recent ny cases

Weinstein v Board of Directors of 12282 Owners' Corp. Weinstein v Board of Directors of 12282 Owners' Corp. 2021 NY Slip Op 50338(U) Decided on April 19, 2021 Supreme Court, New York County Lebovits, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on April 19, 2021
Supreme Court, New York County

Bernard Weinstein, Plaintiff,

against

Board of Directors of 12282 Owners' Corp., AKAM ASSOCIATES, INC., and 12282 OWNERS' CORP., Defendants.

654480/2019

Morrison Cohen, LLP, New York, NY (Gayle Pollack of counsel), for plaintiff.

Abrams Garfinkel Margolis & Bergson, LLP, New York, NY (Barry G. Margolis of counsel), for defendants.
Gerald Lebovits, J.

Plaintiff Bernard Weinstein is a resident in a cooperative apartment building owned by defendant 12282 Owners' Corp. (the Co-Op). In this action, plaintiff has asserted claims against the Co-Op's Board of Directors and against the Co-Op's managing agent, defendant AKAM Associates, Inc., for failure to maintain properly the exterior of the building. Defendants move to dismiss the complaint under CPLR 3211. The motion is granted.

BACKGROUND

The Co-Op owns the apartment building located at 122 East 82nd Street in Manhattan. In [*2]1988, plaintiff and his wife joined the Co-Op by purchasing shares in apartment unit 8AD.

Paragraph 2 of the proprietary lease between the Co-Op and plaintiff (and plaintiff's wife) requires the Co-Op to keep the building in good repair at its own expense, except as expressly provided otherwise elsewhere in the lease. (See NYSCEF No. 7 at ¶ 2.) Paragraph 18 of the proprietary lease excludes from the Co-Op's maintenance responsibilities limited areas of the building, such as the interior space of apartments in the building. (See id. at ¶ 18.)

According to the allegations of the complaint, in 2010, the Co-Op's Board became aware of "an old vertical crack" in the building's façade. The Board opted to address this problem through hiring a contractor who undertook to caulk the crack in the façade every five years, rejecting the position of other engineers whose view was that "extensive brick work to close up the crack was required." (Id. at ¶¶ 41-42 [internal quotation marks omitted].) In a 2011 letter to shareholders, the Board stated that it had started the necessary caulking to protect against future damage to the façade. (Id. at ¶ 45.)

In 2017 and 2018, the Co-Op's architect found that the façade had sustained substantial internal damage due to improper installation of air conditioning "sleeves" in 1984 that had allowed moisture to enter the façade, causing it to deteriorate over time. (See id. at ¶¶ 17, 20, 57.) The Board announced that to address these problems, the Co-Op would undertake a significant repair project, to be financed in part with an assessment on each shareholder. (Id. at ¶ 63.) The Board later announced that the cost of the project would be approximately $980,000. (Id. at ¶ 71.)

Plaintiff was not pleased with the Board's actions with respect to the façade. In a 2018 letter sent to the Board, plaintiff rejected the Board's attempt to "hold the Co-Op's shareholders responsible for the costs" and, instead, demanded among other things that the Board assert claims against AKAM for failing to ensure that the façade was properly inspected and maintained. (NYSCEF No. 13 at 1.) In early 2019, plaintiff followed up this letter with "a formal shareholder demand that the Board . . . will bring suit against AKAM Management and any other professionals responsible for the harm to the building." (NYSCEF No. 14 at 1.) Finally, in May 2019, plaintiff sent the Board a draft derivative complaint against both the Board and AKAM. (See NYSCEF No.17.)

