First Department, November 19, 2020

Law Offices of Paul A. Montuori, P.C., Mineola (Paul A. Montuori of counsel), and Marco & Sitaras, PLLC, New York City (George Sitaras and Adama Varsey Sirleaf of counsel), for appellants-respondents.

Hiller, PC, New York City (Jason E. Zakai and Michael S. Hiller of counsel), for respondents-appellants.

This appeal concerns the question of whether officers of an unincorporated condominium association may avail themselves of the indemnification provisions of the Business Corporation Law. For the reasons that follow, we hold that the Business Corporation Law does not confer any indemnification rights on these unincorporated associations that are not otherwise found in the Real Property Law or the condominium's own bylaws.

Plaintiffs are the board of managers of the four-unit, unincorporated condominium association located at 28 Cliff Street in Manhattan and four of its individual unit owners. The individual and corporate defendants are the owners and operators of an ale house that occupies the commercial space on the first floor of the building. From 2005 to 2011, defendant Philomena Maguire was also the president of the condominium board.

On February 24, 2010, a fire broke out in the ale house resulting in extensive damage to the building and leaving the residential unit owners unable to occupy their units for over a year. After the fire, the condominium board filed an insurance claim with its general liability carrier and began the process of restoring the building. A total of $1.2 million was paid by the carrier on the board's claim. Plaintiffs allege that Maguire misappropriated the insurance proceeds by improving and expanding the ale house, almost doubling its seating, and commandeering the boiler room for the ale house's sole use. According to plaintiffs, the repairs made to the rest of the building were "substandard," leaving the lobby floors uneven, the sprinkler system exposed, and the front entrance without a security door. In or about July 2011, Maguire was removed as president of the board.

This action was commenced in October 2014 with plaintiffs asserting 12 causes of action, both individually and derivatively, on behalf of the condominium. In a prior order dated February 22, 2018, not the subject of this appeal, Supreme Court dismissed the derivative claims because plaintiffs had not shown demand futility, and the claims were so intertwined it was impossible to determine which claims were asserted derivatively and which were asserted individually (2018 NY Slip Op 30334[U] [2018]). Consequently, the only claims{**191 AD3d at 28} remaining are for private nuisance and injunctive relief, each asserted against Maguire individually, and defendants' counterclaim relating to unrepaid loans. Maguire separately asserted a counterclaim for "common law" indemnification. Although Supreme Court dismissed this counterclaim, it nonetheless determined that Maguire had a viable claim for legal fees.

Maguire brought a motion for an interim order of indemnification, seeking to recover legal fees she incurred in defending the dismissed derivative claims. She argued that under Business Corporation Law § 724 (c), which allows a court to order a corporation to indemnify its officer or director during the pendency of an action if the corporation refuses to do so voluntarily, she was legally entitled to such relief. Supreme Court granted Maguire's motion for statutory indemnification under the Business Corporation Law to the extent of ordering a hearing on whether she acted in good faith while serving as president of the condominium (65 Misc 3d 737 [2019]). In making its decision, Supreme Court found that although the condominium is not a corporation, but an unincorporated association, "the Business Corporation Law governs the operation of a condominium where the Real Property Law is silent" (id. at 743). The court reasoned that if the plaintiffs in a derivative action can recoup their attorney's fees in pursuing a claim on behalf of the corporation, then so should the defendant officers who were sued, but nonetheless executed their duties in good faith. On appeal plaintiffs challenge the court's legal authority to order indemnification; while on cross appeal Maguire challenges whether a good faith hearing is required. Both sides agree this case presents an issue of first impression, calling upon us to examine the relationship among the Business Corporation Law, the Real Property Law, and the common law as applied to unincorporated condominium associations.

Unlike cooperative apartment corporations, which are corporate entities owned by shareholders, most condominiums are unincorporated associations (Pomerance v McGrath, 143 AD3d 443, 445 [1st Dept 2016], lv denied 32 NY3d 913 [2019]). Nothing, however, prohibits a condominium from choosing to incorporate. In fact, Real Property Law § 339-v (1) (a) expressly states that "[n]othing contained herein shall bar the incorporation of the board of managers under applicable statutes of this state; such incorporation must be consistent with the other provisions of this article and the nature of the condominium{**191 AD3d at 29} purpose." If a condominium decides to file a certificate of incorporation with the Department of State, a corporation is formed and it becomes a for-profit entity organized under Business Corporation Law § 102 (a) (4). It is not disputed on this appeal that an incorporated condominium is subject to the Business Corporation Law, as well as the condominium act.

