Cohen v Seward Park Hous. Corp.

[*1] Cohen v Seward Park Hous. Corp. 2005 NY Slip Op 50614(U) Decided on April 18, 2005 Supreme Court, New York County Feinman, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on April 18, 2005
Supreme Court, New York County

DANIEL COHEN and MALKI COHEN, Plaintiffs,

against

SEWARD PARK HOUSING CORPORATION and THE BOARD OF DIRECTORS OF THE SEWARD PARK HOUSING CORPORATION, Defendants.



105088/04



For the Plaintiffs:For the Defendants:

Mark R. Kook, Esq.Todd M. Parmett, Esq.

Vandenberg & Feliu, LLPWinget, Spadafora & Schwartzberg, LLP

110 East 42nd Street, Suite 150245 Broadway, 19th Fl.

New York NY 10017New York NY 10006

(212) 763-6800(212) 221-6900

Paul G. Feinman, J.

Plaintiffs, husband and wife, are shareholders in the defendant cooperative housing corporation, Seward Park Housing Corporation. The plaintiffs have also sued the Board of Directors of the corporation. The defendants move to dismiss the complaint based upon documentary evidence and on the ground that it fails to state a cause of action (CPRL 3211[a][1] and [7]). For the reasons set forth below, the motion is granted as to the second cause of action only and otherwise denied.

Factual Background

Plaintiffs Daniel and Malki Cohen are shareholders of the Seward Park Housing Corporation. According to their complaint and Mr. Cohen's affidavit, plaintiffs are Orthodox Jews who have lived in the Seward Park Apartments for more than 13 years. Their application to purchase apartment C402, which adjoins their current unit, was denied by the cooperative board in 2001 and again in 2002. Plaintiffs' complaint alleges causes of action for breach of fiduciary duty, breach of contract, and unlawful discrimination based on religion pursuant to NY Exec. L. § 296.

Plaintiffs own the shares and have proprietary leases for apartments C503, C502, and C403 (Complaint 6). According to defendants, in addition to being a shareholder of the Seward [*2]Park Housing Corporation, plaintiff Daniel Cohen served on the board of directors for eight years and is a commercial tenant with storefront space in the apartment complex (Not. of Mot., Anderson Aff. ¶ 2). In February 2001, plaintiffs entered into a contract to purchase the shares and proprietary lease for apartment C402 for $160,000, from the Estate of Milton Greenberg (Complaint 9). Apartment C402 is contiguous to other apartments already owned by plaintiffs (Complaint 10). Plaintiffs sought to add it to their existing space for living purposes (Cohen Aff. ¶ 10).

In March 2001, plaintiffs submitted their application to the cooperative board (Complaint 12). On about April 5, 2001, the board asserted a "right of first refusal" with respect to the contract on the ground that the purchase price was too low or not within the market range for such apartments (Complaint 18, 37). Mr. Cohen avers that the board's use of the "right of first refusal" is a tactic that is no longer employed because the board was advised it violates shareholders' rights to freely buy and sell apartments (Cohen Aff. ¶ 21). Plaintiffs claim the price was within the fair market price (Complaint 19).

Sometime in December 2001, plaintiff Daniel Cohen and board president Donald West discussed the fact that the apartment was still vacant and available and plaintiffs were told to submit a written offer (Complaint 21-22). On about January 28, 2002, plaintiffs delivered a written offer of $190,000, without brokerage fee, a price within the fair market, and were prepared to offer a higher price if the board requested it (Complaint 23-26).[FN1] The board apparently rejected the offer, but never informed plaintiffs of the decision. Plaintiffs only learned that apartment C402 had been sold, apparently in May 2002 for $230,000, when they overheard construction work being done (Complaint 28-30; Not. of Mot., Anderson Aff. ¶ 16).

Plaintiffs allege that the board acted in bad faith and without a legitimate purpose, and acted in a discriminatory manner (Complaint 32-34). They have never been in default on their maintenance or other obligations with respect to any of the three apartments they own in the Seward Park Apartments and have "excellent financial qualifications" (Complaint 13, 30). They note that the board has approved other applications by shareholders and residents to purchase "similar" apartments at prices equal to or below the market price, and allowed certain shareholders and residents "who have personal relationships with particular Board members" to purchase apartments at below market rates without asserting a right of first refusal (Complaint 39-40; Cohen Aff. ¶¶ 31-34). Moreover, there are "well over a dozen multiple-residences of similar size" in the cooperative complex, and one board member owns four apartments and was approved to purchase a fifth after plaintiffs' application was rejected (Cohen Aff. ¶¶ 36-38). In addition, West and other members of the board allegedly held "personal animosities" against plaintiffs, and some of the board members "discriminated generally against Orthodox Jewish residents and shareholders" (Complaint 16-17). Plaintiffs seek a total of $3,000,000 in damages for the claims of breach of fiduciary duty, breach of contract, and discrimination based on religion (Complaint 45, 48, 52).

