Croton River Club, Inc., In re

• Decision Date: 14 April 1995
• Docket Number: No. 1554,D,1554
• Citation: 52 F.3d 41,27 Bankr.Ct.Dec. 113
• Parties: In re CROTON RIVER CLUB, INC., Debtor. CROTON RIVER CLUB, INC., Plaintiff-Appellee, v. HALF MOON BAY HOMEOWNERS ASSOCIATION, INC.; Steven Blust; David Cohen; Mable Fischella; Stanley Teller; Brian Trainor; Andre Vanschaffen; Ed Zafrewski, Defendants-Appellants, Federal Deposit Insurance Corporation, Defendant-Appellee. ocket 93-5109.
• Court: U.S. Court of Appeals — Second Circuit

Page 41

52 F.3d 41

27 Bankr.Ct.Dec. 113

In re CROTON RIVER CLUB, INC., Debtor.

CROTON RIVER CLUB, INC., Plaintiff-Appellee, v. HALF MOON BAY HOMEOWNERS ASSOCIATION, INC.; Steven Blust;

David Cohen; Mable Fischella; Stanley Teller;

Brian Trainor; Andre Vanschaffen; Ed

Zafrewski, Defendants-Appellants,

Federal Deposit Insurance Corporation, Defendant-Appellee.

No. 1554, Docket 93-5109.

United States Court of Appeals, Second Circuit.

Argued Aug. 10, 1994.

Decided April 14, 1995.

Barry Werbin, New York City, for defendants-appellants.

Barbara Balaber-Strauss, White Plains, NY, for plaintiff-appellee.

Before: WINTER and LEVAL, Circuit Judges, and BURNS, ^* District Judge.

WINTER, Circuit Judge:

Defendants appeal from Judge Goettel's affirmance of two decisions by Bankruptcy Judge Schwartzberg. The first decision granted partial summary judgment to plaintiff-appellee on the ground that the allocation of a portion of the budget of a homeowners' association to a marina was not protected by the business judgment rule. The second decision was entered after an evidentiary hearing and concluded that the allocation was unreasonable. The bankruptcy court then substituted a different allocation. We affirm, although we hold that the decision barring any change in the new allocation is no longer in force because the marina has been sold.

BACKGROUND

Croton River Club, Inc. ("Croton") sponsored and developed a planned community named Half Moon Bay on the banks of the Hudson River. Croton planned to build 326 residential units within 13 buildings. The development's amenities were to include tennis courts, a restaurant, a public park, automobile parking, a swimming pool, a community building, a lagoon, and a marina with 300 boat slips. Croton intended to construct an infrastructure including an access road with On February 14, 1991, Croton filed for bankruptcy under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Secs. 1101 et seq., when construction of Half Moon Bay was still incomplete. Most of the infrastructure was in place, but only 120 residential units and 162 marina slips had been constructed. Croton had sold 71 of the residential units and the remaining 49 were still not entirely complete.

a bridge across the nearby Metro North railroad tracks, street lighting, a sewage pumping station, landscaping, a garbage processing center, a riverfront promenade, and a sound barrier along the Metro North tracks. The Half Moon Bay Homeowners Association, Inc. (the "Homeowners Association") is a New York non-profit corporation that oversees the common elements of the Half Moon Bay development.

At issue in the present matter is the allocation of the project's budget to the marina. At various stages of the development of Half Moon Bay, the sponsor--Croton--set an allocation for the marina of 14.25% of designated line items that reflected services used by both the marina and the residential units.

In December 1990, a group of residential unit owners from the Half Moon Bay development (hereafter "homeowners") initiated a derivative action against Croton and others seeking declaratory and injunctive relief and $6 million in damages. The derivative action alleged a failure by Croton to fulfill the offering plan and a breach of fiduciary duty by the Board of Directors of the Homeowners Association.