In this action, plaintiff is asserting claims against the Board for breach of fiduciary duty and breach of the proprietary lease for failing to oversee properly the inspection and maintenance of the building's façade; and for failing to take steps to hold AKAM and contractors retained by the Board and AKAM legally responsible for their putative failures to detect and remedy the damage to the façade. Plaintiff also is asserting claims against AKAM for breach of fiduciary duty and breach of the lease for failing to retain competent professionals to inspect and maintain the façade and failing to monitor the façade's condition. Plaintiff seeks to recover the assertedly resulting damages suffered by "the Co-Op and its shareholders," in the amount of the façade's repair costs, namely $980,000 (or more), as well as attorney fees. (NYSCEF No. 1 at 17-21.)

Defendants now move to dismiss the complaint under CPLR 3211 (a) (7) and (a) (10) for failure to state a claim for relief and failure to join a necessary party.

DISCUSSION

I. Whether Plaintiff Failed to Join a Necessary Party

Defendants argue that this court should dismiss plaintiff's complaint under CPLR 3211 (a) (10). They contend that plaintiff may maintain this action only if he does so jointly with his wife, who also has an ownership interest in their apartment's shares of the Co-Op.

Joint tenants "take and hold property as though they together constitute one person." (Smith v Bank of Am., N.A., 103 AD3d 21, 23 [2d Dept 2012].) Joint tenants possess an undivided interest in the property. (Chiang v Chang, 137 AD2d 371, 373 [1st Dept 1988].) An individual or entity is a necessary party to litigation "if complete relief is to be accorded between the persons who are parties to the action" or if the entity "might be inequitably affected by a judgment in the action." (CPLR 1001 [a].) Joinder is mandatory if the non-party is subject to the court's jurisdiction. (CPLR 1001 [b].)

Here, plaintiff and Ms. Weinstein own Co-Op shares as joint tenants with the right of survivorship. Both tenants have a shared interest in their apartment. Complete relief rendered by the court could adversely affect Ms. Weinstein's interests. Ms. Weinstein is a necessary party for this litigation.

Dismissal for failure to join a necessary party, however, should be a last resort. (Saratoga County Chamber of Commerce v Pataki, 100 NY2d 801, 821 [2003].) A party may amend the pleading at any time by leave of court or by stipulation. (CPLR 3025 [b].) Leave shall be freely given "absent showing it would cause surprise or prejudice." (170 W. Vill. Assocs. v G & E Realty, Inc., 56 AD3d 372, 372 [1st Dept 2008].) Plaintiff seeks to replead should this court grant any part of defendants' motion. Plaintiff has filed a proposed amended complaint, which adds Ms. Weinstein as a plaintiff but does not otherwise modify the allegations of the existing complaint. (NYSCEF No. 18.) Defendants do not oppose this request in their reply papers, and they do not allege any prejudice or surprise. Thus, ordinarily this court would grant leave to replead in the form of the proposed amended complaint. But given this court's disposition of the remainder of defendants' motion, the court concludes that granting leave in this instance would be futile.

II. Whether Plaintiff Was Bound by Pre-Suit Notice Requirements in the Proprietary Lease

Defendants contend that plaintiff's action should be dismissed because ¶ 45 of the proprietary lease required plaintiff to provide advance written notice to the Co-Op of this action, and he did not do so.[FN1] This court does not agree that ¶ 45 of the lease unambiguously required [*3]advance written notice so as to warrant dismissal at the pleading stage.

Paragraph 45 of the lease provides that the "Lessee may not institute an action against the Lessor or defend or assert a counterclaim in any action by the Lessor related to the Lessee's failure to pay rent" (in the form of maintenance charges), when the action, defense, or counterclaim is "based on the Lessor's failure to comply with its obligation under this lease or any law, ordinance or governmental regulation" absent advance written notice to the Co-Op of the action.[FN2] (NYSCEF No. 7 at ¶ 45.)

