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Court Holds That Tenant-Shareholder That Is a Limited Liability Company May Not Assert Breach of Warranty of Habitability Claim

A recent decision in Blumenfeld v. Stable 49, Ltd., 62 Misc. 3d 1208(A) (Sup. Ct. N.Y. Co. Dec. 17, 2018), addresses numerous issues arising from protracted litigation among a cooperative and some of its tenant-shareholders.  Among other subjects, the court addressed issues arising from the ownership of a cooperative unit in the name of a limited liability company (LLC).  One of the claims asserted by the LLC, as well as by the individual who owned the LLC, was for breach of the warranty of habitability, which requires that the premises must be fit for habitation.  The court dismissed the LLC’s warranty of habitability claim.  “Although the proprietary lease denominates [the] LLC as the proprietary lessee, it is not an individual and thus cannot occupy the Apartment within the intendment of the proprietary lease, which contemplates that the building’s lessees would be individuals, and that the lessee, together with any family members, would be occupying their respective units for residential purposes.  Because [the] LLC cannot occupy the Apartment and, thus, never attempted to live in it, it has no breach of warranty of habitability claim. . . .”  On the other hand, the individuals could not assert this claim either, because they are not parties to the proprietary lease.

Addressing other claims, the court restated the familiar principles underlying the Business Judgment Rule, which protects board actions undertaken “within the scope of its authority and in good faith,” but does not protect decisions based upon “favoritism” or that are “discriminatory, arbitrary and/or malicious.”  Breach of fiduciary duty claims must be pleaded “with particularity” and where “the allegations are wholly conclusory, replete with surmise and speculation, and are devoid of facts necessary to meet the pleading requirements,” they will be dismissed.  In addition, a claim that board members improperly refused to spend the cooperative’s funds, because they would have been responsible for their share of the expense in their capacity as shareholders, is insufficient because that claim could be made any time a board declines to incur an expense.   In addition, a cause of action that fails to distinguish between individual claims (brought on behalf of one or more individual shareholders) and derivative claims (brought on behalf of the cooperative) will be dismissed.