16 E. 96th Apt. Corp. v Neubohn

[*1] 16 E. 96th Apt. Corp. v Neubohn 2006 NY Slip Op 52701(U) [25 Misc 3d 1203(A)] Decided on August 10, 2006 Supreme Court, New York County Solomon, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 August 10, 2006
Supreme Court, New York County

16 East 96th Apartment Corp., Plaintiff,

against

Lars Neubohn and JEAN NEUBOHN, Defendants.



LARS NEUBOHN and JEAN NEUBOHN, Counterclaim Plaintiffs,

against

KENNETH WILLIG, STEPHEN MORGAN, ROSETTE WILLIG and PATRICIA PETERSON, Additional Counterclaim Defendants.



100034/06



Plaintiff was represented by Andrew Bart, Esq., of Kurzman Karelson & Frank, LLP, 230 Park Avenue, New York, NY 10169, tel. no. 212-867-9500. Defendants were represented by Eric Levine, Esq. and Rudy Lehrer, Esq., of Wolf Haldenstein Adler Freeman & Herz, LLP, 270 Madison Avenue, New York, NY 10016, tel. no. 212-545-4600. Counterclaim defendants were represented by Rosen & Livingston, 275 Madison Avenue, New York, NY 10016, tel. no. 212-684-7770.

Jane S. Solomon, J.

Plaintiff 16 East 96th Apartment Corp. moves for partial summary judgment and to sever the counterclaims. Defendants Lars Neubohn and Jean Neubohn cross-move for summary judgment. By a separate motion, plaintiff and the additional counterclaim defendants also move to dismiss the counterclaims. For the reasons below, the motion for partial summary judgment is denied; the cross-motion for summary judgment is denied; and the motion to dismiss defendants' counterclaims is granted as to the first and second counterclaims, and denied as to the third, fourth and fifth counterclaims.

Plaintiff is a cooperative corporation that owns the land and building located at 16 East 96th Street. Defendants are tenant-shareholders in plaintiff's building. Plaintiff alleges defendants made alterations to their apartment without obtaining plaintiff's prior written consent, [*2]as required by the proprietary lease. In April 2004, defendants submitted architectural plans to the then President of the Board of Directors ("Board"), Pat Peterson ("Peterson"), for approval. The alterations entailed a gut renovation of the unit leased by defendants under a proprietary lease. The plans were sent to an architect, Matt Markowitz ("Markowitz"), hired by the Board and paid for by the defendants, for review. Included in the plans were notes calling for the testing of gas lines to two fireplaces for possible reactivation and the installation of central air conditioning. However, detailed plans for the air conditioning were not submitted at this time.

During this period, defendants also sought Peterson's signature for a Department of Buildings ("DOB") permit application. Prior to receiving Board approval for the alterations or Peterson's signature for the DOB application, defendant Lars Neubohn submitted a permit application to the DOB, which he signed as "unit owner." Lars Neubohn also submitted a letter to the DOB stating that the Board was aware he had signed the application as "owner." However, the Board was not aware and had given no approval for the application. In September 2004, however, Peterson signed the alteration agreement and a DOB permit application. Lars Neubohn did not file this application with the DOB, as he had already filed an application, albeit without appropriate authorization. Subsequent to signing the alteration agreement, Peterson stated that she would prefer that defendants did not activate the gas fireplaces. Nonetheless, the alteration agreement was not revised to incorporate this comment.

Defendant's architect submitted detailed plans for the central air conditioning system to Markowitz in February 2005. The plans included compressor units that would be installed on the roof of plaintiff's building. Markowitz sent the plans to a HVAC consultant for review. The HVAC consultant reviewed the plans, made comments, and requested more information. Neither Markowitz nor the consultant objected to the roof location of the compressor unit. The comments focused on the mechanical details of the system. In April 2005, Markowitz learned that work on the air conditioning unit was in progress, and notified the management company, Gabriel Management. Gabriel Management promptly sent defendants a letter requesting that all air conditioning work cease and desist until the Board granted approval. Upon inspection in May 2005, Markowitz discovered that condenser units had been installed on the roof. Defendants state that the building superintendent had provided access to the roof.

In June 2005, defendants notified plaintiff of the completion of alterations, excluding painting and refinishing work. In August and September 2005, plaintiff, through its attorneys, contacted the DOB and alerted them to the lack of authorization for the permit filed by Lars Neubohn. The DOB eventually revoked its permit and issued a stop work order. Plaintiff later informed the DOB that work had not stopped. Upon inspection, the DOB issued a violation for painting. The DOB did not proceed with the matter after receiving letters from two Board members stating that the matter was an internal dispute and that defendants had been authorized to make alterations.

