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Davis v. Howell Management Co.


November 19, 2009


On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket No. L-2909-07.

Per curiam.


Submitted October 28, 2009

Before Judges Sabatino and Lyons.

This case arises out of the removal and destruction of the contents of a storage bin located in the basement of a cooperative housing project. Plaintiff Rosetta C. Davis, a resident of the complex, owned the stored possessions that were discarded. She appeals the Law Division's order granting summary judgment to defendants, whom she claims are responsible for her loss. We affirm in part, and remand in part for further proceedings.

The operative facts are largely undisputed. Plaintiff is a tenant and shareholder, pursuant to a proprietary lease, of a cooperative apartment complex known as Fox Hill Apartments in Dover. Defendant Fox Dover Tenants Corporation ("the Association") is the owner of Fox Hill Apartments. Fox Hill Apartments is a cooperative housing corporation with a Board of Directors. Each resident at Fox Hill is issued a Proprietary Lease, through which he or she pays rental and maintenance fees to the Association.

Under the terms of the Proprietary Lease, storage space was provided by the Association to each resident under a revocable license. The Proprietary Lease instructs residents to refrain from using the storage space for valuable or perishable items. The storage space was located in the basement of plaintiff's apartment. Plaintiff was assigned a single storage bin for her use, which she secured with her own lock.

The Proprietary Lease provides the Association and its agents with authorization to enter the apartment and the resident's designated storage space "at any reasonable hour of the day upon notice, or at any time and without notice in case of emergency[.]" The Association is granted such access "to make or facilitate repairs in any part of the building or to cure any default by [a resident.]" The resident is obligated to provide the Association with a key to each lock the resident uses for his or her apartment and storage bin. If the resident is not present to open an apartment or storage space, and he or she has not furnished the Association with a duplicate key, the Association may "forcibly enter the apartment or storage space without liability for damages by reason thereof . . . and without in any manner affecting the obligations and covenants of [the] lease."

At some unspecified time between July 25 and July 30, 2007, employees or agents of the Association broke the padlock on plaintiff's storage bin, which was labeled with her name. They removed most of the bin's contents, and then discarded or damaged them. The Association contends that this occurred accidentally as part of a general cleanup effort, and that its workers were under the mistaken impression that the property in the storage bin had been abandoned there by a previous resident.

Several days later, on July 30, 2007, defendant Glenn Faltico, the president of Fox Hill's Board of Directors, circulated an apologetic memorandum to all shareholders and residents of Fox Hill Apartments. The memo explained that certain property in the storage area had been inadvertently discarded during a cleanup of the basement areas. According to the memo, efforts had been made to retrieve the property once the staff realized that it belonged to current residents, but unfortunately some items had already been hauled away. Management and the Board of Directors were immediately notified, and an investigation was launched. The memo noted that "policies are being implemented to prevent such a thing from happening again." The memo concludes with an assurance that "[s]teps for proper restitution are currently being explored."

As a result of this mistake, many of plaintiff's belongings were discarded or damaged. Several of the lost items were personal in nature, including such things as high school yearbooks and wedding gifts. Plaintiff tabulated the value of the lost or damaged items at $16,658. Despite Faltico's written apology and his assurance that the loss was accidental, plaintiff felt that she had been deliberately targeted to have her property thrown out because she has been outspoken in complaining about the management of the cooperative association.

Plaintiff filed a complaint in the Law Division against the Association; Faltico, both as an officer and a director of the Association; and Howell Management Company, the managing entity for the cooperative. Plaintiff also named as defendants three other officers and directors: James Howe, Lynn Howell, and Warren Howell.

The complaint alleged that defendants wrongfully entered plaintiff's storage bin and removed her belongings, either willfully or at least negligently. Plaintiff sought compensation for her items that had been discarded or damaged. In a second count, plaintiff sought damages for the emotional distress that defendants had caused her through their alleged retaliatory conduct.

After limited discovery was completed, defendants moved for partial summary judgment, which subsequently was treated by the trial court as a motion to dismiss plaintiff's claims in their entirety. Upon hearing oral argument, the judge granted defendants' application.

