Business Judgment Rule Bars Claim That Board Treated Shareholder Differently Than Other Shareholders

• Posted on: Apr 14 2025

By: Jeffrey M. Haber

It has long been the law that the business judgment rule applies to the decisions made by boards of directors of residential cooperatives and condominiums.[1] “The business judgment rule ‘bars 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.’”[2] “[C]ourts must defer to a board’s determination if it was taken in furtherance of the corporation’s purposes, was within the scope of the board’s authority and was taken in good faith.”[3] Stated differently, and in the context of a cooperative and condominium, judicial scrutiny into the board’s actions may only be triggered if “an aggrieved shareholder-tenant [can] 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.”[4]

In Avrahami v. 235 W. 108th St. Owners Corp., 2025 N.Y. Slip Op. 02126 (1st Dept. Apr. 10, 2025) (here), the Appellate Division, First Department examined the business judgment in connection with the cooperative board’s decision to bar plaintiffs from reinstalling their jacuzzi in their unit.

Avrahami arose out of claims asserted by plaintiffs who are the lessees and stock owners of the shares allocated to an apartment located within 235 West 108th Street, New York, N.Y. (the “building”). Plaintiffs signed a proprietary lease associated with the apartment on July 25, 2007. According to plaintiffs, at the time the lease was executed, the apartment’s master bedroom included a jacuzzi.

Plaintiffs alleged that prior to purchasing the shares and signing the lease, there was no documentation that addressed the use of whirlpool style tubs in the building. Plaintiffs claimed that their decision to enter the lease for the apartment was partly based on the existence of the jacuzzi within the unit.

Plaintiffs alleged that they used the jacuzzi for years without any problem, complaint, or objection from anyone in the building. However, at some point in 2017, the building’s superintendent, who lived below plaintiffs, noticed that the gap between the bathtub and the wall titles above it seemed wider than usual, indicating that the jacuzzi within plaintiffs’ unit sank.

Sometime in April of 2017, the superintendent notified plaintiffs that the toilet in plaintiffs’ master bedroom began to leak into her apartment.[5] To resolve the issue, plaintiffs considered numerous contractors for the repair work. After selecting a contractor, plaintiffs notified the superintendent, who emailed the building’s board of directors (the “board”) to inform them of the repair work that was going to take place, and that the superintendent would oversee the work as she did other projects in the building. According to plaintiffs, the repair work started on April 29, 2017, and included the temporary removal of the jacuzzi, which was expected to be reinstalled after other work was completed. However, on May 3, 2017, during a monthly meeting with the board, plaintiffs received an email from the superintendent, who was informed by the board that the building’s rules prohibited whirlpool tubs, and that plaintiffs were to replace their jacuzzi with a standard tub.

Plaintiffs commenced the action against defendant asserting claims for declaratory relief, breach of contract, negligent misrepresentation, breach of fiduciary duty, and unjust enrichment. Defendant denied plaintiffs’ material allegations, asserted affirmative defenses, including one based on the business judgment rule, and asserted counterclaims for declaratory judgment and attorneys’ fees.

Defendant moved pursuant to CPLR 3212 for summary judgment dismissing plaintiffs’ complaint in its entirety, CPLR 3001 for a declaration that plaintiffs were not entitled to install or re-install a jacuzzi-like whirlpool tub in their unit, and for attorneys’ fees. Plaintiffs also moved for summary judgment as to liability pursuant to CPLR 3212.

Defendant argued that its decision to stop plaintiffs from re-installing the jacuzzi in their unit was a good faith decision, made in the interest of the co-op, thereby entitling it to summary judgment because their decision was protected by the business judgment rule. Defendant argued that its decision to deny plaintiffs the ability to reinstall the jacuzzi was based on past practices of the board, which prohibited whirlpool tubs due to concerns regarding noise and/or vibration from the pump, which could transfer to neighboring apartments. Defendant also contended that by signing the lease and buying shares in the co-op, plaintiffs agreed to be bound by the governing powers of the board, which notified plaintiffs that whirlpools were forbidden in the building. Defendant further argued that plaintiffs entered into an alteration agreement with the co-op concerning an air conditioning unit in June of 2010, well before the renovation of plaintiffs’ bathroom and the removal of the whirlpool tub occurred, and in said alteration agreement, plaintiffs acknowledged that the board did not allow the installation of whirlpools and agreed to such via signature.

Plaintiffs argued in opposition that defendant’s decision was not protected by the business judgment rule because the rule does not protect bad faith, arbitrary conduct, or capricious decisions. In particular, plaintiffs argued that the board did not have any documents that supported its decision to prevent the reinstallation of the whirlpool. Additionally, plaintiffs argued that the board was not acting for the good of the co-op when it made such a decision, that the board refused to consult with an expert to determine if the board’s concerns for damage to the property and neighboring properties within the co-op were legitimate, and that the board never considered if the tub was grandfathered in under the lease, since it was present when plaintiffs moved in the unit.