Plaintiff commenced this action in January 2006. In the first cause of action, plaintiff seeks a declaratory judgment declaring defendants are in violation of the lease, the alteration agreement, and the law. In the second cause of action, plaintiff seeks a permanent injunction enjoining plaintiff from performing alterations in their unit; requiring plaintiffs to remove alterations and restore the apartment to its prior condition; restraining plaintiffs from denying plaintiff access to the apartment; and restraining defendants from activating gas fireplaces. [*3]Plaintiff further seeks a permanent injunction enjoining defendants from performing work on the roof of the building; requiring them to remove structures they placed on the roof and to restore the roof to its prior condition; and restraining defendants from using the flues placed on the roof of the building. In the fourth cause of action, plaintiff seeks legal fees, as provided for in the proprietary lease in the event of lessee's default.

Plaintiff contends that defendants did not have Board consent to reactivate their gas fireplaces, and that use of the gas fireplaces would pose a safety hazard to other lessees and the building. In addition, plaintiff argues that defendants appropriated common property in creating flues for their fireplaces. Plaintiff also contends that defendants have damaged the building's roof in creating two holes for their compressor unit. Defendants counter that the plaintiff explicitly consented to the gas fireplaces in signing the alteration agreement. Furthermore, defendants argue that plaintiff consented to the air conditioning system, if not its details. Defendants also point out that other shareholders have HVAC compressor units on the building's roof.

In a motion for summary judgment, the moving party must demonstrate entitlement to judgment as a matter of law in its favor, offering sufficient evidence that there is no material issue of fact. CPLR 3212(b); Alvarez v Prospect Hosp., 68 NY2d 320, 324 (1986). Summary judgment cannot be granted where arguable issues of fact exist. Sillman v Twentieth Century-Fox Film Corp., 3 NY2d 395, 404 (1957). Here, material issues of fact clearly exist. The issues include: 1) whether plaintiff consented to reactivation of the gas fireplaces and creation of flues in signing an alteration agreement that called for possible reactivation; 2) whether consent was revoked as to the fireplaces; 3) what exactly plaintiff consented to in approving architectural plans that provide for a central air conditioning system. The existence of material issues of fact preclude summary judgment in either party's favor.

Defendants counterclaim that Kenneth Willig, Rosette Willig, Patricia Peterson, and Stephen Morgan breached their fiduciary duties as board members in singling out defendants for disparate treatment. The second counterclaim for aiding and abetting breach of fiduciary duty alleges Rosette Willig assisted the individual board members in breaching their fiduciary duties. In the third counterclaim, defendants allege that plaintiff breached its contract with them, including the proprietary lease, by-laws, alteration agreement, and house rules. In the fourth counterclaim, defendants claim a breach of contracts between plaintiff and a cable television service provider, where plaintiff charged defendants a fee proportionate to the number of shares owned rather than the contractual flat fee for all shareholders. Defendants allege that they are third-party beneficiaries of that contract. And finally, in the fifth counterclaim, defendants claim interference with prospective economic advantage. They allege that Peterson, acting for plaintiff, willfully and maliciously refused to execute a recognition agreement, preventing defendants from obtaining a favorable interest rate for their home financing.

These motions were made early in the lawsuit, before a preliminary conference was held or any meaningful discovery made. The plaintiff/counterclaim defendants motion to dismiss was made before answering.

DISCUSSION

A corporation's director owes a fiduciary duty to the corporation and its shareholders, but the business judgment rule generally bars the court from reviewing actions taken by directors on [*4]behalf of the corporation. Konrad v 136 East 64th Street Corp., 246 AD2d 324, 325 (1st Dept 1998). In the absence of allegations that individual directors acted tortiously other than in their capacity as board members, plaintiffs fail to state a cause of action for breach of fiduciary duty against individual directors. Brasseur v Speranza, 21 AD3d 297, 298 (1st Dept 2005). While unequal treatment of shareholders is sufficient to impose liability on individual directors, individual directors may not be subject to liability without allegations of separate tortious acts. DeCastro v Bhokari, 201 AD2d 382, 383 (1st Dept 1994).

Here, defendants contend that counterclaim-defendants breached their fiduciary duties as Board members. Defendants' factual allegations include claims of disparate treatment, accounting and tax fraud related to the 80-20 rule, and Peterson's disclosure to the Board of defendants' private financial information. However, defendants fail to allege independent tortious acts on the part of the individual directors. The factual allegations are entirely based on counterclaim-defendants' actions in their capacity as board members. As such, the motion to dismiss the first counterclaim for breach of fiduciary duty is granted. Accordingly, the second counterclaim, against Rosette Willig for aiding and abetting breach of fiduciary duty also is dismissed.

The motion to dismiss the third counterclaim against the Corporation for breach of the Proprietary Lease, the By-Laws, Alteration Agreement, and House Rules is denied. The business judgment rule prohibits judicial review of a cooperative corporation's decisions, where the board acted for the purposes of the cooperative, within the scope of its authority, and in good faith. Levandusky v One Fifth Avenue Apartment Corp., 75 NY2d 530, 538 (1990). However, the business judgment rule does not prohibit review of decisions when the challenger demonstrates they were made by a board which deliberately singled out individuals for harmful treatment. Id. at 540; see DeCastro, 201 AD2d at 383.

