A Way for Co-op and Condo Boards to Avoid Costly Litigation

Lawsuits from cooperative shareholders and condominium unit-owners opposing their boards’ conduct have become commonplace. When confronted with such challenges to their authority, boards may, of course, defend their position on the merits, or they may seek legal vindication under the Business Judgment Rule. However, pitched legal battles of this nature tend to plunge a residential community into civil war and impede a board’s overall ability to manage building affairs.

Fortunately, boards in New York have a little-known but highly effective alternative to costly and protracted litigation. Most lawsuits challenging the propriety of decisions by co-op and condo boards are subject to a four-month statute of limitations (under Section 217 of the Civil Practice Law and Rules, or CPLR). As a practical matter, by the time an aggrieved party decides to sue, procures counsel, and prepares and files the summons and complaint, the four-month statute of limitations may well have elapsed. Thus, only the swiftest acting plaintiffs can sidestep a solid statute-of-limitations defense. By filing a procedural motion to dismiss the case rather than defending on the merits or asserting a Business Judgment Rule defense, a board may avert a costly public conflagration.

The vast majority of complaints by aggrieved shareholders and unit-owners challenging the propriety of board decisions are styled as actions for declaratory judgment. In our experience, nearly all defense counsel accept the characterization at face value and assume that the six-year statute of limitations for this relief as spelled out in Section 213 of CPLR applies. However, in a trio of decisions, the New York Court of Appeals has decreed that, regardless of how styled, if an action could lawfully be commenced as an Article 78 Proceeding – a challenge to a board’s actions – then the four-month statute of limitations applies.

The seminal case on this subject is Solnick v. Whalen from 1980. That case entailed an action for declaratory relief by a private nursing-home operator challenging a determination by the State Commissioner of Health adjusting Medicaid reimbursement rates. The challenge was brought on the grounds that the method for determining rate reductions was a violation of due process. The plaintiffs commenced the declaratory action more than four months but less than six years after applying for the reduced reimbursement. The Health Commissioner moved to dismiss on the ground that the action was time-barred because the four-month statute of limitations for Article 78 Proceedings as set forth in CPLR Section 217 had elapsed. The nursing-home operator maintained that the six-year statute of limitations spelled out in CPLR Section 213 applied to her declaratory judgment action.

Since the plaintiff’s suit could lawfully have been initiated as an Article 78 Proceeding to challenge the validity of the Medicaid reimbursement rates, the 120-day statute of limitations applicable to declaratory judgment actions was applied. Accordingly, the nursing home operator’s action was dismissed as untimely, and a legal conflagration was avoided.

Bruce Cholst is a shareholder and Devin W. Ness is an attorney at the law firm Anderson Kill’s New York office. A prior version of this article ran in the June 22 issue of The New York Law Journal, and it is reprinted with permission.