Scott E. Mollen

Condominiums—Business Corporation Law (BCL) Permits Indemnification From Board of Managers of a Condominium—Question of First Impression—Whether BCL §§722 and 724 Authorize Indemnification in Condominium Context

A defendant and counterclaimant ("A") had moved for an interim order granting her indemnification from a plaintiff condominium Board of Managers and certain individuals (board). The court explained that this motion involved a "question of first impression; whether the (BCL) §§722 and 724 authorize indemnification in the condominium context." The board opposed the motion and cross-moved pursuant to CPLR 3211(a)(7), to dismiss certain counterclaims. The board alternatively, sought summary judgment dismissing those claims.

The dispute involved a fire which caused significant damage. The condominium consisted of four stories, with a commercial unit on the first floor and a portion of the cellar, and residential units above. The first floor was occupied by a bar and restaurant, owned and operated by "A," who is a member of the condominium and was president of the board from 2005-2011. The second floor unit was owned and occupied by "B" and "C." The fourth floor was owned and occupied by "D."

The board had filed a complaint against "A." They claimed that "A" "mismanaged and embezzled insurance funds earmarked for building repairs." The court previously dismissed 10 causes of action involving the subject allegations. The dismissed claims were for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, aiding and abetting fraud, an accounting, violation of Real Property Law (RPL) §339-w, unjust enrichment, breach of contract and violation of RPL §339-k. However, the court denied "A's" motion as to the board's private nuisance claims relating to allegation of noise emanating from the first to the second floor and sought damages and injunctive relief. The board's only claims that remain are based on nuisance.

The "A" had asserted 10 counterclaims. "A" had alleged that the restaurant "lent the condominium money to expedite repairs prior to receipt of the insurance payments, and (the board) failed to repay $155,000.00 of the loaned amount." The defendants further alleged "that the board misappropriated and liquidated funds within a 'roof escrow' account." These counterclaims included a claim that "A" is "entitled to indemnification for legal fees that she has expended in defending herself from (the board's) claims."

"A" sought indemnification for approximately $350,000.00 spent on legal fees. Her indemnification claim is based on BCL §722(c) and BCL §724(c). BCL §722 is entitled "authorization for indemnification of directors and officers." BCL §724 is entitled "Indemnification of Directors and Officers by a Court" and permits judicial enforcement of the indemnification rights provided for in BCL §722.

The board argued that condominiums are "subject to the Real Property Law (RPL) rather than the BCL." It cited a case which involved inspection rights of condominium unit owners. The defendants countered that where the RPL is "silent, as it is in respect to indemnification for an unsuccessful claim brought against officers, the BCL governs." The defendants cited an Appellate Division, First Department decision which cited BCL §626(e) and held that condominium owner plaintiffs suing derivatively on behalf of a condominium "may pursue their claim for attorney's fees to the extent it relates to the breach of contract and breach of fiduciary duty causes of action…."

The subject court held that the First Department case stood for the "propositions that the BCL governs the operation of a condominium where the RPL is silent, that condominium shareholders may bring derivative suits pursuant to BCL §626, and that plaintiffs in condominium derivative suits may seek reasonable attorney's fees pursuant to BCL §626."

Thus, the court held that since the "RPL is silent as to the indemnification rights of officer and directors, BCL §§722 and 724 govern here." It reasoned that "[t]o rule otherwise would be to accept the nonsensical result that plaintiffs in derivative condominium actions, individual unit owners, may recoup attorney's fees pursuant to the BCL but defendant officers and directors may not do the same under the same statute." The First Department case involving condominium shareholders' rights to inspect records involved a situation where the RPL was not silent and "in fact, had its own provision relating to condominium shareholders' rights to inspection of records." Here, the "RPL is silent."

The board further argued that even if the BCL is applicable, "then the statute leaves the question of indemnification up to the condominium." The board emphasized that BCL §722, provides that a corporation "may" indemnify. However, BCL §724(a), provides "notwithstanding the failure of a corporation to provide indemnification, and despite any contrary resolution of the board…indemnification shall be awarded by a court…to the extent authorized under §722."

The board also reasoned that "A" was not entitled to indemnification since claims against her had not been dismissed on the merits. The court acknowledged that there is an exception "for instances in which the parties resolve the claims amongst themselves rather than claims which are judicially resolved, as is the case here." It noted that its prior decision had "judicially resolved the claims related to ("A"'s) application for indemnification" and therefore the exception was inapplicable.

