Allegations of Misconduct

Illegal defamatory comments by a co-op board member about a prospective apartment purchaser are not a passport for admission to the co-op for some breach of fiduciary duty. Based on Simon v. 160 West End Avenue Corp., at best the allegedly defamed purchaser may have a cause of action against the board member for defamation.

Defendants 160 West End Avenue Owners Corporation, Gerald Ross, an officer of the co-op and Insignia Residential Group, its managing agent, submitted a motion to dismiss a complaint. Defendants argued that all of plaintiffs’ causes of action were, in essence, claims for defamation, and time-barred, insufficiently specific, and based on actions protected by the business judgment rule. In opposition, plaintiffs argued that the false statements upon which they based their defamatory claims occurred within one year prior to the commencement of the action, were sufficiently specific, and were not privileged.

Jean C. White owned shares and a proprietary lease of an apartment located at 160 West End Avenue, in Manhattan. In June 1999, White applied for an inter vivos transfer of the apartment to plaintiffs, Simon and Porteous, as joint tenants. Ross, a director of West End, advised White that her transfer was legally and morally improper. Based on information supplied by Insignia, the complaint claimed that Ross made false accusations “to the building staff, to the Board of Directors and to others including, but not limited to, the Disciplinary Committee of the Supreme Court, Appellate Division” that “the Plaintiffs were acting illegally and unethically in their dealings with” White and “were attempting to improperly influence the elderly to turn over property to them.”

In the letter to the Disciplinary Committee, dated September 29, 1999, Ross and Insignia claimed that Simon, an attorney, improperly represented clients, including White, preyed on the elderly, and attempted to obtain advantages from West End by false representations. Ross also complained that Porteous, an investigator, conspired with Simon in preying on the elderly. Based on Ross’s accusations, West End refused to consider White’s application. In March 2000, the Disciplinary Committee dismissed Ross’s complaint.

In June 2000, White died, and her will naming Simon as executrix bequeathed the apartment to Simon and Porteous. Simon and Porteous subsequently applied for a transfer of the apartment pursuant to the will, but their application was rejected, based on the false information supplied by Ross. Porteous thereafter applied for a transfer to himself, but withdrew his application four months later.

In September 2001, the estate, through Simon, applied for a transfer to herself individually but was also denied as a result of an alleged false accusation made by defendants that she was “not a good neighbor,” as well as the allegations in the complaint letter. “Upon information and belief, [West End] did not act in good faith or within the business judgment rule but used its secret proceedings to defame the innocent...” Simon was also denied access to the list of shareholders necessary to appeal the board’s decision.

On July 21, 2002, Ross told a tenant cooperator that he had a “lot of information about” Simon, and that Simon had acted “improperly” in that “she was the lawyer for the lady who left the apartment and she wound up getting the apartment.” It was also alleged in the complaint that Ross also told the tenant that Simon had “acted improperly and unethically as a lawyer.” In September 2002, Ross allegedly told another tenant that he had a “lot of information” about Simon, that she was “manipulative” and that there were “bad reports” about her from her present building.

Based on the complaint, plaintiffs sought against West End, Ross, or Insignia separately or collectively (1) money damages arising from West End’s and Ross’s breach of fiduciary duty, resulting when West End used confidential information to falsely attack a member and a prospective transferee and interfered with an agreement between the shareholder and a proposed transferee; (2) (as a result of the false statements by West End resulting in denials of plaintiffs’ applications to take title), an order directing West End to transfer shares under the terms of the will; (3) an injunction on behalf of the estate requiring West End to provide the shareholder list in order for the estate to appeal the board’s denials; and other relief including damages.

The court said that the plaintiffs’ first cause of action for breach of fiduciary duty against West End and Ross arose from West End’s alleged improper reliance on false statements and its failure to act in 1999 on White’s application; West End’s alleged improper reliance and denial of Simon’s and Porteous’s transfer applications some time prior to September 2001; West End’s failure to act on Porteous’s subsequent transfer application; and West End’s improper reliance upon and making of defamatory statements to deny the estate’s transfer application in September 2001. Plaintiffs’ breach of fiduciary duty claim against Ross was based on his alleged false accusations.

The court said that cooperative corporations and their boards of directors owe a fiduciary duty to their shareholder-tenants and have a duty to act in an appropriate and reasonable manner. It was undisputed that Simon, in her individual capacity, and Porteous were not shareholders of the subject apartment in 1999 when White applied for the transfer, or in the period prior to September 2001. Thus, West End and Ross did not owe a fiduciary duty to them during this time.

