Lawsuits against board members alleging discrimination

1. ADA M LEITM A N BAILEY, P.C.
WE GET R ESULTS
Lawsuits Against Board
Members Alleging
Discrimination

2. 1
PIERCING THE “BUSINESS JUDGMENT” RULE
TO SUE CONDO AND CO-OP BOARD MEMBERS
By
Adam Leitman Bailey and John M. Desiderio*
Ever since the Court of Appeals decided Matter of Levandusky v. One Fifth Avenue
Apartment Corp.,1
New York courts have liberally applied the business judgment rule to
decisions made by condo and co-op boards in governing the buildings they control, thereby
insulating individual board members from personal tort liability where the boards have acted in
good faith. Recently, however, the Appellate Division First Department, in Fletcher v. Dakota,
Inc.,2
held that the business judgment rule does not protect individual board members from
personal tort liability where a board acting in its corporate capacity has acted in bad faith, but
where it is not alleged that individual board members have committed a tort independent of the
tort committed by the board itself. As the Court explained, “although participation in a breach of
contract will typically not give rise to individual director liability, the participation of an
individual director in a corporation’s tort is sufficient to give rise to individual liability.” In so
deciding, the First Department expressly overruled its prior decision in Pelton v. 77 Park Ave.
Condominium,3
which had held to the contrary. The Court said it wanted to “clear up an element
of possible confusion in this area of law that may arise out of [the Pelton decision].”
The plaintiff in Fletcher, an African-American resident shareholder of The Dakota co-op in
Manhattan, had applied for board approval to purchase an apartment adjacent to one he owns for
the purpose of combining the two apartments. The board refused to approve the purchase, and the
plaintiff alleged that, in refusing its approval, The Dakota and two of its directors had
discriminated against him on the basis of race. The defendant directors contended that the
discrimination claims should be dismissed against them because the complaint failed to allege that

3. 2
they had engaged in any acts separate and distinct from actions they took as board members. In
response, the Court stated that “there is no principle of corporate law that director liability arises
only where the director commits a tort independent of the tort committed by the corporation itself.”
In Levandusky, the Court of Appeals explained that, as developed in the context of
commercial enterprises, the business judgment rule “prohibits judicial inquiry into actions of
corporate directors ‘taken in good faith and in the exercise of honest judgment in the lawful and
legitimate furtherance of corporate purposes,’” and that, “[s]o long as the corporation’s directors
have not breached their fiduciary obligation to the corporation, ‘the exercise of [their powers] for
the common and general interests of the corporation may not be questioned, although the results
show that what they did was unwise or inexpedient.” Adopting the business judgment rule as the
standard for judicial review of the decisions of non-profit corporations, the Court of Appeals stated
that “courts are ill equipped and infrequently called on to evaluate what are and must be essentially
business judgments [and] by definition the responsibility for business judgments must rest with the
corporate directors; their individual capabilities and experience peculiarly qualify them for the
discharge of that responsibility.”
Levandusky further explained that “[t]he business judgment rule protects the board’s
decisions and managerial authority from indiscriminate attack. At the same time, it permits review
of improper decisions, as when the challenger demonstrates that the board’s action has no
legitimate relationship to the welfare of the cooperative, deliberately singles out individuals for
harmful treatment, is taken without notice or consideration of the relevant facts, or is beyond the
scope of the board’s authority.” (Emphasis added). Nevertheless, the Court of Appeals held that
“[s]o long as the board acts for the purposes of the cooperative, within the scope of its authority
and in good faith, courts will not substitute their judgment for the board’s, [and] unless a resident

4. 3
challenging the board’s action is able to demonstrate a breach of this duty, judicial review is not
available.”
The First Department’s Pelton decision had involved a claim of unlawful discrimination
brought by a condominium unit owner against the condominium’s board and its individual board
members. The plaintiff, who suffered from muscular dystrophy, alleged that the board and its
individual members had discriminated against him by failing to honor his request that the building
be made handicap accessible. Before commencement of the action, the plaintiff and the board had
engaged in more than two and one-half years of negotiation over the manner in which the building
could be made handicap accessible to accommodate the plaintiff’s needs. Seeking to dismiss
plaintiff’s complaint, the individual board members moved for summary judgment on their
counterclaims for a declaratory judgment that certain actions of the board, which had been taken in
response to the plaintiff’s request, constituted reasonable accommodations to his needs. The First
Department noted that Supreme Court had denied the board members’ motion for summary
judgment and had held that the business judgment rule “afforded no immunity [to individual board
members] where the board’s decision is alleged to have been made on an unlawful discriminatory
basis.”
In reversing the Supreme Court order, the First Department, in Pelton, quoting from the
Court of Appeals decision in 40 West 67th
St. v. Pullman,4
explained that, before dispensing with
“[the] ‘deferential standard’ that has become the hallmark of the business judgment rule,” and
triggering judicial scrutiny of the actions of corporate boards, “an aggrieved shareholder-tenant
must make a showing 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.” The First Department noted
that a review of the [Pelton] record clearly demonstrated that plaintiff had “failed to make a

