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BLOG / 02.25.20 /

Tort and contract claims against Coop Board Member survive pre-answer dismissal motion

Members of a cooperative’s board of directors enjoy the protections of both the corporate shield and the business judgment rule, such that they may not be held personally liable for property damage or personal injury when a claim is made in connection with actions taken by directors in their official capacity as board members. But that protection is not absolute and does not always provide an immediate exit from litigation.

In one recent case[1], the New York County Supreme Court was faced with a complaint alleging that a restaurant operating on the ground floor of a Coop building suffered significant damage when a fire erupted in its premises. A fire department report concluded that the sprinkler system for the premises had been turned off manually, and the restaurant thereafter alleged negligence, gross negligence and contract claims against the cooperative, its managing agent and various board members. Prior to answering the complaint, the board members moved to dismiss, arguing that they could never be held personally liable for the acts alleged.

The Court disagreed. While recognizing the general principles protecting board members, the Court held that at this very early stage in the litigation, the restaurant’s only burden was to assert a viable claim that (if proven) would justify piercing the corporate veil or falling outside of the business judgment rule, regardless of whether that claim was likely or unlikely to ultimately prevail. Disclosure of information and records in the course of the litigation might very well relieve the subject board members from liability. For now, though, even though the directors’ dual protections under the corporate shield and the business judgment rule would be preserved, the restaurant could proceed with its claims against the individuals pending development of the facts.

[1] Manna Amsterdam Avenue LLC. v. West 73rd Tenants Corp. et al (Sup. Ct. NY Cty. 12/20/19)