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Perspectives

Court Holds Former Condominium Board President May Be Entitled to Indemnification for Legal Fees Incurred in Board’s Lawsuit Against Her

            A New York court held that a Condominium may be required to indemnify its former Board President for legal fees incurred in litigation brought by the Board of Managers, if she acted in good faith in her actions as President.  Board of Managers of 28 Cliff Street Condominium v. Maguire, 2019 N.Y. Slip Op. 29275, 2019 N.Y. Misc. LEXIS 4800  (Sup. Ct. N.Y. Co. Sept. 9, 2019).

The Board brought the lawsuit against its former President and three companies, which owned and operated a restaurant in the commercial unit.  The complaint alleged that after a fire, the then-President, among other things, “mismanaged and embezzled insurance funds earmarked for building repairs.”  The court eventually dismissed all of the Board’s claims except for one alleging excessive noise.  In the interim, the former President counterclaimed for legal fees and moved for indemnification seeking $350,000 in legal fees.  She cited Section 722(c) of the New York Business Corporation Law (BCL), which authorizes a corporation to indemnify any person sued by or on behalf of the corporation “by reason of the fact that [s]he …  is or was a director or officer of the corporation,” provided she acted in good faith and not in opposition to the corporation’s best interests.  She also cited Section 724(c), which authorizes a court to direct interim payment of legal fees (sometimes referred to as “advancement”) while the litigation is pending.

The Condominium responded that while the BCL applies to cooperatives, it does not apply to unincorporated condominiums, which are organized under the Real Property Law (RPL) rather than the BCL.  The court held, however, that where the RPL is silent on an issue, the courts may apply the BCL by analogy. The Condominium also observed that Section 722(c) is permissive, rather than mandatory, and provides that a corporation “may” provide indemnification to its officers or directors who have been sued, not that it “must” do so.  The court responded by citing Section 724(a), which provides that “[n]otwithstanding the failure of a corporation to provide indemnification, and despite any contrary resolution of the board …, indemnification shall be awarded by a court … to the extent authorized under Section 722.”  The court reached this conclusion about the statute without citing any provision of the Condominium Declaration or By-Laws discussing indemnification.  In conclusion, the court directed that a hearing be held to “determine if [the former President] executed her duties in good faith following the fire; and if so, what are the reasonable amount of attorneys’ fees [she] expended to defend against the ten causes of action the Board brought against her….”

Both cooperatives and condominiums should consider the implications of this decision before commencing any litigation against present or former officers or directors, given the possibility that they may wind up paying for the other side’s legal fees and expenses in addition to their own.  Boards may also wish to have their counsel review their By-Law provisions relating to indemnification and advancement issues.