Published: Autumn 2013

CNYC president Marc J. Luxemburg, Esq. is an attorney specializing in cooperative and condominium law. Each year at CNYC's annual Conference, he reviews recent court cases that have the potential to answer questions commonly faced by Boards as part of their responsibilities or raise new issues of concern. This article features cases highlighted at CNYC's 32nd annual Housing Conference. At CNYC's 33rd annual Housing Conference on Sunday, November 17th, Mr. Luxemburg will again present this morning class, for which CNYC has made application for CLE credit.

SUITS AGAINST INDIVIDUAL DIRECTORS
Gotham Condominium, 946 NYS2d 66 (Sup. Ct. NY Co. 12/21/2011), involved a bitter dispute arising out of damage to the apartment caused by the Board's alleged failure to repair leaks, and use of a terrace as a staging area for exterior work causing damage to the terrace. The unit owner alleged 8 causes of action arising out of both tort and breach of contract. Individual claims against the directors were dismissed, except claims against 2 directors alleged to have made fraudulent statements to plaintiff.

The Court explained why individual directors should not be sued personally: "[v]ery strong protections for board members are there for a very good reason. It is important that shareholders be willing to participate in the governance of their corporations. Shackling them with individual liability for the board's actions would deter them from participating. Only individual and separate acts of self-dealing or other personally corrupt activities should burden them with liability.

However, a motion to dismiss by the Condominium was denied – the complaint must be accepted as true and stated causes of action.

BUSINESS JUDGMENT RULE
The continued applicability of the business judgment rule to Boards was affirmed in 1812 Quentin Road, LLC v. 1812 Quentin Road Condominium, 943 NYS2d 206 (App. Div. 2d Dept. 4/24/2012), a unit owner's action against the Board and a director for breach of contract, which was dismissed on summary judgment. The Court stated: "Under the business judgment rule, the court's inquiry is limited to whether the board acted within the scope of its authority under the bylaws (a necessary threshold inquiry) and whether the action was taken in good faith to further a legitimate interest of the condominium. Absent a showing of fraud, self-dealing or unconscionability, the court's inquiry is so limited and it will not inquire as to the wisdom or soundness of the business decision"

However, in Fletcher v. The Dakota, Inc., 948 NYS2d 263 (1st Dept. 7/3/2012), an action by an African- American shareholder based on alleged racial discrimination in the rejection of his purchase of an adjacent apartment, the Court sua sponte limited the protection for individual Board members to claims of breach of contract. It held that the participation of a director in a corporation's tort is sufficient to give rise to individual liability. While "participation" was not specifically defined, it might include no more than being involved in, approving or ratifying the decision that led to the discrimination claim. Liability is not limited to cases of individual tortious conduct. This case represents a serious adverse change in the law.

We strongly recommend that if your cooperative or condominium becomes involved in a tort case where Fletcher becomes an issue, you immediately advise CNYC, as we may be interested in writing a brief amicus curiae to limit the damage that may be caused by this case.

UNIFORM ENFORCEMENT OF BUILDING POLICIES ALSO: COLLECTING LEGAL FEES
White v. Gilbert, [Mid-83 House Corp.], 2012 WL 3260300 (Sup. Ct. NY Co. 7/24/2012), was an action by a shareholder against the coop and the individual board members for unequal shareholder treatment in assessing fines. Plaintiff was fined for not recycling trash, for not removing construction trash and for removing kitchen cabinets. Plaintiff's claim that other shareholders and board members were not fined for similar incidents stated a claim for unequal shareholder treatment, and raised a triable issue of fact sufficient to defeat the cooperative's motion for summary judgment. The action was dismissed against the individual board members for failure to assert individual tortious conduct. This case demonstrates the importance of enforcing the rules on a uniform basis.

The court also held that the standard form of proprietary lease does not authorize recovery of legal fees incurred by the cooperative in attempting to cure a shareholder's default until a court action or proceeding is instituted. The cooperative breached the lease by requiring payment of fees as a condition to granting consent to an alteration.

Cooperatives should consider amending their form of lease to specifically allow for legal fees incurred prior to an action being brought.

