A Tale of Two Sales

May a shareholder recover damages when the co-op rejects his first prospective purchaser and he then sells to a second purchaser for more money? The issue was based on a claim that the board treated him unfairly because two of the board members’ spouses were real estate brokers who wanted a commission, even though the brokers were not involved in either sale. That was the question before the court in Silverstein vs Westminister House Owners Inc.

Keith D. Silverstein was a shareholder in the co-op. In the event a shareholder wanted to assign the shares allocated to an apartment, the proprietary lease said that consent of the co-op was necessary. Prospective purchasers were required to submit a purchase application to the board, including detailed personal and financial information, financial statements, income tax returns, and social references. Moreover, the board had the right to interview prospective purchasers prior to rendering a decision as to whether it would approve an assignment of the stock and the proprietary lease.

Silverstein initially hired Warburg Realty Partnership to market the apartment on an exclusive basis from March 7, 2006, through June 7, 2006. Specifically, he hired the wives of two board members. Warburg was unable to produce a satisfactory offer for the apartment within the 90-day exclusive period and the plaintiff thereafter hired Halstead Property to market the apartment.

In November 2006, Silverstein entered into a contract to sell the apartment to Mark and Maria Alvarez for $735,000. The sale was subject to the unconditional consent of the board. The board rejected the application and the apartment was immediately placed back on the market.

Silverstein then entered into a contract to sell the apartment to John Immundo for $745,000, or, $10,000 more than the prior contract. Warburg was not the broker. The board received an application package on February 16, 2007, reviewed the application at its meeting on March 20, 2007, and entered into negotiations with Immundo concerning certain financial issues. An agreement was reached between Immundo and the board, he was approved on April 26, 2007, and a closing took place on May 22, 2007.

Upon these facts, Silverstein claimed that the co-op and two board members breached their fiduciary duty to him as a shareholder; breached the proprietary lease; and breached the implied covenant of good faith and fair dealing. The court explained that the elements of a claim for breach of fiduciary duty are (i) breach of a fiduciary duty owed to the plaintiff; (ii) the defendant’s knowing participation in the breach; and (iii) damages.

The court also explained that the elements of a breach of contract are (i) the existence of a binding contract; (ii) the plaintiff’s performance of the contract; (iii) the defendant’s material breach of the contract; and (iv) resulting damages. Finally, it explained that a breach of the implied covenant of good faith and fair dealing is considered a breach of the underlying contract.

The court stated that the plaintiff would have had to have demonstrated that he had sustained damages in order to prove his causes of action and held that, in the absence of allegations showing damages, mere charges of breach were insufficient. The plaintiff could not demonstrate that he suffered any damages. The court noted, instead, that he had actually made a profit.

The court also stated that there was no factual basis upon which to sustain the cause of action for breach of fiduciary duty. Silverstein claimed that the board members conspired to deny the first application and put conditions on the second application because they wanted to enhance the reputation of their real estate broker spouses. The plaintiff asserted that this was self-dealing and malicious and that the board members would have gained a personal benefit. He claimed the board members were not acting for a legitimate corporate purpose.

The court rejected this claim and stated that the Business Judgment Rule permits judicial inquiry into claims of fraud or self-dealing by board members only where the claims have a basis. Here, Silverstein’s charges that the board members acted improperly because they wanted their wives to gain the commissions of the sale was not supported by the evidence.

Silverstein appealed this decision. The appellate court affirmed it and explained that the proper standard for judicial review of decisions by co-op corporations is the Business Judgment Rule and that the rule places the burden on the party seeking review of a board decision to demonstrate a breach of fiduciary duty. The court explained that the plaintiff’s speculative allegations as to the basis for the rejection of one purchaser and the imposition of conditions on another, who ultimately purchased the apartment, were insufficient to sustain his claims. The appellate court also explained that the plaintiff’s claim that he needed discovery was unavailing because he merely speculated that discovery would provide the evidence necessary to prove his claims.

Comment: Although the plaintiff tried to claim that there was self-dealing by the board members, he had no evidence of that. The board members’ wives had lost their exclusive on the apartment months before the first prospective purchaser was brought to the board and the wives had no involvement in finding either prospective purchaser.

This is another case which demonstrates that, in order to prove breach of fiduciary duty, the shareholder must be able to plead acts which show that the board acted in bad faith, outside the scope of their authority or for something other than a legitimate corporate purpose. Merely framing an alternate cause of action based on the same facts as one for breach of contract will not successfully avoid application of the Business Judgment Rule. Speculation as to the intent or motives of board members is insufficient. Moreover, an unsupported claim that discovery will reveal an improper motive will not defeat a motion to dismiss.

Counsel in the Case
Full Disclosure: One of the authors of this piece represented the defendants in the lower court.
Attorneys: The plaintiff represented himself. The defendants were represented by Cantor, Epstein & Mazzola.