COURTS SELDOM LET INDIVIDUAL BOARD MEMBERS GET SUED. EXCEPT WHEN….

(Page 2 of 2)

As to claims against the board, the court recited the Business Judgment Rule, which states that as long as a board acts in good faith within its corporate powers and in furtherance of its corporate purposes, its actions will not be second-guessed. But the court found that the factual background for each claim had been set in sufficient detail. As to fraud, Grubin and Lans detailed that the board misrepresented material facts that the defendants knew were false and that Grubin and Lans relied on the misrepresentations.

The court also found that, with respect to the fraud claim, it not only duplicated the breach of contract claim as the defendants asserted; the necessary proof for each of the two claims was different. The breach of contract claim, which alleged a breach of the bylaws, was also not dismissed. As to breach of fiduciary duty, the elements of the claim required Grubin and Lans to plead that there was a fiduciary relationship and that their damages were the result of board misconduct. The court determined that facts that could support this claim were pleaded.

Statute of Liberty

Finally, the defendants claimed that the statute of limitations (the time within which one must sue) required dismissal of certain claims. In response, Grubin and Lans alleged that they did not bring an action earlier because of the representations made by the defendants, which included out-and-out misrepresentations that certain items were on order or unavailable when, the complaint alleged, both statements were false. The court did not dismiss any claims based on the statute of limitations, both because the motion required the court to accord every favorable inference to Grubin and Lans, and also by invoking the doctrine of "equitable estoppel," which prevented enforcement of the statute of limitations based on the allegations of deception set forth in the complaint.

Comment: This case reminds us that when making a motion to dismiss the complaint — as opposed to a motion for summary judgment — courts will adhere to and enforce the rule that provides that, if the facts asserted in the complaint set forth any theory of law, the complaint will not be dismissed.

The court does not determine any facts; it merely looks to whether there is enough information in the complaint that, if ultimately proven to be true, would sustain a recognizable legal theory. While the plaintiffs here were able to make such a demonstration with respect to all claims against the board and the managing agent, they could not do so as to most of the individual board members.

Detail Work

When suing a board member, an apartment owner must allege — with specific details — why the actions of the board member, if proven to be true, would subject that person to individual liability. As this court explained and as we have seen, co-op and condominium board members are volunteers who serve with no remuneration. It would be untenable to subject them to personal liability and exposure merely because they serve on a board or take action as a board member. That is why it is necessary for a plaintiff to allege (and ultimately demonstrate) that the board member's conduct was separate from his actions as a board member and that such action is tortious.

Without such a rule, we submit, it would be virtually impossible to convince any apartment owner to serve on a board. This rule is most important in a case such as this, where plaintiffs are seeking punitive damages. In New York, the law is clear that if punitive damages are assessed against an individual, the board member cannot be indemnified or reimbursed by the cooperative or condominium or the board's insurance carrier. Thus, if a board member is ultimately determined to be liable for punitive damages, the board member would be solely responsible to pay those damages to a plaintiff. 

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.

Illustration by Liza Donnelly

 Adapted from Habitat April 2012. For the complete article and more, join our Archive >>