Bill Morris in Legal/Financial on February 12, 2013
Feb. 12, 2013 — When the news broke, it sent a shiver of dread through every one of the 40,000 unpaid volunteers who serve on co-op and condo boards in New York City. At one of the poshest co-ops in town — the Dakota Apartments at 1 W. 72nd Street and Central Park West, where Leonard Bernstein lived and John Lennon died — a longtime shareholder was suing two board members and the corporation for racial discrimination. Alphonse Fletcher Jr., an African-American who owns the Fletcher Asset Management investment firm, was seeking $15 million in compensatory and punitive damages.
Fletcher, who has lived in the Dakota since 1992 and served nearly a decade on the co-op's board, including two terms as president, filed the lawsuit after the board rejected his request to buy a three-bedroom, $5.7 million apartment adjacent to the one in which he lives. He charged that rejecting the sale was the board's way of retaliating against him for standing up for the rights of other minority and Jewish shareholders and applicants. The board countered that it had rejected Fletcher's bid to buy the second apartment based on "the financial materials he provided."
That shiver of dread turned to icy foreboding in July 2012, when the Appellate Division of the state Supreme Court brushed aside the board's 237-page response to Fletcher's allegations and ruled the case could go to trial. In doing so, the appellate division overturned one of the bedrock decisions in New York co-op law, Pelton v. 77 Park Ave. Condominium (2006), which largely protected board members from personal liability in discrimination cases.
"In short," the appellate court wrote, "although individual participation in a breach of contract will not typically give rise to individual director liability, the participation of an individual director in a corporation's tort [wrongful act] is sufficient to give rise to individual liability."
No Sure Thing
Board members across the city who had been lulled into thinking they were immune to personal liability in discrimination lawsuits began waking up to the realization there's no such thing as a sure thing. Since neither compensatory nor punitive damages in discrimination cases are covered by insurance companies in New York State, the appellate court's ruling left condo and co-op board members exposed to devastating financial liability.
In a friend-of-the-court brief filed on behalf of the Dakota's board, attorney Marc Luxemburg, president of the Council of New York Cooperatives and Condominiums (CNYC), wrote of the likely fallout if Fletcher wins: "The most serious impact of the decision will be felt not by board members of wealthy cooperatives and condominiums, but by members of middle- and lower-income co-ops, for whom the cost of litigating, let alone paying any adverse judgment, would result in financial ruin..."
Such boards, he added, would be unlikely to risk fighting such a lawsuit, even if it lacked merit. The end result, Luxemburg concluded, is that people "will be deterred from serving on boards or carrying out their duties."
The Dakota's board has filed a motion to re-argue the evidence in the Appellate Division of State Supreme Court, according to Luxemburg. If the motion is denied, the case will be heard in Supreme Court, probably in late 2013.
"Up to now," Luxemburg said in an interview, "the law has been that if a board member did nothing more than carry out his duties and vote on the issues, he couldn't be personally liable for whatever the co-op did that was wrong."
What About the Business Judgment Rule?
Two legal precedents stand out. The landmark Levandusky v. One Fifth Ave. (1990) upheld the Business Judgment Rule. That means, says attorney, Richard Siegler, of Stroock & Stroock & Lavan, "So long as the board acts for the purposes of the corporation, within the scope of its authority, and in good faith, the courts will not substitute their judgment for the board's." The second was the aforementioned Pelton.
But attorneys point out that the legal protections provided by these and other rulings, though strong, were never ironclad. Arbitrary, malicious or discriminatory acts have never been protected. All board members must abide by three stringent sets of anti-discriminatory laws: the city and state human rights laws, and the federal Fair Housing Act.
As Luxemburg wrote in his friend-of-the-court brief: "The Pelton rule doesn't shield directors who engage in intentional wrongdoing from the consequences of their actions, but is designed to protect innocent board members who do nothing more than carry out their responsibilities, including, particularly, participating in board meetings and voting."
The board's attorney, John Van Der Tuin, declined to comment, and he has advised the board members not to talk to the news media. Fletcher did not respond to requests for an interview.
"The point is, board service continues to carry liability," Siegler said. "If there's a wrongful act, that's where you draw the line."
Photo by Jennifer Wu. Click to enlarge.
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