The Dakota, one of the legendary co-operative apartment buildings in Manhattan, has long shunned attention.
Its Board of Directors has allegedly even denied the purchase applications of celebrities in order to avoid the publicity that accompanies high profile residents. Ironically, instead of fame, the Dakota has been plagued by infamy, most notably by the murder of John Lennon at its doorstep, and most recently by a discrimination law suit brought by a former Board president against the Board of Directors and two individual Board members.[i]
Alphonse Fletcher, the plaintiff in the lawsuit, purchased a unit in the Dakota 20 years ago and served as a Board member and president of the Board.
In 2011, while no longer on the Board, Fletcher applied to purchase a second apartment in the building, adjacent to his unit, with the intention of combining the two apartments into one large one. The Board of Directors denied his application. According to the Board, Fletcher’s financial situation at the time of the application raised legitimate questions as to whether he would be able to afford the carrying costs of both apartments.
Fletcher saw things differently. He claimed that his financial condition was beyond reproach and that the denial of his application by the Board was due to discrimination (he is African American) and retaliation (he promoted the rights of other minority and Jewish shareholders at the Dakota) by the Board and the several individual Board members.
The case has drawn wide attention in the legal community due to the issue of the liability of individual Board members. The standard for community association Board, and Board member, liability was originally established in the 1990 landmark ruling of the NYS Court of Appeals, known as Matter of Levandusky v. One Fifth Ave. Apt. Corp.[ii] The Court applied the “business judgment” rule to Board actions that were taken in good faith and in the lawful and legitimate furtherance of corporate purposes. While the business judgment rule would prohibit courts from second-guessing most Board decisions, the Court of Appeals also cautioned that the business judgment rule would not shelter Boards, and Board members, that allowed discrimination or arbitrary and malicious considerations to influence decision-making.
In a 2006 case known as Pelton v. 77 Park Avenue Condominium[iii], the Board of Managers and its individual Board members were accused of discrimination of a disabled resident. The Appellate Division, First Department applied the business judgment rule and found that individual board members would not be liable for a Board’s discriminatory action. While the Court acknowledged that individual Board members could be held liable for discriminatory actions taken independent of the Board, they would not be subject to liability if the discriminatory steps they took were in the context of action by the Board.
In the case of Fletcher v. Dakota, Inc., the Appellate Division, First Department overruled its own decision in the Pelton case. While finding that a Board member’s participation in a breach of contract by the Board did not result in individual liability, a Board member’s participation in a tort (legal wrong) of the Board could indeed result in individual liability of that Board member. The defamation and retaliation claims made by Fletcher are such legal wrongs, and the Court ruled that therefore, the claims against the individual Board members would continue.
The decision of the Appellate Court in Fletcher should come as no great surprise. The seeds of the decision were sown 23 years ago in the Levandusky case.
Nonetheless, while no decision has been made yet as to whether the individual directors in Fletcher are actually liable for any wrong-doing, the “damage” has been done. It has now been made eminently clear that Board members can be found individually liable when they participate or aid in discriminatory acts by a Board. And individual liability can mean compensatory and punitive damages – in other words, money out of a Board member’s pocket that will not be reimbursed by community funds or insurance coverage.
The question now needs to be asked: Should anyone volunteer to serve on a community association Board when they may be subjecting themselves to individual liability?
And the answer is a resounding “YES!” Certainly, any prospective Board members who intend to use their positions to discriminate should think twice about running. But Board members whose intentions are to genuinely do what is best for the community should not be intimidated. In fact, the Fletcher decision should have been intuitive. No-one should expect discriminatory, or other improper, behavior to go unpunished just because it was undertaken while serving on a Board. But courts will still apply the business judgment rule and provide Boards and Board members with protection from mistakes or bad judgment, as long as those decisions are made “in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of [community] purposes” – which is exactly what most community association Boards have been doing all along.
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[i] Fletcher v. Dakota, Inc., 99 A.D.3d 43, 948 N.Y.S.2d 263 (1st Dept. 2012)
[ii] Matter of Levandusky v. One Fifth Ave. Apt. Corp., 75 N.Y.2d 530, 554 N.Y.S.2d 807, 553 N.E.2d 1317 (1990)
[iii] Pelton v. 77 Park Ave, Condominium, 38 A.D.3d 1, 825 N.Y.S.2d 28 (1st Dept. 2006)