ALLEGED WASTE
In Hubshman v. 1010 Tenants Corp., 2012 WL 4472559 (Sup. Ct. NY Co. 9/19/2012) the Eleventh cause of action in the second action between the shareholder and the cooperative was a derivative claim alleging waste by the board in bringing the first suit, which the shareholder won. The derivative action was dismissed on summary judgment – because the shareholder displayed hostility and lack of objectivity and was not a proper plaintiff to bring an action allegedly on behalf of her fellow shareholders.

DOCUMENT BASIS FOR BOARD DECISIONS
Board of Managers of the 4260 Broadway Condominium, v. Caballero, 2012 Slip Op. 51402 (Sup Ct. NY Co. 7/20/2012), was an action to foreclose a lien for unpaid assessments totaling $900,000. The By-laws require unit owner approval for improvements over $25,000 per year, but not for repairs. The Board was required to demonstrate that assessments were for repairs, or obtain approval, and the Board's payment records were inadequate to show amounts due. Summary judgment for board denied. This case again demonstrates the necessity of proper support and documentation of the basis for Board decisions.

PRESERVE ALL MINUTES
Norton v. 360 Riverside Owners Corp., 2011 WL 6445231 (Sup. Ct. NY Co. 12/4/2012), was an action by a shareholder to recover a transfer fee paid at closing against the cooperative and the individual directors. The action was dismissed against the individuals for failure to allege independent torts. The motion to dismiss by the cooperative was denied because, despite general authority in the offering plan, proof of collection for the entire existence of the cooperative, and ratification by board 10 years earlier, the minutes of the original meeting at which the transfer fee was passed in the 1980s was missing. Blatant misrepresentation to the Court by the plaintiffs – former treasurers of the cooperative – that they were unaware of the transfer fee was ignored, but the loss of a 40 year old set of minutes was deemed significant.

RECOVERING EXPENSES
Himmelberger v. 40-50 Brighton First Road Apartments Corp, 943 NYS2d 118 (App. Div. 2d Dept. 4/10/2012), was an action by a cooperative to recover from the proceeds of the sale of the apartment the costs of a security guard allegedly necessitated by the presence of an unauthorized occupant (the son of the deceased shareholder). The court held that Paragraph 19 concerning the right to recover the expenses of removing an objectionable condition requires the service of a notice to cure the condition, in order to allow the shareholder an opportunity to cure, before the cooperative could recover its expenses.

BOARD LIABILITY RE : NOISE,. SMOKE, MOLD, ETC.
Williams v. Esplanade Gardens Inc., 2012 WL 3164286 (Sup. Ct. NY Co. 7/23/2012), was an action by a shareholder against the upstairs neighbor and the cooperative for making unreasonable noise – thumping, dragging heavy objects, tapping. The shareholder's motion for preliminary injunction was denied because there are issues of fact as to whether any noise caused a substantial and unreasonable interference with plaintiff's use of her apartment.

In Reinhard v. Connaught Tower Corporation, 2011 WL 6119800 (Sup. Ct. NY Co. 11/30/2011), the unit owner sued the cooperative and the president for failure to remedy second hand smoke in plaintiff's apartment. Various experts disagreed as to whether there was smoke in the apartment and if so how it got there. Summary judgment motion for the cooperative was denied because there are triable issues of fact as to whether there was sufficient smoke to support the complaint. Motion for summary judgment by the president was granted – there was no evidence of any independent tortious conduct.

In Cornell v. 360 West 51st Street Realty, LLC, 939 NYS2d 434 (App. Div. 1st Dept. 3/6/2012) (3-2 decision), the tenant's action against a landlord for personal injuries due to mold exposure, summary judgment for the landlord was reversed. The court held that there is sufficient scientific evidence that mold can cause plaintiffs illness.

In Pechman v. Vista at Kingsgate Section II, 948 NYS2d 662 (App. Div. 2d Dept. 7/18/2012), a unit owner slipped on a door mat placed in the stairway by another unit owner. Summary judgment motions by the unit owner and the board were denied. The door mat constituted a dangerous condition, the Unit Owner had placed it there, and the board failed to show when the stair had last been inspected, and thus did not show it lacked constructive notice of the dangerous condition. This case raises the question of whether a door mat placed in an elevator landing would also be considered a dangerous condition.