By: Scott E. Mollen
June 27th, 2012
Co-Ops—Selling Shareholders Stated Claim for Housing Discrimination Under New York and Federal Statutes—Sellers, as Well as Purchasers Have Standing—Breach of Fiduciary Duty and Claims Against Individual Directors Dismissed-Punitive Damage Claim Permitted, but Statutory Limit Is $10,000
The plaintiffs had entered into a contract to sell their cooperative apartment (contract) to two purchasers, who were senior citizens residing primarily in Florida (purchasers). The defendants were the co-op corporation and board members. They had denied the purchasers’ application for approval of the contract on the ground that the purchasers did not meet a by-law requirement that they use the apartment as their primary residence. The plaintiffs alleged that the by-laws had “never contained any primary residence requirement” and the purported “ground for rejecting the application was a pretext for discriminating against the [purchasers]” based on their age and against the husband purchaser because he was of Brazilian origin.
The court found that the complaint stated a cause of action for “housing discrimination under New York State’s Human Rights Law (Executive Law §296 ), which makes it an unlawful discriminatory practice to refuse to sell a housing accommodation to any person on the basis of, inter alia, national origin or age….” The defendants challenged the plaintiffs’ standing to assert the claim, since they were “the sellers, not the purchasers,” and they were “not members of the class allegedly being discriminated against (the elderly).”
The court explained that Executive Law §296 (5)(a)(2), “makes it an unlawful discriminatory practice to ‘discriminate against any person’…on the basis of, inter alia, national origin or age in the sale of a housing accommodation.” The court opined that the statute provided “a remedy for any person’ adversely affected by reason of discrimination’ in the provision of housing in New York….” In addition to the statutory language, the court cited the remedial purpose of the Human Rights Law. Moreover, “[g]iven the substantial identity between the language and purposes of Executive Law §296(5) and those of the federal Fair Housing Act (42 USC §3601 et seq.)…, plaintiffs have also stated a claim for housing discrimination under the Fair Housing Act….” The Fair Housing Act defines “an'[a]ggrieved person’ as ‘any person who…(1) claims to have been injured by a discriminatory housing practice; or (2) believes that such person will be injured by a discriminatory housing practice that is about to occur.’…”
Additionally, the court stated that “a corporation does not owe fiduciary duties to its members or shareholders” and dismissed the plaintiffs’ claim alleging a breach of fiduciary duty against the defendant corporation. The court also explained that the plaintiffs’ allegations “that not every board member convened to review the application of the…[purchasers], and that the board improperly rejected the application, do not allege that the directors acted outside their official capacities, and are insufficient to state claims against the directors in their individual capacities….” The court noted that “[a]lthough 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….”
The court further held that the plaintiffs had “alleged sufficiently reprehensible behavior on defendants’
part to support an award of punitive damages….” The plaintiffs “were not required to allege behavior directed at the public generally….” However, “any punitive damages award to plaintiffs for violation of Executive Law §296 is statutorily limited to $10,000….”
Comment: The plaintiffs’ attorney, Adam Leitman Bailey, stated that the foregoing decision by the Appellate Division, First Department, was a case of first impression. Bailey noted that the law has “generally been applied to people who sought to rent or buy a housing unit. Here, the plaintiffs were the sellers.”
When prospective co-op purchasers are rejected, most sellers will not sue their co-op corporation or members of their co-op board. Usually, that is because sellers are anxious to sell their apartment and do not want the apartment to be “tied up” in protracted and expensive litigation. Sellers know that a co-op corporation and its directors have a larger litigation “war chest” since they can fund the litigation from the co-op corporation’s revenues and/or by insurance. Sellers also know that if they lose, they will need their co-op board to approve their next purchaser. Sellers also know that the conduct of the co-op’s corporation and directors will often be protected by the business judgment rule. This means that plaintiffs need to demonstrate that the defendants’ conduct was not in furtherance of the general corporate purposes and constituted bad faith, etc. Absent bad faith, the courts will not “Monday morning quarterback” the judgment of a co-op board. Finally, sellers usually lack evidence of conduct that constitutes illegal discrimination. Co-op boards do not have to explain their decision to reject a purchaser and they rarely do so.