The motion court held that plaintiffs failed to rebut the standard of review imposed by the business judgment rule, and the lawful and legitimate corporate purpose the board had established in support of its decision. The motion court found that the proprietary lease gave the board the power to stop conduct that was, or could be, damaging to the building:

If, in the Lessor’s sole judgment, any of the Lessee’s equipment or appliances shall result in damage to the Building … the Lessee, on notice from the Lessor, shall immediately cease using any such appliance or equipment which may be creating the objectionable condition and shall take all other steps promptly to remedy such condition.

The motion court rejected plaintiffs’ argument that they used the jacuzzi for years without any problem, complaint, or objection from anyone in the building, stating that such facts were irrelevant and did not preclude the board from enforcing a specific house rule addressed to the subject of the dispute.[6]

The motion court also noted that plaintiffs could not point to any writing in which the use of the jacuzzi was permitted. The absence of such a writing was significant, noted the motion court, because the proprietary lease specifically provided that the “[d]irectors may alter, amend or repeal such House Rules and adopt new House Rules” at any time. Therefore, concluded the motion court, “it cannot be reasonably argued that [plaintiffs] had somehow acquired vested rights in the continued maintenance of [the whirlpool],” or that the whirlpool was grandfathered under their lease.

Finally, the motion court rejected plaintiffs’ argument that defendant singled them out or selectively enforced the rules against them because another shareholder allegedly had a jacuzzi in their unit. The motion court held that the existence of another jacuzzi in the building was insufficient by itself to raise a triable issue of fact as to the allegation that the board deliberately singled them out for harmful treatment or selective enforcement.[7] The motion court noted that 15 years before the dispute between the parties, the board denied permission for jacuzzi like whirlpool tubs to building tenants.

Accordingly, the motion court dismissed plaintiffs’ breach of fiduciary duty claim.

On appeal, the First Department affirmed the motion’s court order regarding application of the business judgment rule.

The Court held that the “breach of fiduciary duty claim was properly dismissed under the business judgment rule.”[8] The Court found “Plaintiffs’ arguments — that they were treated differently than other shareholders who were permitted to install hot tubs in their apartments and that the board acted arbitrarily and capriciously in refusing to allow plaintiffs to reinstall theirs — [to be] unavailing.”[9] The Court explained that the “undisputed facts show[ed] that plaintiffs’ tub was damaging the building, there was no evidence that the other tubs were causing damage, and the board was acting for a business-related purpose under the terms of the proprietary lease in requiring plaintiffs to install a standard tub.”[10] Under such circumstances, concluded the Court, plaintiffs could not “overcome the cooperative’s express right under paragraphs 16(d) and 19(b) of the proprietary lease to manage the installation and removal of appliances and fixtures that are damaging the building.”[11]

In addition, the Court noted that even if the business judgment rule did not apply, plaintiffs’ breach of fiduciary duty claim would still be dismissed because a cooperative corporation, which plaintiff sued, does not owe its shareholders a fiduciary duty.[12]

______________________________

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y.2d 530 (1990).

[2] Ull v. Royal Car Parle LLC, 179 A.D.3d 469, 470 (1st Dept. 2020) (quoting, Auerbach v. Bennett, 47 N.Y.2d 619, 629 (1979)).

[3] Barbour v. Knecht, 296 A.D.2d 218, 224 (1st Dept. 2002).

[4] 40 W. 67th St. v. Pullman, 100 N.Y.2d 147, 155 (2003).

[5] Plaintiffs conceded that the original whirlpool tub had been sinking and separating from the bathroom wall at the same time that there was a water leak from plaintiffs’ unit into the unit below.

[6] Cannon Point N., Inc, v. Abeles, 160 Misc. 2d 30, 32 (1st App. Term 1993).

[7] Skouras v. Victoria Hall Condo., 73 A.D.3d 902, 904 (2d Dept. 2010).

[8] Slip Op. at *2 (citing Goldstone v. Gracie Terrace Apt. Corp., 110 A.D.3d 101, 106 (1st Dept. 2013)).

[9] Id.

[10] Id. (citing Konrad v. 136 E. 64th St. Corp., 254 A.D.2d 110 (1st Dept. 1998), lv. dismissed, 92 N.Y.2d 1042 (1999)).

[11] Id. at *1 (citations omitted).

[12] Id. at *2 (citing Kleinerman v. 245 E. 87 Tenants Corp., 105 A.D.3d 492, 493 (1st Dept. 2013)).