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THE JUDGE SHOULD NOT HAVE DENIED THE MOTION TO DISMISS THE ARTICLE 78 PETITION/COMPLAINT AND THEN CONSIDERED THE MERITS OF THE PETITION/COMPLAINT WITHOUT ALLOWING RESPONDENT TO INTERPOSE AN ANSWER; THE JUDGE SHOULD NOT HAVE DISMISSED THE PETITION/COMPLAINT ON GROUNDS NOT ADDRESSED BY THE UNDERLYING ADMINSTRATIVE RULING (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the judge could not deny the motion to dismiss the Article 78 petition/complaint and then consider the merits and dismiss the petition/complaint before allowing the respondent to interpose an answer. In addition, the court did not have the authority to consider issues not addressed by the underlying administrative ruling. The action was brought by an owner of shares in a cooperative (petitioner) against the co-op board (respondent) which denied petitioner’s application to convert an office to a residential unit:

… Supreme Court erred by considering the merits of the petition/complaint and, in effect, denying the petition/complaint and dismissing the proceeding/action, after it denied the co-op’s motion, inter alia, pursuant to CPLR 3211(a) to dismiss the petition/complaint. In a CPLR article 78 proceeding, if a motion to dismiss the petition is denied, “the court shall permit the respondent to answer” … . Here, the court should not have decided the merits of the petition seeking relief under CPLR article 78, as the co-op had not yet filed an answer … , and it cannot be said, on this record, “that the facts are so fully presented in the parties’ papers that it is clear that no dispute as to the facts exists and no prejudice will result from the failure to require an answer” … .

Moreover, under all the circumstances, including that issue had not been joined and that branch of the co-op’s motion which pursuant to CPLR 3211(a) to dismiss the petition/complaint was not converted into a motion for summary judgment, there was no basis for the Supreme Court, in effect, to dismiss the proceeding/action after concluding that the co-op was not entitled to dismissal of the petition/complaint pursuant CPLR 3211(a) … .

Further, it has “long been the rule that judicial review of an administrative determination is limited to the grounds presented by the agency at the time of its determination” … . A reviewing court is “powerless to affirm the administrative action by substituting what it considers to be a more adequate or proper basis” … . Here, when the Supreme Court, in effect, affirmed the board’s denial of the application, the court improperly “surmise[d] or [*3]speculate[d] as to how or why” the board reached its determination and improperly relied on grounds not mentioned in the denial letter … . Matter of 195 N. Vil. Ave., LLC v 195 Apts., Inc., 2024 NY Slip Op 06037, Second Dept 12-4-24

Practice Point: Once a judge denies a motion to dismiss a petition/complaint, the merits of the petition/complaint should not be considered before the respondent interposes an answer.

Practice Point: A judge reviewing an administrative ruling cannot decide the merits on grounds not addressed by the administrative ruling.

 

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PURSUANT TO THE BUSINESS JUDGMENT RULE, INDIVIDUAL CONDOMINIUM BOARD MEMBERS MAY BE LIABLE FOR UNEQUAL TREATMENT OF SHAREHOLDERS IN THE ASSESSMENT OF COMMON CHARGES (SECOND DEPT). ​

The Second Department, reversing (modifying) Supreme Court, determined individual condominium board members could be liable under the business judgment rule for unequal treatment of shareholders with respect to the assessment of common charges:

“The business judgment rule is applicable to the board of directors of cooperative and condominium corporations” … . The rule provides that “a court should defer to a [condominium] board’s determination ‘[s]o long as the board acts for the purposes of the [condominium], within the scope of its authority and in good faith'” … . Unequal treatment of shareholders is sufficient to overcome the directors’ insulation from liability under the business judgment rule … , and a director who participates in the commission of a tort committed by the board may be held individually liable … .

Here, the complaint sufficiently alleged a cause of action sounding in breach of fiduciary duty against the individual defendants. The complaint also sufficiently alleged a cause of action sounding in fraud against the individual defendants to the extent that the plaintiff seeks damages for the overassessment of common charges … . 72 Poplar Townhouse, LLC v Board of Mgrs. of the 72 Poplar St. Condominium, 2024 NY Slip Op 00606, Second Dept 2-7-24

Practice Point: Here the complaint stated causes of action for breach of fiduciary duty and fraud against individual condominium board members for unequal treatment of shareholders in the assessment of common charges.