In July 1991, Croton entered into a stipulation and settlement agreement (the "Settlement") with HMB Acquisition Corp. and the homeowners. The HMB Acquisition Corp. wanted to purchase several of the assets connected to the Half Moon Bay site, but the settlement of all disputes between Croton and the homeowners was a condition for closing the sale. The Settlement thus provided that

the budgets set by the [Half Moon Bay Homeowners Association, Inc.], and the allocations under the control of the [Half Moon Bay Homeowners Association, Inc.] (including the allocation of expenses to the Marina parcel), shall be finally decided by a vote of the homeowner-in-residence members of the [Half Moon Bay Homeowners Association, Inc.] Board.

The Settlement also restricted use of the Half Moon Bay site by owners of marina slips. Subsequent to the Settlement, Croton sold the residential units and the partially developed land to HMB Acquisition Corp. This sale included neither the marina nor the parcel of land intended for the restaurant.

In December 1991, the Homeowners Association Board of Directors set allocations for the 1992 budget. As indicated in the portion of the Settlement quoted above, only the Board members who owned residential units were entitled to vote on the budget. The allocation to be paid by the owners of marina slips (the "Marina Allocation") was set at approximately $160,000, or 53% of an expanded list of line items. The Marina Allocation was a three-fold percentage increase in the amount of the allocation from previous years and over an eight-fold increase in the dollar amount of the allocation initially recommended by the managing agent for the Homeowners Association.

On May 21, 1992, Croton commenced an adversary proceeding on behalf of itself and all others similarly situated to invalidate the Marina Allocation. The bankruptcy judge held that the business judgment rule did not protect the Marina Allocation and ruled, after two days of evidentiary hearings, that the marina slip owners should pay an allocation based on a 14.25% multiplier (as they had in previous years) applied to an independently arrived at list of line items that, in the court's view, represented shared expenses.

Appellants appealed to the district court claiming that the bankruptcy court: (i) should have applied the business judgment rule to the allocation and (ii) erred in creating and enforcing its own allocation of expenses common to the marina slip owners and the residential unit owners.

The district court upheld the bankruptcy court, although the district court held that the bankruptcy court had not created its own allocation but had "simply struck down the 53% allocation which automatically reinstated the 14.25% figure." Therefore, the district Appellants brought the present appeal. At oral argument, it was disclosed that the marina has been sold.

court believed that it "need not reach whether or not Judge Schwartzberg would have had the power to set a new allocation had there been sufficient evidence on the record."

DISCUSSION

The first issue is whether the business judgment rule protects the Marina Allocation determined by the Board of the Homeowners Association. In Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y.2d 530, 554 N.Y.S.2d 807, 553 N.E.2d 1317 (1990), the New York Court of Appeals held that the business judgment rule informs the standard of review for the actions of cooperative and condominium governing boards. The business judgment rule, as developed in the commercial context, precludes judicial inquiry into the actions of corporate directors so long as those actions were taken in good faith and after a reasonable investigation. See id. 554 N.Y.S.2d at 811, 553 N.E.2d at 1321-22.

It is black-letter, settled law that when a corporate director or officer has an interest in a decision, the business judgment rule does not apply. See, e.g., Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557, 483 N.Y.S.2d 667, 674-75, 473 N.E.2d 19, 26 (1984) (when merger creates inherent conflict of interest, burden to prove good faith and fairness of merger shifts to interested directors); Lewis v. S.L. & E., Inc., 629 F.2d 764, 769 (2d Cir.1980). In commercial matters, moreover, if the business judgment rule does not protect a board's decision, then the burden falls upon the board to demonstrate that its actions were reasonable and/or fair. See, e.g., Alpert v. 28 Williams St. Corp., 483 N.Y.S.2d at 674-75, 473 N.E.2d at 26.

The bankruptcy court apparently relied upon this body of law in determining that the business judgment rule did not apply and in applying a reasonableness test. See Ludwig v. 25 Plaza Tenants Corp., 184 A.D.2d 623, 584 N.Y.S.2d 907, 908 (1992). We are less certain that Levandusky adopts in wholesale fashion the rule that the protection of the business...