Business Judgment Rule Does not Permit Discrimination

A recent decision of the Appellate Division, First Department has dealt a body-blow to the business judgment rule oft-cited by cooperatives when those cooperatives are fighting with an individual shareholder. The case of Fletcher v. Dakota, Inc., N.Y. Slip Opinion 05338 (1st Dept. 2012) is an interesting study in how an individual shareholder can experience the wrath of his/her cooperative board.Alphonse Fletcher (the plaintiff) is an African-American who owns a cooperative in the famous building known as the Dakota. Over the years Mr. Fletcher has been something of a gadfly. In 2007 he was elected to be the president of the cooperative board. He described in his papers submitted to the Court situations when he stood up for people against whom the Board was discriminating. There was a description of a derogatory comment about a Jewish person. There were descriptions of other similar situations.

The cooperative apartment adjacent to Mr. Fletcher’s came available. He sought to purchase it to combine it with the apartment he already occipied. However, the Board denied his application. Mr. Fletcher then sued alleging discrimination under the New York Human Rights Law.

The Board defended the lawsuit by claiming that the decision to deny Mr. Fletcher the right to purchase the apartment adjacent to his own was protected by the Business Judgment Rule and that the Court did not have the ability to substitute its judgment for that of the Board’s. Mr. Fletcher alleged that the Board did not exercise legitimate business judgment – instead acting in a discriminatory way in retaliation for his defense of those against whom the Board had previously discriminated.

The Appellate Division held that the allegation of discrimination trumps the defense under the Business Judgment Rule. If Mr. Fletcher can prove that the Board discriminated against him then the Business Judgment Rule does not apply.

As the years have passed since the Court of Appeals decided that cooperatives would be able to exercise their business judgment without interference from the Court, that rule has been chipped away. There are many cases that now hold that when a cooperative does act arbitrarily that the Business Judgment rule will not apply.