Co-Ops—Individual Board Members Are Not Subject to Injunction and Breach of Fiduciary Duty Claims

This case involved “the parameters for allowing a shareholder of a cooperative corporation to name as defendants, in an action against the corporation, individual members of the corporation’s board of directors.”

The plaintiffs had purchased a penthouse apartment in a residential cooperative in September 2005. They claimed that although the defendants knew that “the apartment required major renovations to make it habitable, and had assured plaintiffs before the purchase that their renovation plans would be given prompt consideration, defendants have unreasonably withheld their approval for plaintiffs’ planned renovations…, in violation of the provision of the proprietary lease stating that the consent of the lessor ‘shall not be unreasonably withheld.’”

The plaintiffs alleged that in October 2005, they and the board had agreed that “plaintiffs would first submit a general alteration plan to the board, then seek approval from the Landmarks Preservation Commission (LPC), and thereafter submit a detailed plan to the board for its approval.” The plaintiffs retained an architect, a structural engineer and a mechanical engineer. The local community planning board had approved the alteration plan (plan). However, the board’s president (“A”), had allegedly refused to sign the plaintiffs’ application to the LPC for nearly seven months, without providing any reason. In February 2007, the LPC approved the plan. In April 2007, the plaintiffs submitted detailed renovation plans to the board.

The plaintiffs alleged that in June 2007, the cooperative advised them that it would not approve the plan because it needed to retain its own experts to consider the plan’s structural integrity, at plaintiffs’ expense. Although the board retained such experts, the plaintiffs alleged that the board had “substantially delayed” the review process “by withholding information from those experts, and then requiring, on three separate occasions, that additional experts be retained.” The plaintiffs further claimed that the experts had required “multiple additional submissions of information from plaintiffs such that the board did not vote on the alteration plans until June 6, 2008. Apparently, because of that delay, the LPC had to reapprove the plans and assign a new examiner, and according to plaintiffs, the board refused to sign the reapplication.”

In August 2008, the board rejected the plans, “asserting safety reasons.” By Jan. 15, 2009, “the board’s experts approved the safety and mechanical plans, but one week later, the board allegedly ‘raised four completely new issues with the mechanical plans.’ In February 2009, the board ‘listed 14 new issues with [the]…plans,’ and plaintiffs claim that, by April 2009, the board’s architect was satisfied with the manner in which those problems were addressed….” However, the board required the plaintiff to pay a construction consultant to assess the issues.

In September 2009, that consultant provided the board with a report. By late September, the board notified the plaintiffs “of the risks that needed to be addressed, and asked plaintiffs for the pertinent plans.” In February 2010, the board advised the plaintiffs that “it would not approve the plans,” citing multiple reasons. The plaintiffs asked for the reports upon which the board’s decision had been based. The board also advised the plaintiffs that “if any building occupant ‘experience[s] undue inconvenience as a result of [the] renovation,’ plaintiffs would be responsible for temporary housing costs ‘not to exceed $1,000 per night.’” In July 2010, the plaintiffs submitted revised plans to the board. In September 2010, the plaintiffs submitted further revised plans, together with a letter in support from the plaintiff’s structural engineer. In November 2010, the board, again, rejected the plans.

The plaintiffs thereafter commenced the subject action, asserting claims for breach of the proprietary lease as against the cooperative, attorney fees under Real Property Law §234, breach of fiduciary duty by the cooperative as well as four of the nine board members (individual defendants), and a permanent injunction requiring the cooperative and the board to approve the plan and “sign such documents as required to effectuate the same, and prohibiting all defendants from interfering with the alterations.” The plaintiffs asserted that the cooperative, the board and its members had “unreasonably withheld consent to alterations.”

There was “no challenge to the propriety of the claim against the cooperative corporation based on its allegedly unreasonable withholding of consent. The only challenge was by the individual defendants, who moved, pre-answer, to dismiss the only claims seeking relief against them….” The trial court granted the motion to dismiss, to the extent of dismissing the breach of fiduciary duty claim against the individual defendants, but denied the motion as it related to a cause of action for an injunction. The individual defendants appealed. The Appellate Division (court) reversed and also dismissed the claim for injunctive relief against the individual defendants.

The court explained that:

As a general matter, courts are prohibited from inquiring into the propriety of actions taken by a director on behalf of the corporation…; “[t]he business judgment rule protects individual board members from being held liable for decisions…that were within the scope of their authority.” …Of course, individual board members may be validly sued for breach of fiduciary duty if the complaint pleads independent tortious acts on the part of those individual directors…. But, here, the breach of fiduciary duty claim against the individual board members has been dismissed, and that ruling is not challenged on appeal. Therefore, the [business judgment] rule precludes claims against the individual directors.