In general, the Condominium Act (Real Property Law § 339-d et seq.) governs and regulates the formation, management, powers and operation of condominium associations under the act, regardless of whether the condominium decides to incorporate or remain an unincorporated association (Real Property Law § 339-f). Among the operations regulated by the Condominium Act are the mechanism for calling meetings, the procedure for electing the board president and officers, the percentage of unit owners (662/3%) needed to vote in favor of an amendment to the condominium's bylaws, and restrictions on the use of the units and common elements (Real Property Law § 339-v [1] [a]-[j]). The statute provides the minimum requirements that every condominium must satisfy.

Condominium governance is also guided by the bylaws adopted by the association. The condominium bylaws are, "in essence, an agreement among all of the individual unit owners as to the manner in which the condominium will operate, and which set forth the respective rights and obligations of unit owners, both with respect to their own units and the condominium's common elements" (Board of Mgrs. of Vil. View Condominium v Forman, 78 AD3d 627, 629 [2d Dept 2010] [internal quotation marks omitted], lv denied 17 NY3d 704 [2011]). The bylaws can, for instance, provide that a higher percentage of votes than set out in the Real Property Law is needed to amend the bylaws, or set forth restrictions on the leasing of units (see e.g. Demchick v 90 E. End Ave. Condominium, 18 AD3d 383 [1st Dept 2005]). The bylaws can also specify whether and under what circumstances legal fees will (or will not) be paid, and to whom (see Board of Mgrs. of the 25th Charles St. Condominium v Seligson, 126 AD3d 547, 548 [1st Dept 2015] [condominium's bylaws authorized the payment of attorneys' fees only to the condo board, not residential unit owner]).

As relevant to these disputes, article II, § 14 of 28 Cliff Street condominium's bylaws contains the following provision regarding indemnification of board members:

"The members of the Board of Managers shall not{**191 AD3d at 30} be liable to the Unit Owners for any mistake of judgment, negligence, or otherwise, except for their own individual willful misconduct or bad faith. The Unit Owners shall indemnify and hold harmless each of the members of the Board of Managers against all contractual liability to others arising out of contracts made by the Board of Managers on behalf of the Condominium unless any such contract shall have been made in bad faith or contrary to the provisions of the Declaration or of these By-Laws. It is intended that the members of the Board of Managers shall have no personal liability with respect to any contract made by them on behalf of the Condominium."

In finding that Maguire was entitled to indemnification, Supreme Court reasoned that the Real Property Law was "silent" and this provision of the bylaws did not sufficiently address the issue of indemnification raised in this action. Although Supreme Court also found that Maguire was not entitled to common-law indemnification (an issue not contested on appeal), it nonetheless determined that pursuant to Business Corporation Law § 626 and this Court's decision in Tsui v Chou (135 AD3d 597 [1st Dept 2016]), indemnification was permitted. In Tsui this Court reinstated a derivative action that had been dismissed and permitted plaintiffs to "pursue their claim for attorneys' fees to the extent it relates to the breach of contract and breach of fiduciary duty causes of action (see Business Corporation Law § 626 [e])" (135 AD3d at 598). As discussed herein, the "see" reference to the Business Corporation Law in Tsui was read too broadly by Supreme Court and we take this opportunity to make a clearer statement.

Maguire relies on three sections of the Business Corporation Law in support of her argument that an officer or director of an unincorporated condominium association is entitled to indemnification where such relief is not otherwise provided in the Real Property Law or the condominium's own bylaws. These statutes are Business Corporation Law §§ 626, 722 and 724.

Business Corporation Law § 626 (e) states the following:

"If the action on behalf of the corporation was successful, in whole or in part, or if anything was received by the plaintiff or plaintiffs or a claimant{**191 AD3d at 31} or claimants as the result of a judgment, compromise or settlement of an action or claim, the court may award the plaintiff or plaintiffs, claimant or claimants, reasonable expenses, including reasonable attorney's fees, and shall direct him or them to account to the corporation for the remainder of the proceeds so received by him or them. This paragraph shall not apply to any judgment rendered for the benefit of injured shareholders only and limited to a recovery of the loss or damage sustained by them."

Business Corporation Law § 722 (a) provides as follows:

"A corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding (other than one by or in the right of the corporation to procure a judgment in its favor) . . . which any director or officer of the corporation served in any capacity at the request of the corporation, by reason of the fact that he . . . was a director or officer of the corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding . . . if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation."

