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Court Imposes Remedies After Finding Sponsor-Dominated Board Violated Election Procedures and Had Conflicts of Interest

Several unit owners of a Condominium filed a derivative action on the Condominium’s behalf against the Sponsor and three individual principals of the Sponsor. Plaintiffs contended that these individuals were “using their influence to maintain control of the Board” and engaged in self-dealing by causing the Company to retain their wholly owned management company. In an earlier stage of the protracted litigation, the court concluded that one of the individuals had breached the Offering Plan by failing to disclose that she had decided to retain, rather than sell, several units and by continuing to vote for a majority of Board seats although the By-Laws precluded her from doing so.

The court conducted a three-day trial on Plaintiffs’ remaining allegations. In a 25-page decision after trial, the court concluded that the Board, dominated by the principals of the Sponsor, breached the Offering Plan and the By-Laws by disregarding various provisions governing election of the Board of Managers in order to retain control of the Board, and by failing to recuse themselves from the Board’s decisions to retain and renew their affiliated management company. As a remedy for the election-related violations, the court directed that a new election for the Board of Managers must be held within 90 days, with no more than two of the individual defendants permitted to serve on the six-member Board.

With regard to the managing agent, the court held that the Board’s selection was not protected by the Business Judgment Rule because of the conflicts of interest involved. Nonetheless, the plaintiffs had failed to show that that the Board’s retention of the affiliated managing agent had caused any financial harm to the Condominium, so no damages were awarded. As a remedy, the court ordered that after the new Board of Managers is installed, it must reconsider the selection of managing agent, and that if the incumbent managing agent wishes to retain the position, the decision must be made by a committee of independent directors. The court also held that under the Business Corporation Law provisions governing derivative actions, the plaintiffs were the successful parties and were entitled to recover their legal fees for the trial and related briefing. Tsai v. Chou, 2021 N.Y. Misc. LEXIS 1727, 2021 N.Y. Slip Op. 32112(U) (Sup. Ct. N.Y. Co. Apr. 9, 2021).