In permitting the claim for injunctive relief to proceed against the individual board members, the motion court had relied on a prior Appellate Division decision. However, the Appellate Division distinguished the prior case on the grounds that the prior case involved a proprietary lease which required authorization by “the directors.” Thus, the Appellate Division had previously permitted a claim for a mandatory injunction to proceed against the directors based on the specific language of the proprietary lease. In the instant case, however, the written consent required by the proprietary lease is that of the “lessor,” i.e., the cooperative corporation. Therefore, the court opined that there was “no logic in keeping individual directors in the case, where only the cooperative corporation may be directed to sign the consent.”

The court then held that:

including individual board members as defendants, where they are not accused of tortious conduct, cannot be justified based merely on the assumption that they may be required to sign a consent on behalf of the corporation. An injunction against a corporation “is enforceable against not only th[at] corporation…but also the persons who act for it in the transaction of its business, that is, corporate officers and agents with knowledge of the injunction.” …Indeed, the individuals named as defendants may not even remain in their positions by the time the sought relief is awarded.

Moreover, injunctive relief is simply not available when the plaintiff does not have any remaining substantive cause of action against those defendants. An injunction is a remedy, a form of relief that may be granted against a defendant when its proponent establishes the merits of its substantive cause of action against that defendant. “Although it is permissible to plead a cause of action for a permanent injunction, …permanent injunctive relief is, at its core, a remedy that is dependent on the merits of the substantive claims asserted”…. Here, there is no remaining substantive claim interposed against the individual defendants, since the breach of fiduciary duty claim against them has been dismissed, and that ruling is not challenged on appeal. Consequently, nothing in the complaint as it now stands entitles plaintiffs to any injunctive relief—neither a direction that these defendants sign off on the proposed renovation work, nor a prohibition against interference with the contemplated work after consent is obtained, which form of injunction in any event finds no support in the complaint.

The court then explained that given the possibility in the prior case, that a claim against “the individual directors could successfully be pleaded, which in turn could warrant the issuance of injunctive relief against them, dismissal of the claim for injunctive relief against the individual defendants arguably would have been premature.” The court emphasized that in the subject case, “no such possibility exists.” Moreover, absent “pleaded tortious conduct on the part of the individual directors,” they may not be included as named defendants in the case. Accordingly, the court reversed and the action was dismissed against the individual defendants.

Weinreb v. 37 Apartments Corp., 650868/11, NYLJ 1202553247596, at *1 (App. Div., 1st, Decided May 10, 2012), Before: Saxe, J.P., Sweeny, Jr., Renwick, DeGrasse, Richter, JJ. Decision by Saxe, J.P. All concur.

Foreclosures—Defendant Alleged That a Mandatory Settlement Conference Was Essentially an Illusion—Person Representing the Plaintiff Was Merely a “Body,” With “No Authority”—Court Would “Not Turn a Blind Eye” Toward Serious Allegations of Robo-Signing

The State of New York Mortgage Agency (SONYMA) (plaintiff) had sought the appointment of a referee “to ascertain the amount due plaintiff,” and a determination “whether the mortgaged premises can be sold in parcels.”

The plaintiff had provided the court with a notice of default, an “Affirmation of Regularity” by an Attorney (“A”), and an “Affidavit of Merit and Amount Due in Support of Application for an Order of Reference and Compliance with CPLR §3408″ (“B”). The defendants cross-moved to dismiss on the grounds that the plaintiff was “not a proper party,” denying the plaintiff’s motion on the grounds that the plaintiff failed to show proper grounds for the relief requested and staying the plaintiff from proceeding until the plaintiff engaged “in meaningful settlement discussions by counsel authorized to dispose of this case.”

The court stated that “[a]lthough imaginative, the Court is not inclined to grant the defendants relief, including a finding that the plaintiff is not a proper party plaintiff and/or denying relief on the grounds that plaintiff has failed to show ‘proper grounds’ to support its claims.” However, the defendants had raised “troubling questions of fact and procedure….”

The defendants had argued that a mandatory settlement conference “was essentially an illusion.” She claimed that the plaintiff’s representative who attended the conference was “merely a ‘body,’ a person with no authority, who was sent there for the sole purpose of technically complying with the CPLR by appearing, so that the plaintiff could assert that they complied with the mandatory conference, but, in reality, is a sham.”

The plaintiff countered that the defendant’s position was “purely sour grapes because the matter was not resolved at the conference” and there was “absolutely no evidence that there was no ‘meaningful’ settlement negotiations.” The court disagreed. Under oath, the defendant had asserted that plaintiff’s representative lacked authority and the plaintiff failed “to submit any proof that compliance with the mandatory foreclosure conference (other than mere attendance) was held.” The defendant also asserted that the “plaintiff’s supporting papers are acknowledged either not at all, or by someone without first-hand knowledge of the events and/or transactions.”

