Individual cooperative board members scored a major victory recently in the case of Weinreb v. 37 Apartments Corp., et al, an appellate court decision that relieved them of certain responsibilities when it comes to shareholders' proposed alterations.
A Little Background
The case of Weinreb vs. 37 Apartments Corp. commenced when a shareholder sued not just the apartment corporation for breach of the proprietary lease, but the members of the cooperative’s board individually for breach of fiduciary duty.
In brief, the events leading up to the court's decision were put in motion in September of 2005 when Robert and Champa Weinreb purchased the penthouse apartment in the residential cooperative at 37 Riverside Drive in Manhattan. The Weinrebs claimed that although the co-op board was aware that the unit required major renovations to make it habitable—and had assured them that their renovation plans would be given prompt consideration—the board unreasonably delayed approval of the plans multiple times.
The plaintiffs subsequently hired an architect, structural engineer and a mechanical engineer, received Landmarks Preservation Commission approval and the okay from Community Board 7.
By April 2007, detailed renovation plans were submitted to the 37 Riverside’s board of directors, who delayed any type of vote on the alteration until June 2008 conducting multiple reviews and additional submissions of information about the project, according to the court decision. In February 2010, the board denied the original plans, and in November of that year, subsequently rejected plaintiff’s revised renovation plans.
Indeed, the Weinrebs and the board were locked in procedural conflict until March of 2011 when the Weinrebs commenced legal action against both the board as a body and against four of the nine board members, alleging the following four causes of action:
Breach of proprietary lease as against the cooperative Attorneys' fees under Real Property Law S234 Breach of fiduciary duty by the cooperative, as well as four of the nine board members
A permanent injunction requiring the co-op and board to approve the proposed alterations and sign such documents as required to effectuate those alterations.
The Court Rules
The court ruled that such an injunction should be issued against the corporation, but not against the individual board members. The decision essentially held that in an alteration dispute where the cooperative has an approval right over alterations, it is neither necessary nor appropriate for a plaintiff to name individual board members as defendants in an action. If the plaintiff were to succeed against the corporation, the corporation’s board would be bound by the decision.
In charge of the real estate litigation department at Wolf Haldenstein Adler Freeman & Herz LLP, I represented the co-op and its individual board member defendants in the case, which lasted well over a year. “Our original motion to dismiss the claims against the individual board members before the Supreme Court was only partially granted—it dismissed the breach of fiduciary duty claim, but refused to dismiss the cause of action for an injunction.”
The court's general rationale for refusing to dismiss the injunction cause of action was that should the plaintiff's claim succeed, the court would be able to order one or more of the named board members to sign the plaintiff’s alteration application with the city.
As a general matter, courts are prohibited from inquiring into the propriety of actions taken by a director on behalf of a co-op (see Matter of Levandusky v. One Fifth Avenue Apt. Corp., 75 NY2d 530, 537-538 ); “[T]he business judgment rule protects individual board members from being held liable for decisions...that were within the scope of their authority.” Of course, individual board members may be validly sued for breach of fiduciary duty if the complaint pleads independent tortious acts on the part of those individual directors, but in the Weinreb case the breach of fiduciary duty claim against individual board members at 37 Riverside Drive has been dismissed, and that ruling is not being challenged on appeal. Therefore, the Levandusky rule precludes claims against individual directors.
In its ruling the court also said, “There is no logic in keeping individual directors in the case, where only the cooperative corporation may be directed to sign the consent. In any event, including individual board members as defendants, where they are not accused of tortious conduct, cannot be justified based merely on the assumption that they may be required to sign a consent on behalf of the corporation.”
“On appeal we argued, among other things, that 1) under the lease, it is the corporation— not the board—that approves alterations; and 2) you cannot have an injunction claim without some other substantive claim tied to it. The breach of fiduciary duty claim had been dismissed already, and no appeal was taken following its dismissal. Finally, it made no sense to continue to have these board members remain defendants, since they may not even be board members who could sign DOB forms by the time this case concludes.”
The decision is a significant one—especially in New York City where there are many cooperative apartment buildings—because it makes it even more difficult to assert claims against board members individually.
Steven D. Sladkus is a partner with Wolf Haldenstein Adler Freeman & Herz LLP, a full service law firm that represents approximately 300 boards of cooperative and condominium apartment buildings.