Business Corporation Law § 724 (a) provides for judicially-directed indemnification, even if the corporation fails to provide indemnification, and despite any contrary resolution by the board of shareholders. Business Corporation Law § 724 (c) further specifies that

"[w]here indemnification is sought by judicial action, the court may allow a person such reasonable expenses, including attorneys' fees, during the pendency of the litigation as are necessary in connection with his defense therein, if the court shall find that the defendant has by his pleadings or during{**191 AD3d at 32} the course of the litigation raised genuine issues of fact or law."

We find that the Business Corporation Law does not directly control the parties' legal fees dispute. Further, we find that the legal principles contained in these Business Corporation Law provisions do not concern disputes analogous to those in this case and provide no guidance by which to resolve those disputes.

Contrary to the Supreme Court's analysis, we find that plaintiffs' bylaws expressly address board member indemnification, and set enforceable limitations on when board members are entitled to indemnification. The 28 Cliff Street condominium is not a corporation and although the Real Property Law is silent on the issue of board member indemnification, an unincorporated condominium association can include a provision in its bylaws addressing the issue of indemnification (see LNYC Loft, LLC v Hudson Opportunity Fund I, LLC, 154 AD3d 109, 115 [1st Dept 2017]), and legal fees (see Board of Mgrs. of the 25th Charles St. Condominium, 126 AD3d at 548). With the assumption of board duties comes a measure of risk, and the absence of an indemnity provision or presence of a limited one, apprises prospective board members of those risks. The 28 Cliff Street condominium bylaws provide for board member indemnification but limit it only to circumstances where the issue is contractual liability.

[1] Plaintiffs' 10 dismissed claims alleged that Maguire had, among other things, breached her fiduciary duties by misappropriating the insurance proceeds and unjustly enriched herself at plaintiffs' expense by expanding the ale house's capacity. Each of these claims is a tort committed against the condominium; they do not arise out of contractual liability. Since the condominium's bylaws expressly provide that a board member can only recover their legal fees if the lawsuit arises "out of contracts made by the Board of Managers on behalf of the Condominium unless any such contract shall have been made in bad faith," and the claims here do not come within the scope of that provision, Maguire's application for indemnity should have been denied on that basis alone.

[2] The further question raised on appeal is whether and to what extent the Business Corporation Law may provide an independent right to indemnification, notwithstanding the bylaws. Certainly, where a Business Corporation Law provision expressly states that it applies to all condominium associations,{**191 AD3d at 33} it must be followed (Business Corporation Law § 727 [a]). Here, the particular provisions Maguire relies upon do not expressly so state and we reject the proposition that the Business Corporation Law applies across the board to all condominiums when the Real Property Law is silent.

Business Corporation Law § 626 allows a shareholder in an organized corporation to bring a derivative action on behalf of a corporation. It does not expressly apply to condominiums. There is no statutory equivalent to Business Corporation Law § 626 in the Real Property Law (Caprer v Nussbaum, 36 AD3d 176, 187 [2d Dept 2006]). Nonetheless, courts have held that derivative actions may be brought on behalf of either an unincorporated condominium association or a corporate condominium (id.). While the right to bring a derivative action on behalf of a corporate condominium may be based upon a direct application of the Business Corporation Law, the right of an unincorporated condominium association to bring a derivative action is derived from common law. As recognized in the case of Caprer v Nussbaum, "The derivative action . . . is not solely a creature of statute. Rather, the derivative action originated at common law as an equitable proceeding by which shareholders could assert claims necessary to protect their interest in a corporation" (id.). Finding support in the common law, a unit owner may assert a claim derivatively on behalf of an unincorporated condominium because "[a] derivative action proceeds not on the basis of any individual right, but as an assertion of the interest of the entity by one or more of its owners or members when the management of the entity fails to act to protect that interest" (Caprer at 186). Since the "capacity" of a unit owner to sue on behalf of a condominium is not addressed, let alone circumscribed under the Real Property Law, and the underpinnings of a derivative suit are in the common law, "[c]ondominium unit owners are . . . entitled to the same consideration by the courts as the litigants in those situations in which the courts have historically allowed derivative actions to proceed, independent of any statutory authority" (id at 189). Consistent with this analysis, we clarify that Tsui does not stand for the proposition that where the Real Property Law is silent, the Business Corporation Law broadly applies to all condominium associations to fill in the gaps. The "see" reference to Business Corporation Law § 626 (e) in Tsui is merely an acknowledgment that the Business Corporation Law can be looked at for guidance in interpreting the common law on derivative{**191 AD3d at 34} actions. We have previously looked to the Business Corporation Law for guidance in applying the common law to condominium associations. For instance, in two notable decisions (Pomerance v McGrath, 104 AD3d 440, 441-442 [1st Dept 2013] [Pomerance I]; Pomerance v McGrath, 143 AD3d at 445 [Pomerance II], citing Pomerance I), this Court determined that condominium unit owners, like shareholders in a cooperative corporation, can as a matter of common law obtain a list of the names and contact information of other unit owners, and make copies of the condominium records. In deciding the scope of the common-law rights, this Court consulted Business Corporation Law § 624 and found it useful, but did not apply it.

