The Directors of a Corporation Owe a Fiduciary Duty to Their Shareholders

Without doubt, the directors of a corporation owe its shareholders a fiduciary duty. The fiduciary duty of a director of a corporation consists of the obligation to perform his duties in good faith, without discriminatory practice, and with the degree of care which an ordinary prudent person in a like position would use under similar circumstances. See, Bernheim v. 136 East 64th Street Corp., 128 AD2d 434 [1 Dept. 1987].

In Levandusky v. One Fifth Avenue Apartment Corp., 75 NY2d 530 [1990], the Court of Appeals held that, generally, members of a board of directors 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 held to apply to cooperative apartment sales. See, Woo v. Irving Tenants Corp., 276 AD2d 380 [1 Dept. 2000].

Without doubt, the directors of a corporation owe its shareholders a fiduciary duty. The fiduciary is bound at all times to exercise the utmost good faith toward the principal or shareholder. Soam Corp. v. Trane Co., 202 AD2d 162, 608 NYS2d 177 [1 Dept. 1994].  The fiduciary must also act in accordance with the highest and truest principles of morality. Elco Shoe Mfrs., Inc., v. Sisk, 260 NY 100, 183 NE 191 [1932].

The fiduciary duty of a director of a corporation consists of the obligation to perform his/her duties in good faith, without discriminatory practice, and with the degree of care which an ordinary prudent person in a like position would use under similar circumstances. See, Bernheim v. 136 East 64th Street Corp., 128 AD2d 434 [1 Dept. 1987].

However, the business judgment rule does not apply where the directors acted in bad faith or were motivated by factors other than the interest of the cooperative corporation. See, Woo v. Irving Tenants Corp., supra. Further, the business judgment rule does not protect the board from liability for discrimination. Jones v. Surrey Cooperative Apartments, 263 AD2d 33 [1 Dept. 1999].

In a case in which the owner of a cooperative unit sued the board members for rejecting applicants for various reasons, including discriminatory ones, the court noted that the general deference granted to decisions of a cooperative corporation’s board of directors is not unlimited. If those board members act in a manner which is contrary to their duty to act fairly and impartially, courts may review claims of misconduct. Further, upon review, those claims of misconduct may prove actionable against the board members. See, Axelrod v. 400 Owners Corp., 189 Misc.2d 461 [Sup.Ct., NY Co. 2001].

A corporation can be directly liable for breach of fiduciary duty by the actions of its board of directors.  The Board owes a fiduciary duty to its shareholders, and controlling case law is replete with examples of shareholders properly stating these claims directly against cooperative housing corporations where particular board misconduct is alleged. Kleinerman v. 245 East 87 Tenants Corp, et al., 74 AD3d 448, 903 NYS.2d 356 [1 Dept. 2010] (denying defendants’ pre-answer motion to dismiss where complaint stated claims for breach of fiduciary duty against the cooperative, its board, its officer and individual board members); Stowe v. 19 East 88th Street, Inc., 257 AD2d 355, 683 NYS2d 60 [1 Dept. 1999] (denying a pre-answer motion to dismiss of the sole defendant, a cooperative corporation, and holding that directors of apartment cooperative owe a fiduciary duty to act solely in best interest of all shareholders); Ackerman v. 305 East 40th Owners Corp., 189 AD2d 665, 592 NYS2d 365 [1 Dept. 1993] (same); Demas v. 325 West End Ave. Corp., 127 AD2d 476, 511 NYS2d 621 [1 Dept. 1987] (same).

It is therefore beyond cavil that where a board of directors allegedly breaches its fiduciary duty to a shareholder, the claim is actionable against the corporation, particularly where a board’s conduct has “no legitimate relationship to the welfare of the coop at large.” Bryant v. One Beekman Place, Inc., 73 AD3d 616, 904 NYS2d 370 [1 Dept. 2010].

The very fact that the Board refused to satisfy its obligation to repair the shareholder’s apartment is alone sufficient to state a claim for breach of fiduciary duty. Kaymakcian v. Board of Managers of Charles House Condominium, 49 AD3d 407, 854 NYS2d 52 [1 Dept. 2008] (denying dismissal of fiduciary duty claim against a condominium board of managers where it failed to repair limited common elements).

