Ash to Ashes

We last visited Allan Ash and The 155 Condominium in January 2008 when the appellate court ruled that Ash had the right to repeatedly send letters to the condominium and the condominium’s unit-owners that contained disparaging remarks. The speech was protected by the state and federal constitutions. We now address the latest issues in the continuing case of Ash v. Board of Managers, The 155 Condominium. Specifically, may the board of managers and its individual officers be liable for breach of fiduciary duty when the board (i) authorized the managing agent to remove monies from the operating account to be placed in a CD; (ii) learned, belatedly, that the money had been used by the managing agent for another purpose and not for the benefit of the condominium; (iii) upon learning that the monies had not been properly deposited, recovered the monies from the managing agent with interest; and (iv) did not fire its managing agent immediately. The answer was “no” based upon application of the Business Judgment Rule.

In the action, Ash asserted derivative claims on behalf of all unit-owners for breach of fiduciary duty and an accounting. The board of managers of The 155 Condominium and its managers, Gary Dong and Arnold Gitomer, moved to dismiss the complaint or, alternatively, for an order disqualifying Ash as the representative of the unit-owners in this action. Defendants New Bedford Management Corp. and Michael Wechsler, its owner, and principal made similar motions. Ash moved for an order that the judge recuse himself from presiding over this matter and also asked for a default judgment against the board defendants.

In first discussing Ash’s motion to recuse the judge, the judge explained the following background. Ash was 93 years old and had, from the onset of the litigation, engaged in a campaign of letter-writing that the appellate court characterized as being “numerous, unnecessary and vexatious ramblings.”

In an effort to restore civility, the court, in October 2006, entered an order prohibiting Ash from contacting the litigants directly and to cease what the court regarded as a form of harassment. The appellate court vacated that order, holding that the defendants had not demonstrated that Ash’s actions were a “clear and present threat” to the administration of justice.

Ash then expanded his letter-writing campaign to include the court and its staff. This was an ill-disguised effort to have the court recuse itself and to have a judge more to his liking assigned. In December of 2006, in an effort to assuage Ash’s fears, the court directed a special referee to oversee discovery. Even so, the court noted that Ash’s verbal attacks on the lawyers, litigants, staff, and the court continued unabated.

On November 16, 2007, Ash made a formal motion to compel the court’s recusal based on what he perceived as the court’s bias against him. During the conference, the court addressed the letters and requests for recusal by Ash, and set forth its thoughts and the legal standards that would form the basis of the court’s decision. The court denied plaintiff’s request for recusal, and indicated that it would remain, and indeed was compelled to remain on this case for the duration of the proceedings.

After hearing oral argument from both sides, Ash claimed that the court allegedly “encouraged” the defendants to make another motion for summary judgment dismissing the complaint, by advising them to “try again.” The plaintiff argued that the court’s suggestion, together with Ash’s numerous strong accusations and writings against the court and some of this court’s prior decisions, gave rise to a level of bias and prejudice sufficient to compel the court’s recusal.

The court discussed the applicable statute as to when a judge must recuse himself from a case: “a judge shall not sit as such in, or take any part in the decision of an action, claim, matter, motion or proceeding to which he is a party, or in which he has been attorney or counsel, or in which he is interested, or if he is related by consanguinity or affinity to any party to the controversy within the sixth degree.” There was no allegation here that recusal was required under the statute. As to whether the judge could remain unbiased, that was a matter of discretion within his own conscience.

The court explained that its suggestion to the defendants that they might want to make another motion for summary judgment was not intended to predetermine any eventual decision. The suggestion was made as a way to search the now fully available record, and apply the applicable law. Ash had a full and complete opportunity to argue his position. The court also noted that Ash’s behavior, as disagreeable as it might have seemed, played no role in assessing the bona fides of the complaint. Finally, on this point, the court noted that “judge shopping” was unacceptable.

The judge determined that it could hear the motions and continue to preside over the case.

The court then discussed the relevant background of the case. The derivative action was originally started in 2003 by the late Ruth Mishkin. Mishkin was the owner of unit 17B of the condominium, located at 155 East 38th Street in Manhattan. Defendants Dong and Gitomer were the president and treasurer of the board of managers. New Bedford was the condominium’s managing agent and was responsible for collecting condominium fees from the unit-owners and paying condominium bills. The board was elected by the unit-owners and was responsible for managing the financial affairs of the condominium. In 2005, following Mishkin’s death, the court granted the motion to substitute Allan Ash and his son, Joel Ash, as co-executors for Mishkin’s estate, as plaintiff.

Based on prior motion practice, the remaining causes of action were for breach of fiduciary duty and an order for an accounting as against New Bedford. In addition, the court denied a prior motion by the board defendants for summary judgment dismissing the complaint, finding that – at that time – “it could not be presently determined that the moving defendants engaged in the type of actions that would shield them from judicial inquiry under the Business Judgment Rule.” The court noted that, since that motion, discovery was completed so that the board defendants and New Bedford made new motions for summary judgment.

