Legal Target

When the news broke, it sent a shiver of dread through every one of the 40,000 unpaid volunteers who serve on co-op and condo boards in New York City. At one of the poshest co-ops in town – the Dakota on Central Park West, where Leonard Bernstein lived and John Lennon died – a longtime shareholder was suing two board members and the corporation for racial discrimination. The disgruntled shareholder, Alphonse Fletcher Jr., an African-American who owns the Fletcher Asset Management investment firm, was seeking a stunning $15 million in compensatory and punitive damages.

Fletcher, who has lived in the Dakota since 1992 and served nearly a decade on the co-op’s board, including two terms as president, filed the lawsuit after the board rejected his request to buy a three-bedroom, $5.7 million apartment adjacent to the one in which he currently lives. Further, Fletcher charged that rejecting the sale was the board’s way of retaliating against him for standing up for the rights of other minority and Jewish shareholders and applicants. Fletcher also contends that the board defamed him when he brought the alleged discriminatory conduct to light. The board countered that it had rejected Fletcher’s bid to buy the second apartment based on “the financial materials he provided,” adding that Fletcher’s allegations of discrimination and retaliation are “untrue and outrageous.”

That shiver of dread turned to icy foreboding in July, when the appellate division of the state supreme court brushed aside the board’s 237-page response to Fletcher’s allegations and ruled that the case could go to trial. In doing so, the appellate division overturned one of the bedrock decisions in New York co-op law, Pelton v. 77 Park Ave., from 2006, which largely protected board members from personal liability in discrimination cases.

“In short,” the appellate court wrote, “although individual participation in a breach of contract will not typically give rise to individual director liability, the participation of an individual director in a corporation’s tort [wrongful act] is sufficient to give rise to individual liability.”

No Sure Thing

Board members across the city who had been lulled into thinking they were immune to personal liability in discrimination lawsuits began waking up to the unpleasant realization that there’s no such thing as a sure thing. Since neither compensatory nor punitive damages in discrimination cases are covered by insurance companies in New York State, the appellate court ruling left co-op and condo board members exposed to devastating financial liability.

In a friend-of-the-court brief filed on behalf of the Dakota’s board, attorney Marc Luxemburg, president of the Council of New York Cooperatives and Condominiums (CNYC), wrote of the likely fallout if Fletcher wins in court: “The most serious impact of the decision will be felt not by board members of wealthy cooperatives and condominiums, but by members of middle- and lower-income co-ops, for whom the cost of litigating, let alone paying any adverse judgment, would result in financial ruin...” Such boards, he added, would be unlikely to risk fighting such a lawsuit, even if it lacked merit. The end result, Luxemburg concluded, is that people “will be deterred from serving on boards or carrying out their duties.”

The Dakota’s board has filed a motion to re-argue the evidence in the Appellate Division of State Supreme Court, according to Luxemburg. If the motion is denied, the case will be heard in Supreme Court, probably in late 2013. Bruce Barnes, current president of the Dakota’s board, has stated publicly that Fletcher’s attempt to buy the adjacent apartment was turned down not because of Fletcher’s race but because the purchase would have presented “an unacceptable financial risk” to the co-op. The board wrote that Fletcher’s investment firm’s “apparent lack of profitability” and other evidence “suggested that it may be seriously troubled and the source of future potential costs and liabilities.”

In July, Fletcher International, a hedge fund overseen by Fletcher Asset Management, declared bankruptcy. In September, a Manhattan bankruptcy judge agreed to put a federal trustee in charge of the bankrupt hedge fund, a decision that was seen as a victory for three Louisiana pension funds that had invested $100 million in Fletcher International and had been trying, unsuccessfully, for more than a year to withdraw their money. Fletcher Asset Management fought against the naming of a federal trustee.

Alphonse Fletcher’s financial condition will surely come under far closer scrutiny if the case goes to trial. But the ancillary issue – the liability of individual directors – is arguably of much greater concern to most people who sit on co-op and condo boards.

“Up to now,” Luxemburg said in an interview, “the law has been that if a board member did nothing more than carry out his duties and vote on the issues, he couldn’t be personally liable for whatever the co-op did that was wrong.”

