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Perspectives

Tenant-Shareholder Has Mixed Success in Derivative Action Against Board Members

   A tenant-shareholder brought derivative claims against the members of the cooperative’s Board of Directors. The directors’ motion to dismiss was granted only in part. One group of claims sought to challenge the Board’s decision-making in connection with a roof repair and resurfacing project. The court held that the Board’s decisions in this area were protected by the business judgment rule, under which “as long as a board of a cooperative corporation acts for the purposes of the entity, and within the scope of its authority and in good faith, its actions are protected by the business judgment rule, even if unwise or inexpedient.”

However, a claim that the Board treated commercial tenant-shareholders wishing to sublet differently from residential tenant-shareholders survived the motion to dismiss because “unequal treatment of shareholders by directors is not insulated from liability under the business judgment rule.” A claim that the Board contracted for electrical work that benefitted only two board members and not the entire building was held sufficient, as was a claim that a transfer of common space to a company owned by a board member. Finally, the court also sustained a claim that the Board committed trespass by refusing to remediate asbestos that allegedly was brought into the building by a contractor working for the Board. Real World Holdings, LLC v. Clark, No. 655499/2018, 2019 N.Y. Misc. LEXIS 6586 (Sup. Ct. N.Y. Co. Dec. 13, 2019).