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Shareholder’s Action Asserting That Board and Managing Agent Failed to Keep Building Exterior in Proper Repair Is Dismissed

A lawsuit by a tenant-shareholder in a Cooperative alleging that the Board of Directors and managing agent failed to keep the exterior of the building in proper repair was dismissed under the Business Judgment Rule. Weinstein v. Board of Directors of 12282 Owners’ Corp., 2021 N.Y. Misc. LEXIS 1840, 2021 N.Y. Slip Op. 50338(U) (Sup. Ct. N.Y. Co. Apr. 19, 2021).

The lawsuit was based on paragraph 2 of the proprietary lease between the Cooperative and the plaintiff, which requires the Cooperative to keep the building in good repair at its expense. Plaintiff alleged that in 2010, the Board of Directors became aware of a crack in the building’s façade. The Board addressed this problem by hiring a contractor who undertook to caulk the crack every five years, while rejecting the view of other engineers that “extensive brick work to close up the crack” was required. In 2018, the Cooperative’s architect found that the façade had sustained substantive damage due to improper installation of air conditioning sleeves in 1984. The Board then announced that to address these problems, it would undertake a significant repair project, which would cost $980,000 and be financed in part with an assessment.

Plaintiff wrote to the Board asserting that the Cooperative’s managing agent, rather than the shareholders, should bear the costs of the façade repairs because the managing agent had failed to ensure that the façade was properly inspected and repaired. Plaintiff submitted a formal shareholder demand that the Board sue the managing agent. Plaintiff subsequently filed this action against the Board and the managing agent, asserting both derivative claims on behalf of the Cooperative and individual claims on his own behalf.

In its decision dismissing the complaint, the court addressed several procedural issues. First, the court concluded that plaintiff should have joined his wife, with whom he co-owns his cooperative shares, as a plaintiff because the outcome of the lawsuit could affect her interests. However, if the complaint were otherwise viable, this deficiency could be cured by amendment. Second, the court addressed a requirement contained in Section 45 of this proprietary lease that a shareholder may not commence certain types of litigation against the Cooperative without first providing written notice. The court found that Section 45 was ambiguous as applied in this case and therefore declined to dismiss the action on that basis. Third, the court found that plaintiff had made a sufficient pre-suit demand on the Board before bringing his derivative claims. Fourth, the court held that parts of the complaint were improperly pleaded because they intermingled derivative and direct (individual) claims without making clear which was which.

On the merits, the court dismissed plaintiff’s claim against the Board for breach of fiduciary duty under the Business Judgment Rule. While plaintiff alleged that the Board had mismanaged the façade crack issue by failing to competently retain or oversee contractors to address the problem, “allegations merely of mismanagement are not enough.” Rather, ‘absent a showing of discrimination, self-dealing, or misconduct’ by the Board or its members, ‘judicial inquiry into the actions of corporate directors is prohibited’ – even if ‘the results show that what [Board members] did was unwise or inexpedient.’” Plaintiff also alleged, “upon information and belief,” that the Board failed to act sooner because imposing a large assessment might result in the directors being voted off the Board. This did not change the result because plaintiff did not provide particulars of any self-interested conduct by the Board or specify the sources of his information and belief.

The court also dismissed the claims against the managing agent. The court rejected the argument that the managing agent’s actions were also protected by the Business Judgment Rule, stating that this rule was developed to protect boards and board members, not third-party agents. However, the Board’s own decisions remained protected, and one of those decisions was not to sue the managing agent. Thus, “even if [the managing agent] is not itself covered by the business-judgment rule, permitting plaintiff’s derivative claims against [it] to go forward would impermissibly circumvent that rule as it protects the decisions of the Board.”