GDLC, LLC and Michael Salzhauer v. The Toren Condominium, Board of Managers of the Toren Condominium, The Residential Board of the Toren Condominium
Supreme Court of the State of New York, County of New York, October 21, 2016
Petitioners GDLC, LLC (“GDLC”), the owner of the largest commercial unit, and Michael Salzhauer, a principal of GDLC and a member of the commercial Board of Managers, commenced this Article 78 mandamus proceeding against respondents the Toren Condominium (the “Condominium”) and its Board of Managers (the “Board”) to compel the production of respondents books and records. In particular, petitioners sought copies of the Condominium’s 2015/2016 financial statements and 2016 budget, as well as a settlement agreement (and related engineering report) entered into between the Board and the Condominium’s sponsor/developer, without Salzhauer’s knowledge or consent.
Respondents cross-moved to have the proceeding transferred to Kings County and to dismiss on the grounds that the proceeding was brought against the incorrect parties and that an Article 78 was not a proper procedural mechanism for the enforcement of petitioners’ inspection rights. Respondents claimed that mandamus was not available in this proceeding since “petitioner was seeking to compel respondents to perform a discretionary act rather than a ministerial act subject to mandamus” and that the Board’s decision was protected by the business judgment rule. Petitioner, in opposition, claimed that the proceeding was proper, and that as a member of the Board, Salzhauer should have “unfettered right to inspect the books and records” because without such right, he cannot fulfill his fiduciary duties. Petitioner also claimed that GDLC, as a unit owner, had a right to inspect the books and records as long as it had a good faith purpose to do so. Separately, the non-party sponsor, Myrtle Owner LLC (the “Sponsor”), cross-moved to intervene on the basis that it was an interested party who could be directly affected by the result and, upon intervention, to dismiss the proceeding. Petitioners opposed both cross-motions.
The Court granted petitioners’ motion to compel the inspection of certain of respondents’ books and records, denied respondents’ cross-motion to change venue and/or to dismiss, and denied the Sponsor’s cross-motion to intervene and dismiss.
In denying respondents’ cross-motion to change venue to Kings County, the Court held that New York County was a proper venue as “material events involving respondents’ refusal to turn over certain documents occurred in New York County.”
In granting petitioner’s motion and denying respondents’ cross-motion to dismiss, the Court held that an Article 78 proceeding was proper for the relief sought as CPLR § 7802 specifically includes “boards” as a body for which an Article 78 is permitted, and that the review of records was ministerial in nature with petitioners having a legal right to the requested relief. The Court granted Salzhauer the right to inspect the documents reasoning that because board members have a fiduciary duty to the condominium and the unit owners, they “need unfettered access to the books and records of the condominium.” The Court further held that Salzhauer “would not be fulfilling his fiduciary duty as a board member, and could theoretically face individual liability, if he did not inspect a settlement agreement that purportedly binds the board and the entire condominium.” The Court also held that GDLC, as a unit owner, was entitled to review of the requested documents because GDLC demonstrated that it had a good faith purpose for doing so.
The Court rejected the Board’s business judgment rule defense and held that the Board “failed to demonstrate that they made a good faith decision by refusing to turn over critical documents to an individual board member who is purportedly bound by these documents.”
The Court further denied the Sponsor’s cross-motion to intervene holding that it did not have “a real or substantial interest in whether a sitting board member gets access to the settlement agreement or confidential documents,” and a claim that a review of the documents would be a breach of confidentiality was speculative.