Osberger v 18 Mercer Equity Inc.
Annotate this CaseDecided on December 23, 2015
Civil Court of the City of New York, New York County
Bonnie Soon Osberger and Mark Osberger, Plaintiffs,
against
18 Mercer Equity Inc., Defendant.
CV-23033-14/NY
Plaintiffs' Counsel
William A. Thomas, Esq.
89 Fifth Ave, Suite 900
New York, NY 10019
Defendant's Counsel
Michael P. Regan, Esq.
Smith, Gambrel & Russel LLP
1301 Avenue of the Americas, 21st Floor
New York, NY 10019
Paul A. Goetz, J.
Plaintiffs, Bonnie Soon Osberger and Mark Osberger ("Plaintiffs"), brought this action against Defendant, 18 Mercer Equity Inc. ("Defendant"), seeking to recover thirteen thousand five hundred seventy-one dollars and sixty-nine cents ($13,571.69) for attorney's fees expended as a result of retaining counsel to intervene on their behalf in administrative proceedings brought by the City of New York (the "City") against [*2]Defendant. The administrative proceedings were brought by the City in response to complaints made against Plaintiffs by a former member of the Board of Directors of Defendant that Plaintiffs were illegally renting their apartment for short periods of time. Plaintiffs now move for summary judgment pursuant to Civil Practice Laws and Rules ("CPLR") section 3212 and Defendant cross-moves for summary judgment or in the alternative for an order compelling Plaintiffs to comply with disclosure demands. Plaintiffs assert four causes of action: common law indemnification, contractual indemnification, breach of fiduciary duty and breach of the duty of good faith and fair dealing "inherent in plaintiff's [sic] proprietary lease."
The Motion and Cross-Motion for Summary Judgment
Defendant is a cooperative corporation that owns 18 Mercer Street ("the building"). Plaintiff Bonnie Soon Osberger is a cooperative shareholder and proprietary lessee of an apartment in the building and Plaintiff Mark Osberger is her husband and resides with her in the apartment. There is no dispute that a former member of the Board of Directors of Defendant called 311 to ask the City to investigate Plaintiffs' use of their apartment in April, 2011 and November, 2012 specifically whether Plaintiffs were illegally renting their apartment on a short-term basis. In response to the April, 2011 call to 311, an investigation was conducted and no violations were issued. In response to the November, 2012 call to 311 an investigation was conducted and the Nyew York City Department of Buildings ("DOB") and New York City Fire Department ("FDNY") issued violations against the Defendant relating to the alleged illegal transient use of Plaintiffs' apartment.
By email, dated December 18, 2012, from the Defendant's counsel to Ms. Soon Osberger, the Board agreed to defer sending Plaintiffs a notice to cure the alleged illegal use if Ms. Soon Osberger, inter alia, obtained counsel to appear at the hearing on the DOB violations and seek their dismissal. Ms. Soon Osberger did retain counsel who appeared at the hearing but was not permitted by the administrative law judge to intervene. Defendant's counsel also appeared at the administrative hearing held on February 21, 2013, and was successful in having the DOB violations dismissed.
Plaintiffs now seek to recover the attorney's fees they expended for counsel to represent them at the hearing. Plaintiffs deny illegally renting their apartment, claiming that the former Board member made false allegations that resulted in violations issued against the building. Plaintiffs allege that it was this wrongful conduct by the former Board member and ratified by the Board that caused them to incur the legal fees.
In support of its cross-motion and in opposition to Plaintiffs' motion, Defendant submits the affidavit of the former Board member who states that he had a good faith [*3]belief that Ms. Soon Osberger was illegally renting her apartment on a short term basis based on his observations of people frequently entering and leaving Ms. Soon Osberger's apartment for short term stays, based on conversations with some of those people, and based on internet advertisements offering to rent Ms. Soon Osberger's apartment for periods as short as a week. The former Board member further attests that City investigators instructed him to call 311 during their April, 2011, visit to the building if he observed that Ms. Soon Osberger continued to operate an illegal hotel out of her apartment. Based upon the City investigators' instructions and his concern for the safety and well-being of the other tenant shareholders in the building, the former Board member states that he believed he had a duty to the building to report future instances of illegal conduct to the City. Finally, the former Board member attests he did not know that any violations issued would be issued against the Defendant and not Ms. Soon Osberger personally.