There are numerous legal precedents, but two stand out. In the landmark Levandusky v. One Fifth Ave. ruling of 1990, the Business Judgment Rule was upheld. Here’s how attorney Richard Siegler explains the essence of that case: “So long as the board acts for the purposes of the corporation, within the scope of its authority, and in good faith, the courts will not substitute their judgment for the board’s.”

The second ruling was the aforementioned Pelton v. 77 Park Ave. Attorneys point out that the legal protections provided by these and other rulings, though strong, were never ironclad. Arbitrary, malicious, or discriminatory acts have never been protected. All board members must abide by three stringent sets of anti-discriminatory laws: the city and state human rights laws, and the fair housing act. Among many other proscriptions, these laws forbid boards from retaliating against someone who has opposed discriminatory practices. In addition to alleging retaliation, Fletcher’s suit also claims that the board has discriminated against other black shareholders, including singer Roberta Flack.

The board’s attorney, John Van Der Tuin, declined to comment, and he has advised the board members not to talk to the news media. Fletcher did not respond to requests for an interview.

“The point is, board service continues to carry liability,” Siegler said. “If there’s a wrongful act, that’s where you draw the line.”

As Luxemburg wrote in his friend-of-the-court brief: “The Pelton rule doesn’t shield directors who engage in intentional wrongdoing from the consequences of their actions, but is designed to protect innocent board members who do nothing more than carry out their responsibilities, including, particularly, participating in board meetings and voting.”

Biondi Redux

When the news of Fletcher’s lawsuit broke, a name popped into many minds: Nick Biondi.

In what still stands as one of the messiest – and costliest – discrimination cases in the city’s history, Biondi and his fellow board members at a 66-unit Upper East Side co-op called Beekman Hill House were sued for racial discrimination by an interracial couple who were turned down for a sublet in 1995. The suit was brought by lawyers Gregory and Shannon Broome – he’s black, she’s white – and it was based on the fact that the board had rejected the couple only after a face-to-face interview with Gregory Broome, during which a board member scribbled “black man” on a notepad. Biondi says he voted to reject the couple because he found Gregory Broome “arrogant” and possibly litigious. The judge in the case remarked that “arrogant” is a spruced-up contemporary synonym for “uppity,” an old epithet frequently used to denigrate black people. The board’s lawyers countered that “arrogant” can apply to any person, regardless of race, but the judge was not swayed.

A federal court ruled the Beekman Hill House board was guilty of racial discrimination, and it awarded the Broomes $640,000 – including $410,000 in punitive damages that came directly from the pockets of Biondi and his fellow board members. Biondi, in turn, sued the co-op to recoup the money he had to pay. Again he lost.

Biondi, who now works as an insurance broker on Long Island, has developed a website (punitivedamage.com) that leaves little doubt over the lingering effects of that long-ago discrimination suit. The website opens with this declaration: “As a volunteer on a committee of his NYC co-op, Nick Biondi was victimized by circumstances and a system that changed his life forever.”

Biondi says that he has paid $180,000 in punitive damages in the case and an additional $70,000 in legal fees. The total cost of the case came to $1.69 million – $804,000 in compensatory and punitive damages, plus $886,000 in legal fees.

“It knocked me out,” Biondi says. “I’ve been working all my life, and that was a lot of money.”

He believes he was a victim of reverse discrimination because white people are not among the “protected classes” in anti-discrimination laws. “We knew we did nothing wrong,” Biondi contends. “I didn’t like being pushed around because of my race. The takeaway for me is that a person who’s not in the protected classes is the one who’s going to get discriminated against.”

Lawyers familiar with the Biondi case and the current Dakota case are quick to point out that there are major differences between the two. For starters, in the latter case there is no smoking gun – no written notation by a Dakota board member that Fletcher is a “black man” – and his request to buy a second apartment was not weighed after the board realized he was black. The Dakota board has known for 20 years that Fletcher is black.

“In the Biondi case there was evidence of discrimination,” says Luxemburg. “Someone wrote that note that said ‘black man’ and there were board discussions about Gregory Broome’s race. In 20 years at the Dakota, Fletcher never pointed to any incident where anyone had done something that was racist. Fletcher’s argument is completely circumstantial.”

