Direct Claims Proceed Despite Business Judgment Rule Challenge; Derivative Claims Fail for Lack of Standing

By: Jeffrey M. Haber

In Bent v. Cirone, 2026 N.Y. Slip Op. 03875 (1st Dept. June 18, 2026), the Appellate Division, First Department, addressed the scope of the business judgment rule and the requirements for derivative standing. The dispute arose after a condominium resident claimed that board members retaliated against him for opposing a proposed $3 million capital improvement project. Although the motion court dismissed the claims against the individual board members, finding that their conduct was protected by the business judgment rule and that Plaintiff lacked standing to assert derivative claims, the First Department modified the order (i.e., the motion court’s decision). The Court reinstated the plaintiff's direct claims, holding that allegations of an animus-driven campaign of retaliation and other tortious conduct were sufficient to survive dismissal and were not barred by the business judgment rule at the pleading stage. At the same time, the Court reaffirmed that derivative standing belongs to shareholders/unitholders and cannot be acquired merely through an assignment of litigation claims.

Bent arose from a disagreement between Plaintiff and the Condominium Board and Residential Board (“Board”) of the 99 Jane Street Condominium (“Condominium”) over the management of the residential section of the Condominium. Plaintiff and his family live in a unit of the Condominium (“Unit”), which is owned solely by his wife. Just prior to commencement of the action, Plaintiff and his wife executed an agreement in which she “irrevocably sold, conveyed, transferred and assigned” to Plaintiff all of her “ownership, right, title and interest in and to the litigation claims” against Defendants. The Individual Defendants are members of the Board responsible for managing the Condominium’s residential section.

According to Plaintiff, in June 2021, he objected to the Board’s proposed plans to conduct $3 million in capital improvements of the building. Plaintiff contended the Board’s response to his objections resulted in improper and retaliatory conduct. In that regard, Plaintiff alleged that (a) Defendants purposefully created unsafe and unhealthy living conditions for him and his family, (b) his family had been denied paid-for services, such as routine maintenance work in the Unit, (c) sewage odors were prevalent in the Unit, of which Defendants were aware, and (d) there were unrepaired issues with the air conditioning, including noise from the ventilation fans. Plaintiff further asserted that Defendants intentionally spread false and malicious communications about Plaintiff in notices distributed to unit owners, among others, through the Condominium’s official, building-wide communication system, impacting his participation in Board elections.

Plaintiff commenced the action on September 29, 2023, and amended the complaint on December 22, 2023. Of the ten causes of action, eight were brought individually, and two were brought derivatively on behalf of all the Condominium’s unit owners.  

Defendants moved to dismiss all causes of action pursuant to CPLR 3211(a)(1), (3), and (7), except for those against the Board for breach of contract and for a permanent injunction. In support of their motion to dismiss, Defendants argued that Plaintiff failed to allege any wrongdoing of the Individual Defendants that would be separate from their action as Board Members, and, in any event, under the exculpation of liability provision of the Condominium’s By-Laws, the Individual Defendants were exempt from liability. They further argued, inter alia, that their actions were protected by the business judgment rule and that Plaintiff failed to demonstrate that he had standing to bring his claims for record inspection and his derivative actions.

Relevant to this article, the motion court granted Defendants’ motion to dismiss the amended complaint with respect to the direct and derivative claims asserted against the Individual Defendants.

The motion court held that Plaintiff improperly brought his claims collectively against multiple defendants without specifying the precise tortious conduct charged to a particular defendant.[1]  The motion court explained that the amended complaint did not specify any individual conduct each Individual Defendant purportedly had undertaken that would result in the tortious conduct warranting damages or the permanent injunction sought by Plaintiff.

The motion court also held that even if Plaintiff had been sufficiently specific in his allegations, the Individual Defendants’ conduct was protected under the business judgment rule.[2] The motion court explained that Plaintiff’s causes of action against the Individual Defendants were rooted in the Board’s decision not to perform repairs in the Condominium as requested by Plaintiff. Such conduct, said the motion court, was subject to the business judgment rule. Accordingly, the Individual Defendants could not be held liable under Plaintiff’s tort-based causes of action.

Further, the motion court held that Plaintiff, as a non-unit owner, lacked standing to bring derivative claims against the Individual Defendants on behalf of all Condominium unit owners.[3] 

On appeal, the First Department modified the motion court’s order, to deny the motion as to the direct claims, and otherwise affirmed.

The Court held that “Plaintiff adequately stated direct claims against the individual defendants.”[4] The Court explained that the “allegations that the individual board members all participated in, directed, controlled and/or approved the alleged tortious acts that were taken collectively by the condominium board [were] sufficient to sustain the claims at this pre-discovery stage.”[5] 

The Court also held that the “[t]o the extent the complaint include[d] nonconclusory allegations of an animus-driven campaign of retaliatory actions that constitute[d] tortious conduct, the direct tort claims [were] not properly dismissed at this stage based on the business judgment rule.”[6] 

The Court further held that Plaintiff’s claims should not have been dismissed based on the Condominium’s by-law provisions that limit the personal liability of the board members, where the members engaged in bad faith or willful misconduct.[7]

Finally, the Court held that the motion court “properly dismissed the derivative claims that were asserted against the individual defendants on behalf of the condominium’s unit owners” on standing grounds.[8] 

Under New York law, “[a] membership interest in a limited liability company is assignable in whole or in part.”[9] However, the assignment of a membership interest “does not . . . entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights or powers of a member.”[10] Rather, “the only effect of an assignment of a membership interest is to entitle the assignee to receive, to the extent assigned, the distributions and allocations of profits and losses to which the assignor would be entitled.”[11] 

The Court found that “neither the assignment, nor any other instrument, transferred to him the membership interest in the condominium that is required for the assertion of derivative claims on behalf of the unit owners.”[12]

Takeaway

The principal takeaway from Bent is that the business judgment rule will not shield board members from suit when a complaint contains nonconclusory allegations of bad faith, retaliation, or other tortious conduct, but derivative standing remains limited to those who hold a membership interest in the corporation and cannot be acquired merely through an assignment of litigation claims.