Analysis[*3]

To begin, it must be emphasized that at this early stage of the litigation, when the defendants have not even yet interposed an answer to the plaintiffs' claims, the law requires the court to accept all the facts alleged in the complaint as the truth. The court has neither knowledge of, nor an opinion of, whether the board or any of its individual members has acted in a manner that discriminates based upon religion. However, the plaintiffs must be accorded the "benefit of every possible favorable inference," and the court's role at this juncture is only to determine "whether the facts as alleged fit within any cognizable legal theory" (Leon v Martinez, 84 NY2d 83, 87-88 [1994] [citations omitted]). Of course, bare legal conclusions are not entitled to such consideration (Franklin v Winard, 199 AD2d 220, 220 [1st Dept. 1993]).

Where the grounds for dismissal are founded upon documentary evidence, "the documents relied upon must resolve all of the factual issues as a matter of law" or dismissal will be denied (Weiss v Cuddy & Feder, 200 AD2d 665, 667 [2d Dept 1994][emphasis added]; CPLR 3211 [a] [1]). Furthermore, when assessing a motion under CPLR 3211 (a) (7), the court may consider affidavits submitted by the plaintiffs to remedy any defects in the complaint (Leon v Martinez, 84 NY2d at 88, citing Rovello v Orofino Realty Co., 40 NY2d 633, 635 [1976]). The test is "whether the proponent of the pleading has a cause of action, not whether he has stated one" (Leon v Martinez at 88, citing Guggenheimer v Ginzburg, 43 NY2d 268, 275 [1977]; Rovello, 40 NY2d at 636). In order for a defendant to prevail on a motion to dismiss, it must convince the court that nothing the plaintiff can reasonably be expected to prove would establish a valid claim (Siegel, New York Practice, § 265 [3d ed.]).

Here, although defendants proffer many varied documents, including minutes from various board meetings, portions of the proprietary lease and the bylaws, certificates for the apartment shares owned by plaintiffs, the assignment and bill of sale and plaintiffs' lease for the commercial store, the documents do not resolve all the factual issues at hand. Therefore, as is discussed more fully below, the court is compelled to deny defendants' motion to dismiss pursuant to CPLR 3211(a)(1). As to whether the complaint states a cause of action, the court shall address the asserted causes of action in seriatim.

1. Breach of Fiduciary Duty

Citing several cases from the Appellate Division, First Department involving rejected cooperative buyers, defendants argue they did not owe plaintiffs a fiduciary duty, because as purchasers of shares and the proprietary lease for apartment C402, plaintiffs were "strangers" to the board and have no standing to sue (Woo v Irving Tenants Corp., 276 AD2d 380 [1st Dept. 2000]; Pober v Columbia 160 Apts. Corp., 266 AD2d 6 [1st Dept. 1999]; GSG Holdings, Inc. v Multi Boro Realty Corp., 240 AD2d 159 [1st Dept.], lv denied 91 NY2d 804 [1997]). In all of the cases relied upon by defendants, upon post-answer motions for summary judgment, the plaintiffs therein were held to lack standing to enforce the proprietary lease against the cooperative corporation because they were "mere contract vendees" and not parties or third-party beneficiaries of the proprietary lease between the cooperative and the owner of the contracted-for shares (Woo, at 380; Pober at 6; GSG Holdings at 160). The courts in Woo and Pober also explicitly found that there had been no showing of bad faith on behalf of the cooperatives (Woo [*4]at 380), nor evidence of self-dealing (Pober at 6).[FN2] Defendants also contend that plaintiffs have failed to plead their claim of breach of fiduciary duty with the required particularity and only make conclusory assertions (Parmett Aff. ¶¶ 14-15, citing Le Bar Bat v Shallo, 198 AD2d 49 [1st Dept. 1993], CPLR 3016[b]).

Relying on Bernheim v 136 East 64th Street Corp., 128 AD2d 434 (1st Dept. 1987), plaintiffs argue that because they are existing shareholders, defendants do in fact owe them a fiduciary duty. In Bernheim the Appellate Division reinstated a claim for breach of fiduciary duty because there was a question of good faith rejection of the plaintiffs' application as the plaintiffs were shareholders of the cooperative (128 AD2d at 435; see also Bryan v West 81 Street Owners Corp., 186 AD2d 514 [1st Dept. 1992] ["directors of the coop owe a fiduciary duty to plaintiffs-shareholders"]) .

