A Question of Liability

I am a member of a cooperative/condominium board in New York City. Can I be held personally liable for my actions and conduct as a board member?

Members of a co-op/condo board can be held personally liable for their actions as board members only if they engage in tortious conduct that is independent from their role as board members. In contrast, board members will not be personally liable for conduct that is within the scope of the board members’ authority, is taken in good faith, and is in the best interests of the building’s shareholders/unit-owners.

The acts and determinations of directors of a cooperative apartment corporation and members of a condominium board are generally shielded from judicial review by the Business Judgment Rule. In essence, this rule serves to prevent directors and board members from being discouraged from taking actions that are in the best interest of the co-op/condo and its shareholders/unit-owners for fear of facing personal liability. 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 in an “unwise or inexpedient” manner.

In order to take a legal claim outside the protection of the Business Judgment Rule, a plaintiff claiming a breach of fiduciary duty against individual members of a board is required to assert specific allegations of independent tortious conduct to demonstrate that the board members acted in bad faith or with a discriminatory purpose – that is, acts that are separate and apart from their duties as board members.

Thus, for example, a board member may have engaged in independent tortious conduct if, when considering an alteration application submitted by a shareholder/unit-owner, the board member votes to reject the application based on the applicant’s ethnicity or the board member’s personal animus toward the applicant.

Similarly, a board member could be held personally accountable if he or she were to hire a specific contracting firm in which the board member had a financial interest to perform work at the building while intentionally not disclosing that financial interest to the rest of the board.

On the other hand, board members should not fear being held personally accountable for the outcomes of their determinations while serving on the board so long as they act and conduct themselves strictly as board members, not engaging in independent action in their personal capacities.

For instance, I had a case where shareholders of a co-op client wanted to implement a major, idiosyncratic alteration of their penthouse unit in the building. Their proprietary lease provided that they could not perform any alteration without first obtaining the co-op’s consent, which could not be unreasonably withheld. The board unanimously rejected the proposed alteration, which failed to address whether there would be costs to the building associated with the alteration and whether additional shares would be issued for air rights the shareholder sought to acquire from the co-op. The shareholders sued not only the co-op, but also its individual directors claiming breach of fiduciary duty. The shareholders alleged that the directors had unfairly discriminated against them by not approving their alteration while approving alterations of other tenants. The trial court declined to dismiss the individual directors from the lawsuit, holding that the claims of unequal treatment alone are sufficient to allege a breach of fiduciary duty.

Reversals

On appeal, however, the appellate division reversed the trial court’s holding. It found that even though an allegation of unequal treatment may be enough to overcome the protections of the Business Judgment Rule, the shareholders were still required to allege independent tortious acts. Because the plaintiffs made no assertion that the directors had acted outside their official capacities in discriminating against them, the allegation of unequal treatment alone was insufficient to hold the directors personally liable.

In a similar case, shareholders started a legal action against one of my co-op clients and four of its directors challenging the co-op’s refusal to approve all aspects of an alteration to their apartment. The directors believed that some aspects of the alteration compromised the structural integrity of the building and could severely disrupt the lives of the building’s tenants if the construction was not perfectly executed.

The trial court dismissed the primary claim against the individual directors, for breach of fiduciary duty, because it failed to allege an “independent tort” against the directors. However, the court refused to dismiss the claim for a permanent injunction.

Here, we had a situation where the substantive claims of wrongdoing against the individual directors were dismissed, yet they were kept in the lawsuit only to perform a ministerial act on behalf of the co-op. Thus, the individual directors no longer were at risk of being liable for a money judgment against them. But, because they were still named in the lawsuit, they could potentially face obstacles apart from the lawsuit, such as having difficulty getting approved for a mortgage refinancing.

We therefore filed an appeal. On appeal, the court ruled that the claim for a permanent injunction against the individual directors should have been dismissed because it is only a remedy and may not be asserted as an independent legal cause of action. The appeals court also found that the plaintiffs’ proprietary lease required only the co-op, and not its directors, to sign documents in connection with the alteration, and that an injunction against the co-op, already a named defendant, is binding on its directors as well.

Often, the personal interests of individual board members will overlap with those of the building community as a whole. In such circumstances, conduct by board members predicated on the general well-being of the building’s residents is proper. But unavoidably, sometimes the board member may have a personal, not necessarily applicable, feeling about the subject: the board member may not particularly like the shareholder/unit-owner, or may be faced with a situation where the board member would suffer greater personal inconvenience if he or she voted to approve a particular project or proposal even if it benefits the co-op/condo. Situations like these can give rise to a claim that the board member did not act as a board member, but independently, for a non-corporate reason.

The lesson we can take away is that board members should carefully 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. By adapting this strategy, the board member can effectively perform his or her board functions without having to fear personal liability.