Skip to main content

Perspectives

Cooperative Board May Have Engaged in Self-Dealing by Rejecting Purchase of a Unit After the Board Made an Offer for the Unit

Cooperative boards are generally free to disapprove an application to purchase a unit for any reason or no reason, so long as the board does not act for an unlawful reason such as discrimination. However, the recent appellate decision in Graham v. 420 E. 72nd Tenants Corp., 2019 N.Y. App. Div. LEXIS 406, 2019 N.Y. Slip Op. 409 (1st Dep’t Jan. 22, 2019), may be a rare exception.

The plaintiff in this case is the tenant-shareholder of a ground-floor unit in the Cooperative.  According to the facts set forth in a lower court’s opinion, the Board of Directors had expressed interest in purchasing the unit to create a gym for the Cooperative.  After some time elapsed without confirmation of whether the Board wished to pursue the purchase, plaintiff listed the unit for sale for $499,000.  Two weeks later, the Board offered $400,000 for the unit, which plaintiff declined as being below market value.  Plaintiff then received an all-cash $495,000 offer from a third party and entered into a contract of sale.  The Cooperative’s managing agent advised that the sale had not been approved because the Board “felt the sale price was under market value” and that a reapplication with a price of at least $535,000 would be considered.

Plaintiff and the purchasers agreed to amend their contract of sale to increase the price to $535,000.  Plaintiff also obtained an appraisal, which reflected a market value of $525,000.  The Board responded by requesting that the purchase price be further increased to $610,000.  Plaintiff then sued the Cooperative and its board members for breach of fiduciary duty, tortious interference, and breach of contract, “alleging that the defendants acted in bad faith and self-dealing in not approving the sale of [the unit].”  Defendants moved for summary judgment based on the Business Judgment Rule, arguing that there was no evidence of discrimination, self-dealing, or misconduct.  Defendants contended that the rejection was based on the low purchase price for the unit compared to recent sales of other units in the building.

 

The trial court’s decision acknowledged that Board decision-making is typically protected by the Business Judgment Rule. However, in this case the plaintiff presented a sufficient basis for judicial review of the Board’s decision.  “Plaintiff provides a showing that the Board may have engaged in self-dealing by denying the application and basing the denial on the sales price being too low, when the Board had previously offered to the Plaintiff to purchase [the unit] from her at the price of $400,000.  The Board’s offer was much less than the Purchasers’ initial offer of $495,000.  Further, Plaintiff has shown that after the Board initially stated that the $495,000 sales price was too low, and to come back with an offer of at least $535,000, Plaintiff and the Purchasers complied with this request, but the Board still denied the sale.”  The court concluded that “issues of fact remain as to whether the Board engaged in self-dealing because they had an interest in purchasing [the unit].”

            The defendants appealed.  The appellate court agreed that insofar as the claims were asserted against the Cooperative itself, the plaintiff had “presented sufficient evidence to raise a triable issue of fact as to whether defendant cooperative board rejected the offers to purchase the subject unit in bad faith and for purposes of retaliation.”

            However, the appellate court dismissed all claims insofar as they were asserted against the board members individually.  “As the complaint does not allege individual wrongdoing by defendant board members separate and apart from their collective action taken on behalf of the cooperative, no breach of fiduciary duty claim lies against the individual defendants.  Indeed, as the complaint does not specifically allege, and there is no record evidence of, any individual defendant’s participation in the board’s allegedly wrongful conduct or bad faith motive therefor, none of the claims can be sustained against any of the individual defendants.”