 

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THE OWNER OF A COOPERATIVE BUILDING WAS PROPERLY FOUND LIABLE FOR FAILING TO REMEDIATE LEAD PAINT IN A SHAREHOLDER’S APARTMENT WHICH WAS SUBLET TO PLAINTIFF AND HER YOUNG DAUGHTER (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Oing, determined the owner of the building (Windsor) in which a cooperative shareholder, Sersch, sublet her cooperative apartment to plaintiff, had constructive knowledge plaintiff’s young daughter was living with plaintiff. Plaintiff’s daughter was diagnosed with lead poisoning and peeling lead paint was found in the apartment. Summary judgment finding Windsor liable for failing to remediate the lead paint problem was affirmed:

Windsor’s agents’ frequent and consistent interactions with plaintiff and the infant plaintiff were sufficient to provide constructive notice to Windsor … . Windsor failed to proffer an affidavit from any of the doormen stating that they did not know plaintiff and the infant plaintiff or were unaware of their residence. Under these circumstances, Windsor failed to raise a triable issue of fact as to the issue of constructive notice … . * * *

Windsor argues that section [NYC Administrative Code] 27-2056.15(c) exempts it from the duty to remediate and abate the lead paint in the apartment because Sersch “occupied” the apartment during plaintiffs’ subtenancy. Here, the terms of the sublease and the stipulation of settlement clearly indicate that the apartment was not “occupied” by Sersch during plaintiffs’ subtenancy. E.S. v Windsor Owners Corp., 2024 NY Slip Op 00267, First Dept 1-23-24

Practice Point; Here the owner of a cooperative building was deemed liable under New York City law for failure to remediate lead paint in a shareholder’s apartment which had been sublet to plaintiff and her young daughter.

 

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A CORPORATION (HERE A COOPERATIVE) DOES NOT OWE A FIDUCIARY DUTY TO THE SHAREHOLDERS; THE INDIVIDUAL BOARD MEMBERS MAY OWE A FIDUCIARY DUTY TO THE SHAREHOLDERS FOR INDIVIDUAL ACTIONS BUT NO ALLEGATIONS OF WRONGDOING BY BOARD MEMBERS WERE MADE (FIRST DEPT).

​The First Department, reversing (modifying) Supreme Court, noted that a corporation (or, in this case a cooperative) does not owe a fiduciary duty to its shareholders:

… [T]he second cause of action for breach of fiduciary duty as against the cooperative and the board member defendants also does not state a claim upon which relief may be granted. The cause of action cannot be sustained as against the cooperative “because a corporation owes no fiduciary duty to its shareholders” … . Furthermore, even assuming that the cause of action was addressed to the actions taken by the individual board member defendants, it “does not allege any individual wrongdoing by the members of the board separate and apart from their collective actions” taken in their capacity as board members … . Tahari v 860 Fifth Ave. Corp, 2023 NY Slip Op 01269, First Dept 3-14-23

Practice Point: A corporation does not owe a fiduciary duty to shareholders. Individual board members may owe a duty which would be breached by wrongdoing, not alleged here.

 

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THE PLAINTIFF DID NOT DEMONSTRATE HIS DECEASED BROTHER MADE AN INTER VIVOS GIFT OF THE COOPERATIVE APARTMENT TO PLAINTIFF; THE STATUTE OF FRAUDS APPLIES AND THERE WAS NO WRITING; AND THE FAILURE TO FOLLOW THE TRANSFER PROVISIONS OF THE PROPRIETARY LEASE NEGATED A FINDING OF DONATIVE INTENT (FIRST DEPT).

The First Department, reversing Supreme Court, determined plaintiff did not demonstrate his deceased brother made an inter vivos gift of a cooperative apartment to plaintiff. The alleged transfer of the property was subject to the Statute of Frauds and there was no writing memorializing the alleged gift:

Defendant established that there was no valid inter vivos gift to plaintiff of the shares and proprietary lease for the apartment, as the statute of frauds applies to the sale of stock in a housing cooperative and there was no writing to effect the transfer … . …

Plaintiff’s claim further fails as a matter of law, as the decedent — his brother — failed to follow the transfer provisions of the proprietary lease, which required, among other things, a written assignment of shares signed by the shareholder and the approval of defendant’s board of directors to make a valid transfer of the shares to the apartment within the decedent’s lifetime … .

… [E]ven if the decedent had not been required to abide by the terms of the proprietary lease to make a valid inter vivos gift of the apartment, the lack of a writing also militates against establishing the decedent’s donative intent, which is a necessary element of a valid inter vivos gift … . Not only does the decedent’s failure to follow the procedures in the proprietary lease contradict any donative intent, but plaintiff also acknowledges that the delivery of the share certificate and proprietary lease were not made by the decedent himself, and the conflicting affidavits of the decedent’s girlfriend fail to establish that she was acting as decedent’s agent for that purpose. Rivera v 98-100 Ave. C Hous. Dev. Fund Corp., 2022 NY Slip Op 06074, First Dept 10-27-22

Practice Point: Plaintiff did not demonstrate his deceased brother made an inter vivos gift of a cooperative apartment. The Statute of Frauds applies and there was no writing. In addition the failure to follow the transfer provisions in the proprietary lease negated donative intent.