" [T]he proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact.'" (Jacobson v New York City Health and Hospitals Corp., 22 NY3d 824, 833 [2014] [quoting Alvarez v Prospect Hosp., 68 NY2d 320, 324 (1986)]. "This burden is a heavy one and on a motion for summary judgment, facts must be viewed in the light most favorable to the non-moving party.'" (Id. [quoting William J. Jenack Estate Appraisers and Auctioneers, Inc. v Rabizadeh, 22 NY3d 470, 475 (2013)]. "If the moving party meets this burden, the burden then shifts to the non-moving party to establish the existence of material issues of fact which require a trial of the action.'"(Id. [quoting Vega v Restani Constr. Corp., 18 NY3d 499, 503 (2012)]).
The Court now turns to each of Plaintiffs' four causes of action: (1) common law indemnification; (2) contractual indemnification; (3) breach of fiduciary duty; and (4) breach of the duty of good faith and fair dealing "inherent in plaintiff's [sic] proprietary lease."
Common law indemnification
As the Court of Appeals has observed, "[i]mplied or common-law indemnity is a restitution concept which permits shifting the loss because to fail to do so would result in the unjust enrichment of one party at the expense of the other. . . Consistent with the equitable underpinnings of common-law indemnification, our case law imposes indemnification obligations upon those actively at fault in bringing about the injury, and thus reflects an inherent fairness as to which party should be held liable for indemnity." (McCarthy v Turner Construction, Inc., 17 NY3d 369, 375 [2011] [internal quotations and citations omitted]).
Plaintiffs argue Defendant is actively at fault for their incurring legal fees because the former Board member called 311 with a false claim against Plaintiffs and then [*4]importuned upon Plaintiffs to hire counsel to represent them at the administrative hearing on the violations issued as a result of the former Board member's call to 311.
While Plaintiffs' claim may be for common law indemnification, "the business judgment' rule [is] the correct standard of judicial review of the actions of the directors of a cooperative corporation. That rule prohibits judicial inquiry into the actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.'" (Fletcher v The Dakota, Inc., 99 AD3d 43, 48 [1st Dept 2012]; quoting Levandusky v One Fifth Ave. Apt Corp., 75 NY2d 530, 553 & 537-538 [1990]). "Arbitrary or malicious decision making or decision making tainted by discriminatory considerations is not protected by the business judgment rule." (Id.)
The Court rejects Plaintiffs' assertion that the former Board member falsely accused Plaintiffs of illegally renting out their apartment on a short term basis. Annexed to Defendant's moving papers are screen shots of Craigslist and Airbnb listings advertising Plaintiffs' apartment for periods as short as a week. Plaintiffs' reply and opposition papers consist only of counsel's affirmation and do not deny that the adverstisements offer Plaintiffs' apartment for short term rental. Consequently, the Court deems admitted by Plaintiff that the screen shots of advertisements for short term rental of an apartment from Craisgslist and Airbnb are for Plaintiffs' apartment. (Madeline D'Anthony Enterprises, Inc. v ZCAM LLC, 101 AD3d 606, 609 [1st Dept 2012] [" Facts appearing in the movant's papers which the opposing party does not controvert, may be deemed to be admitted.'"] [quoting Kuehne & Nagel v Baiden, 36 NY2d 539, 544 (1975)]).
Also, annexed to Defendant's moving papers are New York City Fire Department ("FDNY") violation orders, dated November 13, 2012, including a violation order requiring Plaintiffs to "discontinue transient use occupancy/hotel operation on 3rd floor contrary to Department of Buildings Records (Certificate of Occupancy No. 118622)." The violations are issued against Defendant but list Plaintiffs' apartment as the location within the building where the violations exist. Annexed to Plaintiffs' moving papers is a DOB violation pertaining to work done in Plaintiffs' apartment without a DOB permit, directing that all work be stopped and that a permit be obtained. "[P]ursuant to CPLR § 4518(c), books, papers and other things of a . . . department or bureau of a municipal corporation or of the state' (CPLR § 2307 [a]), are admissible as business records and are deemed prima facie evidence of the facts contained therein, "provided they bear a certification or authentication by the head of the department or bureau of a municipal corporation or of the state, or by an employee delegated for that purpose.'" (Barchar v Radovich, 183 AD2d 689 [2nd Dept 1992] [citations omitted]). While the FDNY and DOB violations are not certified or authenticated, neither party challenges the authenticity of the violations submitted by the other party and, therefore, the Court deems the violations authenticated and prima facie evidence of the facts contained in each. (Madeline D'Anthony Enterprises, Inc., 101 AD3d at 609).
