May a co-op avoid or limit a shareholder’s claims based on an assertion that the shareholder was required to, but did not, sue within three years of the complained of act or condition? That was the question in Lombard v. Station Square Inn Apartments Corp. Leonard Lombard was the owner of 12 co-op apartment units in three buildings owned by the defendant cooperative corporation, located at 1 Station Square, 10 Station Square, and 2 Dartmouth Street in Forest Hills, New York. Lombard and his wife lived in two of the units at 1 Station Square and Lombard alleged that, beginning in 2003, the co-op failed to maintain the buildings, charging, among other things, that the co-op had breached the warranty of habitability; that the value of the apartments had decreased as a result of the co-op’s negligent acts; that the co-op had created a nuisance by erecting scaffolding and netting on the exterior of the apartments owned by Lombard; and that one of the co-op’s board members had made defamatory and libelous statements about Lombard.
The co-op moved to dismiss all causes of action. Lombard complained about water leaks during the period 2003 through 2009, which caused him to be “evicted” – at least partially. Under Real Property Law Section 235-b, every residential lease contained an implied warranty of habitability providing that the leased premises be fit for human habitation and would not be subjected to any conditions that would be dangerous, hazardous, or detrimental to life, health, or safety.
The co-op sought to dismiss some of these claims, arguing that they fell outside the three-year statute of limitations. Lombard countered by relying on a section of the statute, Civil Practice Law and Rules, Section 214, which provided for a three-year statute of limitations on actions “to recover on a liability, penalty or forfeiture created or imposed by statute except as provided in CPLR 213 and CPLR 215.” Because the court found that CPLR Section 213 provided that actions “upon a contractual obligation or liability, express or implied ...” had to be brought within six years, Lombard’s claim for damages was not dismissed.
The court observed that the co-op’s alleged liability had its genesis in the contractual relationship between the parties (i.e., the proprietary lease). Moreover, the court found that the warranty of habitability permitted recovery of only economic loss and was not intended to provide a basis to recover damages for personal injuries, which would have been recoverable in a negligence action, which carried a three-year limit. Lombard sought damages for economic loss, another indicator that a six-year statute of limitations was applicable. Further, the court said that Lombard could only obtain damages, if at all, for breach of the warranty of habitability with respect to the apartments he personally occupied.
The co-op asserted that Lombard’s claims should have been dismissed because of the Business Judgment Rule (BJR). The BJR prohibits judicial inquiry into the actions of the board of a cooperative corporation as long as the board acts for the purposes of the cooperative, within the scope of its authority, and in good faith. The court noted, however, the long-standing rule that the Business Judgment Rule did not protect a co-op board from liability for its own breach of contract. Thus, the BJR did not shield the co-op from liability for its alleged breach of the implied warranty of habitability because the claim was based on the parties’ contractual relationship.
The co-op also sought to have the court dismiss Lombard’s claim for damages for the diminution of value of the apartment as a result of the co-op’s negligent maintenance of the buildings. Again, the co-op asserted that the claim was moot because of a three-year statute of limitations. The court, however, found that New York’s highest court had held, in another case, that where a claim is “one for damages to property or pecuniary interests only, where there is a contractual agreement between the parties, the general tendency has been to allow the plaintiff to elect to sue in contract or tort, as he [or she] sees fit.” Even though the claim was for “negligence,” the court found that it was actually for a breach of the provisions in the parties’ lease that obligated the co-op to maintain the apartment in good repair. Therefore, the claim was for breach of contract and the six-year statute applied.
The co-op also sought to have the court dismiss Lombard’s nuisance claim as outside the statute of limitations. Lombard alleged that the co-op created a nuisance by installing, in 2005, scaffolding and netting on the exterior of the building in which Lombard resided, which were in place at the time of the motion and that allegedly caused an infestation of wildlife outside Lombard’s apartments and blocked light and air from entering the apartments. Again, the co-op relied upon a three-year statute.
Again, however, the court ruled against that argument, holding that, because of the continued presence of the scaffolding and netting, the wrong was continuous or recurring and gave rise to successive causes of action under the “continuous wrong doctrine.” The court explained, however, that damages would only be recoverable to the extent they were incurred within three years prior to the start of the action.
Finally, the court discussed Lombard’s claim for libel and defamation. The co-op sought to dismiss the claim because the complaint did not set forth a detailed account of the allegedly improper language. The court explained that a cause of action for libel or defamation that did not comply with the special pleading requirements contained in the applicable statute that stated that the complaint must set forth “the particular words complained of” had to be dismissed.
The court noted that the requirement that the defamatory words had to be quoted verbatim was strictly enforced by the courts. Here, the complaint merely paraphrased the allegedly defamatory statements, notwithstanding quotation marks around certain words. The actual words used were not evident from the face of the complaint and thus the defamatory words were not pleaded with the particularity required by the statute.
Moreover, the court discussed the “qualified privilege” that extended to a communication made by one person to another about a subject in which both have an interest. To overcome a defense of a qualified privilege, Lombard had to make an evidentiary showing that the statements were published with malice.
Lombard alleged that a shareholder and member of the cooperative’s board of directors made defamatory statements regarding the plaintiff, who was also a shareholder and member of the board of directors. The statements – concerning acts of nuisance, criminal conduct, and a conflict of interest – were directed to the shareholders and the board of directors. Given that they all had a common interest in protecting the rights of the cooperative, these statements were subject to a qualified privilege inasmuch as Lombard failed to allege any facts from which malice could be inferred. His conclusory allegations of malice were insufficient.
Comment: The co-op tried to limit the amount that the plaintiff could recover by asserting that the plaintiff had to have started the action within three years of when the conditions began. While the court limited some of the damages plaintiff could recover, it also explained that a six-year period was applicable in most instances.
In passing, the court discussed an important rule which was been well established by the courts - that a tenant or shareholder cannot recover damages for breach of the warranty of habitability unless they live in the apartment. Further, the court explained one of the exceptions to the Business Judgment Rule. If a co-op has a contractual obligation, it cannot avoid it by claiming that it is in the best interest of the co-op to not perform. Thus, if a proprietary lease requires a co-op to act (or bylaws require a condominium to act), the entity cannot ignore its obligations by reliance on the Business Judgment Rule.
Finally, the court discussed the qualified privilege or common interest exception to claims of defamation. This privilege – which protects speech where all parties have an interest in the subject matter – is important because it allows a free flow of communication about co-op or condo matters so long as statements are not made with malice. n
For Plaintiff Paul B. Dalkony
For Defendant Hankin & Mazel, PLLC