Case Notes in

Business Judgment Rule

First published: May 2022
Timing is Everything

If you are dissatisfied with the action of the cooperative or the board, and you believe that the court should review it under Article 78, bring an action immediately, as the statute of limitation is quite short.

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First published: Feb 2022
Getting Off the Board

WHAT YOU NEED TO KNOW As is always the case, it is vital to follow the bylaws, which the Esplanade Board did in exercising its right to remove directors for cause.

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First published: Jul 2021
Weinstein v. Board of Directors of 12282 Owners' Corp.

As stated decades ago, without a showing of a breach of fiduciary duty, judicial inquiry into the action of directors is prohibited – even if the board’s decision was unwise or inexpedient. Broad statements accusing a board wrongdoing will not suffice; the plaintiff must state with particularity that the actions of the board were taken in bad faith, showed self-dealing, discrimination or misconduct, or otherwise fell outside the scope of the business judgment rule. Weinstein failed to show any of the above, and thus the court dismissed his case. Management contended that its actions were also shielded by the business judgment rule. The court disagreed. However, bringing an action against management was a decision for the board to make, and the board’s decision not to bring such an action was also protected by the business judgment rule. Therefore, the derivative claims against management were also dismissed. This case is a useful reminder that the decisions of co-op and condo boards will be respected by the courts – provided there is no bad faith or self-dealing and provided the decisions are made within the scope of the board’s authority. The business judgment rule is alive and well. But the lesson to be learned is that no matter how often the courts uphold this rule, shareholders will continue to attack their boards’ decisions. Therefore, every board should be forewarned to always make educated and well-documented decisions and to always act within the scope of its authority.

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First published: Sep 2018
Avramides v. Moussa

If a shareholder or unit-owner is so 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. Courts have been attempting to determine Fletcher’s true scope ever since it was decided in 2012. In effect, Fletcher said that board members were not protected by their position if they acted improperly. 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. In Stinner v. Epstein, another case decided by another appellate court at about the same time as Avramides, the court found that allegations that a board member had improperly received a $25,000 payment was enough to allow a claim against that member to proceed. It seems that the facts in Avramides and Stinner lie at opposite ends of the spectrum. In the former, the board did not breach its duty and thus no individual could be held accountable; in the latter, the allegation that the board member did something in his own interest to the detriment of the building was sufficient to allow the court to deny a motion to dismiss the complaint.

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First published: Jun 2014
1855 7th Ave. Housing Dev. Fund v. Wigfall

By Richard Siegler and Dale Degenshein, Stroock & Stroock & Lavan After analyzing a number of post-Pullman decisions, the court laid out the procedure courts should use when there is an issue of fact that eliminates the possibility of summary judgment. The court was given a copy of the co-op’s proprietary lease and house rules; there was testimony about the procedure put in place by the board in order to record the misconduct (including entry into a log book and review of security footage); and Wigfall had received earlier notices telling her that the behavior had to stop. With this information, the court did not need to satisfy itself that the conduct was objectionable, but instead found that the Business Judgment Rule applied so that the court was bound to defer to the board’s decision. As always, it is important to remember that one of the key factors of the Business Judgment Rule is that it is the one challenging the board’s decision who has the burden of showing that what the board did was improper. Here, Wigfall was unable to successfully challenge the procedure the board used to evict her.

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First published: May 2013
Elias v. Orsid Realty Corp.

This case reminds us that there is a difference between the Business Judgment Rule and a requirement that a board or its agent act “reasonably.” Under the rule, a court defers to a board if its actions are taken in good faith, with honest judgment, for the lawful and legitimate furtherance of corporate purposes. Although some of the case law is unclear, typically, the Business Judgment Rule will not apply if the document at issue – a proprietary lease or bylaws, for example – requires consent to be “reasonable” or “not unreasonably withheld.” Cases have said that this reasonableness standard requires that the board or its agent take actions “legitimately related to the welfare of the cooperative.” In many circumstances, this is a distinction without a difference. As demonstrated in this case, however, boards and their agents must be mindful that there can be actions that may be protected under the rule but may not be acceptable. It has been the law for several years that a managing agent has the right to impose the rules of a cooperative if the proprietary lease requires the agent – and not the board – to approve purchasers of unsold shares. Here, the court determined that the board’s rules could be applied in principle. But because specific language in the lease required the managing agent to be “reasonable,” it could not reject a purchaser solely because the financing was in excess of the amount permitted by the board. This decision is subject to appeal and therefore could be modified or reversed.

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First published: Dec 2008
Del Puerto v. Port Royal Owners Corp.

Once again, the courts give great deference to a decision of a co-op board under the Business Judgment Rule. Here, the plaintiffs made several allegations of bad faith and disparate treatment. There were sufficient allegations so that discovery was warranted to consider and investigate plaintiffs’ claims. However, it was ultimately determined that plaintiffs did not satisfy their burden to show that the board treated them differently. The board demonstrated its basis for rejecting plaintiffs’ application to purchase. The court applied the rule as plaintiffs were already shareholders and not, as most purchasers, strangers to the co-op. Notably, the Business Judgment Rule requires courts to defer to board decisions made in good faith, in the exercise of honest judgment, and for lawful and legitimate purposes and places the burden on shareholders challenging a board’s actions. However, once challenged and faced with specific allegations of wrongdoing, it is necessary for a board to set forth the specific, legitimate basis for its rejection.

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First published: Jun 2006
Strax vs Murray Hill Mews Owners Corp.

Under New York law, attorneys admitted to practice are entitled to brokerage fees for acting as a broker in real estate transactions without specifically holding themselves out as a broker. Here, the attorney-board member may not have been recognized initially as seeking a commission, especially when that person served on the board without compensation. The confusion of the two roles could have been avoided if the board member had asserted from the beginning her intention to seek a commission for services that other board members could otherwise reasonably have assumed were being provided without an expectation of compensation.

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First published: Sep 2004
Rouette v. One West 126th Street Housing Development Fund Corp.

This case illustrates a co-op board’s misuse of the business judgment rule standard of review from the Levandusky case to justify its action. The rule only protects board decisions within the scope of the board’s authority taken in good faith for legitimate business purposes of the co-op. It does not permit the co-op to breach its contractual obligations to buy and sell a co-op apartment with one of its shareholders.

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First published: Jun 2002
Seif v. 72 Horatio Street Owners Corp.

This case illustrates the fiduciary duties that a co-op or condo board has to treat all unit-owners fairly. Decisions made by boards, which are imposed in fact only on a limited number of unit-owners, are always suspect and subject to challenge. Moreover, fair notice of any impending change in the basic co-op or condo affairs or documents is clearly essential if the change is to withstand challenge. Unfairness to minority shareholders often prompts judicial relief.

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