Michelle P. Quinn is an associate at Gallet Dreyer & Berkey. She worked with partner David L. Berkey on the Herz case.
Wesley Herz (a pseudonym, because of ongoing litigation) is a tenant-shareholder of two combined cooperative apartments located on the Upper East Side of Manhattan. Herz was elected to the board of directors of the cooperative in 2007. As a director and fiduciary, he was expected to act in the best interests of all of his fellow shareholders and the cooperative as a whole. Instead, Herz’s repeated disruptive and aggressive behavior toward fellow board members and other building residents led to his removal from the board and could lead to his eviction from the cooperative.
In December 2007, Herz was issued a notice to cure because he installed a washing machine in his apartment without permission in violation of the cooperative’s house rules. In January 2008, at the board meeting held immediately following issuance of the notice, Herz’s outbursts, derogatory comments, and refusal to comport himself in a civil manner, presumably in reaction to his receipt of the notice, forced an adjournment of the meeting, which was later continued without Herz’s disruptive presence. This incident led the board to consider whether Herz could be removed from the board or even from the co-op.
On February 21, 2008, Herz sued the cooperative, its board of directors, and managing agent, claiming that the cooperative and the individual board members had improperly precluded him from attending the meeting and from carrying out his duties as a board member; had improperly sought to terminate his tenancy; and, in doing so, had improperly wasted corporate assets. He filed an order to show cause seeking interim relief, which was resolved by the parties agreeing that Herz could attend board meetings provided he behaved in an appropriate manner.
Recognizing that Herz’s behavior was likely to continue, Gallet Dreyer & Berkey, as counsel to the cooperative, advised the board members that it was not necessary to suffer through his disruptive behavior, and that the cooperative’s bylaws could be used to remove him as a director prior to the expiration of his term. The bylaws provide that any director may be removed from office without cause by the shareholders of the corporation at a meeting duly called for that purpose.
On April 1, 2008, the cooperative distributed to its shareholders a notice of a special meeting of shareholders to be held on April 28, 2008 for the purpose of removing Herz from the board. In order to fully inform the other shareholders of the grounds on which his removal was being sought, a “charges and specifications” document was prepared, detailing the long history of Herz’s improper behavior – his unapproved alterations to his apartment, his unapproved sublet of his apartment, his repeated derogatory and profane remarks, and his physically threatening conduct toward other residents. It was then circulated with the notice of special meeting. In response, Herz brought another order to show cause, seeking to prevent the meeting from taking place. This was denied by the court, which declined to interfere with the special shareholder’s meeting. On April 28, 2008, the shareholders voted overwhelmingly (31,410 shares for, 2,000 shares against) to remove Herz from the board.
Subsequently, Herz amended his original complaint against the cooperative, board and management to include a claim for libel based on statements made in the charges and specifications. The cooperative then filed a motion for summary judgment to dismiss the amended complaint based on the protections afforded by the Business Judgment Rule and the qualified privilege, both of which shield the cooperative from liability for its actions under these circumstances. The Business Judgment Rule protects cooperative boards and shareholders from judicial scrutiny into their actions as long as those actions follow corporate procedures, are taken in good faith, and are in furtherance of the cooperative’s corporate purpose.
Here, given the long history of Herz’s improper conduct, personal agenda, and ongoing breaches of the proprietary lease, it was squarely within the interest of the shareholders to remove Herz as their representative on the board. The board’s distribution of the “charges and specifications” was appropriate to inform all the shareholders of the grounds upon which removal was sought. Such a statement is protected by a qualified privilege, since it is made between individuals who share a common interest.
Although such privilege can be overcome by a showing of actual malice, Herz made no such showing. The Supreme Court applied the Business Judgment Rule and the qualified privilege to the board’s and shareholders’ conduct and granted summary judgment in favor of the cooperative, board, and management on November 14, 2008, dismissing all claims made by Herz in his amended complaint. Unfortunately, removal from the board of directors has not curbed Herz’s disruptive behavior, and the cooperative is now considering the termination of his tenancy based upon his “objectionable conduct.”