouse apartments in the building into one large unit and was rejected by the co-op board. The plaintiff sued on several grounds and the defendants sought to dismiss the claims. The lower Court denied the defendants’ motion to dismiss. The New York Appellate Division, First Department allowed some claims to proceed but dismissed others.
The plaintiff claimed the board breached its fiduciary duty in refusing to approve the project. The Appellate Division dismissed this claim noting that a corporation owes no fiduciary duty to its shareholders.
The Court, however, refused to dismiss the claim for breach of fiduciary duty against two of the board members based on the plaintiff’s allegations they had a bad faith motivation for their refusal to approve the plaintiff’s project. Generally, the “Business Judgment Rule” immunizes a board member from liability as long as their actions are taken in good faith, that the member exercises honest judgment, and the action taken by the board furthers lawful and legitimate corporate purposes. The Court found that the plaintiff’s claim could proceed because the complaint alleged that the two board members (whose unit is located near the units the plaintiff sought to combine) had based their refusal on the potential impacts to their own apartment rather than considering the benefit of the plaintiff’s project to the co-operative as a whole.
In addition, the Court permitted the plaintiff’s cause of action for declaratory and injunctive relief to go forward. The plaintiff asked the Court to require that the co-op approve its project on terms similar to those afforded other shareholders. The Appellate Division noted that the defendants claimed that the plaintiff was not being treated any differently than other similarly situated shareholders, however, that was an issue for the lower Court to address.
This decision is limited to allowing the plaintiff to proceed with two of the claims, which now go back to the trial court. It is possible that during the discovery phase of this litigation, facts will be uncovered which show that the two individual board members were in fact acting in good faith and that they just happened to live in close proximity to the penthouse units that the plaintiff was seeking to combine. If that is the case, the defendants will likely make a motion for summary judgment asking the court to rule in their favor on the remaining causes of action.
The lesson to be learned from this case is that prior to undertaking a project of this magnitude a co-op shareholder, or its counsel, should discuss matters with the managing agent and possibly the board in order to determine past precedent for approving similar projects and what is considered objectionable for the particular building.
If you have a similar situation in your co-op or if you are a board member and feel you need advice regarding how to perform your duties, please contact one of our attorneys.