The Court finds that the former Board member and the full Board's actions were done in good faith and in the exercise of their honest judgment in the lawful and legitimate furtherance of the cooperative corporation's purposes. (Fletcher, 99 AD3d at 48). The Airbnb and Craisgslist listings gave rise to Defendant's legitimate concern that Plaintiffs were illegally renting their apartment for short term stays. The Court finds the former Board member's calls to 311 — because he was concerned for the well-being of the other tenants in the building — constituted legitimate actions in furtherance of the cooperative corporation's purposes. (Id.). That the former Board member and Board were unaware any violations issued by the City would be issued against Defendant and not Plaintiffs and indeed were issued against Defendant is of no importance.Decisions by the Defendant's Board that subsequently turn out to be ill-advised do not take Defendant's actions out of the purview of the business judgment rule. Irrational or ill-advised decisions are still protected as long as the decisions, as here, were made in good faith to advance the corporate interests. (In Re Caremark Int. Inc., 698 A2d 959, 967 [De Chancery Ct, New Castle 1996] [observing that whether a fact finder determines after the fact that a corporate decision was substantively wrong does not provide a basis for liability "so long as the court determines that the process employed was either rational or employed in a good faith effort to advance corporate interests."]).
Even if Defendant's actions were not protected by the business judgment rule, Plaintiffs' common law indemnification claim would still fail because Defendant was not unjustly enriched at Plaintiffs' expense. (see Fidelity National title Insurance Co. v NY Land Title Agency LLC, 121 AD3d 401, 404 [1st Dept 2014] [holding "[t]o adequately plead an unjust enrichment claim, plaintiff must allege, among other things, that [defendant] was enriched at plaintiff's expense]). While Plaintiffs did hire counsel at Defendant's urging to appear at the administrative hearing, Plaintiffs' counsel was not allowed to appear, Defendant's counsel succeeded in having the violations dismissed, and Plaintiff had a vested interest in seeing that the violations were dismissed because if they were proven then Defendant would have a basis for serving Plaintiffs with predicate notices and seeking their eviction if the violations were not cured. Consequently, Defendant did not derive a benefit from Plaintiff's retention of counsel. (Id.).
Moreover, "[t]he theory of unjust enrichment lies as a quasi-contract claim. It is an obligation imposed by equity to prevent injustice, in the absence of actual agreement between the parties concerned. Where the parties executed a valid and enforceable written contract governing a particular subject matter, recovery on a theory of unjust enrichment for events arising out of the subject matter is ordinarily precluded." (IDT Corp. v Morgan Stanley Dean Witter & Co., 12 NY3d 132, 142 [2009]). Here the parties entered into a valid and enforceable proprietary lease which governs the parties' relationship - their rights and responsibilities to each other vis-a-vis Plaintiffs' occupancy of the apartment. Therefore, Plaintiffs' unjust enrichment claim is precluded. (Id.). Whether Plaintiffs may recover attorney's fees under the terms of the proprietary lease, will be discussed below. (Id.).
Accordingly, summary judgment is granted in favor of Defendant on Plaintiffs' common law indemnification claim.
Consequential or Special Damages
Plaintiffs also argue that they are entitled to recover their attorney's fees under a consequential damages theory which according to Plaintiffs are outside the American Rule on attorney's fees.
It is long established that American Rule "requires all parties to a controversy - the victors and the vanquished - to pay their own incidents of litigation,'" including attorney's fees. (Matter of Hyde, 15 NY3d 179, 185 [2010]). "There is a well-recognized exception [to the American Rule], however, where the damages are the proximate and natural consequence of defendants' tortious act which requires plaintiff to defend or to bring an action against a third party." (Central Trust Co., Rochester v Goldman, 70 AD2d 767, 767-68 [4th Dept 1979]; app dismissed 47 NY2d 1008).
This case does not fall within the exception to the American Rule on attorney's fees carved out by Central Trust Co. for two reasons. First, as shown above, Defendant's actions were taken in good faith and are not tortious. Second, Plaintiffs were not a party to the administrative hearing and therefore, were not required to defend themselves at the hearing because the violations were issued against the Defendant not Plaintiffs.
Accordingly, Plaintiffs are not entitled to recover the attorney's fees they incurred under consequential damages theory.