However, the court found that the board was correct to the extent that the court's prior decision "did not contain a finding that ("A") had acted in good faith to further the interests of the condominium following the fire…." Thus, it held that since BCL §722 and 724 apply to condominium officers such as "A," it would "send the question of attorney's fees to (a) special referee with a two-part instruction: first, the special referee must determine if ("A") executed her duties in good faith following the fire; and, second, if so, what are the reasonable of attorney's fees ("A") expended to defend against the ten causes of action the board brought against ("A")" which were previously dismissed. The court stated that if the special referee answers no to the first question, the referee will not reach the second question and "A" will "only be entitled to attorney's fees, pursuant to BCL §722, if she executed here duties as president of the condominium board with good faith."

The board had cross moved to dismiss the defendants' counterclaims for breach of contract, unjust enrichment, and common-law indemnification. The board had not opposed the cross motion that sought dismissal of the breach of contract counterclaim. Thus, the breach of contract counterclaim was dismissed. The court further held there was no basis for "A" to seek common law indemnification, as that theory is "reserved for parties that have been held vicariously liable…." Thus, to the extent that a counterclaim sought "common-law indemnification in addition to indemnification under the BCL, the branch seeking common-law indemnification (was) dismissed."

However, the court found that the board failed "to make prima facia showing as to unjust enrichment. To establish unjust enrichment, the claimant had to show that the other party was enriched, at that party's expense, and that it is against "equity in good conscience to permit the other party to retain what is sought to be recovered…." Moreover, "for an unjust enrichment claim to succeed, the party making the claim 'need not be in privity' with the party claimed against, but 'there must exist a relationship or connection between the parties that is not too attenuated…." Here, there was a question of fact as to the amount of money the board advanced to the condominium and whether "it is against equity for the condominium to retain that amount." Thus, the board's motion to dismiss the defendant's counterclaim for unjust enrichment was denied.

Accordingly, the court held that the BCL §§722 and 724 apply to the subject action and a special referee is to hear and determine whether "A" executed "her duties as president of the condominium board in good faith following the subject fire; if so, what are the reasonable of attorney's fees that ("A") expended to defend against the ten dismissed causes of action the board brought against her relating to her conduct as board president."

Bd. of Mngrs, 28 Cliff St. Condo v. Maguire, Supreme Court, New York Co., Case No. 653115/2016, decided Sept. 9, 2019, Edmead, J.

Brokerage—Sellers Never Signed Brokerage Agreement and Were Granted Dismissal of Broker's Complaint—Claims for Implied Agreement, Unjust Enrichment, Quantum Meruit, Tortious Interference and Fraud Dismissed

Defendant sellers of a property had moved pursuant CPLR §3211, seeking to dismiss a complaint served by a real estate broker, seeking a commission. The sellers had sold the property to the defendant purchasers. The broker had also sued the attorney for the purchasers.

The purchasers and the broker had entered into an "offer to purchase agreement," pursuant to which it was agreed that the broker was to be paid a brokerage fee. The agreement provided that "unless stated otherwise, the brokerage commission is to be paid by the sellers." The sellers had moved to dismiss on the grounds that there was no brokerage agreement between them and the broker. The broker's agreement was only with the purchasers.

The only question was "whether an implied agreement existed. A brokerage agreement 'may be implied where the principal received a benefit from the broker's services under circumstances which, in fairness, preclude the denial of an obligation to pay….'" Here, the court found that there was "no evidence an implied agreement existed between the (broker) and the (sellers)." The agreement had only been signed by the purchasers and the purchasers had signed "confidentiality agreements with the (broker) making an implied contract with the (sellers) impossible."

Moreover, an unjust enrichment claim will fail "when it duplicates or replicates a conventional contract with tort claim …" and "unjust enrichment is not a catch all cause of action to be used when others fail." The court noted that, "unjust enrichment is usually reserved for cases where though the defendant committed no wrong doing has received money to which he or she is not entitled…a truism inapplicable in this case." Where there was no contract between the sellers and the broker, "there can be no reasonable argument that (sellers) had been unjustly enriched."

The court also rejected the quantum meruit claim because "there was no expectation of compensation by the (sellers). Any work the (broker) performed was reasonably expected to be compensated by the (purchasers) who signed the agreement." It also dismissed the broker's tortious interference claim. In order to establish tortious interference, the broker had to establish the existence of a valid contract between the broker and a third party, the sellers' knowledge of that contract, the sellers' intentional procurement of the purchaser's breach of that contract without justification and damages. The broker also had to allege "that 'but for' the sellers' conduct, there would have been no breach of the contract."

