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Lustig v. Regency Co-Op, Inc.

BER-C-167-10 (N.J. Super. Ch. Div. 2011) (Unpublished)

COOPERATIVES; CORPORATIONS; DIRECTORS — A co-op corporation’s board of directors is protected by the business judgment rule which bars judicial inquiry into decisions made in good faith.

Each unit tenant in a high rise cooperative apartment building was a shareholder in the co-op corporation and was apportioned a number of shares based upon the size of his or her apartment. The building was internally managed by a board. It performed various duties, including overseeing building maintenance and repairs, and reviewing requests for alterations from the residents. Each apartment was subject to a long-term proprietary lease. The lease provided that the tenant would have the exclusive use of a terrace or balcony, subject to such regulations as were prescribed by the board of directors. Further, under the lease, any installations on the terrace or balconies required the prior written approval of the landlord. As to alterations, the lease said that a tenant could not, without first obtaining written consent, alter, enclose or add to the balconies. According to the lease, such consent could not be unreasonably withheld.

A tenant sued the board of directors over the board’s denial of a request to enclose a balcony. Specifically, the tenant alleged that she was an oppressed minority shareholder, that the board of directors had breached its fiduciary duty by scheming to actively prevent her from enclosing her balcony, and lastly, that the board had engaged in a civil conspiracy in either committing an unlawful act or committing a lawful act by unlawful means. The board of directors filed a motion for summary judgment to dismiss the complaint and the Court granted the motion.

The Court first said that the tenant could not assert oppressed minority shareholder status because, under the New Jersey Business Corporation Act only shareholders of corporations having 25 or fewer shareholders may pursue remedies based on misconduct by directors. The cooperative apartment building had more than 25 shareholders. In fact, with over 160 apartment units, each of whose tenant was a shareholder, it had more than 160.

The Court next assessed whether the directors had breached their fiduciary duty in their denial of the tenant’s application. According to the Court, the business judgment rule bars judicial inquiry into decisions made in good faith by a corporation’s board of directors. The rule protects a board of directors from being questioned or second-guessed in its conduct of corporate affairs, other than where there is fraud, self-dealing or unconscionable conduct. Here, the Court found that the tenant failed to demonstrate that the board singled her out for enforcement of its rules. The record showed that the board had suspended all improvement applications for balconies while it hired an engineering firm to perform inspections for the purpose of planning remedial work on all balconies. Evidence, in the form of expert reports, was submitted as to damage to the balconies prior to this particular application denial. After the denial, the board even engaged another firm to prepare an overall repair protocol. Just as important, the board had the right to withhold its consent to enhancements to the balcony. Thus, the Court concluded the tenant failed to overcome the presumption of good faith imposed by the business judgment rule.


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