The Affidavit of Merit was signed by “B,” who identified himself as a “vice president of loan documentation of State of New York Mortgage Agency.” The defendant asserted that “SONYMA is not a corporation and state agencies do not have vice presidents” and that the title was obliviously “a fictitious title that someone invented solely to get around the issue of ‘robo-signer’ which this person clearly is.”

“B”‘s affidavit stated that “B” had executed the affidavit in the City of Buffalo. However, “B”‘s affidavit stated that it was “executed and notarized outside of New York State….” Yet, the affidavit purported to be acknowledged in New York State. The defendant argued that “B” was either “a liar or he never read the affidavit that he signed, which makes everything in his affidavit suspect.” “B”‘s affidavit was also undated, although the notary stated that “B” had appeared before her in June 2010, “before all of the required steps to foreclose a mortgage in this state had to be taken, including the mandatory conference.” Moreover, a Google search revealed that “B” claimed to be a “vice president of a number of companies and governmental agencies, all in different parts of the United States.”

The court had anticipated that the plaintiff would address these claims relating to “B,” noting that “[s]ociety, through the courts, rely on an orderly process by which disputes are resolved. In motion practice, we rely on candor, and an appreciation of the sanctity of an oath to the person who submits data for the court which impacts possessory rights of people. The Court will not turn a blind eye toward these serious allegations.”

The plaintiff’s counsel essentially assured the court that he had communicated with a representative of plaintiff and such person, had “personally reviewed plaintiff’s documents and records…for factual accuracy” and “confirmed the factual accuracy.”

The court further noted that plaintiff’s representatives were, in a Florida litigation, alleged to have been involved with “questionable practices.”

The court reserved its decision on the plaintiff’s application, stayed the proceeding and ordered, based on a “positive change of circumstances in the defendants’ life vis-à-vis her employment and income,” that the parties conduct a CPLR §3408 conference. The court also ordered the plaintiff to produce “B,” since the plaintiff’s response to the cross-motion failed “to address, with even a single meaningful word, the troubling allegations that ['B'] is a robo-signer with zero first hand knowledge of the events and transactions which form the foundation of plaintiff’s claims.”

State of NY Mortgage Age. v. Vaccerino, 15445/2010, NYLJ 1202553430579, at *1 (Sup., SUF, Decided May 7, 2012), Garguilo, J.

Tax Certiorari—Court Denies Petitioner’s Request for Specific Performance of Orally Negotiated Consent Judgment and Declines to Extend Petitioner’s Time to File Note of Issue, Nunc Pro Tunc—RPTL 718(1)

This case involved a tax certiorari matter relating to tax years 2003 and 2004 and 2006 through and including 2008. However, the subject issue related to a challenge to the assessment relating to tax year 2007. The petitioner sought an order “which would compel adherence by respondent (Village) with a Consent Judgment negotiated by prior counsel representing petitioner.” In the alternative, the petitioner sought an order, “pursuant to RPTL 718(1) (§718), extending the time, nunc pro tunc, within which it may file a note of issue…as to tax year 2007, in excess of four years having elapsed since the inception of the matter.”

The petitioner asserted that its prior counsel and counsel for the Village, negotiated a consent judgment with respect to some of the tax years at issue, including tax year 2007. The petitioner alleged that in a pretrial conference in July, 2010, an oral agreement was reached as to tax years 2004, 2007 and 2008. In October 2010, the petitioner sent a consent judgment to the Village. The Village’s counsel rejected the proposed consent judgment as inconsistent with his understanding of the agreement as it related to tax year 2007. In December 2010, the petitioner sent a new consent judgment incorporating the Village’s proposed changes for tax year 2007 to the Village’s counsel.

The Village’s counsel amended the new proposed consent judgment to change the assessment for a different tax year, 2008, “in conformity with his understanding of the agreement.” The petitioner declined to sign the consent judgment containing the Village’s proposed changes, and inquired “why the changes were made.” In February 2011, the petitioner sent an appraisal to the Village, and “by letter invited a conversation regarding a revised settlement in light of this new appraisal.”

Thereafter, the petitioner sought to have the matter restored to the trial calendar, but had “neglected to file a Note of Issue for tax year 2007 on or before April 30, 2011, the last date for the four year period within which a note of issue must be filed.”

Section 718 provides in pertinent part:

When proceeding deemed abandoned

1. Where a proceeding is commenced pursuant to this article to review the assessment of a parcel of real property…unless a note of issue is filed and the proceeding is placed on the court calendar within four years from the last date provided by law for the commencement of the proceeding, the proceeding thereon shall be deemed to have been abandoned and an order dismissing the petition shall be entered without notice and such order shall constitute a final adjudication of all issues raised in the proceeding, except where the parties otherwise stipulate or a court or judge otherwise orders on good cause shown within such four-year period.