As for damages, the trial court is accorded significant leeway in ascertaining a fair approximation of the loss where a breach of fiduciary duty has been proved.  Keizman v. Hershko, 52 AD3d 204, 859 NYS.2d 79 [1 Dept. 2008].  After all, “[w]hen a difficulty faced in calculating damages is attributable to the defendant's misconduct, some uncertainty may be tolerated.” Whitney v. Citibank, 782 F2d 1106, 1118 [2 Cir. 1986].

Courts have held a fiduciary liable for the attorney's fees and other expenses incurred in exposing his misconduct. Birnbaum v. Birnbaum, 157 AD2d 177, 555 NYS2d 982 [4 Dept. 1990]; Matter of Campbell, 138 AD2d 827, 829, 525 NYS2d 745 [4 Dept. 1988]; Parker v. Rogerson, 49 AD2d 689, 689-690, 370 NYS2d 753 [3 Dept. 1975]; Matter of Rothko, 84 Misc.2d 830, 379 NYS2d 923 [Surr. Ct., NY Co. 1975].

These holdings do not conflict with the “American Rule” articulated in Matter of A.G. Ship Maintenance Corp. v. Lezak, 69 NY2d 1, 511 NYS2d 216 [1986]. While Lezak holds that attorney's fees are ordinarily not recoverable by the prevailing party against the losing party as an incident of litigation, Lezak does not concern the propriety of awarding attorney's fees as an element of damages.

In a case of breach of fiduciary duty, the aggrieved party is entitled to prejudgment interest. CPLR 5001; Howard v. Carr, 222 AD2d 843, 635 NYS2d 326 [3 Dept. 1995].

Indeed, if the breach of fiduciary duty is found to be sufficiently egregious, punitive damages may be recoverable. Don Buchwald Assocs. v. Rich, 281 AD2d 329 [1 Dept. 2001].

by Richard A. Klass, Esq.

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copyr. 2012 Richard A. Klass, Esq.
The firm's website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

Requirements under Truth in Lending Act

The Truth in Lending Act requires the lender to provide the consumer with clear, conspicuous, and accurate disclosures of loan terms. Regulation Z (see footnote 1), 12 C.F.R. Section 226.18 (“Content of Disclosures”). Among other required disclosure items, the amount of credit provided to the consumer and every loan charge must be properly described. See, e.g., Regulation Z, 12 C.F.R. Section 226.18(b) (amount of credit provided), 12 C.F.R. Section 226.18(d) (finance charges), and 12 C.F.R. Section 226.18(e) (interest rate and prepaid charges). The security interest to be taken in the consumer’s principal residence, and any other property, must be disclosed. Regulation Z, 12 C.F.R. Sections 226.5 – 15 (open end transactions), 226.17-23 (closed end transactions).

Section 226.5b requires that the disclosures be given at the time of application, as follows:

“(b) Time of disclosures. The disclosures and brochure required by paragraphs (d) and (e) of this section shall be provided at the time an application is provided to the consumer.”

Footnote:
[1] The provisions of Part 226 of Title 12 of the C.F.R. are commonly known as Regulation Z.  Regulation Z (including its commentary) are consistently followed by courts in determining compliance with TILA, which is a “strict liability” statute.  See, e.g., Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565 (1980) (Regulation Z and its commentary are entitled to substantial deference and are dispositive unless demonstrably irrational).

by Richard A. Klass, Esq.

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copyr. 2012 Richard A. Klass, Esq.
The firm's website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

An Extra $1,500,000 for the Aged

More than fifty years ago, a charitable woman executed her Last Will and Testament, bequeathing all of her assets to two Catholic charities in the event that her siblings did not survive her. The two Catholic charities named in the Will were the Columbus Hospital and St. Joseph Rest Home for the Aged, each to get 50% of her estate. Both of these institutions were founded or operated by Italian American Catholic Orders.

In March 2008, the woman passed away, leaving more than $3,000,000 worth of assets in her estate. Since her siblings predeceased her, the Will left everything to the two Catholic charities.

Demise of Columbus/Cabrini Hospital

Columbus Hospital was founded in 1892 and operated a hospital in Manhattan. It was opened by a mission of the Missionary Sisters of the Sacred Heart of Jesus to address the needs of Italian immigrants. In 1973, Columbus Hospital and Italian Hospital merged to form Cabrini Medical Center. Cabrini Medical Center operated as a hospital on the same site as Columbus Hospital on East 19^th Street until it filed for bankruptcy on July 9, 2009. Through the bankruptcy proceedings, Memorial Sloan Kettering Cancer Center purchased the buildings in which Cabrini Medical Center was formerly located.

