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Unhappy Shareholders Cannot Sue Boards Willy-Nilly

Dale J. Degenshein in Legal/Financial on October 19, 2018

Turtle Bay, Manhattan

Willy-Nilly Lawsuits

For a shareholder lawsuit to succeed, a co-op or condo board must be doing something demonstrably bad, like sleeping on the job (illustration by Liza Donnelly).

Oct. 19, 2018

Owners of cooperative and condominium apartments have the right to bring derivative actions, meaning they can sue on behalf of a corporation. But under what circumstances and with what notice? That is one issue addressed in a recent decision, Avramides v. Moussa

Michael Avramides owned a co-op apartment at 319 East 50th Street. He began an action “derivatively” on behalf of the cooperative, alleging that the individual board members were responsible for improper repairs to the roof and terraces of the building. In a co-op, as in all corporations, a derivative action is a creature of statute. The statute allows a shareholder to start a lawsuit, but he or she has to give the board an opportunity to begin an action itself. The shareholder has to tell the board, in effect, “This is what is wrong, and if you don’t take steps, I will.” 

If, however, the shareholder believes that to ask the board to start the action would be futile (meaning, essentially, that the board members realize they are in the wrong), the shareholder does not need to first alert the board but must explain to the court why he or she did not initially ask the board to take action. 

In this case, the lower court found that Avramides had not shown that the individual defendants – all directors – lacked independence or had a personal stake in the substance of the suit. The appellate court concurred. Another issue addressed was the potential culpability of individual board members, acting in their official capacity. The lower court found that the complaint failed to state a solid claim against any of the individual directors, separate from their collective action on behalf of the cooperative. Accordingly, those claims were dismissed as well.

The appellate court took it a step further. Avramides argued that a 2012 appellate case, Fletcher v. Dakota Inc., superseded and changed the cases relied on by the lower court – that in light of Fletcher, there is no “safe harbor from judicial inquiry for directors who are alleged to have engaged in conduct not protected by the Business Judgment Rule.” The appellate court noted that, in Fletcher, the directors allegedly discriminated against the plaintiff based on race; in Avramides, however, the actions taken by the board were protected by the Business Judgment Rule. 

If a shareholder or unit-owner is dissatisfied with the way a board is acting, a derivative action is one way to deal with the situation. However, as this case reminds us, the claim cannot be brought willy-nilly. The apartment owner must ask the board to act or must prove that the board was corrupt. In Avramides, the board’s actions – repairs to the roof and terraces – were within its business judgment, and there was no basis to hold any individual liable. 

Dale J. Degenshein is special counsel at Stroock & Stroock & Lavan.

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