HABITAT

LEGAL/FINANCIAL

Huh? Court Rules Co-op Boards Have No Fiduciary Duty—but Board Members Do.

Richard Siegler & Dale J. Degenshein in Legal/Financial on June 26, 2012

1010 Fifth Avenue, New York City

June 26, 2012Barbara Hubshman, a co-op shareholder at 1010 Fifth Avenue in Manhattan, sued her board, each individual member, the managing agent and others, claiming that they failed to maintain the building, as required by the proprietary lease — and tried to conceal from residents and possibly governmental agencies dangerous conditions that existed in a the building's fireplaces and flues. In fact, she claimed, the board even went so far as to encourage residents to use their dangerous fireplaces even though the board knew there were problems with the chimney.

In Hubshman v. 1010 Tenants Corp., Hubshman claimed there were smoke, fumes, and soot that for decades seeped into her penthouse apartment, depriving her of use of her apartment and endangering others who lived there, as well as other other residents. She stated that the conditions resulted in criminal charges being issued against one of the defendant/board members.

Hubshman claimed the board was fined by the New York City Fire Department and ordered to stop using the fireplaces until repairs were made. The board spent significant funds to pay engineers and other professionals to try to remedy the chimney problem, and who recommended that a flexible steel liner be installed in the chimney.

According to Hubshman, the board rejected this recommendation and opted to have an illegal fan system in place "to pull up the smoke past all the defects in the flues." She also said the board encouraged residents to use their fireplaces. Hubshman claimed that the money paid to these professionals was a sham and a waste of corporate assets.

Disregarding the Department of Buildings 

The Department of Buildings (DOB) issued an order on December 9, 2009, ordering that no fireplaces be used at the building. Rather than comply, the board appealed the DOB order and, Hubshman alleged, falsely stated in documents to government officials that the smoke was not leaking outside the chimney. The board asked that the "jury-rigged" fan be approved, even though it was inadequate to address the dangerous conditions identified by the DOB.

The court ruled a co-op

housing corporation owes

no fiduciary obligation

to its shareholders!

Hubshman asserted that when she complained and wrote letters to building residents, the board started a lawsuit against her seeking the immediate removal of her rooftop garden to remedy leaks into the unit below hers. Hubshman complained that the suit was brought in retaliation for her having complained about smoke problems, and that the board knew or should have known the leakage claims were false. She said the board wanted to deprive her of her contractual rights under the lease by destroying and permanently removing her roof garden.

Hubshman contended that the board's actions were aided and abetted by the managing agent and manager, who at the board's behest concealed the board's misconduct.

Hair-Splitting in the Court 

The court, using normal judicial standards, could not dismiss Hubshman's claims for breach of the warranty of habitability and partial constructive eviction. 

However: The court also rules that although corporate directors and officers had a fiduciary duty to shareholders, no such duty was imposed on the housing corporation itself. Therefore, the court dismissed the breach of fiduciary duty claim against the co-op.

The court did not dismiss the breach of duty claim against the board or the managing agent. But the court said individual board members cannot be held liable for breach of fiduciary duty unless it was alleged that they acted outside their official capacity or otherwise engaged in separate conduct. The court found that the complaint did not attribute any independent inappropriate conduct to any individual director.

Hubshman argued that there was a criminal summons issued to a specific officer of the co-op regardings violations of the administrative code of the City of New York in connection with the fireplaces. The court noted, however, that the officer was the defendant in the criminal proceeding only in her capacity as an officer of the co-op and not in her individual capacity. Accordingly, the court dismissed claims against the individual board members.

Comment: The court made what we believe is an interesting distinction concerning the breach of fiduciary duty claims. The court determined (as have other, recent cases) that the cooperative housing corporation owes no fiduciary obligation to its shareholders. Further, the individual board members could not be found to have breached their fiduciary obligations absent allegations that they engaged in inappropriate conduct separate and independent from their actions as members of the board.

Yet the court sustained an action against the cooperative "board," having found that a board owes a duty to the shareholders, which we believe is a novel holding in the cooperative corporation field. We are not certain how this claim will ultimately be determined.

 

Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan.  Dale J. Degenshein is a special counsel for that firm.

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