Beware of Discrimination

The famous “BIONDI CASE” really refers to two separate legal cases, one in the federal courts, Broome v. Biondi et al., and one in New York State courts, Biondi vs Beekman Hill House Apartment Corporation, which deal with two major co-op issues: housing discrimination and personal responsibility of directors for the consequences of their actions.

In 1995, the board of directors of Beekman Hill House, a co-op at 425 East 51st Street, considered a sublet application from a prospective subtenant of one of its shareholders. There are reports that there had been difficulties between the board and the shareholder seeking permission to sublet. However, despite those difficulties, the president of the co-op, Nicholas Biondi, and a fellow board member, Michael Silverman, had an initial meeting with the husband of the couple seeking to sublet. At that meeting, the two directors learned that the husband was black. Although the applicants had initially been advised that no full board meeting would be needed, after this meeting they were advised that an interview with the full board would be required. During the board discussion on whether or not to consent to the sublet, one board member warned that if board members were uneasy because the husband was black, the board would be sued. The board eventually withheld its consent to the sublease, with some members apparently stating that the prospective tenants were “aggressive,” “arrogant,” and possibly litigious. (At this meeting, one director wrote the words “black man” in notes concerning the application.)

On February 2, 1996, the rejected applicants sued the co-op and each member of the board of directors in federal court. Their claims were based on racial discrimination and civil rights violations under the Federal Fair Housing Act and the New York State Human Rights Law, both of which prohibit racial discrimination. After a seven-day jury trial, the jury found that the sublet application was denied because of the race of the husband, and that the board members had acted in bad faith and with a purpose that was not in the best interests of the co-op. The couple was awarded $230,000 in compensatory damages and $410,000 in punitive damages. The shareholder of the apartment was awarded $57,000 in punitive damages and $25,310 in compensatory damages because the board members had breached their fiduciary obligations to that shareholder. The president was found to be personally liable, “jointly and severally” with the co-op and another director, for the compensatory award of $230,000 and individually liable for $125,000 of the punitive damages. Only one other director was found to be personally liable for any portion of the damages to the applicants. Attorneys’ fees of some $886,000 were awarded to the applicants and the subletting shareholder.

After the verdict, the co-op, the plaintiffs, and individual director defendants entered into a settlement agreement that allocated the various parts of the judgments among the defendants. The liability of the individual directors was limited to the punitive damages levied against them.

Biondi then sued the co-op in state court. He claimed that because the co-op’s bylaws provided that “to the extent allowed by law, the corporation shall indemnify any person made a party to an action…by reason of the fact he…is or was a director or officer of the corporation…” the corporation should reimburse him for the punitive damages he was obligated to pay. This was a standard co-op bylaw provision. After two conflicting lower court decisions, New York’s highest court, the court of appeals, held, on April 11, 2000, that the public policy of the state requires that indemnification may only be made to a director if the judgment establishes that his acts were in good faith for a purpose which he reasonably believed to be in the best interests of the corporation. The court found that not only were Biondi’s actions in bad faith, but his “willful racial discrimination cannot be considered an act in the corporation’s best interest.” Biondi could not be reimbursed by the co-op for the judgment against him.

The Biondi cases are significant because they forced many co-op boards to learn the potential liabilities inherent in the admission and sublet processes, the extent of the “protected categories” under the various discrimination laws, and the exposure to personal financial losses facing individual board members for violation of the law.

There are three sets of laws that define “unlawful discrimination” applicable to co-op admission and sublet procedures. The New York State Human Rights Law prohibits discrimination because of race, age, creed, national origin, or sex of the applicant. The New York City Human Rights Law prohibits discrimination because of actual or perceived race, creed, color, national origin, gender, age, disability, sexual orientation, marital status, alienage, citizenship, presence of children, or type of job. Finally, the Federal Fair Housing Act prohibits refusal because of race, color, religion, national origin, handicap, or familial status. Any person who can establish membership in a “protected class” and whose application for consent to a sublet or purchase is denied may allege that the rejection was illegally based on that status.

Before Biondi, many co-op board members believed that an applicant could be rejected for any reason, without a requirement that a reason for rejection ever be provided. This is not the case. While New York’s highest court has recognized that “there is no reason why the owners of the cooperative apartment house could not decide for themselves with whom they want to share their elevators, their common halls and facilities…and their homes,” it is now clear that if the rejected applicant falls in any of the “protected classes” of any of the anti-discrimination statutes, the burden in any litigation will be on the co-op to establish bona fide reasons for the rejection. In the words of the Biondi court, the co-op board members “had the burden of rebutting any inference of housing discrimination by proffering a legitimate, nondiscriminatory reason for their actions.”

Boards now seek to ensure that a rejection not be deemed to have been based on the status of the applicant as a member of a protected class by doing all that is possible to keep from the board any knowledge of such status. Boards must place a barrier between themselves and applicants during the initial review of an application to establish that the board cannot be aware of, or in any way consider, any facts that may place an applicant in a “protected class.” The review of the applicants’ financial statements must be made before any meeting is scheduled. Once it is known that an application for a sublet or sale is being processed, no board member should have any personal dealings with any of the parties involved. The building attorney or managing agent should be the “point person” in the process. If finances do not meet the building’s criteria, no personal meeting should be scheduled. The board should, throughout the review, treat each of the discrimination topics as prohibited areas of which they should have no information whatsoever. Application forms should be reviewed by the building’s attorney to remove any questions relating to “protected” areas (surprisingly, that includes age, marital status, citizenship, and number of children, among the other categories described above).

In a telling example, the Biondi record shows that one board member stated that an interview was essential to “eyeball the actual person.” He indicated that he would vote to reject if the applicant had “severe disabilities, and, under the American Disabilities Acts [sic] you might have to…spend a lot of money [for accommodations].” That is the very definition of the discrimination prohibited by law, and the expression of that attitude may very well have contributed to the finding that the Biondi board’s reasons for rejection were found to be “pretextual” and actually based on racial considerations.

Because of the tremendous potential liabilities to both the co-op corporation and individual directors, no board should ever consider rejecting an applicant without consulting with its attorney and reviewing the reasons for the rejection and the record supporting that decision. No board member should ever discuss or review any aspect of the rejection with anyone. A letter of rejection should be sent by the building’s attorney.

The exposure of directors to personal and unreimbursable monetary damages in discrimination cases must be considered by each director when weighing a decision as to how to vote with respect to an applicant in a protected class. Any objections to a rejection should be part of the record of the matter maintained by the building’s attorney, which should also include evidence of the reasons for the rejection.

Unfortunately, many attorneys feel that the Biondi logic may someday be extended to a case involving routine laws such as those mandating carbon monoxide and smoke detectors, window guards, pointing, and lead reduction, which could eventually result in civil liability with punitive damages – and unexpected personal liability to individual directors.