Ruling in Dakota Discrimination Case May Pose Liability Risks for Board Members

A recent court case, Fletcher v. The Dakota, Inc., is casting some doubt on that long-standing belief, established as the Business Judgment Rule in Levandusky v. One Fifth Avenue Corporation. The Levandusky court found that the Business Judgment Rule was the proper standard of judicial review and that the court would not review actions by corporate directors if taken in good faith, in the exercise of honest judgment, and in the lawful furtherance of corporate purposes.

The Fletcher case potentially shakes that up. Alphonse “Buddy” Fletcher Jr. was a resident of the Dakota Apartments, a co-op at 1 West 72nd Street in Manhattan. Fletcher, an African-American, alleged that the co-op and two of its directors had discriminated against him because of his race when the board refused to approve his purchase of an apartment adjacent to the one he already owned, for the purpose of combining the two. Fletcher claimed that the co-op and two individual board members retaliated against him because he sought to protect the rights of minority and Jewish shareholders and applicants.  He also claimed he was defamed by the defendants.

The state appellate court handed down a decision in early July that generally ruled against the co-op (some claims were dismissed). According to attorney Steve Wagner, a partner in Wagner Davis, the court narrowed the protections a board could invoke in a lawsuit against the board and individual members. “In the past,” Wagner said, for an individual board member to have been held personally liable, they would had to have committed the [action that resulted in the lawsuit.]”

Now, Wagner noted, just being on the board could make you personally liable for, say, discriminatory actions taken by the full board. You, in effect, would become an accessory. “The ruling could make it difficult to get people to serve on the board,” Wagner said.

Richard Siegler, a partner in Stroock & Stroock & Lavan and co-author of a “Case Notes” on the Fletcher case in the September 2012 Habitat, was not quite as emphatic as Wagner: “What they said was that if a director commits a tort – such as discrimination or defamation – then they can be sued personally. Personal liability then leads to punitive damages. I would say directors should feel a little less comfortable, but I don’t think it’s enough to make people decide that they can’t serve on boards.”

Siegler added: “I don’t think it’s a serious problem, so long as you do your job [correctly]. You can’t discriminate. That’s existing law. You can always become personally liable – but only if you’re doing egregious acts. If you’re going to reject a purchaser, I tell my clients that you should always consult with counsel. The rejections are few and far between, but they have the potential for litigation. Consulting counsel adds an extra layer of protection.”