Axelrod v. 400 Owners Corp.

A co-op shareholder seeking to sell her apartment claimed that the co-op refused to approve purchasers who might have children. The court refused to dismiss the action in Axelrod v. 400 Owners Corp., holding that the shareholder should be given an opportunity to prove the allegations.

In this case, the plaintiff, Sharon Axelrod, was a co-op shareholder. She alleged that, when she sought to sell her apartment, the co-op improperly refused to approve two prospective purchasers before finally consenting to a sale to a third person. The board moved for an order dismissing the complaint because she lacked standing and had failed to state a cause of action.

In July 1998, Axelrod entered into a contract to sell the apartment to Richard Kassel and Penny Venetis for $435,000. She alleged that the directors rejected the prospective purchasers because they were a married couple in their thirties and were of child-bearing age. In December 1998, Axelrod's broker found another married couple interested in buying the apartment. In an informal interview with the board, the broker was advised that the prospective purchasers would not be approved, so the parties did not go to contract.

In February 1999, the broker secured several additional prospective purchasers: the Rigbys, a married couple, offered $435,000, and John McCusker, who offered $455,000. Axelrod then entered into a contract with McCusker, who was in his early thirties and was about to be married. The board of directors, however, rejected McCusker as a purchaser.

In October 1999, Axelrod entered into a contract of sale with Martine Shen, a 59-year-old divorced woman with no children who were under-age. The price was $455,000. This time, the board approved the sale.

In evaluating a motion to dismiss, the court said that it would assume the allegations of the complaint to be true and liberally construe the complaint in the plaintiff's favor. The first cause of action alleged that defendant Harold Spitzer, the board president, breached a fiduciary duty owed to plaintiff, in that his position regarding the suitability of prospective purchasers was motivated by his own interest. Specifically, it was claimed that Spitzer, whose apartment was on the same floor as that of Axelrod, thought it was in his interest to keep his floor quiet and free of children.

In addition, Axelrod stated that Spitzer had a business relationship with the real estate broker involved in the proposed sale to Shen (i.e., the broker stood to gain a commission if the sale went through) and brought about the approval of the sale in order to enhance that business relationship.

Axelrod claimed that, as a result of the alleged wrongful conduct, she was delayed for 18 months in transferring her apartment, which caused her to incur additional monthly maintenance charges. Furthermore, it made the apartment marketable to only a small percentage of potential buyers.

In response to Axelrod's allegations, Spitzer submitted an affidavit in which he strongly denied any intent to discriminate against prospective purchasers who had children, and pointed out that many building residents had children. Moreover, Spitzer, an architect, stated that he had designed a children's playroom as a gift to building residents. The court said that Spitzer's claims might ultimately prove to be valid, but at this stage, the court had to accept Axelrod's version of the events.

The second cause of action alleged that other members of the board improperly deferred to Spitzer regarding the approval or rejection of prospective purchasers of Axelrod's apartment, and failed to exercise their independent judgment in deciding whether or not to approve prospective purchasers.

The third cause of action alleged that the board breached an implied obligation of good faith and fair dealing.

In its ruling, the court observed that members of a board who act in good faith and in the honest exercise of business judgment are protected by the business judgment rule. The business judgment rule has been applied to cooperative sales. However, the rule does not apply where the directors acted in bad faith or were motivated by factors other than the interest of the co-op. Moreover, the rule does not protect the board from liability for discrimination.

The court also noted that a corporate board of directors has a duty to treat shareholders in a fair and impartial manner. The cases cited by the court indicated that the power of a co-op board of directors to reject purchasers was not unlimited. If Axelrod could prove that, in accepting or rejecting proposed purchasers, Spitzer and the other board members were motivated by concerns other than the best interest of the co-op and that she had been damaged by that conduct, then Axelrod would have a right of recovery.

Although courts have generally given great deference to the decisions of a co-op's board of directors, that deference is not, and should not be, unlimited. Thus, when the directors act in a manner that is contrary to their duty to act fairly and impartially, courts will review their actions. If proven, the conduct alleged in the complaint, would be actionable. In the court's view, to prevent a plaintiff from having her day in court to prove such allegations would effectively insulate a co-op's board from review of its actions. It held that co-op boards must be accountable for their actions.

The co-op and its board members maintained that Axelrod sustained no damages by reason of their acts, in that the board approved a sale of the apartment to Shen for $455,000, the same price as the rejected McCusker sale and greater than the price called for by the rejected Kassel sale. In response, Axelrod claimed that the apartment was worth close to $600,000, and sought to recover "lost profits."

The court concluded that, since Axelrod had not alleged that defendants improperly rejected a specific sale in that amount, she could not recover the claimed lost profits. However, the court said that, even though defendants approved the Shen sale, Axelrod might still have sustained recognizable damages. After all, she was compelled to continue paying maintenance between the time of rejection of the Kassel purchase and the approval of the Shen purchase, and the loss of interest that she would have received on the proceeds of the sale had one of the prior prospective purchases been approved by the board.

Moreover, if the defendants' breach of fiduciary duty was found to be sufficiently egregious, the court said that punitive damages might be recoverable. In light of the above, the court denied the motion to dismiss the first and third causes of action.

The fourth cause of action alleged that the defendants had discriminated on the basis of age and familial status, in violation of Executive Law Section 296(5) that prohibits discrimination on the basis of age and familial status. Executive Law Section 296(26) states that "familial status" means a person who is pregnant or has a child or is in the process of obtaining legal custody of a child (e.g., adoption). Since none of the rejected purchasers had children at the time of the rejection, they apparently were not protected from discrimination based on familial status.

However, if the plaintiff could prove that the defendants rejected all the relatively young applicants because it was anticipated that the people would have children, then the court said that she might have a viable claim for age discrimination. Moreover, New York City Administrative Code, Section 8-107(5), prohibits a co-op board of directors from refusing to approve a sale "because children are, may be or would be residing" with the applicant. To the extent that Axelrod charged the defendants with having improperly rejected young married persons or engaged persons who were likely to have children in the foreseeable future, the court said that she had pleaded a viable cause of action.

The defendants maintained that Axelrod lacked standing to assert a discrimination claim in that the allegedly improper actions were directed not at her but at prospective purchasers who were of childbearing age. However, the court cited cases that allowed claims by persons who were not themselves members of the protected class but who were personally affected, albeit indirectly, by virtue of the alleged discrimination. In one case, a court sustained a complaint by a physician who alleged that a landlord refused to renew his office lease because, among other things, one of his subtenants was treating AIDS patients. In the second case, the court permitted a Caucasian to maintain a claim that he was denied an apartment because his roommate was African-American.

If Axelrod could show that she was adversely affected by reason of discrimination perpetrated against the prospective purchasers, the court said that she had a cognizable claim for discrimination. Moreover, although punitive damages are not recoverable under the executive law, they are available under Section 8-502 of the administrative code. In light of the above, the fourth cause of action was not dismissed.

The fifth cause of action, which sought attorneys' fees, had to be dismissed in the court's view, inasmuch as Axelrod had not shown a legal basis for such fees. However, such dismissal was without prejudice to Axelrod's right, if any, to recover attorneys' fees under the anti-discrimination laws.