 

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A LEASE BETWEEN PLAINTIFF CORPORATION AND DEFENDANTS (ONE OF WHOM WAS A MEMBER OF PLAINTIFF’S BOARD) WAS NOT VOTED ON BY A MAJORITY OF DISINTERESTED DIRECTORS AND WAS THEREFORE VOIDABLE UNDER BUSINESS CORPORATION LAW 713(B); DEFENDANTS BREACHED THEIR FIDUCIARAY DUTY TO THE CORPORATION BY SUBLETTING THE LEASED PREMISES FOR A MUCH HIGHER RENT WITHOUT PLAINTIFF’S KNOWLEDGE (FIRST DEPT).

The First Department, reversing Supreme Court, determined plaintiff cooperative apartment corporation (HDFC) demonstrated defendants (one of whom was a member of plaintiff’s board) had entered a lease with plaintiff which was not voted upon by a majority of disinterested directors and was therefore voidable under Business Corporation Law 713(b). In addition plaintiff demonstrated defendants had breached their fiduciary duty to the corporation:

Plaintiff, a low-income cooperative apartment corporation (HDFC), established prima facie that the lease between plaintiff and defendants Thomas Green and A Cup of Harlem was not voted on by a majority of disinterested directors and is therefore voidable under Business Corporation Law § 713(b). A Cup of Harlem is a partnership between Thomas Green and Siwana Green, who are married. Siwana Green is a shareholder in the HDFC and a former officer and member of plaintiff’s board of directors. By lease dated April 1, 2004, while Siwana Green was one of three members of the board, plaintiff leased one of the two commercial spaces in the building to Thomas Green and A Cup of Harlem for a 99-year term, with a monthly rent of $700 for the entirety of the term and an option to extend the lease for a 10-year term at a rate of $800 per month. In support of its motion, plaintiff submitted a former board member’s affidavit that he was elected to a one-year term in February 2004, that he only learned of the lease in 2018, when Siwana Green was removed from the board, and that he never would have approved a lease with such “outlandish” terms. …

The record demonstrates that Siwana Green breached her fiduciary duty to plaintiff by diverting a corporate opportunity without plaintiff’s knowledge or consent and admittedly receiving more than $200,000 profit from the sublessee to whom, in March 11, 2009, Thomas Green sublet the leased premises at a monthly rent of $2,500 for a ten-year term, which was then renewed for a monthly rent of $2,800. 67-69 St. Nicholas Ave. Hous. Dev. Fund Corp. v Green, 2022 NY Slip Op 04087, First Dept 6-23-22

Practice Point: Here a low-rent lease between plaintiff corporation and defendants (one of whom was a member of plaintiff’s board) was voidable because the lease was not approved by a majority of disinterested directors. Defendants sublet the leased premises for a much higher rent without plaintiff corporation’s knowledge and thereby breached their fiduciary duty to the corporation.

 

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THE DEPOSITION OF THE NONPARTY MAJORITY SHAREHOLDER IN THE COOPERATIVE REGARDING LEAKS IN THE UNITS WAS PROPER AND SHOULD NOT HAVE BEEN STOPPED AND SUPPRESSED BY THE JUDGE; SANCTIONS AGAINST PLAINTIFF’S ATTORNEY FOR FRIVOLOUS AND UNPROFESSIONAL CONDUCT WERE WARRANTED (FIRST DEPT). ​

The First Department, reversing Supreme Court, determined the deposition of a witness, Ruth Miller, was proper and the judge should not have ordered the deposition to cease and should not have suppressed the portion of the deposition which had already been taken. Miller was a nonparty majority shareholder in the cooperative and the action concerned leaks in the units. The First Department further determined that sanctions against plaintiff’s counsel were warranted:

It was an improvident exercise of discretion for the court to issue a protective order under CPLR 3103(a) barring a continuation of the deposition of nonparty Ruth Miller. Miller is the majority shareholder of the Coop, and therefore is a key figure in the events surrounding plaintiffs’ negligence and breach of contract claims regarding leaks in plaintiffs’ units. Moreover, Miller was a member of the Board during a period of time when decisions were made about building maintenance, which is a relevant issue in plaintiffs’ action. Thus, her testimony is “material and necessary” (CPLR 3101[a] …). …

… [i]t was error for the court to sua sponte issue a suppression order of the testimony previously taken (see CPLR 3103[c]). Defendants made no showing that evidence was improperly or irregularly obtained during the deposition, or that prejudice to a substantial right had accrued through discovery of improperly obtained evidence … . …

