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Perspectives

Court Upholds Board’s Rejection Of Purchase Application

A tenant-shareholder in a cooperative sought to purchase the shares appurtenant to an additional unit in the building, but the Board denied the application.  The tenant-shareholder filed a lawsuit asserting a series of claims against the members of the Board of Directors.  In Jarmuth v. Leonard, 2019 N.Y. Misc. LEXIS 1545, 2019 N.Y. Slip Op. 30846(U) (Sup. Ct. N.Y. Co. Apr. 4, 2019), the court dismissed all of the plaintiff’s claims.

Among other claims, the plaintiff sued the members of the Board of Directors for breach of fiduciary duty.  However, plaintiff failed to plead that the individual board members had “acted tortiously other than in their capacity as board members.”  As a result, the claim was dismissed.  Another ground for dismissing this claim was that “[t]he courts are generally prohibited by the business judgment rule from inquiring into the propriety of actions taken by the directors on [the Cooperative’s] behalf.”  Judicial review is only permitted of “‘improper’ decisions, such as ‘when the challenger demonstrates that the board’s decision has no legitimate relationship to the welfare of the cooperative, deliberately singles out individuals for harmful treatment, is taken without notice or consideration of the relevant facts, or is beyond the scope of the board’s authority.’”

As to the remaining claims, the plaintiff asserted that the Board denied her application in bad faith because she had filed previous lawsuits against the cooperative.  The court nonetheless held that there still was “no allegation in the complaint that provides a basis to overcome the business judgment rule, which precludes judicial review of the board’s decision.  None of the allegations in the complaint amount to the level of bad faith.”  Moreover, the proprietary lease expressly recognized the Board’s authority to reject a transfer of shares “for any reason or for no reason.”