While it is true that in the case at bar the allegations set forth in the complaint are stated in general terms, it is clear that plaintiffs allege that the board did not act in good faith or in the interest of the shareholders. Plaintiffs clearly allege that the board refused to sell the apartment to them, shareholders in good standing, who raised their initial offering price and expressed a willingness to pay even more. They further allege with specificity that the decision to keep the apartment off the market for more than a year before selling it without informing plaintiffs was not done in good faith.

Regardless of whether plaintiffs have standing to sue, defendants further contend that dismissal of this cause of action is required because the board's decision to reject plaintiffs' application is shielded from court review as it falls within the board's business judgment in furtherance of proper corporate purposes. The Court of Appeals established the parameters of judicial review of board actions in Matter of Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530 [1990]. So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the board's. Stated somewhat differently, unless a resident challenging the board's action is able to demonstrate a breach of this duty, judicial review is not available.

(Matter of Levandusky, at 538). Levandusky requires a plaintiff challenging an action by a board of directors to demonstrate a breach of the board's fiduciary duty (75 NY2d at 539). Thus, the court in Jones v Surrey Coop. Apts., Inc., 263 AD2d 33 (1st Dept. 1999), in reversing the denial of summary judgment and dismissal of the complaint, explained that "without a showing of a breach of fiduciary duty to the corporation, judicial inquiry into the actions of corporate directors is prohibited. . . . Inquiry into claims of fraud and self-dealing is permitted only where a factual basis exists to support such a claim." (263 AD2d at 36, citations omitted). Defendants contend that plaintiffs resort to conclusory allegations such as that the board president and other board members had "personal animosities" toward them, allegations which were explicitly characterized as legally insufficient by Levandusky (at 540), and argue that the complaint [*5]accordingly fails to state a cause of action.

Here, however, plaintiffs have not simply asserted that the board holds personal animosity toward them, but have set forth circumstances which, if true, show a board seemingly unwilling to allow them to buy the apartment they wanted at any price for a reason which could be understood as exhibiting animosity. They allege that their application was treated differently from others, in that other apartments sold for similar prices to what they offered, and that a board member had been given approval to buy a fifth apartment. A showing of unequal treatment is sufficient to allege bad faith (Barbour v Knecht, 296 AD2d 218, 224 [1st Dept. 2002]). Moreover, it should be noted that Levandusky is distinguishable in terms of its procedural posture. Levandusky was an Article 78 proceeding and, pursuant to CPLR 409(b), Article 78 proceedings are disposed of in the same manner as motions for summary judgment (CPLR 409[b]), meaning that the issue will be whether there are triable issues of fact (Kosson v "Algaze," 84 NY2d 1019 [1995]), rather than whether the complaint has sufficiently stated a cause of action (Leon v Martinez, 84 NY2d 83). In the pre-discovery stage of litigation, it is inappropriate to dismiss a claim by invoking the "business judgment rule," given that plaintiffs have set forth more than conclusory allegations concerning defendants' fiduciary duties (see, Bryan v West 81 Street Owners Corp., 186 AD2d 514, 515 [1st Dept. 1992]; see also Ackerman v 305 East 40th Owners Corp., 189 AD2d 665 [1st Dept. 1993] [pre-discovery dismissal of pleadings in the name of the business judgment rule is inappropriate where shareholders sufficiently alleged facts to support finding that defendant board did not act in good faith by withholding approval of sale of apartment]). Accordingly, defendants' motion to dismiss the first cause of action is denied without prejudice to renewal upon completion of discovery.

2. Breach of Contract

Defendants move to dismiss the second cause of action on the same grounds stated above concerning the breach of fiduciary duty, and on the fact that plaintiffs have not articulated the provisions of the contract allegedly breached (see, Atkinson v Mobil Oil Corp., 205 AD2d 719, 720 [2d Dept. 1994]) . According to the complaint, the contract at issue consists of the documents between the shareholders and residents and the cooperative corporation (Complaint ¶ 47). "A condominium's by-laws constitute a contract with the unit owners" (Mishkin v 155 Condominiums, 2 Misc 3d 1001(A), 784 NYS2d 921 [Sup. Ct., NY County 2004], citing, Lesal Assocs. v Board of Mgrs., 309 AD2d 594 [1st Dept 2003]). Here, the bylaws set forth the duties of the board of directors (Not. of Mot. Ex. J, By-Laws, Art. II, sec. 12), forbid the misuse of corporation information (Art. II, sec. 14), and set forth the procedure for the right of first refusal (Art. VI, sec. 6). Plaintiffs do not allege that the board of directors misused information when it denied their application, nor do they argue that the right of first refusal procedure was carried out improperly. Accordingly, as plaintiffs fail to establish a separate breach of contract claim apart from their claim for breach of fiduciary duty, defendants' motion is granted to the extent that the second cause of action is dismissed.