Nor, said the court, could this cause of action be maintained against West End for breach of its fiduciary duty to White in 1999, when it relied upon the alleged false statements and failed to act on White’s transfer application or in 2001, when it relied on alleged false statements to deny the estate’s transfer application. In evaluating a motion to dismiss, the court must liberally construe the complaint in plaintiff’s favor and assume that the allegations of the complaint were true.

Assuming as true plaintiffs’ claims that West End relied on false statements and delayed acting on White’s application in 1999 and denied the estate’s application in September 2001, such claims failed to make out a claim of breach of fiduciary duty. Plaintiffs argued that “the evidence will show that the board singled out White and the Plaintiffs because of the way they sought to transfer the property which singled out Plaintiffs because Barbara A. Simon was a lawyer and a friend of the shareholder.”

Although pleading unequal treatment of shareholders is sufficient to allege a breach of fiduciary duty, the court said that the allegation that West End subjected White or her estate to disparate or unequal treatment because the prospective transferee was a lawyer and friend was insufficient. There were no allegations that this type of treatment by the board toward White or to her estate differed from the treatment other similarly situated shareholders received. In the court’s view, the complaint was devoid of any allegations describing what the uniform treatment of shareholders was, or that West End’s acts constituted a departure from any such uniform treatment.

The court noted that cooperative boards have the absolute right for any reason or no reason to withhold approval of applicants, or to require reasonable financial documentation, provided the boards did not act in bad faith or engage in illegal discriminatory practices. The proprietary lease regarding the subject apartment permitted West End to reject White’s transfer application in 1999 or in 2001 for any reason.

The proprietary lease provided in Section 16 (c): “There shall be no limitation, except as above specifically provided, on the right of Directors or lessees to grant or withhold consent, for any reason not proscribed by law or for no reason, to an assignment.”

The allegations in the complaint were insufficient to rise to the level of bad faith, in that the facts, as pleaded, did not denote misconduct amounting to bad faith. Further, there were no allegations of illegal discriminatory practices, other than the alleged disparate treatment discussed above.

Also according to the court, plaintiffs’ breach of fiduciary duty claim against West End for its alleged defamatory statements made in connection with the estate’s transfer application in September 2001 sounded like defamation. Since these alleged false accusations occurred outside the one-year statute of limitations, they were time barred.

Additionally, plaintiffs’ claims against Ross for breach of fiduciary duty to White for his alleged false statements to the board and to White in 1999, and to the board in 2000 and 2001 were not actionable said the court. Individual directors cannot be held liable for breach of fiduciary duty absent an allegation of a separate tortious act. Here, Ross’s advice to White that her 1999 application was legally and morally improper, and his “accusations,” including those in the 1999 complaint letter to the board also sounded like defamation. The alleged statements by Ross in 2000 through September 2001 to the board, including statements that Simon was “not a good neighbor” also sounded like defamation. Therefore, the court concluded that, notwithstanding the label applied by plaintiffs to their first cause of action, the claims against Ross, in essence, were ones for defamation. Since the alleged false accusations occurred outside the one-year statute of limitations, they were time barred.

In light of this determination, the court did not reach the merits of the business judgment rule or common interest privilege claims.

Plaintiffs’ second cause of action against West End for an order directing the transfer of shares as requested by the will was also dismissed. The crux of plaintiffs’ second cause of action was that West End improperly relied on false information supplied by defendants Ross and Insignia to deny the conveyance of the apartment inter vivos or through the will and to “cover” the board’s improprieties. The court held that this cause of action essentially mirrored the first cause of action and was dismissed for the reasons set forth above.

According to the Business Corporation Law, Section 607, a “list of shareholders ... shall be produced at any meeting of shareholders upon the request thereat or prior thereto of any shareholder.” The plaintiffs failed to allege that the request for the shareholder list was made during a shareholder meeting, or requested prior thereto. Plaintiffs’ mere allegation that they were denied access to the list was fatally vague. Therefore, a cause of action for an injunction directing West End to produce the shareholder list was dismissed by the court.

Consequently, the defendants’ motion to dismiss the complaint in its entirety was granted by the court.

Comment: Here, the plaintiff was without a remedy. Not only was the board’s action within its discretion, but also the statute of limitations for defamation had run. In addition, the purchasers failed to demonstrate that under applicable law they were members of a protected class which would shift to the co-op the burden of proof to justify the board’s rejection.