… [C]ounsel’s behavior at the deposition was frivolous and unprofessional. Among other things, counsel called the witness “a liar” and told her on the record that she had done “plenty wrong” and had “plenty to worry about in this case,” despite the fact that she is not even a party to the action. Sanctions against counsel are therefore warranted (22 NYCRR 130-1.1 …). Gendell v 42 W. 17th St. Hous. Corp., 2022 NY Slip Op 00272, First Dept 1-18-22

 

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DEFENDANTS PREVAILED IN A SUIT BY PLAINTFF COOPERATIVE PURSUANT TO A PROPRIETARY LEASE; THEREFORE DEFENDANTS WERE ENTITLED TO ATTORNEY’S FEES PURSUANT TO REAL PROPERTY LAW 234 EVEN THOUGH THE ISSUE WAS NOT RAISED IN A COUNTERCLAIM (SECOND DEPT).

The Second Department determined defendants, who prevailed in an action against them by plaintiff cooperative apartment corporation, was entitled to attorney’s fees pursuant to Real Property Law 234 even though that theory was not pled as a counterclaim:

As the prevailing parties to the action commenced against them by the plaintiff pursuant to the proprietary lease, which contained a provision entitling the plaintiff, as lessor, to attorney’s fees incurred in instituting an action against a lessee based on the lessee’s default, the defendants were entitled to attorney’s fees pursuant to Real Property Law § 234, which “provides for the reciprocal right of a lessee to recover an attorney’s fee when the same benefit is bestowed upon the lessor in the parties’ lease” … .

The defendants were entitled to an award of attorney’s fees pursuant to Real Property Law § 234, despite their failure to plead that cause of action as a counterclaim in their answer, since the evidence supported the claim and the plaintiff was not misled or prejudiced by their failure to plead the cause of action … . Round Dune, Inc. v Filkowski, 2021 NY Slip Op 04771, Second Dept 8-25-21

 

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BY THE TERMS OF THE MANAGING AGENT’S CONTRACT WITH THE COOPERATIVE, THE MANAGING AGENT DID NOT FULLY ASSUME THE DUTY TO MAINTAIN THE COOPERATIVE PREMISES SUCH THAT THE AGENT WOULD BE LIABLE FOR PLAINTIFF’S SLIP AND FALL ON THE PREMISES; THE MANAGING AGENT’S MOTION FOR SUMMARY JUDGMENT SHOULD HAVE BEEN GRANTED (SECOND DEPT). ​

The Second Department, reversing Supreme Court in this slip and fall case, determined the defendant managing agent was not liable based on the terms of managing agent’s contract with the cooperative where plaintiff fell:

Where … a managing agent is accused of nonfeasance which causes injury to a third party, it is subject to liability only where it has complete and exclusive control of the management and operation of the property in question … . A managing agent is not in complete and exclusive control of the premises where the owner has reserved to itself a certain amount of control in the written agreement … . …

… [T]he terms of the management agreement … established (1) that the resident manager, who was an employee of the cooperative, was responsible for supervising all personnel, including the maintenance staff, (2) that all personnel were employees of the cooperative, and (3) that all maintenance, repairs, and inspections were performed by the resident manger or members of the maintenance staff. Cacciuottolo v Brown Harris Stevens Mgt., 2021 NY Slip Op 04656, Second Dept 8-11-21​

 

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THE CRITERIA FOR APPOINTMENT OF A TEMPORARY RECEIVER IN THIS PARTITION AND SALE ACTION WERE NOT MET (SECOND DEPT).

The Second Department, reversing Supreme Court, determined that the evidence did not support the appointment of a temporary receiver of a residential building and cooperative apartment that were the subjects of a partition and sale action:

CPLR 6401(a) permits the court, upon a motion by a person with an “apparent interest” in property, to appoint a temporary receiver of that property where “there is danger” that it will be “materially injured or destroyed.” However, the appointment of a temporary receiver “is an extreme remedy resulting in the taking and withholding of possession of property from a party without an adjudication on the merits” … .Therefore, a motion seeking such an appointment should be granted only where the moving party has made a “clear and convincing” evidentiary showing of “irreparable loss or waste to the subject property and that a temporary receiver is needed to protect their interests” … .

Here, the plaintiff failed to make the requisite showing. In particular, the plaintiff’s speculative and conclusory allegations that the defendants failed to repair and maintain the subject properties and commingled income derived from the subject properties with their personal income were insufficient to demonstrate that there was a danger of irreparable loss or material injury to the subject properties warranting the appointment of a temporary receiver … . Similarly, without more, the defendants’ failure to maintain adequate records does not demonstrate that the plaintiff’s interest in the subject properties is in imminent danger of irreparable loss or waste … . Cyngiel v Krigsman, 2021 NY Slip Op 01390, Second Dept 3-10-21

 

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