On a motion to dismiss under CPLR 3211, the court must take the allegations as true and resolve all reasonable inferences in favor of the party opposing the motion. Cron v Hargro Fabrics, 91 NY2d 362, 366 (1998). Here, defendants allege that plaintiff unreasonably withheld consent to and hindered defendants' alterations in response to Lars Neubohn's exposure of plaintiff's alleged accounting and tax fraud. Defendants contend that other tenants were permitted to proceed with alterations without permits, and that other tenants have activated gas fireplaces and installed HVAC compressor units on the roof. In addition, defendants allege that the House Rules were amended subsequent to defendants' submission of alteration plans to specifically hinder defendants. Therefore, defendants' allegations establish a question as to whether plaintiff singled defendants out for harmful treatment, thereby failing to act in good faith.

Plaintiff's motion to dismiss the fourth counterclaim of breach of the Time Warner Cable contracts is denied. Shareholders have an individual cause of action where the wrongdoer has breached a duty to the shareholder independent of any duty owed to the corporation. Abrams v Donati, 66 NY2d 951, 953 (1985). Furthermore, a third-party may sue as a beneficiary on a contract made for his benefit. Crown Wisteria, Inc. v F.G.F. Enterprises Corp., 168 AD2d 238, 241 (1st Dept. 1990). Although defendants are shareholders, their factual allegations establish an individual cause of action as tenants against the plaintiff. Defendants claim to have been billed for more than the agreed-upon fee provided for in the contracts between plaintiff and Time [*5]Warner Cable. As tenant-shareholders were the intended beneficiaries of the cable contracts, defendants have standing to sue as third-party beneficiaries.

That part of the motion seeking to dismiss the fifth counterclaim for tortious interference with prospective economic advantage also is denied. Defendants allege that Peterson refused to execute a recognition agreement in connection with defendants' effort to obtain a loan, and that she did so on plaintiff's behalf with malice, and for the sole purpose of inflicting harm on defendants. They allege that had the recognition agreement been executed, they would have qualified for a loan secured by their apartment at a favorable interest rate, and as a result they are paying a higher interest rate.

"To establish [a claim for tortious interference with prospective economic advantage], a plaintiff must demonstrate that the defendant's interference with its prospective business relations was accomplished by wrongful means' or that defendant acted for the sole purpose of harming the plaintiff." Snyder v Sony Music Entertainment, Inc., 252 AD2d 294, 299-300 (1st Dept. 1999). A plaintiff must also establish that defendant directed "some activities towards the third party." Carvel Corp. v Noonan, 3 NY3d 182, 192 (2004).

Here, there is no claim of wrongful means, which would include such conduct as physical violence, fraud, civil suits or criminal prosecution. Snyder, 252 AD2d at 300. However, defendants allege that the sole purpose for Peterson's refusal to execute the recognition agreement sought by the lender was to harm defendants. Although the refusal was not communicated directly to the lender, the only purpose for the recognition agreement was to be submitted to the lender to satisfy its requirements for making the loan, so the counterclaim alleges "some" activity directed toward the third party lender. Carvel, supra. Moreover, if defendants' allegations are believed, the refusal was motivated solely by malice and a desire to harm plaintiffs, which arguably was not a proper exercise of business judgment that would shield plaintiff and Peterson from liability. Cf, Levindusky, 75 NY2d at 542 (business judgment rule applies to board action undertaken in furtherance of legitimate corporate purpose). On a motion to dismiss, the court accepts the facts as alleged in the complaint as true, and accords to the plaintiff every possible favorable inference. Cron, supra, and see Leon v Martinez, 84 NY2d 83 (1994). Under this standard, the fifth counterclaim survives.

Finally, that part of plaintiff's motion which seeks to sever the remaining counterclaims is denied because they relate to defendants' status as tenant-shareholders, and plaintiff offers no good reason to sever them. Accordingly, it hereby is

ORDERED that plaintiff's motion for summary judgment and to sever the counterclaims is denied; and it further is

ORDERED that defendants' cross-motion for summary judgment is denied; and it further is

ORDERED that the motion by plaintiff/counterclaim defendants to dismiss the counterclaims is granted as to the first and second counterclaims, and otherwise is denied; and the plaintiff/counterclaim defendants shall serve a reply to the counterclaims by September 15, 2006; and it further is

ORDERED that counsel appear in Part 55, 60 Centre

Street, Room 432, New York, NY on September 18, 2006 at 12 noon for a preliminary conference. [*6]

Dated: August , 2006

ENTER:

__________________

J.S.C.