5. 4
showing of any of the three elements that would trigger judicial scrutiny of the board’s action”5
(emphasis added) and that Supreme Court, in its denial of the individual board members’ motion
did not “point to a single fact giving rise to liability on the part of any of the defendants.”
The Pelton Court further noted that the individual board members had established that the
board’s reliance upon the professional advice of its architects and counsel had “satisfied the
business judgment rule’s requirement of taking action in good faith and in the exercise of honest
judgment in the lawful and legitimate furtherance of the condominium’s purposes.” The Court then
held that “[t]he burden thereupon shifted to plaintiffs, who, to defeat summary judgment, would
have to offer proof of unlawful discrimination sufficient to raise a triable issue of material fact.”
Up to this point, there was nothing in the Pelton Court’s opinion that was either
problematic or contrary to the reasoning of the Court of Appeals in Levandusky. However, Pelton
went on to hold as follows:
In bringing an action against the individual members of a cooperative or
condominium board based on allegations of discrimination or similar wrongdoing,
plaintiffs were required to plead with specificity independent tortious acts by each
individual defendant in order to overcome the public policy that supports the
business judgment rule. (Emphasis added).
The Court then noted that “neither the complaint nor plaintiffs’ submissions on the motion
assert a specific claim against any of the individual defendants other than as a member of the 77
Park board,” and that “control of the board’s policies lies in the hands of the board collectively, not
in the hands of any individual member.”
The Court thereupon concluded that the Levandusky standard, “which permits review of
improper decisions ‘when the challenger demonstrates that the board’s action has no legitimate
relationship to the welfare of the cooperative, deliberately singles out individuals for harmful
treatment, is taken without notice or consideration of the relevant facts, or is beyond the scope of

6. 5
the board’s authority,’ should also serve as a minimum standard for challenging the conduct of
individual board members.” (Emphasis added).
In effect, Pelton interpreted Levandusky’s standard as being applicable to improper “board
action” only -- and not applicable to the improper actions of those board members whose actions
as individuals, when collectively acting for the board, constitute improper “board action”
unprotected by the business judgment rule. This was clearly an illogical reading of Levandusky,
and such reasoning could only lead to illogical results in practice.6
Indeed, in Stalker v. Stewart Tenants Corp.,7
a decision rendered three months before
Fletcher, a separate First Department panel, citing prior First Department authority upon which
Pelton had relied,8
held that the plaintiffs’ complaint stated causes of action for housing
discrimination against the corporation, but that the individual board members who had approved
the discriminatory acts of the corporation were not themselves subject to personal liability. The
Stalker Court stated: “Although allegations of unequal treatment of shareholders may be sufficient
to overcome the protection afforded directors under the business judgment rule, individual
directors may not be subject to liability absent allegations that they committed separate tortious
acts.” It was this kind of ruling, which evidences the “confusion” the Fletcher Court perceived in
the application of the business judgment rule, that Fletcher sought to “clear up.”
Contrary to the situation in Pelton, the facts alleged in Fletcher, if proven, would clearly
show that the “board” had acted in a discriminatory manner and that the two defendant board
members were the driving forces behind the discriminatory “board” action. In reviewing the
reasoning of its prior decision in Pelton, the Fletcher Court concluded (a) that “the Levandusky
rule will not protect a board member where he engages in discriminatory conduct,” and (b) that