But that doesn’t mean the Dakota’s board is off the hook. In these matters, appearances can be every bit as important as facts. As veteran real estate attorney Stuart Saft, current chairman of the CNYC, said in 2001 about the Biondi case: “You have a mixed-race couple with excellent finances who are members of a prestigious law firm, one of whom is a member of a protected class. The board turns them down. How is it not discriminatory? It’s unfortunate for Mr. Biondi, but the way the board made its decision gave every impression it was racially motivated. And in cases like this, perception is just as bad as reality.”

Chilling Prospect

For board members, one of the most chilling prospects of discrimination lawsuits is the cold reality that hit Nick Biondi – paying damages out of their own pockets. One lawyer called punitive damages the “club” that litigants use in an attempt to get boards to settle out of court. There are ways to avoid this unsettling prospect.

“The clear lesson is that a board has to document its decisions, particularly in an area where there might be discrimination claims,” Luxemburg says. “Such decisions should be based on careful weighing of the facts – and that process should be documented. Even if you don’t release these documents at the outset of a legal proceeding, you need to have them in writing.”

Additionally, lawyers advise, once you’re involved in litigation, let your formal court papers do your talking for you.

“If a board member does something that’s not required – say he calls the New York Post to talk about a shareholder who has sued the board – that board member is not immune from liability,” Siegler says.

Adds Luxemburg: “Fletcher threw mud at [Dakota board president] Barnes in the media, and he responded. To defend yourself publicly, you should state your case in your court papers, then release the court papers.”

“It may very well be that the board had good solid reasons for denying Fletcher’s request,” says attorney Andrew Brucker, a partner at Schechter & Brucker who is not involved with the case. “However, since the issues of retaliation and discrimination have been brought up by Fletcher, there had better be some very strong evidence that these were not the reasons for the board’s decision. The Fletcher court reminded us that the Business Judgment Rule will ordinarily prohibit judicial inquiry into the actions and decisions of a board. However, the court also reminded us that there is a ‘potential for abuse through arbitrary and malicious decision-making.’ My firm has always preached that decisions of the board should be reasonable and consistent. Decisions based on favoritism, bad faith, retaliation, and personal agendas will only ripen into lawsuits."

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Biondi: Racist or Just Miffed?

Everyone loves a good horror story, and here’s one that’s enshrined in the Co-op Hall of Fame. Back in 1995, a co-op board on the East Side of Manhattan turned down a financially qualified sublet candidate after two interviews. The snubbed applicant, who was black, sued the co-op and each member of the board for racial discrimination. And he won. Big time. Although Nick Biondi, the president of the board at the time, insisted he was not a racist, he was found to be personally liable along with the co-op and another director for the $230,000 compensatory award and for $125,000 of the $410,000 in punitive damages. Biondi had to sell his apartment to cover $250,000 in fines and legal fees. He now lives in a house on Long Island. Asked if the experience left him bitter, Biondi says, “Of course I’m bitter.”

The following is an excerpt from Biondi’s unpublished autobiography:

“On Monday, June 5, Mr. Broome met with a subcommittee of the Board, Mr. Biondi and Michael Silverman, at approximately 6:30 P.M. It was at this meeting that Mr. Biondi and the other defendants first discovered that Mr. Broome is African American. Upon meeting Mr. Broome in person, Mr. Biondi’s tone became markedly less friendly than on the June 2 phone call.”

The above complaint language states, “Upon meeting Mr. Broome in person, Mr. Biondi’s tone became markedly less friendly than on the June 2 phone call.”

The complaint alleges that it was because we discovered “that Mr. Broome is African American.” If there was any change in my tone it was because I first discovered that Mrs. Broome would not be present at this interview. I was annoyed at the fact that I had tried to accommodate the owner and the renters within a short time frame and Mrs. Shannon Broome, who claimed in a New York Times interview, that, “The Broome’s search for a new apartment began in early 1995. They scanned the classifieds, visited some 60 apartments and finally, over the Memorial Day Weekend, found a two-bedroom apartment on the seventh floor of Beekman Hill House.” Shannon Broome had time within six months to visit 60 or so apartments and did not show up for the interview of the “dream apartment”? I thought to myself, today is June 5th. Tomorrow, June 6th, I have to go out to Long Island for business. How in the heck was I going to arrange another meeting for Tuesday evening, June 6th, with another board member to interview the missing wife, who was too busy to show up to be interviewed for her “dream apartment”?