The complaint did not "explain in any detailed way the conduct of the (sellers) that constituted interference with the contract between (broker) and the purchasers." The complaint had alleged that the sellers "conspired to induce" the purchasers to "circumvent the broker agreement…." The complaint further alleged that the sellers "frustrated the (broker's) expectation to receive the bargained for compensation for its service." The court found that "there were no facts supporting those conclusory allegations" and granted the motion to dismiss the tortious interference claim.

Additionally, the court dismissed claims based on "fraud and conspiracy to commit fraud." The complaint failed to present "any material misrepresentation made by the (sellers) upon which the (broker) relied." The complaint "merely states that sellers informed Broker that they no longer wished to sell the…premises for the agreed upon price and that they wanted more money for the…premises…." The complaint did not cite an "actual misrepresentation that induced the (broker's) reliance." Thus, the court granted the sellers' motion and dismissed the complaint. The remaining parties were directed to proceed with discovery.

Bay Sun Realty Inc. v. Li, Supreme Court, Kings Co., Case No. 508685/19, decided Sept. 9, 2019, Ruchelsman, J.

Landlord-Tenant‑—Owner Granted Possession Based on Tenant's Breach of No-Pet Clause—Tenant Failed to Demonstrate That Dog Was an Emotional Support Animal—Tenant Registered Dog as an Emotional Support Animal With Internet Company USAServiceDogRegistration—Anyone Could Obtain a Certificate From Such Organization By Paying a Fee

A landlord commenced a summary holdover proceeding, seeking to evict a tenant and her son, on the ground that they had "failed to cure their violation of the no-pet clause in the parties' lease." The tenant and her son had harbored a dog without the landlord's possession. The tenant did not appear in the action. However, her son appeared and claimed that the dog was an "emotional support animal entitling him to keep said pet in the subject premises." A non-jury trial was held.

A landlord witness testified that neither the tenant nor her son had asked for permission to maintain the dog in their apartment and that the tenant owed $3,467.00 in use and occupancy.

The son admitted that the dog had been brought into the apartment without the landlord's permission. He claimed that he suffered from "kidney problems and depression and … he should be allowed to keep the dog for his emotional support." He claimed that his therapist advised him to "obtain a dog for emotional support." The son had "applied to the U.S. Service Animal Registry, and received a service animal registration certificate and photo ID…for his dog as an emotional support animal."

The court explained that "no-pet" clauses are enforceable, are "substantial obligations of the tenancy" and that "[t]o establish that a violation of the Human Rights Law (Executive Law Art. 15) occurred and that a reasonable accommodation should have been made, the occupant must demonstrate that he is disabled and that because of his disability it is necessary for him to keep the dog in order for him to use and enjoy the apartment, and that reasonable accommodations could be made to allow him to keep the dog." The "burden is on the party requesting the reasonable accommodation…."

The court found that the tenant had "failed to demonstrate through either medical or psychological expert testimony or evidence that her son required a dog in order for him to use and enjoy the apartment." The son had "failed to submit evidence that the dog helped him with his symptoms of depression and kidney disease." He had not presented "any medical or psychological evidence to demonstrate that the dog was actually necessary in order for him to enjoy the apartment…." He had failed to call "any professional witness … to testify on his behalf."

Thus, the court only had the son's testimony and "documentary evidence registering his dog as an emotional support animal with an internet company, USAServiceDogRegistration, to rely on." It stated that registration of a dog with that entity may be "completed by anyone after paying a fee and there is no case law or statute requiring this Court to accept this entities' determination that a dog is deemed to be an emotional support animal."

Accordingly, the court held that the son failed to meet his burden of demonstrating through "either medical or psychological expert testimony that the dog is an emotional support animal necessary for him to enjoy the use of his apartment." It awarded a judgment of possession to the landlord and $3,467.00 for use and occupancy. Further, it granted a 30-day stay of issuance of the warrant, during which time the tenant may correct the breach and pay the outstanding arrears.

Westchester Plaza Holdings v. Sherwood, City Court, Westchester Co., Case No. 1431-19, decided Aug. 23, 2019, Armstrong, J.

Scott E. Mollen is a partner at Herrick, Feinstein.