With respect to the business judgment rule, the motion court viewed the dispute as one involving board decisions concerning repairs, maintenance, and condominium operations, precisely the type of discretionary decisions typically protected under the rule. The motion court, therefore, concluded that the Individual Defendants were insulated from liability because the challenged conduct arose from decisions made within the scope of their authority as board members.

The First Department applied the doctrine differently than the motion court. While recognizing the application of the business judgment rule, the Court held that the rule does not require dismissal where a complaint alleges more than mere disagreement with board decisions. In Bent, Plaintiff alleged that the board members engaged in an animus-driven campaign of retaliatory actions in response to his opposition to a multimillion-dollar capital improvement project. According to the Court, allegations that the Individual Defendants participated in, directed, controlled, or approved retaliatory and otherwise tortious conduct were factually sufficient to state claims for relief. As a result, the Court held that the business judgment rule did not warrant dismissal of the direct tort claims at the pleading stage. The Court’s decision reinforces the principle that the rule protects good-faith board decision-making but does not provide blanket immunity for conduct alleged to have been motivated by bad faith, retaliation, or willful misconduct.

The First Department similarly rejected reliance on the Condominium’s by-law provisions limiting personal liability of board members. Those protections, the Court noted, do not apply where the complaint adequately alleges bad faith or willful misconduct. Thus, Bent underscores that both the business judgment rule and exculpatory by-law provisions have limits when a plaintiff alleges facts that board members acted with improper motives.

The second significant holding of Bent concerns derivative standing. Plaintiff’s wife owned the Unit and assigned him all rights and interests in the litigation claims against Defendants. The First Department held that the assignment was sufficient to give Plaintiff standing to pursue the direct claims. However, it was insufficient to confer standing to assert derivative claims on behalf of the Condominium’s unit owners.

The Court emphasized the distinction between the assignment of a cause of action and ownership of the membership interest from which derivative standing flows. A derivative action is not based on an individual’s personal rights; rather, it is an assertion of the rights of the corporation by one of its owners. Because Plaintiff never acquired his wife’s ownership or membership interest in the corporation, only her litigation claims, he lacked the standing necessary to sue derivatively on behalf of the unit owners. The assignment transferred claims, but it did not transfer the ownership interest required to step into the shoes of a Condominium member for derivative purposes.

Accordingly, Bent stands for two important propositions: first, factual allegations of bad faith and retaliatory conduct may prevent board members from obtaining dismissal under the business judgment rule at the pleading stage; and second, derivative standing depends on ownership or membership status in the corporation itself, not merely on the assignment of litigation claims. An assignee may pursue the assignor’s direct claims, but absent a transfer of the underlying ownership interest, the assignee cannot maintain derivative claims on behalf of the corporation.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice.

Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. ___________________________________

[1] Aetna Cas. & Sur. Co. v Merchants Mut. Ins. Co., 84 A.D.2d 736 (1st Dept. 1981).

[2] Berenger v. 261 W. LLC, 93 A.D.3d 175, 184 (1st Dept. 2012) (“[T]he business judgment rule protects individual board members from being held liable for decisions, such as those concerning the manner and extent of repairs, that were within the scope of their authority”).

[3] Bd. of Mgrs. of the 28 Cliff St. Condominium v. Maguire, 191 A.D.3d 25, 33 (1st Dept. 2020) (“[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”) (citing Caprer v. Nussbaum, 36 A.D.3d 176, 186 (2d Dept. 2006).

[4] Slip Op. at *1.

[5] Id., citing Fletcher v. Dakota, Inc., 99 A.D.3d 43, 49 (1st Dept. 2012); see also Stewart Tit. Ins. Co. v. Liberty Tit. Agency, LLC, 83 A.D.3d 532, 533 (1st Dept. 2011).

[6]  Id., citing Board of Mgrs. of the Alfred Condominium v. Miller, 202 A.D.3d 467, 469 (1st Dept. 2022); Gochberg v. Sovereign Apts., Inc., 119 A.D.3d 431, 432 (1st Dept. 2014).

[7] Id.

[8] Id.

[9] Behrend v. New Windsor Group, LLC, 180 A.D.3d 636, 639 (2d Dept. 2020); see Limited Liability Company Law (“LLC Law”) § 603(a)(1).

[10] LLC Law § 603(a)(2); see Behrend, 180 A.D.3d at 639. It is important to note that Section 603(a) of the LLC Law makes clear that an assignment of a membership interest is governed by the statute, “[e]xcept as provided in the operating agreement.”

[11] LLC Law § 603(a)(3); see Behrend, 180 A.D.3d at 639.

[12] Id., citing Kober v. Nestampower, 243 A.D.3d 902, 904 (2d Dept. 2025); MFB Realty LLC v. Eichner, 161 A.D.3d 661, 661 (1st Dept. 2018).