BOARD SUED ON APT. REPAIRS, P.2

Decisions made by a condo board are reviewed according to the Business Judgment Rule, which states that courts are required to defer to the good-faith decisions made by a co-op board or a condo board. To trigger judicial inquiry, a unit-owner has to show that the co-op or condo board acted

• outside the scope of its authority
• in a way that did not legitimately further the entity's purpose, and
• in bad faith.

Katz failed to demonstrate any of the three elements that would trigger judicial scrutiny of the condo board's actions. Rather, the evidence showed that the board arranged for repairs of the apartment and paid the contractor from the insurance proceeds. Katz failed to demonstrate that any of the alleged delays in effecting these repairs were the result of bad faith on the condo board's part. The court could not substitute its judgment for that of the board's since the record showed that the board acted for the purposes of the condominium, within the scope of its authority, and in good faith.

Proving Quality Work Done

As to the quality of the work performed, the condo board maintained that it had performed all the repairs necessary to make the unit habitable. In support of its position, the board provided numerous photographs, as well as the affidavit of its agent and also of the president and owner of the contracting firm that had performed the repair work.

In contrast, the only evidence Katz submitted concerned the present condition of the unit. She submitted her own affidavit, as well as a memorandum from an environmental specialist (that was unsigned and not sworn and thus not admissible) and correspondence between the parties and Katz's insurance company regarding a water leak that occurred five years after the fire.

Katz's affidavits were conclusive concerning the present condition of the apartment. The only items she specifically identified as requiring further remedy were the windows and HVAC units, which Katz maintained were required to be replaced. Yet she failed to establish that the board violated the bylaws by failing to replace the items, or was otherwise required to perform the repairs. And the court found that plaintiff's documentation concerning the 2008 leak was irrelevant.

Based on these submissions, the court dismissed Katz's the first cause of action. That left her last claim: breach of the implied covenant of good faith and fair dealing. Winning this alone would be all she needed.

The Final Cause of Action

Here, however the court rejected the board's argument that such a breach could create a cause of action independent from breach of the bylaws (i.e., breach of contract). The court found that while the implied covenant did not create new duties under a contract, such a claim could remain even though a breach of contract claim did not otherwise exist.

That might have tipped the scales for Katz ... had she been able to show that the board exercised its contractual right malevolently, for its own gain and as part of a purposeful scheme designed to deprive her of the benefit of the contract. But since she failed to establish that the board acted in bad faith, the board was entitled to summary judgment dismissing this claim as well.

Comment: The court recognized the long-standing principle that a condominium board cannot be liable for breach of the warranty of habitability or constructive eviction because both require the existence of a landlord-tenant relationship, which is not present between a condominium and its unit-owners.

The court also interpreted the bylaws, and the board's actions thereunder, in the context of the Business Judgment Rule. The court explained the well-settled law that bylaws form a contract between the condo board and its unit-owners, and it determined that, because the board had acted within its business judgment when carrying out its contractual obligations, it could not be liable for breach of the bylaws.

Finally, the court considered a cause of action for breach of the covenant of good faith and fair dealing, which asserted that the board did not act fairly or in good faith when performing its obligations. Such a requirement — to act fairly and in good faith — is an implicit requirement in every contract.

Although claims under this cause of action have been asserted for years in general contract matters, we are seeing them asserted more frequently in cases involving cooperatives and condominiums. As this court explained, however, once a determination has been made that the board acted in good faith and did not breach of the Business Judgment Rule, it is highly unlikely that a co-op or condo board will be found to have breached the covenant of good faith and fair dealing.

Now there's a lesson: Act in good faith and with fair dealing, backed by solid documentation. That's what it takes to win a case like this.

Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan.  Dale J. Degenshein is a special counsel for that firm.

Adapted from Habitat March 2010. For the complete article and more, join our Archive >>