Breach of Fiduciary Duty
Plaintiffs cite the Second Department case, Board of Managers of Acorn Ponds at North Hills Condominium I v Long Pond Investors, Inc. (233 AD2d 472 [1996]) for the proposition that they have a right to collect the attorney's fees they seek in this case under a breach of fiduciary duty cause of action. In Board of Managers of Acorn Ponds the Second Department held, inter alia, that "the current board of managers of a condominium may seek recovery from the members of the initial board of managers for the breach of fiduciary duties owed to the condominium and its unit owners . . ." (Id. at 472-473).
Here, however, Plaintiffs are not a condominium board of managers suing an initial board of managers but rather one of the Plaintiffs is a shareholder in the Defendant cooperative corporation (Ms. Soon Osberger) and the other is her spouse. It has long been recognized in the First Department that a cooperative corporation does not owe a fiduciary duty to its shareholders. (Fletcher v The Dakota, Inc., 99 AD3d 43, 54 [1st Dept 2012] [holding "[b]ecause the Dakota is a corporation, it owes no fiduciary [*5]duty to its shareholders."]; Stalker v Stewart Tenants Corp., 93 AD3d 550, 552 [observing "[i]t is black letter law that a coporation does not owe fiduciary duties to its members or shareholders'"] [citations omitted]; Peacock v Herald Sq. Loft Corp., 67 AD3d 442, 443 [1st Dept 2009] [dismissing breach of fiduciary duty cause of action against cooperative corporation]).
Accordingly, summary judgment is granted in favor of Defendant on Plaintiffs' breach of fiduciary duty cause of action.
Contractual Indemnification
Plaintiffs argue that paragraphs 3(b) and 32 of the proprietary lease entitle Defendant to recover attorney's fees and that Plaintiffs are afforded a reciprocal right pursuant to Real Property Law ("RPL") section 234.
RPL section 234 "provides for the reciprocal right of a lessee to recover an attorney's fee when the same benefit is bestowed upon the lessor in the parties' lease." (Cohan v Bd of Directors of 700 Shore Rd Waters Edge, Inc., 108 AD3d 697, 700 [2nd Dept 2013]).
Paragraph 3(b) of the proprietary lease provides in pertinent part that the "Lessee agrees to save Lessor harmless from all liability, loss, damage and expense arising from injury to person or property occasioned by the failure of lessee to comply with any provision hereof, or due wholly or in part to any act, default or omission of Lessee . . . "
Paragraph 32 of the proprietary lease provides in pertinent part "[i]f Lessee shall at any time be in default hereunder and if Lessor shall institute an action or summary proceeding against Lessee, based upon such default, Lessee will reimburse Lessor for the expense of reasonable attorney's fees . . ."
Plaintiffs are correct that had the proprietary lease granted Defendant the right to collect attorney's fees under the circumstances of this case, RPL section 234 would grant Plaintiffs a reciprocal right to recover their attorney's fees. However, the proprietary lease does not permit the Defendant to recover attorney's fees under the circumstances of this case and, therefore, it does not allow Plaintiffs to do so.
Paragraph 3(b) addresses injury to a person or to personal property. Plaintiffs do not allege injury to themselves or to their personal property, therefore, paragraph 3(b) of the proprietary lease does not afford them a right to recover the attorney's fees they seek in this case.
Paragraph 32 addresses summary proceedings initiated by Defendant. Plaintiffs are not seeking to collect attorney's fees incurred in a summary proceeding, therefore, paragraph 32 of the proprietary lease does not afford them a right to recover [*6]the attorney's fees they seek.
Accordingly, summary judgment is granted in favor of Defendant on Plaintiffs' contractual indemnification claim.
Implied Covenant of Good Faith and Fair Dealing
Plaintiffs' breach of the implied covenant of good faith and fair dealing cause of action is based on the same allegations as the underlying breach of the proprietary lease claim and therefore, must be dismissed as duplicative. (Rossetti v Ambulatory Surgery Center of Brooklyn, LLC, 125 AD3d 548 [1st Dept 2015]; Ullmann-Schneider v Lacher & Lovell-Taylor, P.C., 121 AD3d 415 [1st Dept 2014]).
Accordingly, summary judgment is granted in favor of Defendant on Plaintiffs'
breach of the implied covenant of good faith and fair dealing claim.
Accordingly, it is hereby
ORDERED Plaintiffs' summary judgment motion is DENIED in its entirety; and it is further
ORDERED Defendant's cross motion for summary judgment is GRANTED in its entirety; and it is further
ORDERED the Clerk is directed to enter judgment in favor of Defendant.
This Constitutes the Decision and Order of the Court.
Dated: December 23, 2015
ENTER:
_____________________________
PAUL A. GOETZ, J.C.C.
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