Neither the common law, nor Business Corporation Law § 626 (e) by analogy, provides the right to recoup attorney's fees to a board member successfully defending against a derivative action. Business Corporation Law § 626 (e) is not an indemnification provision. Rather, it permits legal fees to be paid to an owner who successfully asserts the interest of an entity "when the management of the entity fails to act to protect that interest" (Caprer at 186). Consequently, "an award of attorneys' fees in a shareholders' derivative suit is to reimburse the plaintiff for expenses incurred on the corporation's behalf" (see Glenn v Hoteltron Sys., 74 NY2d 386, 393 [1989]). The corporation is responsible for paying the legal fees, but only where the corporation benefits from the litigation (Glenn at 393). Neither the Business Corporation Law nor the common law provides a board member with a reciprocal right to recover legal fees for defending against an unsuccessful derivative action, at least not in the absence of such authorization in the bylaws or some other statutory authority. In this respect, Maguire's claims for her defense costs are inapposite to those in Tsui, where the party seeking fees was the one who brought the derivative action.

Maguire argues that indemnification is available in other sections of the Business Corporation Law, including Business Corporation Law §§ 722 and 724. Because these provisions contain no express general application to condominiums, and there is no such right at common law, they do not support Maguire's position. In any event, by its own terms even if Business Corporation Law § 722 were applicable, it provides no basis for the relief sought here. Business Corporation Law § 722 (a) specifies that a corporation "may" indemnify its officers {**191 AD3d at 35}and directors when made "a party to an action or proceeding (other than one by or in the right of the corporation to procure a judgment in its favor)" (emphasis added). Thus, Business Corporation Law § 722 permits, but does not require, a corporation to provide officer and director indemnification. Furthermore, it codifies the common-law principle that directors or officers may be reimbursed by the corporation for expenses they incurred and amounts they paid in the defense of actions or proceedings—other than derivative actions (see Baker v Health Mgt. Sys., 98 NY2d 80, 84 [2002]). Consequently, Business Corporation Law § 722, even if it otherwise applies either directly or by analogy, does not change the result because in this case the corporation is not obligated to indemnify Maguire for expenses in an action brought against her derivatively.

Because Maguire had no right to reimbursement for her legal fees, she likewise had no right to have such legal fees paid during the pendency of this action. Under Business Corporation Law § 724, courts are authorized to order indemnification of present or former corporate directors against litigation expenses, notwithstanding the corporation's refusal to do so. Such indemnity, however, is solely to the "extent authorized under section 722" (Business Corporation Law § 724 [a]). Having found that Business Corporation Law § 722 does not apply, neither does Business Corporation Law § 724 because any pendente lite award under Business Corporation Law § 724 would undermine the limitations set forth in Business Corporation Law § 722.

In the absence of any authority permitting Maguire to recoup her legal fees, the general common-law rule applies, that "attorney's fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule" (Hooper Assoc. v AGS Computers, 74 NY2d 487, 491 [1989]). Maguire, alone, is responsible for her legal fees.

In light of the above determination, we do not reach defendants' argument that the motion court should not have conditioned pendente lite indemnification on a finding that Maguire was acting in good faith (LNYC Loft, LLC, 154 AD3d at 115).

Accordingly, the order of the Supreme Court, New York County (Carol R. Edmead, J.), entered September 9, 2019, which, insofar as appealed from, granted defendants' motion for interim indemnification of defendant Philomena Maguire to the extent of determining that Business Corporation Law {**191 AD3d at 36} §§ 722 and 724 apply, but requiring defendant Philomena Maguire to prove good faith in the discharge of her duties as board president, should be reversed, on the law, and the motion denied in its entirety.

Manzanet-Daniels, J.P., Gesmer and Singh, JJ., concur.

Order, Supreme Court, New York County, entered September 9, 2019, reversed, on the law, and the motion denied in its entirety.