Appellate Court Partially Removes Important Protections for Individual Members of Cooperative and Condominium Boards09/10/2012 | Fall 2012 Newsletter
In a very important decision for Cooperative and Condominium Boards of Directors and Managers, in the 2006 case of Pelton v. 77 Park Avenue Condominium, the Appellate Division, First Dept., set out a fundamental rule that a condominium or cooperative board member cannot personally be sued as a result of claimed wrongdoing by the cooperative or condominium unless the director personally committed tortious actions outside and beyond simply carrying out the duties of a director, e.g., attending board meetings, participating in board activities, becoming informed of the issues, and voting on matters coming before the board. As a result of this decision, many suits seeking to harass individual board members with attempts to assert personal liability had been dismissed. The case was followed by a number of other cases over the past several years upholding this principle, and it seemed that the matter was firmly resolved on the side of protecting board members against unwarranted litigation.
Unfortunately, in a case decided this summer, Fletcher v. The Dakota, a panel of five Judges from the First Department pulled the rug out from underneath a portion of the Pelton decision. The judges, asserting that they were “overruling” Pelton, modified the decision so that if an action is brought against the Board of Directors or Managers, in any case claiming discrimination, or indeed any other tort claim against the Cooperative or the Board of Managers collectively, each individual Director or Manager can be sued personally for “participating” in the decision making process that led up to the commission of the tort on behalf of the entity, even though the individual Director or Manager did nothing more than the typical board activities of becoming informed, attending board meetings and voting. The law that a Board member cannot be personally sued for a breach of contract remains in place.
The Dakota decision was extraordinary because the Court refused to follow its own precedent, and the issue of changing the Rule was never even raised or argued by the parties. Rather, the Court changed the law on its own initiative without any advance notice to the litigants or to anyone else.
Our firm, Gallet Dreyer & Berkey LLP, is involved with the appeal of the Dakota decision. One of the parties in the Dakota case, the defendant director, has filed a motion for reargument, and our firm has filed an amicus (also called a “friend of the court”) brief in support of the motion, on behalf of the Council of New York Cooperatives & Condominiums and five other sister organizations involved in the representation of Cooperatives and Condominiums. In addition, if this motion is not successful and the defendant appeals the decision to the highest level appellate court, the New York Court of Appeals, then our firm will likely file an amicus brief to the New York Court of Appeals in support of the appeal.
Unless and until the Dakota decision is modified or reversed, this new decision places an added burden on board members to be sure that the conduct of the board does not violate any established rules of conduct. Although there is still no requirement that Boards give reasons for many of their decisions, specifically including admissions, individual Board members will be well advised to make a record of the reasons why they acted in any situation where there is a potential for a conflict with a shareholder. It may be advisable to document in the minutes the reasons why the Board actions were taken, even in instances, such as admissions, when up to now the advice has generally been not make a written record of such reasons.
If, in any situation a Board member discovers that another Board member or members are in fact acting with discriminatory or other wrongful motives, those Board members who are acting out of legitimate motives will have a heightened requirement to make sure the record reflects that they are acting in good faith. Under the circumstances the Board should not hesitate to consult with counsel any time a potentially contentious issue comes before the Board, so that counsel may provide guidance as to how to minimize the potential for liability under this new standard.