The current complaint alleged that, on June 26, 2000, New Bedford withdrew the amount of $150,000 from the condominium’s operating account without authorization; that it electronically transferred the $150,000 to another account that only it controlled; and that this money was used by New Bedford for business and/or personal matters unrelated to the condominium.

The misappropriation of the funds was discovered in the spring of 2001 when the condominium’s accountants at the time prepared the 2000 year-end financial reports. They discovered that, as of December 31, 2000, these funds had not been repaid. The misappropriation was not known to the board until Dong, then president, received a letter, dated June 5, 2001, from the accountant. The accountant approached Wechsler, a principal of New Bedford, before it advised the board of the withdrawal of the funds. Wechsler refused to identify the recipient of the $150,000, and allegedly demanded that the accountant hide the withdrawal of $150,000 so that it would not appear on the condominium’s financial statements as having been withdrawn by Wechsler. The accountant refused. Ash claimed that when the board defendants were advised of the misappropriation, they instructed the accountant to enter it as an “erroneous withdrawal” on the 1999/2000 financial statement for the condominium, which was done. The following appeared there:

“(3) DUE FROM MANAGING AGENT - On June 26, 2000, $150,000 was erroneously withdrawn from the [condominium’s] operating account by New Bedford Management. Interest is being accrued on these funds, computed using the prevailing rate of 5.25 percent.”

Ash maintained that the withdrawal by New Bedford and Wechsler was improperly disclosed as an “erroneous withdrawal.” He further claimed that there was no document evidencing the $150,000 withdrawal by New Bedford and Wechsler, nor any evidence of an obligation on their part to repay the money, prior to the accountant’s discovery of the $150,000 withdrawal during the year 2000.

The condominium unit-owners were unaware of the transfer of this money until April 2002, when the condominium’s 1999/2000 financial statement was made available to them. According to the 2000/2001 financial statement, the misappropriated funds were returned by New Bedford to the condominium in payments of $50,000 in January 2001 and $100,000, together with interest of $4,140, in May or June 2001. Ash contended that the interest repayment was insufficient, since the interest was only paid on the interest due for the year 2000, even though the full amount of the withdrawn money was not repaid until June 1, 2001. Ash further claimed that his repeated attempts to investigate the circumstances surrounding the withdrawal were futile.

The first cause of action of the amended complaint alleged breach of fiduciary duty against all the defendants. Ash claimed that Dong and Gitomer breached their fiduciary duty to the condominium and to the unit- owners by failing to honestly manage the financial affairs of the condominium’s finances; failing to discover and/or aiding Wechsler and New Bedford in concealing the unauthorized withdrawal; failing to collect sufficient interest from co-defendants when the misappropriated funds were returned; and refusing to provide Ash with proper disclosure with respect to the unauthorized withdrawal of the $150,000.

Ash alleged that the board breached its fiduciary duty to the condominium and the unit-owners by engaging in the breaches described above and by failing to responsibly supervise the condominium’s agents, including Dong, Gitomer, Wechsler, and New Bedford. The claim of breach of fiduciary duty against New Bedford and Wechsler was based upon their failure to honestly manage the condominium’s funds and bank accounts, and their engaging in the inappropriate withdrawal of the $150,000 from the condominium’s operating account.

Before addressing the motions for summary judgment, the court first addressed Ash’s cross motion to strike defendants’ answers on the theory that defendants destroyed evidence that “ought to have been disclosed...the court may make such orders with regard to the failure or refusal as are just.” In his 60-page affidavit, Ash claimed that various discovery requested had not been produced, including, but not limited to, cancelled checks, the general ledger, and the general journal for 2000, 2001, and 2002, and various invoices.

Ash contended that defendants intentionally destroyed the records and/or failed to preserve and control material evidence in order to conceal evidence of inappropriate and criminal action by Wechsler, the board defendants, and the current president of the board, who claimed that there were numerous “missing documents.”

The court discussed the concept of “spoliation,” which is the negligent or intentional destruction of crucial or key evidence. The defendants contended that they produced all documents in their possession that were demanded by Ash. The requests for the documents Ash claimed were not produced did not appear to be in formal requests, but in personal requests made by letter. Since the requests were not made in accordance with the applicable statute, Ash’s motion to dismiss the answers based on spoliation of evidence was denied.

The court then addressed the board defendants’ motion for summary judgment. The board defendants argued that the action should be dismissed as against them because there was no evidence that they breached their fiduciary duty of loyalty or disclosure. They maintained that they did not participate in the wrongful transfer of the $150,000, or ignore or overlook it, or fail to properly disclose it. They further pointed out that all of the misappropriated funds, plus interest equivalent to 3.42 percent were repaid by Wechsler and New Bedford prior to the start of the action and that the condominium has suffered no loss.

