Dunnegan v. 220 East 54th Street Owners, Inc.

Background

William Dunnegan sued 220 East 54th Street Owners, Inc., alleging breach of contract and breach of fiduciary duty. He alleged that he held “unsold shares” connected to two cooperative apartments and that the cooperative corporation changed its subletting policy in March 2020. The new policy allegedly imposed consent requirements and fees on subletting shareholders, including holders of unsold shares.

Dunnegan relied on Paragraph 38 of the proprietary lease, which states that holders of unsold shares may sublet without the usual board or shareholder consent and that no discriminatory fee may be imposed on them. He also relied on a prior New York State Supreme Court consent judgment stating that his shares were unsold shares and could be assigned or sublet without the corporation’s consent or payment of a discriminatory fee.

Contract Claims

The corporation moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim. It argued that Paragraph 38 was invalid under New York Business Corporation Law § 501(c), which requires equal treatment of shares in the same class. The corporation relied principally on New York appellate decisions that it said invalidated special subletting rights.

The court concluded that the New York Court of Appeals had not directly resolved whether holders of unsold shares may receive exemptions from sublet fees and board-approval requirements. Reviewing New York appellate decisions, the court determined that holders of unsold shares generally constitute a different class from ordinary tenant-shareholders because of their distinct rights and obligations. It therefore concluded that Business Corporation Law § 501(c) does not bar special subletting rights for holders of unsold shares.

The court held that Paragraph 38 was not void as a matter of New York law and that Dunnegan adequately pleaded his breach-of-contract claims. The court also stated that, for enforcement purposes, a consent judgment should be interpreted as a contract, and concluded that Dunnegan adequately alleged a breach of the prior consent judgment for the same reasons.

Fiduciary-Duty Claim

The court dismissed Dunnegan’s breach-of-fiduciary-duty claim. Applying New York law, it concluded that a corporation does not owe fiduciary duties to its shareholders, including shareholders of a cooperative corporation.

Disposition

Judge George B. Daniels denied the corporation’s motion to dismiss the breach-of-contract claims and granted the motion to dismiss the breach-of-fiduciary-duty claim. The court directed the Clerk of Court to close the motion.