In his bench ruling, the judge determined that plaintiff's claims for compensation were mooted by the fact that defendants had already offered her "full restitution" for the lost items.

The judge also found that defendants are protected by "business judgment" principles for their negligent acts and omissions, and that there was no evidence of actual fraud, dishonesty or incompetence on their part. Additionally, the judge rejected plaintiff's claim of emotional distress, finding no proof that defendants had acted with the requisite intent or recklessness to support such a claim.

Plaintiff moved for reconsideration, which the court denied.

Plaintiff now appeals. She argues that the motion judge misapplied business judgment principles and incorrectly assumed that plaintiff had been or would be fully compensated for her property loss. She also invokes N.J.S.A. 2A:18-72 to -82, which prescribe how landlords may lawfully dispose of tenant property and provide certain remedies to tenants--including double damages--when those procedures are not followed.

In assessing the trial court's order granting summary judgment, we bear in mind the familiar standards of Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995) and Rule 4:46. We must "consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Brill, supra, 142 N.J. at 540. These standards apply on appeal in the same way that they apply in the trial court. Liberty Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 445-46 (2007).

We first consider the application of the business judgment rule to these circumstances involving a residential cooperative association.

A cooperative is a type of common interest ownership in real estate. In a traditional cooperative ownership, legal title to the real property of the housing development is in a cooperative entity. Presten v. Sailer, 225 N.J. Super. 178, 184-85 (App. Div. 1988). Individuals, or residents, purchase shares of stock in the cooperative corporation. Id. at 185. This arrangement provides the individual the right "to occupy a dwelling within the cooperative project under a proprietary lease." Ibid.

The New Jersey Cooperative Recording Act (the "Act"), N.J.S.A. 46:8D-1 to -18, enacted in 1988, requires that each purchaser of stock in a cooperative corporation acquire an undivided percentage interest in the common elements of the cooperative project. N.J.S.A. 46:8D-3l. Through a proprietary lease, each stockholder obtains "a long term exclusive right of possession and occupancy of a designated unit . . . or a grant of a leasehold of the cooperative structure." N.J.S.A. 46:8D-3k. The cooperative corporation retains legal title to the lands, the buildings and other improvements, while "[b]eneficial title to the entire project vests in the tenant shareholders in proportion to stock ownership, which corresponds to the undivided percentage interest in the common elements allocated to each cooperative unit." Wendell A. Smith et al., New Jersey Condominium & Community Association Law § 2:3 (Gann 2009).

"A cooperative apartment association . . . is governed by corporate law concerning its internal management." Plaza Road Coop., Inc. v. Finn, 201 N.J. Super. 174, 180 (App. Div. 1985). The officers, managers and directors of a common interest facility have a fiduciary obligation to the entity itself and to the individual residents. See Thanasoulis v. Winston Towers 200 Ass'n, Inc. 110 N.J. 650, 657 (1988); Siller v. Hartz Mountain Assocs., 93 N.J. 370, 382, cert. denied, 464 U.S. 961, 104 S.Ct. 395, 78 L.Ed. 2d 337 (1983); see also Smith et al., supra, § 16:1(a) (equating fiduciary duties owed by condominium associations with those of all "common interest ownership corporations"). This obligation is comparable to the obligation that a corporation's board of directors owes its stockholders. Siller, supra, 93 N.J. at 382. The fiduciary obligation includes a duty to preserve and protect the common elements and areas for the benefit of all of the facility's members. Kim v. Flagship Condo. Owners Ass'n, 327 N.J. Super. 544, 550 (App. Div.), certif. denied, 164 N.J. 190 (2000).

The business judgment rule is a general doctrine that can provide a defense to claims that an officer or director of an organization has breached a fiduciary duty to the organization or its constituents. For example, in Papalexiou v. Tower West Condo., 167 N.J. Super. 516 (Ch. Div. 1979), the court observed:

Although directors of a corporation have a fiduciary relationship to the shareholders, they are not expected to be incapable of error. All that is required is that persons in such positions act reasonably and in good faith in carrying out their duties. Courts will not second-guess the actions of directors unless it appears that they are the result of fraud, dishonesty[,] or incompetence. [Id. at 527 (internal citations omitted).]

