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Mixed Initial Decision in Lawsuit Over Terrace Owner’s Rights

The tenant-shareholder of a cooperative apartment sued the cooperative and all the individual board members on claims concerning the shareholder’s terrace.  An appellate court has dismissed several of the plaintiff’s claims, while allowing others to proceed.  Dau v. 16 Sutton Place Apartment Corp., 2022 N.Y. App. Div. LEXIS 3250, 2022 N.Y. Slip Op. 03315 (1st Dep’t May 19, 2022).

Several of the plaintiff’s claims sought to challenge an amendment to the proprietary lease that shifted responsibility for maintaining and repairing terraces from the cooperative to individual shareholders whose units include terraces.  This amendment was adopted by the board but was not voted on by the shareholders.  Plaintiff challenged the amendment arguing that the proprietary lease requires shareholder consent for this type of amendment.  The court held that this challenge to the amendment had to be raised in an “Article 78 proceeding,” which is subject to a four-month statute of limitations that plaintiff had not met.  Although a lower court had ruled that the statute of limitations did not start to run until plaintiff suffered a financial loss as a result of the amendment, the appellate court disagreed and held that time began to run as soon as plaintiff was notified of the amendment.  The appellate court also rejected plaintiff’s characterization of her claim as one for breach of contract, with a six-year statute of limitations, because “the core of the claims challenge[d] the 2019 amendment as promulgated by the board of directors.”  However, plaintiff could proceed with her cause of action against the cooperative for a declaration that the amendment can apply only prospectively.

The court also dismissed plaintiff’s claims that she had been defrauded into buying her apartment by misstatements contained in the cooperative’s Local Law 11 reports to the Department of Buildings, because she had not pleaded that these statements were made to her or that she relied on them.  In any event, an inspection of the apartment and building would have revealed the conditions that were allegedly falsified.

Plaintiff had mixed results on a claim for breach of fiduciary duty.  This claim was dismissed insofar as it was based on events that occurred more than three years before the lawsuit was filed, and was also dismissed insofar as it was asserted against the cooperative itself, because a corporation does not owe a fiduciary duty to its shareholders.  However, the fiduciary duty allegations against the individual directors based on events within the past three years were allowed to proceed, because “the complaint sufficiently alleges, with the requisite specificity, that plaintiff was subject to unequal treatment with respect to her terrace.”  Although the directors might ultimately prevail on the defense that their actions were protected under the Business Judgment Rule, the court could not reach that conclusion before discovery had taken place.

Plaintiff’s claim for breach of the warranty of habitability, based on work the cooperative had done that rendered her terrace unusable, was dismissed because she was not living in the apartment at the time.  Plaintiff’s warranty of habitability claim was also dismissed to the extent it was based on alleged harassment of plaintiff by another shareholder, as there was no evidence the board controlled that shareholder’s actions.