The petitioner asked the court to “nunc pro tunc, extend the four-year time period within which the Note of Issue is to be filed….” The petitioner argued that its prior counsel had “relied on the reaching of a stipulated settlement of the matter in declining to file the…Note of Issue in a timely manner.”

The Village cited the language of §718 which specified that “the failure to file a Note of Issue and to place the matter on the court calendar, within the four year period, shall be deemed to have been an abandonment of the action;” and “that an order dismissing the petition must be entered without notice.” The Village emphasized that the “sole exception to such an ‘abandonment’, …is triggered only: where the parties otherwise stipulate or a court or judge otherwise orders on good cause shown within such four-year period.”

Here, the parties had not agreed to a stipulation nor did the court order, “on good cause shown, an extension of the four year time period within which a note of issue was required to be filed” within the four-year period. Accordingly, the court held that the matter must be deemed to have been abandoned at the end of the four-year period.

The court also rejected the petitioner’s request for an order that the Village must adhere to the amended consent judgment. The petitioner cited CPLR §2104. Such section provides:

An agreement between parties or their attorneys relating to any matter in an action, other than one made between counsel in open court, is not binding upon a party unless it is in a writing subscribed by him or his attorney or reduced to the form of an order and entered.

The petitioner had not argued that the consent judgment constituted a settlement in “open court.” Rather, the petitioner argued that “it was a writing subscribed by counsel for the [Village], and thus” was “binding on [the Village].” However, the petitioner’s prior attorney had rejected the corrections made by the Village’s counsel and “[s]uch corrections were, in effect, a counter offer by [Village] to the draft stipulation/Consent Judgement submitted by her.”

In December 2010, the petitioner’s prior counsel had inquired by letter as to why additional changes had been made to the petitioner’s draft consent judgment which the petitioner’s prior counsel had signed, indicating that “she did not understand why revisions were made, and requesting a discussion as to the reason for the changes.” In February 2011, the petitioner had also sent a letter in which she “objected to the alteration as having unilaterally been made by the Village, without petitioner’s consent.”

There was further dialogue with respect to a new appraisal. Moreover, the record showed “a rejection of the counter-offer by [Village],” made, again, by the Village’s counsel’s changes to the 2008 assessment in the December proposed consent judgement. Additionally, even if there had been an oral agreement as to the tax year 2007, the “tax year 2007 was clearly bundled and discussed as one of three tax years (2004, 2007 and 2008) negotiated jointly.” The Village’s counsel had already, in October, 2010, “rejected a proposed stipulation for incorporating a different amount for the 2007 assessment than was the subject of their agreement.”

In December 2010, the Village’s counsel had altered the 2008 assessment contained in the petitioner’s new revised draft consent judgment, “again in conformity with his understanding of their agreement, and returned the altered document to petitioner.” This had been “followed by the acts of rejection by petitioner.” Thus, “no writing subscribed to by respondent incorporates an agreement between the parties on all three of the tax years at issue.”

The court explained that “[i]t is simply too late now for petitioner to argue that the Court should ignore those several acts of rejection by respondent, the objection by petitioner to the changes, the sending of a new appraisal, the request for renewed negotiations based on this appraisal, and the request that the matter be scheduled for trial, and, instead, compel respondent to adhere to the rejected December counter-offer.” Finally, the court explained that “any suggestion that the petitioner somehow relied on the stipulated settlement in neglecting to file the Note of Issue in a timely manner, is thoroughly belied by the above-mentioned acts, which together signaled, not acceptance of and reliance on the settlement by petitioner, but, instead, its complete rejection.”

Comment: This case illustrates, inter alia, two important legal principles. When a party attempts to modify a draft agreement that has been proffered by an adversary, the proposed modification constitutes a rejection and a counter-offer. That provides the adversary with a “license” to walk away from the original offer. That may be fine because the original offer may be unacceptable. Parties should just understand the risk of not accepting the original offer. Additionally, as a general rule, “good” settlement discussions and even an oral agreement does not mean that statutory language with respect to a deadline could be avoided. People “break” oral agreements. Even more common, people have “good faith” misunderstandings and recollections as to the terms of the alleged oral agreement. Where possible, practitioners should not rely on other parties having the same exact recollection. Moreover, even when basic terms are agreed upon, deals collapse when the “details” are addressed. Bear in mind, the expression, “the devil is in the details.” The details may involve, for example, critical payment terms or tax related structural issues, or the consent of additional parties, etc.

Matter of American Independent Paper Mills Supply v. Tarrytown, 7943/2007, NYLJ 1202553236202, at *1 (Sup., Westchester Co., Decided May 4, 2012), LaCava, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.