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. SeeBernheim 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].

R. A. Klass
Your Court Street Lawyer

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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).

– R. A. Klass
Your Court Street Lawyer

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