In furtherance of these principles, the business judgment rule "requires the presence of fraud or lack of good faith in the conduct of a corporation's internal affairs before the decisions of a board of directors can be questioned." Ibid. "If the corporate directors' conduct is authorized, a showing must be made of fraud, self-dealing[,] or unconscionable conduct to justify judicial review." Ibid. This assessment is "an issue of law rather than of fact." Ibid.

The application of business judgment principles to a residential cooperative is not a novel concept. For example, in Levandusky v. One Fifth Ave. Apartment Corp., 540 N.Y.S.2d 440 (App. Div. 1989), aff'd as mod., 75 N.Y.2d 530 (1990), the New York court held that the business judgment rule applies to the actions of a board of directors of a cooperative. See also Randolph C. Gwirtzman, Note, An Exception to the Levandusky Business Judgment Rule: Owner and Shareholder Interests in Condominium and Cooperative Board Decisions, 14 Cardozo L. Rev. 1021 (1993) (acknowledging the business judgment rule's applicability to common interest associations, but recommending that the rule not be extended to decisions relating to habitability).

Here, pursuant to the proprietary lease, the storage space was "furnished gratuitously by the Lessor under a revocable license[,]" and plaintiff was warned in the lease not to use the "storage space for the storage of valuable or perishable property[.]" Defendants had a legal right under the lease to go into the storage area and maintain the storage space. Although defendants should have given plaintiff notice that they intended to enter her bin, the absence of such notice does not equate with fraud or the sort of misconduct that could overcome the business judgment rule. Moreover, if a resident is not present to open an entry of an apartment or storage space, and she has not furnished a key to management, the lease allows management to "forcibly enter the apartment or storage space without liability for damages by reason thereof . . . and without in any manner affecting the obligations and covenants of [the] lease."

After discovering their error, defendants took appropriate steps to inform the residents, apologized for the harm that was caused, and promised to take curative measures to prevent the situation from repeating in the future. In addition, defendants promptly offered to compensate plaintiff for her losses. These are all reasonable and timely responses to an unfortunate mistake.

We agree with the motion judge that the business judgment rule properly applies to the present scenario, and that there is insufficient evidence of fraud, dishonesty, or unconscionable conduct on the part of defendants to overcome the rule's protection. We likewise agree with the judge that plaintiff's theory that she had been singled out by defendants for retaliation because she was an outspoken resident is speculative and unfounded. If defendants were truly "out to get" plaintiff, it is unlikely that they would immediately apologize, offer her restitution, and let all of the other residents know about having wrongfully discarded her belongings.

Although not pressed by plaintiff on appeal, we also concur with the dismissal of the emotional distress claims in count two, see Buckley v. Trenton Sav. Fund Soc'y, 111 N.J. 355 (1988), and the claims for punitive damages, see N.J.S.A. 2A:15-5.12.

We only part company with the motion judge in one respect. Although defendants have offered restitution to plaintiff, it is unclear from the record whether the parties have ever agreed on a precise sum that would fairly compensate plaintiff for her lost items. Defendants extended offers of judgment to plaintiff during the pretrial phase, but those offers have expired or have been withdrawn. Rather than dismissing plaintiff's damage claims in their entirety, it would have been preferable for the court to have ascertained if the parties have agreed on a figure for restitution and, if so, to fashion a judgment awarding plaintiff that agreed-upon sum. If, on the other hand, the value of the items is still disputed, a proof hearing is needed to fix an amount.

Consequently, we remand for further proceedings, either by way of the entry of a consent judgment for a sum certain in restitution, or, if such a sum cannot be agreed upon, for a proof hearing at which the judge may consider all pertinent concepts of damages, including the potential applicability of the double damages remedy set forth in N.J.S.A. 2A:18-82.*fn1

Affirmed in part and remanded in part. We do not retain jurisdiction.

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