The parties advance two alternative readings of this provision. Plaintiff argues that ¶ 45 applies only when the lessee's action, defense, or counterclaim is "related to the Lessee's failure to pay rent," which is not the case here. Defendants contend that ¶ 45 applies in two scenarios, not one: (i) when the lessee commences an action against the lessor based on the lessor defaulting on a term of the lease or violating an applicable provision of law; or (ii) when the lessee raises that default or violation by the lessor as a defense or counterclaim in an action commenced by the lessor against the lessee relating to the lessee's failure to pay rent.[FN3]

Defendants' contention is not without force: the only instance in which a lessee might bring an action against the Co-Op that was both based on a lease-default by the Co-Op (or the Co-Op's violation of an applicable statutory provision) and related to the lessee's failure to pay rent would be a preemptive declaratory-judgment action brought by the lessee to obtain legal sanction for his refusal to pay maintenance charges. It seems at least somewhat unlikely that this particular type of action—not other non-rent-related actions brought by lessees against the Co-Op—would alone be subject to an advance notice requirement. But even if this court were to conclude that defendants have the better interpretation of ¶ 45, that would not render plaintiffs' narrower reading unreasonable. Put simply, ¶ 45 is ambiguous. And given that ambiguity, this court may not rely on ¶ 45 to dismiss plaintiff's claims at the pleading stage, before a factual record may be developed about the parties' intent with respect to this provision.[FN4] (See Almah LLC [*4]v AIG Employee Servs., Inc., 157 AD3d 416, 416 [1st Dept 2018].)

III. Whether Plaintiff Made a Pre-Suit Demand to the Board

Defendants next contend that plaintiff's complaint lacks particularized allegations that plaintiff demanded that the Board assert claims against AKAM. Defendants move to dismiss each cause of action on the ground that plaintiff has not shown that making the demand would be futile. This court disagrees. Plaintiff sufficiently alleges that he did make a demand on the Board.

A shareholder who wants to bring a derivative suit must set forth, with particularity, either plaintiff's demand to the board to initiate litigation or, if plaintiff made no such demand, why that effort would have been futile. (Business Corporation Law § 626 [c].) The form and language of such a demand are not prescribed, leaving a plaintiff with different avenues to satisfy this requirement. A plaintiff may fulfill this requirement by forwarding a draft copy of the complaint with a demand letter to defendant directors. (Jones v Jones, 223 AD2d 483, 483 [1st Dept 1996].)

Plaintiff's counsel wrote to the Board's counsel in September 2018, demanding the Board assert a claim against AKAM. Plaintiff's counsel followed up by sending a letter to the Board in February 2019, formally requesting the letter serve as a demand that the Co-Op sue AKAM Management and any other professionals responsible for harming the building. Plaintiff then forwarded a draft derivative complaint to the Board in May 2019. These communications all demonstrate that plaintiff made the requisite demand to the Board to initiate this action.

IV. Whether Plaintiff's Causes of Action Against the Board are Subject to Dismissal

A. The Direct Versus Derivative Issue

Defendants note that the caption of plaintiff's complaint indicates that he is asserting at least some claims directly in his individual capacity (rather than derivatively on behalf of the Co-Op). They contend that plaintiff lacks standing to raise such individual claims. (See NYSCEF No. 9 at 7-8 & n 2.) This court agrees that plaintiff's claim against the Board for breach of the proprietary lease (the complaint's first cause of action) must be dismissed for improperly mingling direct and derivative claims.

On the one hand, the proprietary lease expressly provides that it is a contract between the Co-Op and plaintiff (and plaintiff's wife), in particular. (See NYSCEF No. 7 at 1 [internal pagination].) To the extent that the Board's actions breached plaintiff's lease, this would violate the legal rights of plaintiff and his wife, in particular, not the rights of the Co-Op.[FN5] Thus, plaintiff's cause of action for breach of the lease seeks redress on behalf of himself personally, rather than for the Co-Op.

