Whenever cooperative, condominium or HOA board members are sued individually in a lawsuit, the first thing counsel will try to do is get the case dismissed against the individuals. The general principle is that if the board members did not commit tortious acts independent of their decision making as board members, then they shouldn’t be named in the lawsuit. If the board members self-served themselves, for example, then the court will likely not dismiss the case against the individuals.
The next thing counsel for the board members or the cooperative, condominium or HOA will try to do is get rid of certain claims based on the business judgment rule. If the board members and board acted within their authority, in good faith and in the best interest of the entity and all of the owners or shareholders then the business judgment rule is a great defense which can be used to end certain claims summarily on dismissal or summary judgment motions.
The First Department, Appellate Division, which oversees appeals in the Manhattan and Bronx Supreme Courts, just decided to leave cooperative board members individually in a lawsuit for trial, holding that the business judgment rule does not support dismissing claims against the board members and the cooperative, and that they should remain in the case through trial.
The Court in Nainan v. 715-723 Sixth Avenue Owners Corp. (read the decision by selecting it), issued a decision on November 19, 2019, explaining that “A board’s decision is not entitled to protection under the business judgment rule, however, when the action taken ‘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’ (citation omitted)”.
The facts in the Nainan case made it difficult for the Court to side with the board members or cooperative. Indeed, Plaintiffs there “argued that the board ignored the coop’s bylaws by deciding to enter into a contract for the sale of the coop without obtaining shareholder approval and that the board members used scare tactics to force the shareholders into agreeing to sell the coop. Plaintiffs contend[ed] shareholders were prohibited from selling their apartments while two of the board members were permitted and proceeded to sell theirs. Plaintiffs claim[ed] that the board failed to negotiate the best possible price for the sale. Moreover, plaintiffs allege[d] that one director acted as the broker for the transaction, thereby obtaining an independent financial benefit from the transaction, a fact that was not disclosed to the shareholders.” These type of facts were enough for the Court to leave the individual board members in the case as well as most of the claims against the cooperative which are going to have to be decided at trial.
The lesson from the case however is that board members can be subjected to individual liability and have to defend themselves in lawsuits particularly if they make decision or take actions that serve the board member’s own personal interest. Boards should be careful to make a record establishing that their decision making is covered by the business judgment rule and that they are acting in the best interest of all owners or shareholders and certainly not their own personal interest as seems to be the case with the Nainan board members.
