94 N.Y.2d 659 (2000)

A cooperative apartment corporation cannot indemnify a director for punitive damages when the director violated civil rights laws by denying a sublease application based on race and retaliating against a shareholder, because such actions constitute bad faith.

Summary

Nicholas Biondi, former president of Beekman Hill House, was sued after denying a sublease application based on race and retaliating against a shareholder who opposed the denial. A jury found Biondi liable for violating civil rights laws and awarded punitive damages against him. Biondi then sought indemnification from Beekman. The New York Court of Appeals held that public policy and Business Corporation Law § 721 bar indemnification because the underlying judgment established that Biondi acted in bad faith, undermining the purpose of punitive damages and violating public policy.

Facts

Simone Demou, a shareholder in Beekman Hill House, sought to sublease her apartment to Gregory and Shannon Broome. Biondi, the president of the board, initially indicated a full board interview wouldn’t be needed. However, after meeting Gregory Broome, who is African-American, Biondi informed other board members of Broome’s race and expressed unease. The board unanimously denied the Broomes’ application and issued a notice of default against Demou for accusing Biondi of racism.

Procedural History

Biondi sued Demou for defamation. The Broomes then sued Beekman and its directors, including Biondi, in federal court for civil rights violations. Demou removed Biondi’s defamation action to federal court, consolidated it with the Broomes’ suit, and asserted counterclaims. The jury found Biondi and Beekman liable. Biondi moved for a new trial, which was denied. Biondi then sued Beekman for indemnification, which was initially denied by the Supreme Court, but the Appellate Division reversed and dismissed the complaint. The Court of Appeals affirmed the Appellate Division’s decision.

Issue(s)

1. Whether public policy bars a cooperative apartment corporation from indemnifying a director for punitive damages imposed for discriminatory actions.

2. Whether Business Corporation Law § 721 bars indemnification when the underlying judgment establishes the director acted in bad faith.

Holding

1. Yes, because indemnification in this case would defeat the purpose of punitive damages, which is to punish and deter similar conduct.

2. Yes, because Business Corporation Law § 721 prohibits indemnification when a judgment establishes that a director’s acts were committed in bad faith.

Court’s Reasoning

The Court reasoned that public policy prohibits indemnification for punitive damages because it undermines their deterrent effect. Allowing Biondi to shift the penalty to Beekman would permit him to benefit from his own wrongdoing. While the Business Corporation Law allows for broader indemnification, it still requires that the director act in good faith. The court emphasized that the key to indemnification is a director’s good faith toward the corporation. In this case, Biondi’s discriminatory actions exposed Beekman to liability and cannot be construed as being in the corporation’s best interest. The court highlighted the Federal District Court’s finding that Biondi acted in bad faith, breaching his fiduciary duty to Demou, a finding that Biondi was barred from relitigating. As the court stated, “By intentionally denying the Broomes’ sublease application on the basis of race, Biondi knowingly exposed Beekman to liability under the civil rights laws.” Therefore, indemnification was not permissible.