New York's Cooperative and Condominium Community

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Derivative Action Lawsuit Co-op Board HDFC

Sept. 23, 2011 — Whether you call it Hell's Kitchen or Clinton, the heat was on in a co-op apartment building in that evolving Manhattan neighborhood, when two apartment owners filed a lawsuit that wound up burning them.

It was what's called a "shareholders' derivative action," one in which co-op owners sue to recover damages they believe the corporation suffered because the co-op board refused to act. Good thing to know about and keep in your back pocket. Too bad that in this case, the court kept finding their lawsuits frivolous. Here's what not to do when you think your co-op board isn't behaving right.

The five-story, nine-unit co-op at 322 West 47th Street, between 8th and 9th Avenues, was built in 1920. Census records show a Joseph McCullough living there then, who took in the immigrant boarders Hugh, Thomas and Michael Leonards. The latter two were naturalized citizens, and Hugh, 35, who'd emigrated from Ireland in 1907, was a motorman for something called Street Rail.

The immigrant tradition remains alive in the building today, with the organization Movement for Peace in Colombia, dedicated to encouraging human rights in that country, registered there as a tax-exempt nonprofit. Martha Hauze, a member of MPC's board, bought apartment 2F there in October 2005, comprising one-third of the co-op's shares. In 2006, she became the co-op board's president for a year.

She also became the target of a shareholder's lawsuit.

Battling Board Presidents

Betty Benavides had been elected co-op board president in 1995, and after Hauze's year was reelected to that post in 2007. In 2008, Benavides and fellow tenant-shareholder Cindy Ho first brought suit against Hauze, Sara L. Muhirad, Corey L. Brothers, and 322 West 47th Street Housing Development Fund Corporation (HDFC). The two plaintiffs alleged that in 2003, the sum of $25,629.11 was transferred from the cooperative housing corporation's account at Chase -- which had been opened by Benavides and Ho, and which allegedly required two signatures on checks drawn from that account — and went to either the management company or to another HDFC account, opened by minority shareholder Hauze and which only required Hauze's signature on checks.

The suit also asserted that Hauze falsely represented herself as co-op board president, that she illegally retained a management company, that she acted in contravention of the co-op's bylaws, and that she wrongfully executed checks from the co-op's account.

In July 2008, Benavides and Ho brought a second suit, this one against Hauze, HDFC, Chase Bank, property manager 10 K Management, Inc., and others, alleging the same things and also asserting that Chase had failed to reverse the transfer of the funds between the two HDFC accounts. Additionally, Benavides and Ho said Chase had failed to require two signatures on the check before the transfer, making the transfer illegal. Curiously, 10 K Management has no website, and may or may not be this Bronx company.

On January 9, 2009, Judge Debra A. James of the Supreme Court of the State of New York, New York County, dismissed the first suit's complaint against Muhirad and Brothers and let the one against Hauze proceed. With the second suit, the court dismissed one action against Chase in its entirety, as well as the suit against several of the other defendants.

One surprisingly basic thing Benavides and Ho did incorrectly, said the court in a follow-up decision on January 26, 2011, was to have misread the Business Depository Resolution and Bank Resolution that the co-op board had filed with Chase — and which "clearly states that funds may be withdrawn by any one person authorized to act for HDFC." Oops.

Next page: The Backfire Gets Worse >>

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