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When Are Board Members Personally Liable? - Wolf Haldenstein Adler Freeman & Herz

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Steven Sladkus, Partner, Wolf Haldenstein Adler Freeman & Herz. Do individual board members of a co-op or condo face personal liability in deciding not to approve a proposed alteration by a tenant to his or her apartment?

BACKSTORY Two shareholders began a legal action against one of my cooperative clients and four of its individual directors, challenging the cooperative corporation’s alleged refusal to approve an alteration to their apartment. The primary claim against the individual directors, for breach of fiduciary duty, was recently dismissed by a justice of the Supreme Court of New York, New York County, on the ground, among others, that plaintiffs failed to plead an “independent tort” against the directors.

The plaintiffs, who own an apartment in the co-op’s building, sought to undertake a significant renovation that required, among other things, the removal of exterior walls, the relocation of certain utility pipes, and the incorporation of space owned by the co-op into the interior of the plaintiffs’ apartment. Because of the scale of the proposed alterations, the review process continued over the course of several years, and involved several changes and revisions to parts of plaintiffs’ plans. The cooperative was concerned that certain aspects of the project not compromise the structural integrity of the building and the safety of its tenants. Eventually, an aspect of the project was not approved, the cooperative contending that it posed a risk of shutting essential building services if something went wrong. In addition, the parties were unable to agree to a monetary value for additional space plaintiffs sought to incorporate into their apartment as part of the project.

The plaintiffs sued the cooperative, alleging, among other things, that the cooperative breached the proprietary lease by unreasonably withholding approval of the plaintiffs’ alteration plans. They also sued the four individual directors, claiming that the directors breached their fiduciary duties to the plaintiffs in not approving the plans.

In dismissing the case against the individual directors, the court explained that acts and determinations of individual directors of a corporation, including those of a cooperative corporation, are generally shielded from judicial review by the Business Judgment Rule (BJR). In essence, this rule serves to prevent directors from being discouraged from taking actions that are in the best interest of the corporation and its shareholders for fear of personal liability. To succeed in showing that a board member’s actions fall outside the BJR’s protections, a plaintiff must assert particular allegations. These include demonstrations that the directors acted in bad faith or with a discriminatory purpose. The court found that the shareholders had not sufficiently proved that allegation. It thus applied the Business Judgment Rule and granted the motion to dismiss.

COMMENT The lesson to be learned here is that when directors are deciding whether to cause a cooperative to approve or reject a proposed alteration to an apartment in their building, they should not fear being held personally accountable for the outcome of that determination. That is, so long as they act and conduct themselves strictly as directors, not engaging in independent action in their personal capacities. New York law tries to encourage shareholders and unit-owners to serve as board members in order to facilitate the successful operation of the building. Thus, the law precludes a court from questioning the acts and conduct of individual board members that are undertaken for the common interest of the co-op or condo, even though the outcome may reveal that the board acted “unwise[ly] or inexpedient[ly].”

Board members of a cooperative often find themselves having to decide whether to cause the cooperative to approve or reject an alteration. Often the personal interests of individual board members will overlap with those of the building community as a whole, such as where a major renovation might disrupt or risk the safety of the community in general. In such instances, conduct by board members predicated on the general well-being of the building’s tenants is proper.

But at times the board member may have some personal, not generally applicable, feeling about the subject: the board member may not particularly like the shareholder, or the apartment to be renovated may be near the board member’s apartment, creating a potential personal inconvenience to the board member.

Situations like that can give rise to the claim that the board member is not acting as a board member, but independently, for a non-corporate reason. Board members should scrupulously filter out of their decision-making all considerations that may be self-serving, focusing solely on what is best for the co-op/condo and the other residents.

From the Desk of SS:

An illegal sublet case was reactivated when a shareholder who had signed a settlement agreement in the judge’s chambers disowned it, claiming that she had signed the agreement only because - she said - the judge and I had assaulted her. A lawsuit she brought against us was eventually thrown out of court.

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