On the other hand, the injury plaintiff identifies as resulting from this breach is the $980,000 sum that plaintiff alleges the Co-Op will have to spend on repairing the damage to the building's façade due the Board's alleged failure to maintain the façade in good repair. That injury is one to the Co-Op. It is felt only derivatively by individual shareholders (like plaintiff) based on the Co-Op passing through that injury to shareholders in the form of increased maintenance fees and so on. And a claim that seeks redress for injuries suffered by a corporation (and felt by individuals as equity owners of the corporation), and that will result in recovery to the corporation, is a derivative claim. (See Valyrakis v 346 W. 48th St. Hous. Dev. Fund Corp.; 161 AD3d 404, 406 [1st Dept 2018]; Yudell v Gilbert, 99 AD3d 108, 113-115 [1st Dept 2012].)

In other words, in his first cause of action, plaintiff is seeking to premise a direct, individual claim on an injury that he has not suffered in his individual capacity (i.e., the repair costs incurred by the Co-Op). Alternatively, he is seeking to premise a derivative claim for injury to the Co-Op on the breach of his contractual right as against the Co-Op (the lease provisions obligating the Co-Op to keep the building in good repair). Thus, however one looks at the matter, this claim fails to state a cause of action for relief and must be dismissed. (See Barbour v Knecht, 296 AD2d 218, 227-228 [1st Dept 2002] [dismissing cause of action that mingles derivative and individual claims].)

B. Application of the Business-Judgment Rule

Defendants contend that plaintiff's fiduciary-duty claim against the Board, brought derivatively on behalf of the Co-Op, must be dismissed under the business-judgment rule. This rule, which applies to decisions of residential-cooperative boards (see 40 W. 67th St. v Pullman, 100 NY2d 147, 153 [2003]), requires a court to defer to board determinations "[s]o long as the board acts for the purpose of the cooperative, within the scope of its authority, and in good faith" (Matter of Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530, 538 [1990]). In other words, without "a showing of a breach of fiduciary duty to the corporation, judicial inquiry into the actions of corporate directors is prohibited, even though "the results show that what [the directors] did was unwise or inexpedient." (Jones v Surrey Co-Op. Apts., Inc., 263 AD2d 33, 36 [*5][1st Dept 1999] [internal quotation marks omitted].) Claims for breach of fiduciary duty must be pleaded with particularity under CPLR 3016 [b]. (See Orange Orchestra Props. LLC v Gentry Unlimited, Inc., 191 AD3d 609, 609 [1st Dept 2021].)

Defendants argue that plaintiff has not pleaded with particularity that the Board's actions were undertaken in bad faith, or otherwise fell outside the scope of the business-judgment rule. This court agrees.

The vast majority of plaintiff's allegations assert that the Co-Op has incurred (or will need to incur) nearly $1 million in unnecessary costs because (i) the Board did not competently retain or oversee contractors responsible for inspecting and repairing the building's façade; and, relatedly, (ii) the Board failed to take necessary or appropriate steps to hold contractors (including the Co-Op's longtime managing agent AKAM) responsible for poorly or even negligently performed work. But allegations merely of mismanagement alone are not enough. To the contrary, "absent a showing of discrimination, self-dealing, or misconduct" by the Board or its members, "judicial inquiry into the actions of corporate directors is prohibited"—even if "the results show that what [Board members] did was unwise or inexpedient." (Jones v Surrey Co-op. Apts., Inc., 263 AD2d 33, 37 [1st Dept 1999].)

Plaintiff also briefly alleges, "[u]pon information and belief," that the Board did not investigate or act to repair the façade damage between 2010 and 2018 because "the directors on the Board were concerned that if costs for such repairs required the Board to issue an even bigger assessment on the shareholders, the shareholders would be likely to vote those directors off of the Board." (NYSCEF No. 1 at ¶ 54.) Thus, "[u]pon information and belief," the Board's failure to act between 2010 and 2018 was assertedly "motivated, either wholly or in large part, due to the directors' desires to entrench their positions on the Board."[FN6] (Id. at ¶ 55.) Board decisions driven by the directors' self-interest rather than the best interests of the Co-Op would not be shielded by the business-judgment rule. But plaintiff's allegations on this front do not provide any particulars about the directors' assertedly self-interested motives, or how those motives affected the Board's decision-making process. And the allegations are pleaded "upon information and belief"—but they do not "disclos[e] the source of information that forms the basis of that belief" as is required. (Wall St. Transcript Corp. v Ziff Communications Co., 225 AD2d 322, 322 [1st Dept 2016]; accord RTN Networks, LLC v Telco Grp., Inc., 126 AD3d 477, 478 [1st Dept 2015].) These allegations, standing alone, do not state a claim for relief.