3. Violation of Sec. 296 of New York Executive Law

Plaintiffs' third cause of action is premised on a violation of N.Y Exec. L. § 296(5)(a), which makes it unlawful to refuse to sell real property to a qualified person on the basis of his or her "creed." In establishing a claim based on religious discrimination under the Executive Law, the burden-shifting framework of McDonnell Douglas Corp. v Green, 411 U.S. 792 (1973) and [*6]Texas Dept. of Community Affairs v Burdine, 450 U.S. 248 (1981) applies (Mancabelli v Solvay Union Free Sch. Dist., 180 F. Supp 2d 371 [NDNY 2001]). To prevail, a plaintiff must first prove by a preponderance of the evidence a prima facie case of discrimination. If the plaintiff succeeds in proving the prima facie case, the burden shifts to the defendant to articulate a legitimate, nondiscriminatory reason for its actions. If the defendant succeeds, the plaintiff then may prove by a preponderance of the evidence that the legitimate reasons offered by the defendant were not its true reasons, but were a pretext for discrimination (Burdine, 450 U.S. at 252-53 [quoting McDonnell Douglas, 411 U.S. at 802, 804]).

Here, bearing in mind that in this procedural context, the court's focus is to examine the allegations of the complaint before it, while accepting them as true, plaintiffs clearly have standing to bring a claim based on religious discrimination. They belong to a protected class of persons, Orthodox Jews, covered under the statute (Gaynor v Rockefeller, 15 NY2d 120 [1965]). Defendants argue that this cause of action must be dismissed because plaintiffs have asserted only that the board's president had a "personal grudge and animosity" toward Daniel Cohen (Cohen Aff. ¶ 42) and that he and other board members had "personal animosities against plaintiffs" and "discriminated generally against Orthodox Jewish residents and shareholders" (Complaint ¶ 17), but without setting forth specific factual allegations that would tend to substantiate their claim. However, in this early stage of the litigation, it is sufficient for plaintiffs to allege that they were denied the shares for the apartment based on the board's animus to Orthodox Jews.

Defendants should answer the complaint, and plaintiffs permitted to undertake discovery. It is simply not the role of the court at this juncture to evaluate the truth of plaintiffs' allegations. The board may well defend this action by answering that it simply wanted to sell the apartment for the best price. However, it is simply too early at this juncture to evaluate whether this defense constitutes a neutral reason for its actions and, if so, whether the reason is pretextual in nature (see, Levine v Feldman, 215 AD2d 182 [1st Dept. 1995] [denying pre-discovery dismissal of complaint alleging age discrimination]). Obviously, defendants are free to renew their motion to dismiss upon a motion for summary judgment after they answer and after there have at least been depositions of the parties. Accordingly, the branch of the motion which seeks dismissal of the third cause of action is denied.

It is

ORDERED that the motion to dismiss the complaint pursuant to CPLR 3211(a)(1) and (7) is granted to the extent that the second cause of action for breach of contract is severed and dismissed and the clerk shall enter judgment accordingly on the second cause of action. It is further

ORDERED that the remainder of the action shall continue under the supervision of the Hon. Faviola A. Soto, who is now the justice assigned to IAS Part 7. It is further

ORDERED that if a preliminary conference to establish a discovery schedule has not yet been held, the plaintiffs' attorney shall promptly contact the Clerk of IAS Part 7 to schedule same.

This constitutes the decision and order of the court. The court has mailed copies of this decision to counsel.

Dated:April 18, 2005 ____________________________________ [*7]

New York, New York J.S.C. Footnotes

Footnote 1:According to the January 22, 2002 letter from plaintiffs to the board, in which they offered $190,000 for the apartment, an "identical" one-bedroom apartment on the 14th floor was recently approved for sale at $190,000, less a broker fee (Cohen Aff. in Opp. Ex. 2).

Footnote 2:GSG Holdings concerns a different set of facts involving a seller who, unable to compel the cooperative corporation to transfer the shares and proprietary lease to the prospective buyer-plaintiff, exercised his right to cancel the contract "for any reason." (240 AD2d at 159).