Charitable mission of St. Joseph Rest Home for the Aged

Similarly to Cabrini, St. Joseph Rest Home for the Aged was founded by Nuns whose lives are committed, without compensation, solely to their charitable and religious convictions. Both charitable organizations — Cabrini and St. Joseph — were founded and operated by Nuns of Italian heritage. The Order of St. Joseph’s was founded in Rome by Italian Nuns and still has a mother house located in the Vatican. St. Joseph’s Rest Home for the Aged, which operates a licensed nursing home facility that accommodates forty women, was founded by the Catholic Sisters of The Order of St. Joseph’s and is located in Paterson, New Jersey.

Accounting proceeding

Because Columbus Hospital had ceased to exist, the executor of the deceased woman’s estate filed a judicial accounting with the Surrogate’s Court, requesting that the Surrogate give the 50% share originally meant for Cabrini Hospital to Memorial Sloan Kettering. The executor indicated that the bequest originally meant for Cabrini should be given to Memorial Sloan Kettering because the deceased had been treated there.

The Chairman of the Board of Directors of St. Joseph contacted Richard A. Klass, Your Court Street Lawyer, about objecting to the bequest to Memorial Sloan Kettering and, instead, requesting that the Surrogate pay the entire net estate to St. Joseph Rest Home for the Aged.

Cy Pres doctrine

There is a centuries’ old doctrine of cy pres (pronounced “sigh – pray”), which is a rule that when literal compliance with a Will or trust is impossible, the intention of a donor or testator should be carried out as nearly as possible. This is especially true when a bequest to a charity has “lapsed” as the result of the charity no longer existing to receive the bequest; then the Surrogate may designate another charity in its place.

In the seminal case of In re Brundrett’s Estate [1940], a percentage of the remainder of the estate was left to St. Mark’s Hospital, but the hospital was bankrupt in 1931 and ceased to operate as a hospital and perform the functions for which it was originally incorporated. The court held that the gift to the hospital was, therefore, ineffectual. The court then applied the doctrine of cy pres and paid over that charity’s portion to the other charitable ‘remaindermen’ named in the Will (the term ‘remaindermen’ refers to others who receive the residuary or balance of an estate).

Following the holding in In re Brundrett’s Estate, the court in In re Shelton’s Estate [1942] was faced with a similar issue as presented here. In that case, the decedent left moneys to a charitable institution located in Italy that was maintained by a New York religious corporation. After the death of the decedent, the New York religious corporation relinquished its maintenance of the Italian institution and discontinued all of its religious and charitable activities. Although its officers continued to function, it was a “charity in name only.” The court held that the discontinuance of the charitable and religious functions precluded authorization of payment of the legacy to the entity. However, the court recognized that the decedent had charitable intentions to provide a gift for religious purposes and invoked the doctrine of cy pres. In granting the legacy originally left to the Italian charity to the other charitable legatee, the court in In re Shelton’s Estate held: “By the application of that doctrine [cy pres] the surrogate holds that the legacy did not lapse and may be paid to The Cathedral Church of St. John the Divine in the City and Diocese of New York, the other charitable legatees named in the will and object of the generous bounty of the testatrix.”

After the objection to the judicial accounting by St. Joseph, with sufficient case law being presented in support of the request to pay the bequest of Cabrini Hospital over to St. Joseph, the executor agreed to pay 100% of the residuary estate to St. Joseph, roughly $3 million in total. The nursing home needs a new roof — now they’ll be able to afford it!

— Richard A. Klass, Esq.

Credits:

Photo of Richard Klass by Robert Matson, copyr. Richard A. Klass, 2011.
Newsletter marketing by The Innovation Works, Inc.
Image on page one: Salzgitter, Städtisches Altenheim, 1961, Maria retirement home in Tann, in a hospital room with a Dutch nun. Licensed under the Creative Commons Attribution-Share Alike 3.0 Germany license. Attribution: Bundesarchiv, B 145 Bild-F010160-0001 / Steiner, Egon / CC-BY-SA.

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copyr. 2012 Richard A. Klass, Esq.
The firm's website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.