7. 6
“Pelton takes a rule that applies where a cooperative or condominium board is alleged to have
breached a contractual obligation,9
and incorrectly applies it where a board allegedly engaged in
the intentional tort of discrimination.” In addition, the Court stated that “Pelton failed to
disentangle the principles of individual corporate director liability in the breach of contract context
(understood to provide a shield against liability) from the principles applicable to tort cases (where
there is no such shield).”
The First Department noted, in Fletcher, (a) that “it has long been held by this Court that ‘a
corporate officer who participates in the commission of a tort may be held individually liable, . . .
regardless of whether the corporate veil is pierced,”10
(b) that “[i]n actions for fraud, corporate
officers and directors may be held individually liable if they participated in or had knowledge of
the fraud, even if they did not stand to gain personally,”11
and (c) that “officers, directors and
agents of a corporation are jointly and severally liable for torts committed on behalf of a
corporation and the fact that they also acted on behalf of the corporation does not relieve them
from personal liability.”12
This also has long been the law in the Second Department.13
However, contrary to the path
taken by the First Department in Pelton and the prior First Department cases upon which it relied,
courts in the Second Department have not used the business judgment rule to shield individual
condo and co-op board members from personal liability where their actions, as board members,
have caused “board action” that violated anti-discrimination laws. For example, in Sinensky v.
Rokowsky,14
the Second Department held that the plaintiff’s amended complaint adequately
alleged a cause of action for housing discrimination against individual board member defendants
who were responsible for the “board action” that constituted the illegal discrimination. The Court

8. 7
did not invoke the business judgment rule to shield the board member defendants from personal
liability for the unlawful discriminatory “board action.”
In view of the First Department’s long line of precedent which generally has held corporate
officers and board members personally liable for torts committed in their corporate capacity, the
First Department’s application of the business judgment rule, in Pelton and earlier cases, to shield
condo and co-op board members from liability for unlawful “board action,” appears to have been
an anomaly. The First Department’s departure from the general rule in such cases could only have
been explained by an overly sensitive concern for what the Pelton Court described as “the
formidable obstacle” that “the threat of baseless litigation, with its attendant serious financial and
personal burdens,” would pose “to those willing to volunteer their talent, experience and
knowledge for the common good of their homeowner communities by serving on such [boards].”
With its Fletcher decision, the First Department has clearly and firmly announced that it
will no longer treat allegations of unlawful action by condo and co-op board members any
differently than it will treat allegations of unlawful action by board members of business
corporations and that the business judgment rule can no longer be used to shield the discriminatory
conduct of individual condo and co-op board members.

9. 8
*Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C., and John M. Desiderio is Chair of the
firm’s Real Estate Practice Litigation Group.
1
75 NY2d 530 (1990).
2
__ AD3d__, 948 NYS2d 263 (1
st
Dept. 2012).
3
38 AD3d 1, 825 NYS2d 28 (1
st
Dept. 2006); see also Brasseur v. Speranza, 21 AD3d 297, 800 NYS2d 669 (1
st
Dept.
2005),
4
100 NY2d 147 (2003).
5
Although the Pelton decision dealt only with the appeal of the individual board members and granted summary
judgment dismissing the action against them, the First Department opinion suggests very strongly that the Court
also believed the record showed the action against the “board” defendant to be equally baseless.
6
The Pelton decision, which shielded the board members in that case from liability, was no doubt based, in large
part, on the factual record which clearly showed that the plaintiff had unreasonably rebuffed the attempts of the 77
Park board to reasonably accommodate the plaintiff’s needs.
7
93 AD3d 550, 940 NYS2d 600 (1
st
Dept. 2012) (Full disclosure: The authors’ law firm represented the plaintiffs in
Stalker. The action has since been settled.)
8
Konrad v. 136 E. 64
th
St. Corp., 246 AD2d 324, 667 NYS2d 354 (1
st
Dept. 1998).
9
See Murtha v. Yonkers Child Care Association, Inc., 45 NY2d 913 (1978).
10
Citing Peguero v. 601 Realty Corp., 58 AD3d 556, __ NYS2d ___ (1
st
Dept. 2009).
11
Citing Savannah T&T Co. v. Force One Express, Inc., 58 AD3d 409, __ NYS2d __ (1
st
Dept. 2009).
12
Citing Marine Midland Bank v. Russo Produce Co., 50 NY2d 31 (1980); see also Kleinerman v. 245 East 87 Tenants
Corp., 74 AD3d 448, 903 NYSd 356 (1
st
Dept. 2010); Ackerman v. 305 East 40
th
Owners Corp., 1889 AD2d 665, 592
NYS2d 365 (1
st
Dept. 1993).
13
See Westminster Construction. Co. v Sherman, 160 A.D.2d 867, 554 N.Y.S.2d 300 (2d Dept. 1990); Widlitz v Scher,
148 A.D.2d 530, 540 N.Y.S.2d 179 (2d Dept. 1989); Bellinzoni v Seland, 128 A.D.2d 580, 512 N.Y.S.2d 846 (2d
Dept. 1987).
14
22AD3d 563, 802 NYS2d 491 (2d Dept. 2005) (Full disclosure: The authors’ law firm represented the plaintiffs in
Sinensky. The action has since been settled.)
.