V. Whether Plaintiff's Causes of Action Against AKAM are Subject to Dismissal

Plaintiff also asserts derivative breach-of-lease and fiduciary-duty claims on behalf of the [*6]Co-Op against its managing agent, AKAM. Based on the complaint, the fiduciary duty that AKAM is alleged to owe the Co-Op stems from, and is defined by, AKAM's obligations under the contract between these entities. The fiduciary-duty claim against AKAM thus essentially overlaps the breach-of-lease claim. (See Kaminsky v FSP Inc., 5 AD3d 251, 252 [1st Dept 2004].) The two claims rise—or fall—together.

Defendants contend that these claims must be dismissed because AKAM's actions as the Co-Op's managing agent are shielded by the business-judgment rule in the same manner as the Board's actions. (See NYSCEF No. 21 at 6-7.) This court finds defendants' contention unpersuasive. The business-judgment rule in the context of cooperative and condominium apartments is derived from precedent addressing "challenges to decisions made by corporate directors . . . of commercial enterprises." (Matter of Levandusky, 75 NY2d at 537.) And the cases in this area consistently describe the rule as shielding the acts of cooperative and condominium boards and board members, in particular. (See e.g. id. at 537-539; accord Pullman, 100 NY2d at 153-154; Fletcher v Dakota, Inc., 99 AD3d 43, 48-49 [1st Dept 2012]; Jones, 263 AD2d at 36.) Treating the business-judgment rule as also applying to actions of a cooperative corporation's agents, as well as its board of directors (and individual directors) would significantly expand the scope of the rule. Yet defendants provide no authority standing for that proposition.

Indeed, the one case defendants do cite on this issue cuts against their argument, not for it. (See NYSCEF No. 21 at 6-7, citing Pelton v 77 Park Ave Condominium, 38 AD3d 1, 11-12 [1st Dept 2006], overruled on other grounds Fletcher, 99 AD3d at 49-50.) Pelton involved disability-discrimination claims against a condominium's board of directors and the condominium's managing agent. And the Court in Pelton dealt with these two sets of claims separately. The Court held first that the claims against the board and its members failed under the business-judgment rule. (See 38 AD3d at 10-11.) Then, in addressing the claims against the managing agent, the Court held under principles of agency law that plaintiff had failed as a matter of law to show that the managing agent breached any statutory or common-law duty owed to plaintiff. (See id. at 11-12.) The Court did not, however, say that the managing agent's actions were protected against judicial review unless those actions came within one of the exceptions to the business-judgment rule.

Under the particular circumstances of this case, however, this court's conclusion that the business-judgment rule does not apply of its own force to shield AKAM's conduct does not end the inquiry. One aspect of the Board's conduct that (as discussed above) is shielded by the business-judgment rule is the Board's decision-making with respect to AKAM—including whether to sue AKAM for its putative failure to recommend and oversee competent contractors to inspect, maintain, and repair the building's façade. (See NYSCEF No. 1 at ¶¶ 4, 31-32, 62, 85.) In effect, this court holds above that the Board was legally entitled to decide on behalf of the Co-Op—without judicial second-guessing—to decline to bring contractual or fiduciary-duty claims against AKAM relating to AKAM's conduct with respect to building maintenance and repair.[FN7] [*7]Yet plaintiff is now seeking, on behalf of the Co-Op, to bring precisely those claims. In this particular scenario, this court concludes that even if AKAM is not itself covered by the business-judgment rule, permitting plaintiff's derivative claims against AKAM to go forward would impermissibly circumvent that rule as it protects the decisions of the Board.

