Balber Pickard Maldonado & Van Der Tuin, Partner
Michael T. Manzi
The client’s tale. Some people see problems, others see opportunities. A tenant-shareholder in a small co-op wished to sublet his commercial unit for a considerable rent. The co-op had no subletting fees. But considering how profitable the subletting was going to be for the shareholder and how anxious the shareholder was to get the sublease approved, certain board members saw the request for consent as a financial opportunity. Instead of simply denying the request for subletting, which it had the right to do, the board said it would agree to a sublease if a number of demands were met, including a $100,000 payment. The board did not pretend that the demands were anything other than the exploitation of a one-time opportunity rather than the enforcement of an existing or new policy that affected all tenant-shareholders generally.
The tenant-shareholder sued. The New York County Supreme Court found that by making demands without any legal authority the directors had acted as extortionists. It did not matter that the money they had demanded was for the co-op rather than for themselves; their behavior was outside the protections of the Business Judgment Rule. The court ordered the board to consent to the sublease and to reimburse the tenant-shareholder for certain expenses. In addition, the court ordered the two directors who had been most actively involved in the bad behavior to each pay the tenant-shareholder $50,000 in punitive damages.
The lawyer’s take. Boards cannot use their approval rights for certain shareholder actions to demand payments and other economic concessions from shareholders for which there is no legal basis. A board should not make the mistake of assuming that all of its actions are protected by the Business Judgment Rule. Although that rule provides substantial protection, boards must still act within the scope of their authority, in furtherance of the co-op’s legitimate purposes, and in good faith with honest judgment. When a board violates this standard, it exposes both the co-op and individual board members to liability.
Case closed. Don’t be greedy and don’t do stupid stuff.