Kofinas v. Fifty-Five Corporation

Background

George and Maria Kofinas alleged that they jointly owned the stock and held the leases for three commercial units in a residential cooperative owned by Fifty-Five Corp. They planned to combine and renovate the units into a fertility clinic. According to the amended complaint, water entered the units through the sidewalk and foundation walls. The building’s architect allegedly advised that sidewalk caulking was a quick, inexpensive measure and that the problem was more likely underground, but the cooperative authorized caulking rather than more extensive sidewalk and foundation repairs.

The Kofinases alleged that the cooperative instead spent substantial sums on improvements benefiting residential unit owners, including a rooftop garden, lobby work, and a new roof. The temporary interior sealant eventually failed. The complaint alleged that water, mold, and related conditions damaged the clinic and caused it to close for repairs. The Kofinases also alleged that the board delayed or rejected proposed sidewalk and foundation repairs while pursuing a separate facade project for residential units.

The defendants included Fifty-Five Corp., members of its board, and its managing agent. The six counts alleged breach of contract and negligence against the cooperative; breach of fiduciary duty and tortious interference with contract against board members; and aiding and abetting those alleged wrongs against the managing agent.

Motions and Standing

The defendants filed two motions to dismiss. One relied on Rule 12(b)(1), which concerns the court’s subject-matter jurisdiction. The defendants argued that the Kofinases lacked standing because their professional corporation, Kofinas Fertility Group, P.C., rather than the Kofinases personally, suffered the alleged business losses and paid for some work.

Judge Rakoff rejected that argument. The complaint alleged that the Kofinases personally leased the units, signed the allegedly breached contract, and were the shareholders to whom fiduciary duties were owed. The alleged damage to property in which they held an interest was enough to plead an injury for standing purposes. The court also concluded that the professional corporation was not a required party under Federal Rule of Civil Procedure 19, so the case could proceed without it and diversity jurisdiction remained complete.

Failure to State a Claim

The defendants also moved under Rule 12(b)(6), which tests whether a complaint plausibly alleges a legally valid claim. They argued that the business judgment rule protected the board members and that New York law shielded them from liability for acts taken in their roles as board members.

The court held that the complaint plausibly alleged favoritism: the board allegedly knew about serious problems affecting the commercial units but prioritized projects benefiting residential shareholders. Under New York law, the business judgment rule does not protect decisions allegedly made in bad faith or involving favoritism. The court therefore declined at this stage to apply that rule as a bar to the claims.

The court held that the breach-of-fiduciary-duty claim against the board members stated a legally sufficient claim because New York’s corporate-liability shield does not protect directors from liability for torts such as breach of fiduciary duty. The court reached the same conclusion for the claim against the managing agent for aiding and abetting that alleged breach.

The court reached a different result on Count Four, the claim that the board members tortiously interfered with the contract. Because the corporation was the alleged third party whose breach was induced and the board members were acting for the corporation, the complaint needed to allege independent tortious or predatory conduct beyond their actions as board members. The court found that it did not. Count Six, which alleged that the managing agent aided and abetted that contract-interference claim, was derivative of Count Four and also failed.

Punitive Damages

The court held that the claims arose from the contractual relationship between the Kofinases and the cooperative. Under the New York Court of Appeals decisions discussed in the opinion, punitive damages in that setting require, among other things, an independent tort and a pattern of egregious conduct directed at the public generally. Although the complaint plausibly alleged independent torts, it alleged conduct directed at the Kofinases rather than a pattern directed at the public generally. The court therefore dismissed all claims for punitive damages.

Disposition

By order dated January 29, 2021, and explained in this opinion, the court denied the motion to dismiss for lack of subject-matter jurisdiction and standing. It granted without prejudice the motion to dismiss Count Four, Count Six, and all claims for punitive damages. It denied the defendants’ motions to dismiss in all other respects. The opinion states that the dismissals were without prejudice because the plaintiffs theoretically could allege additional facts curing the defects.