Realty Law Digest

, New York Law Journal

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Scott E. Mollen
Scott E. Mollen

Co-Op Board Reversed a Prior Resolution Which Permitted the Co-Op's Then President to Enclose a Roof Terrace and Create a Master Bedroom Suite and Bath Without Allocation of Additional Shares or Increase in Maintenance—President Had Allegedly Pressured Co-Op's Attorney and Managing Agent to Approve Such Agreement—Co-Op Argued That the Statute of Limitations Had Tolled Pursuant to the "Open Repudiation Rule" Which Tolls the Statute Until a Fiduciary Has Openly Repudiated His or Her Obligation or the Relationship Has Otherwise Been Terminated—Co-Op Failed to Communicate With Its Own Attorney and Managing Agent—President's Self-Interest Was Obvious—He Was Not Acting in the Fiduciary Capacity When He Was Openly Arguing for His Own Benefit—Doctrine of "Unclean Hands"

This matter involved a dispute between the respondent cooperative corporation (co-op) and petitioner "A," the co-op's former board president and his wife. The dispute arose from the co-op's June 8, 2012 reversal of its June 16, 2006 "decision not to allocate additional shares to petitioners' apartment in connection with an alteration" (initial determination). The petitioners sought "a judgment annulling, as unlawful and arbitrary and capricious, the [co-op's] June 8, 2012 decision to allocate 400 additional shares to petitioners' apartment" (second determination). The petitioners also sought a declaration that a 2007 alteration agreement was valid and enforceable. Additionally, they sought "compensatory and punitive damages for respondents' alleged breach of fiduciary duty," citing Business Corporation Law (BCL) §717 (a).

The respondents include three of the four board members who made the initial decision. The respondents argued that "the petition should be dismissed based on ['A''s] 'undue influence and breach of fiduciary duties/self dealing by which he procured a vote by a Co-op board to not allocate additional shares'…." The respondents asserted that they discovered "A's" breach in late 2012, as a result of disclosure of emails which they had not previously seen. They asserted that the emails reflect that "A" "aggressively took steps to conceal his actions, by using his position as board president, and 'plotted' to have his strategems [sic] presented to the board as if conceived" by the co-op's attorney (attorney) and/or the co-op's managing agent (manager). The respondents acknowledged that the alteration agreement was enforceable.

In 2005, when "A" was board president, he sought approval from the co-op to, inter alia, "enclose most of his roof terrace to create a master bedroom suite and bath." The alteration was approved by the co-op. "A" did not vote on the alteration. The board determined that "[n]o additional monthly charges such as maintenance and/or assessments would be charged to the apartment." The "alteration agreement did not allocate additional shares to petitioners' apartment or impose additional maintenance charges." After the petitioners decided to sell their apartment in 2010, two new board members raised concerns as to what had transpired. Thereafter, the board reversed its position and issued the second determination. "They delayed calculation of the price per share to a later date."

Emails indicated that "A" had been "aggressive and manipulative in advocating his position" to the attorney and the manager. When "A" did not like the attorney's position, he advised the attorney that if he would "not render an opinion consistent with unit owner rights under the bylaws, I will be compelled to get another opinion which focuses on my rights." "A" also disparaged the attorney to the manager and "admonished" the manager's account executive. "A" insisted that the attorney "was 'confused' but the [manager] was 'in a better position of experience and practical judgment to make a recommendation to the board.'" The e-mails also reflected that "A" had pressured the manager to try to persuade another board member, who had appeared to agree with "A," "to convince other board members of the correctness of ['A''s] position." "A" had advised the manager that "I'd rather not be 'credited' with bringing this to your attention, as it might be interpreted as self-serving on my part." Additionally, "A" advised the manager that "if the board decided to increase ['A''s] maintenance as 'a result of the alteration,' the board was at 'potential legal risk.'"

Although the co-op had been represented by counsel, the co-op essentially argued that it had been "duped." The co-op cited the "secret" emails that had been sent by or to the attorney and/or the manager. The co-op argued that it had not been "aware of an internal [management] memorandum discussing whether the Co-op possessed the authority to issue additional shares in connection with the alteration…." The "memorandum concluded that 'it would seem logical that an additional "lease payment" for the changed use of the space could be charged.'" The co-op also argued that "A" had "devised 'stratagems' to prevent [the attorney's] opinion (that the Co-op has the right to allocate shares) from being presented to the board." The court stated that "[a]pparently, and inexplicably, the board was content with having the matter handled by [the attorney] and [the manager], with little or no involvement from the board."

The co-op argued that the attorney's and the manager's opinion had not been presented since they had been excluded as a result of "A's" "vetos." Apparently, the only opinion discussed was that of "A's" attorney. One of the board members who had approved the initial determination stated that the board had "proceeded 'on the mistaken belief that the [petitioners' counsel's opinion] also represented the opinions of [the manager] and [the attorney], since no opinions attributable to them were presented."

The co-op asserted affirmative defenses based on "the business judgement [sic] rule, documentary evidence, unclean hands, failure to act in good faith and breach of fiduciary duty."

"A" countered, inter alia, that he had been "openly working" on his own, "disclosed, self-interest" and the co-op had been represented by counsel. "A" explained that he had merely disagreed with the attorney's opinion, "because it was inconsistent with the by-laws and the Co-op's prior practices." "A" also asserted that the board had agreed that he "would be permitted to be present for the discussion of the alteration request" but that he "would excuse himself prior to any vote." "A" further argued that there had been an extensive discussion, he had not asked the board or the manager for special treatment, he had relied on the board's decision not to allocate additional shares and he believed that the board had exercised its business judgment in reaching such decision.

"A" further argued that the co-op had benefited by the alteration because the petitioners had spent $30,000 to repair the roof, they had taken responsibility to maintain the part of the roof that had become the floor of the alteration, and the co-op will receive "an additional flip tax which would be generated from a higher sale price."

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