In support of their argument, the board defendants noted that in 2005 Wechsler and New Bedford agreed to pay additional interest to the condominium in connection with the discontinuance of this action. They further asserted that the board properly exercised its business judgment by deciding not to litigate and instead opted for settlement of the claims against New Bedford and Wechsler in exchange for a $10,000 payment to the condominium.

The board defendants moved for summary judgment dismissing the complaint on the basis that their decisions were well within the business judgment rule. In the leading case on that subject, New York’s highest court declared that as long as the directors of a co-op or condo have acted in good faith, in the exercise of honest judgment and without breaching their fiduciary obligation to the common and general interests of the entity, judicial review to examine their determinations is unavailable.

The court explained that pursuant to the business judgment rule, a unit owner seeking review of a governing board’s actions has the burden of demonstrating a breach of fiduciary duty, through evidence of unlawful discrimination, self dealing or other misconduct by board members, i.e., “that the board acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose or (3) in bad faith.” Even if a board made an unwise, unreasonable, or inexpedient decision, it would not invite judicial review of the board’s decision.

The court found that the board defendants made a showing that they acted in good faith and within the scope of their authority. In opposition to the motion, Ash failed to submit any evidence to support his assertion that the board defendants engaged in bad faith, that their actions had no legitimate relationship to the condominium, that they acted outside the scope of their authority, or that they were guilty of disloyalty and malfeasance with respect to executing their duties.

Gitomer, the former treasurer of the condominium, testified at a deposition that he specifically authorized Wechsler to take $150,000 out of the condominium’s operating account and to put it into an interest bearing reserve account certificate of deposition (CD) to gain more interest. Dong, the former president of the condominium, testified that the board instructed Gitomer, at a board meeting, to transfer the $150,000 “from a non-interest bearing checking account to some higher yielding account.”

The board defendants asserted that they properly relied on the monthly financial reporting system set up by New Bedford and the accountant, which required New Bedford to send monthly reports to the board and to the accountant. The report included copies of monthly bank statements from the condominium’s operating account, a computer printout of all expenditures and receipts, and a reconciliation of the bank statement, expenditures, and income. However, it did not include copies of the bank statements for the condominium’s reserve funds, which were held in CDs at the time. Thus, although the June 2000 report reflected the transfer of $150,000 out of the condominium’s operating account, it did not show that the $150,000 did not get deposited into the reserve account CD, nor did it reveal where the transfer of money went.

The board defendants conceded that this was a “gap” or “hole” in the system that should have been corrected by the accountants, who were discharged as of June 2001 as a result of their failures concerning this matter. The decision to discharge the accountants was entirely within the board’s purview, which is to manage the financial affairs of the condominium.

Similarly, the court found that the board’s reliance on the reporting system prepared by the accountant was reasonable. Ash did not show that the defendants’ actions in relying on the system or in discharging the accountants had no legitimate relationship to the welfare of the condominium or were beyond the scope of their authority.

Further, the court noted that although it appreciated Ash’s frustration with the board defendants’ decision not to immediately discharge New Bedford and hire a new management company, the court could not substitute its own judgment for that of the board under the Business Judgment Rule.

Dong explained that the decision was based on the board’s concern that an immediate change of management, without a competent replacement, would severely affect the daily operations of the condominium. Dong also explained that the board decided to implement improved financial reporting and that it hired a new accountant. It decided to begin a search for a new management company when a new board was in place in January 2003.

The court also discussed the measure of damages for breach of fiduciary duty. Damages were the amount of the loss sustained. Not only was the record devoid of proof of any appreciable monetary damage arising out of the misappropriation of the $150,000, Ash failed to demonstrate wrongful conduct as would have warranted the imposition of liability, based upon breach of fiduciary duty, upon the board or the individual board members. As such, the board members’ motion for summary judgment dismissing the complaint as against them was granted.

New Bedford’s motion to dismiss the action against it was denied since it was determined that it stood in a different position than the board defendants.

The court refused to disqualify Ash as a representative of the unit-owners in the derivative action, finding that Ash could adequately represent the interests of the condominium, notwithstanding allegations by the defendants that he had a “personal vendetta” against them.

Comments: This case reminds us that courts are bound to defer to board decisions taken in good faith, in the best interests of the co-op or condominium and within the scope of their authority. This is true even if it is ultimately determined that the board’s act are unwise or inexpedient. In addition, boards have the right to rely on their experts and, if the expert makes a mistake (such as, here, allowing a reporting system to be implemented which did not give the board all of the information it required), the board will not be liable for following the expert’s advice.

The case also discusses what happens when a party to a litigation asks that a judge recuse himself from the case. As this court explains, orally attacking the court and inundating it with a letter-writing campaign will not force a judge to recuse himself, which would allow the litigant to “shop” for another judge. Assuming there is no statutory obligation, a judge will not remove himself from a case unless the judge believes, as a matter of his own personal discretion, that he cannot remain impartial.