Accordingly, for the foregoing reasons it is hereby

ORDERED that defendants' motion to dismiss under CPLR 3211 is granted, and the action is dismissed, with costs and disbursements to be taxed by the Clerk upon the submission of an appropriate bill of costs; and it is further

ORDERED that defendants shall serve a copy of this order with notice of its entry on all parties; on the office of the General Clerk; and on the office of the County Clerk, which shall enter judgment accordingly.

DATE 4/19/2021 Footnotes

Footnote 1:Plaintiff does not contest defendants' assertion that he failed to provide advance written notice of this action. He argues instead that the notice provision is inapplicable to his claims. (See NYSCEF No. 19 at 18-19.)

Footnote 2:Defendants also rely on ¶ 43 of the lease, arguing that it requires all individuals named in the proprietary lease to "give a duly signed written notice." (NYSCEF No. 21 at 9.) But, as defendants acknowledge, this requirement applies only when ¶ 45 operates to require written notice in the first place. This court therefore limits its discussion to ¶ 45.

Footnote 3:The proprietary lease defines "Lessor" as the Co-Op. (See NYSCEF No. 7 at 1 [internal pagination].) Thus, regardless of how one interprets ¶ 45, it would not apply to plaintiff's claims against AKAM.

Footnote 4:Additionally, even if this court were to agree with defendants that ¶ 45 required advance written notice in other types of actions beyond rent disputes, that would still warrant dismissal only of plaintiff's claim that the Board breached the proprietary lease. As noted above, ¶ 45 provides that in addition to claims that the lessor breached the lease, advance written notice is also required for a lessee's claim that the lessee had failed to comply with "any law, ordinance or governmental regulation." (NYSCEF No. 7 at ¶ 45.) Defendants contend that this phrase requires notice for plaintiff's claim that the Board breached its fiduciary duties to the Co-Op's shareholders. (See NYSCEF No. 21 at 9-10.) But given the joining of "law" in this phrase with "ordinance or governmental regulation," the better interpretation would be to construe "law" here as referring to a "statute," rather than to "legal principles" more broadly (as defendants' reading would have it). (See Kese Indus. v Roslyn Torah Found., 15 NY3d 485, 491 [2010] [noting that courts "ordinarily interpret the meaning of an ambiguous word in relation to the meanings of adjacent words"].) Plaintiff's fiduciary-duty claims thus would not be subject to the notice requirement of ¶ 45 regardless.

Footnote 5:To be sure, the terms of the proprietary lease that plaintiff alleges the Board to have breached are materially identical for each lessee in the building. A breach by the Board of plaintiff's lease thus would also be a breach of the other lessees' leases as well. But those breaches would still each constitute distinct injuries to each lessee, albeit suffered in the same fashion due to identical lease provisions. That is different from one breach injuring the Co-Op such that the injury then flows through to the lessees by virtue of their status as Co-Op shareholders.

Footnote 6:Plaintiff's opposition to the motion to dismiss also claims that "when the Board finally undertook the façade repair work, it off-loaded a portion of the cost onto a limited number of shareholders to mitigate the cost to all shareholders (including Board members)." (NYSCEF No. 19 at 17.) But, as defendants point out, this assertion does not appear in the complaint.

Footnote 7:The absence of allegations against the Board that might undermine applicability of the business-judgment rule distinguishes this case from Tsui v Chou (135 AD3d 597, 597-598 [1st Dept 2016]). There, the First Department held that plaintiffs had sufficiently alleged the Board's decision not to pursue claims against the condominium's sponsor, managing agent, and certain board members was arbitrary and therefore not shielded by the business-judgment rule. Plaintiff does not make that kind of allegation here.