Adam Leitman Bailey, P.C. Successfully Defends Co-Op Board Against Charges of Malfeasance and Breach of Fiduciary Duty
Adam Leitman Bailey, P.C. was retained by a cooperative apartment corporation, consisting of 114 residential units spread among an eight-building complex of one-hundred-year-old landmark buildings. The corporation’s board had determined that the building complex requires extensive repairs and renovation to address seriously deteriorating and dangerous conditions which have developed over time.
Prior to Adam Leitman Bailey, P.C.’s engagement, the board of the corporation had consulted engineer, architect, expediter, and contractor professionals to determine the scope of work needed to address the situation and to provide estimates of the costs of undertaking and completing the project. The board had issued periodic advisements to all shareholders regarding the projected construction work and initial budgetary estimates for the project – including preliminary assessments and information regarding the anticipated dislocation of certain shareholders from penthouse apartments during required roof repairs to their buildings.
On May 8th, at a crucial stage of the board’s actions, in the midst efforts to finalize the planning and obtaining bids for the project, a dissident group of eight shareholder-tenants, through their attorney, claiming to comprise a purported homeowners association, sent a blunderbuss letter-demand to inspect all the corporation’s books and records relating to the project.
The attorney’s letter, among other things, demanded copies of all meetings of the board of directors, executive committee meetings, financial statements, budgets, budget forecasts, mortgage applications, insurance policies, reserve funds, bank records, account statements, deposits, withdrawals, all contracts, agreements, proposals, bids, change orders and correspondence with construction professionals, compensation and financial benefits received by board members, capital projects, management companies, shareholder assessments, New York City Department of Building violations, compliance with Local Law 11 inspection cycles, Landmarks Preservation Commission approvals, tax credits, air rights, and “any and all other books, records, documents and correspondence relevant to the governance, financial management, and operations of the corporation.”
The attorney’s letter warned that, “[s]hould the Corporation fail to arrange for such inspection within five (5) days,” he “reserve[d] all rights to seek judicial enforcement of this demand, including an application for an order . . . compelling inspection, together with costs and attorney’s fees.”
In addition, the attorney’s letter included a laundry list of accusations of alleged incompetence, malfeasance and/or breaches of fiduciary duty by the corporation’s board in the maintenance of the buildings, and in the planning, execution, and funding of the entire renovation project – including the board’s alleged “gross mismanagement of the $32.7 million capital project.”
Upon receipt of the shareholder “association’s” demand letter, Adam Leitman Bailey, P.C. advised the board that the Business Corporation Law required the board to make a good faith effort to produce all relevant and non-privileged documents, including internal board emails, responsive to the demand, which would demonstrate that the board had exercised sound business judgment and acted in the best interests of the corporation and its shareholders.
Adam Leitman Bailey, P.C. counsel then engaged in a discussion with the dissident shareholders’ counsel to request that the Board be given a 60-day extension in which to realistically compile and produce the extensive number of documents that the shareholders demand required. Counsel responded with an unnecessarily aggressive attitude – characterizing the Board’s reasonable request as further “evidence” of the Corporation’s attempt to coverup and delay any disclosure of alleged Board members’ ongoing malfeasance and breach of their fiduciary duties. Nevertheless, in response to Adam Leitman Bailey, P.C. ’s push back on counsel’s unreasonable position, he agreed to accept production of the documents on a continuing “roll-out” basis, but reserved the right to seek judicial intervention if the Corporation appeared to be engaging in bad faith delay.
The Board then indeed did begin reviewing its files and ultimately transmitted to Adam Leitman Bailey, P.C. thousand of documents which required review for attorney-client privileged status. The “privilege” review necessarily required substantial time to complete. This was communicated to shareholders’ counsel, with the advisement that Adam Leitman Bailey, P.C. anticipated being able to forward a “substantial number” of all non-privileged documents during the week of July 6th. Nevertheless, the privilege review took longer than expected, but more than 20,000 documents were produced on July 20th.
However, despite shareholders’ counsel being advised and kept up to date on the progress of the documents categories transmitted to Adam Leitman Bailey, P.C. by the Board and the delay required by the “privilege” review, shareholders’ counsel initiated an action in New York State Supreme Court on July 16th, seeking an “emergency” temporary restraining order (“TRO”) for the Court, among other things, to enjoin and restrain the Corporation and the Board from entering into or materially amending any contracts, financing commitments, or regulatory filings relating to the Project, “until Defendants have produced the requested books and records” previously demanded by the shareholders.
Upon entry of the Court-ordered TRO (the “Shareholder TRO”), Adam Leitman Bailey, P.C. immediately prepared a motion to vacate the “Shareholder TRO” on the ground that shareholders’ counsel had unnecessarily invoked the Court’s intervention. Adam Leitman Bailey, P.C. presented the Court with indisputable evidence of the Corporation’s and Board’s exercise of its sound business judgment in pursuing, planning, and executing the various steps required for the Project. Adam Leitman Bailey, P.C. also presented the Court with indisputable evidence of the Board’s efforts to comply with the shareholders demands; and that, given the Corporation’s initial roll-out compliance, the shareholders’ motion to “compel” the Board’s compliance was moot.
At the Court’s hearing of Adam Leitman Bailey, P.C. ’s motion to vacate the Shareholders’ TRO, the Court granted ALBPC’s motion and vacated the Shareholders’ TRO in its entirety. At a subsequent hearing on the underlying issues, on August 18th, the Court ordered that there be a settlement conference between the parties. On September 3rd, Adam Leitman Bailey, P.C. received notice that the dissident shareholders had changed counsel.
The Adam Leitman Bailey, P.C. attorneys who handled this matter were Adam Leitman Bailey, John M. Desiderio, Lawrence Sklaw, and Caleb Brown.