In this and in future columns, I will be examining decisions of interest to co-op and condo boards and suggesting what valuable lessons can be learned from these legal decisions.
In one of its first decisions in 2004, the Appellate Division, Second Department, unanimously held that the well-known business judgment rule applies to a board of managers' decision to build a shed on the condominium's common area and thus, dismissed a complaining unit owners suit against the condominium. The unit owner was obviously not pleased by the structure and, in 1998, sued for injunctive relief and damages. The condominium raised the business judgment rule as a defense and later established that the board made the business decision "in good faith and within the scope of authority provided by the condominium's bylaws." As such, the condominium's business decision was insulated from judicial scrutiny.
The Merolo decision demonstrates that the business judgment rule is a terrific defense for cooperatives and condominiums that can put an end to lawsuits challenging board business decisions. Many boards, however, believe that the rule will automatically apply to all of their decisions and will insulate them from liability. If that were the case, lawsuits, such as Merolo, would not have proceeded for years (from 1998 to 2004) before being dismissed based upon the business judgment rule. Sometimes, early motion practice based upon the business judgment rule is possible and at other times, discovery is needed before a successful motion can be made to dispose of a case. In any event, the rule is a powerful defense for co-ops and condos.
Inc. v. Jenkins Lesson: When You Settle, Consider A Provision Covering Responsibility for Legal Fees And Costs Incurred in Enforcing Settlement Terms.
An Upper East Side cooperative almost got stuck paying its own legal fees and costs (over $40,000) to enforce a settlement that it had previously reached with a shareholder. The shareholder, Lindsay Jenkins, was allegedly subleasing her two apartments in violation of 178 East 80th Street Owners, Inc.'s proprietary lease. The cooperative and Jenkins ended up in federal court where a resolution was reached and memorialized in a settlement agreement.
When Jenkins violated the terms of the agreement, the co-op returned to court to enforce the settlement terms and incurred the $40,000 plus legal bill. The court recognized that the co-op was not claiming that Jenkins' conduct violated the proprietary lease and thus, the co-op could not take advantage of any attorney fee-shifting provision in the proprietary lease. Instead, the court was willing to apply a federal court rule authorizing the award of penalties when a party is in contempt of court. The court painfully analyzed each time entry in the legal bills, reducing some of the entries and eliminating others. The net result was an award of about $8,000 less than the total legal bills reviewed by the court.