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Davis v. Howell Management Co., Inc.

A-3147-08T3 (N.J. Super. App. Div. 2009) (Unpublished)

COOPERATIVES — A cooperative apartment corporation’s internal management is governed by corporate law and therefore its officers and directors are protected against claims of a breach of a fiduciary duty if the actions of those officers and directors come within the business judgment rule.

A tenant-shareholder of a cooperative apartment corporation stored her possessions in a storage bin at the complex. Her proprietary lease warned not to use the storage space for valuable items and permitted the association to enter and maintain the storage area. As part of a general cleanup, the cooperative association accidentally discarded her stored items. The association offered to pay for the items, but the tenant-shareholder, believing that the association intentionally threw out her belongings, sued the association for the value of the items and for emotional distress she attributed the association’s actions to retaliate against her because she was a persistent critic of the association.

The lower court dismissed the claims, holding that her compensation claims were mooted since the association already offered her “full restitution” for the discarded belongings. It also found that the association was protected by the “business judgment” rule and that there was no evidence of actual fraud, dishonest or incompetence by the association. In addition, it rejected the emotional distress claim, finding no proof that the association acted recklessly or intentionally. The woman appealed.

The Appellate Division affirmed in part and remanded in part. A cooperative apartment corporation’s internal management is governed by corporate law. Thus, its officers and directors have a fiduciary obligation to the entity itself and to the individual residents. This obligation is comparable to the obligation that any other corporation’s board of directors owes its stockholders. According to the Court, the business judgment rule is a general doctrine that can provide a defense to claims of breach of a fiduciary duty to the organization or its constituents. The rule does not apply in the face of fraud or lack of good faith. Here, the Court found that the lease warned the woman not to use the storage space for the storage of valuables and gave the association the legal right to enter and maintain the bins. Although the Court believed that the association should have given the woman notice that it intended to enter the bins, the lack of notice did not equate the kind of with fraud or misconduct that would overcome the business judgment rule. The Court found that after discovering the error, the association took appropriate steps to inform the residents, apologized for the harm that was caused, promised to take curative measures to prevent the situation from reoccurring, and offered compensation for the value of the discarded possessions. The Court agreed with the lower court that there was insufficient proof that the woman had been singled out for retaliation. It reasoned that if the association was truly “out to get” the woman, it was unlikely that it would immediately apologize, offer her restitution, and let all the other residents know that they wrongfully discarded her belongings. Nevertheless, the Court found that it was unclear from the record whether the parties agreed on a precise sum that would fairly compensate for the lost items. It held that the lower court, rather than dismissing the damage claims in their entirety, should have ascertained if the parties had agreed to a restitution figure and, if so, to fashion a judgment awarding the woman the agreed-upon sum. Thus, the Court remanded the matter for further proceedings on this issue.

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