BLOG | Counsels’ Corner: Business Judgment Revisited
By Kenneth J. Finger, Esq., Dorothy M. Finger, Esq., Carl L. Finger, Esq., and Daniel S. Finger, Esq.
(WHITE PLAINS) The authors have previously discussed the leading case of Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y. 2d 530 (1990), a Court of Appeals case which sets forth the applicability of the business judgment rule to the decisions by a Board of Directors (or Board of Managers in a condominium, herein the “Board”).
In short, Levandusky established the basic principle that when a Board acts in good faith, within the law, within the by-laws, and within its authority, the Board’s decisions are protected from a claim against it because the decision is considered to be within the Board’s “business judgment.” This rule, however, is not an unlimited pathway to the complete protection of the Board and this article will discuss several recent cases involving the business judgment rule.
In 72 Poplar Townhouse LLC v. Board of Managers, the Appellate Court had before it a case where a condominium unit owner brought action against the condominium board of managers and individual board members alleging breach of contract, estoppel, breach of fiduciary duty, and fraud arising from the board’s amendment of the condominium’s governing documents that changed the method by which common charges were calculated and assessed to each unit owner.
The Supreme Court, Appellate Division, held that individual board members were not liable under breach of contract or estoppel theory.
However, an issue of fact raised regarding unequal treatment of the condominium owner precluded summary judgment. Another fact issue regarding board members’ participation in fraud precluded summary judgment on that claim as well. Therefore, the case would be scheduled for a trial to determine the facts and thereafter the possible applicability of the business judgment rule.
Other Scenarios
In Christie v. Breezy Point Co-op, Inc., the Board attempted to condition its consent to the assignment of shares upon the shareholder removing alterations performed 10 years earlier. The cooperative failed in its motion to dismiss because the proprietary lease did not specifically authorize the Board to condition its consent on the removal of alterations. In all likelihood, the Court looked at the fact that the Board had not enforced its alteration agreement 10 years earlier. However, the Court did dismiss the breach of fiduciary duty claim alleged against the Board. This is not uncommon because Courts have found that Boards do not owe a fiduciary duty to individual shareholders.
In Carpenter v. Shore Towers, the court held that the Board Members, by the evidence presented, seemed to have acted outside their authority in suffering municipal violations, some apparently criminal, and that all owners would have to contribute to the payment of the fines.
In Queiroga v 340 E.93rd Street Corp., the Supreme Court held that a shareholder failed to allege that the Board’s actions: (a) had no legitimate relationship to the welfare of the cooperative, deliberately singled out individuals for harmful or unequal treatment, were taken without notice or consideration of the relevant facts, or were beyond the scope of the Board’s authority. Therefore, the decision was protected by the business judgment rule.
A Dismissal
The Court in 580 Llorrac Street Corp. v. Board of Managers of 580 Carroll Condo, involving a unit owner’s complaint of a leak, dismissed claims of breach of fiduciary duty and negligence under the business judgment rule. It held that absent any allegation of self-dealing, fraud, misconduct or unconscionability by any board member there was no claim.
Moreover, the evidence demonstrated that the board acted in good faith. However, the Court allowed a breach of contract claim to stand because of the failure to promptly repair the cause of the leak and damages arising therefrom. The proprietary lease is a contract which can be enforced by either the shareholder or the cooperative.
In 390 Riverside Owners v. Stout, the cooperative was successful in defeating a claim for damages by a shareholder because the shareholder did not permit the cooperative’s contractor access to fix a leak. Similarly in Kabba v. Island House Tenants Corp. the Court affirmed the right of a Mitchell-Lama Co-op to set both a minimum and maximum resale price.
Within Authority
In Levy v.103–25 68th Avenue Owners, Inc., the Court deferred to a cooperative board’s determination finding that the cooperative board acted within its authority and did not violate its own governing documents. In that case, former residents of an apartment located in the building failed to state claims for housing discrimination against the cooperative and individual members of the board of directors. The Board had voted to terminate the residents’ lease and commence eviction proceedings following a noise dispute with the neighbors. The complaint, as amplified by evidentiary submissions, failed to set forth acts outside the scope of authority of the board of directors or any violations of the cooperative’s governing documents, and contained only conclusory allegations, without any factual basis, that defendants acted in bad faith or with discriminatory motive. Thus, the Board was protected by the business judgment rule.
While the Court did not dismiss the claims against the cooperative’s board, the following language in Stromberg v. E. River Hous. Corp., 82 Misc. 3d 871, 871–86 (N.Y. Sup. Ct. 2023) is of interest:
“Under the business-judgment rule, a court may not inquire ‘into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.’ ” (Matter of Levandusky v. One Fifth Ave. Apt. Corp. [internal citation and quotations omitted]).
Therefore, unless there is ‘illegal discrimination, the respondent members of the board of directors of the respondent cooperative corporation have the right to withhold their approval of petitioners’ purchase for any reason or no reason.’ (Simpson v. Berkley Owner’s Corp., accord Singh v. Turtle Bay Towers Corp., [finding it proper for a co-op board to reject a purchase application when ‘the decision to deny the purchase application was based upon the determination that the purchase price for the subject unit was significantly below market value).”
Thus, while the business judgment rule gives boards great flexibility in their decision making, so long as they are not involved in self-dealing, discriminatory conduct, fraud, misconduct and the like, and so long as they follow their bylaws and the law, the Boards are protected by the business judgment rule, although there can be exceptions. However, those instances must be reflected by legal complaints with detailed and specific factual allegations to overcome the presumption in favor of the Board acting in the best interest of the entity it governs using its business judgment.
Editor’s Note: The authors are attorneys with Finger and Finger, A Professional Corporation. The firm, based in White Plains, is Chief Counsel to The Building and Realty Institute of Westchester and the Mid-Hudson Region (BRI) and its seven component associations.
This article was featured in the opens in a new windowJune/July 2024 edition of IMPACT newspaper (PDF.)