Recently, the Appellate Division First Department, in Fletcher v. Dakota, Inc., involving a shareholder in The Dakota, a historic luxury co-op on the Upper West Side, held that the business judgment rule does not protect individual condo and co-op 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 defendant board members have committed a tort independent of the tort committed by the board itself.
Following the Business Judgment Rule
The Business Judgment Rule, a court-created rule that pre-dates cooperative corporations themselves, is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings. The origin of the Business Judgment Rule derives from Section 717 of the Business Corporation Law (BCL), which states that “a director shall perform his duties as a director… in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances.”
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, 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].”
In doing so, the First Department brought its interpretation of the business judgment rule, as applied to condo and co-op boards, into alignment with its rulings in cases involving business corporations. The Court noted 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,” 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,” and 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.”