Key Points

  • The Second Department held that the fiduciary duties of directors, officers and key persons of a nonprofit corporation under Not-for-Profit Corporation Law Section 717(a) are owed to the corporation, not to individual members.
  • The court held that a corporation, including the Long Island Board of Realtors, does not owe fiduciary duties to its members.
  • The broker's negligence claim was dismissed because its allegations sounded in breach of bylaws or contract rather than an independent tort duty.
  • The unjust-enrichment claim was dismissed for failure to allege any benefit conferred on the defendants, and the court said the plaintiffs could not collaterally attack LIBOR's disciplinary determination.
  • The court affirmed dismissal of the fraud (no justifiable reliance), General Business Law Section 349 (no consumer-oriented conduct), conspiracy, aiding-and-abetting and time-barred injurious-falsehood claims.

A New York appeals court ruled Oct. 7 that the leaders of a nonprofit trade association owe their fiduciary duties to the organization itself, not to its individual members, and threw out the remaining claims a real estate broker brought against the Long Island Board of Realtors after his accounts were suspended over an unpaid $5,000 disciplinary fine.

A four-justice panel of the Appellate Division, Second Department, reversed a Queens County trial judge who had allowed negligence, breach-of-fiduciary-duty and unjust-enrichment claims by broker James An and Re/Max Frontier, the brokerage he worked with, to go forward. The unsigned decision and order, joined by Justices Francesca E. Connolly, Barry E. Warhit, Helen Voutsinas and Susan Quirk, also upheld the lower court's dismissal of the plaintiffs' fraud, consumer-protection, conspiracy, aiding-and-abetting and injurious-falsehood claims.

The result leaves no claims standing against the board or the three individual defendants, Judy Gehlich, Frank Dell Accio and Matthew Arnold. The panel held that a fiduciary duty does not run from a nonprofit's directors and officers to its members. "The fiduciary duties of the directors, officers, and key persons in non-profit corporations are owed to the corporation," the court wrote, "not to individual members of the corporation."

The board, known as LIBOR, is a nonprofit trade association serving about 30,000 real estate brokers and agents in Nassau, Suffolk and Queens counties, and it enforces a Code of Ethics and Arbitration Manual, according to the decision. On or about April 3, 2019, after a hearing, LIBOR found that An had violated the code and directed him to take a course called "MLS Procedures & Rules" by Dec. 20, 2019, or face a $5,000 fine.

An asked several times for an extension, the court said, citing his belief that he was registered for a course called "Ethics Notification" on Jan. 1, 2020, and his wife's ongoing cancer treatment. LIBOR denied the requests. An did not finish the required course by the deadline, and his failure to pay the fine led to the suspension of the plaintiffs' LIBOR and Multiple Listing Service of Long Island accounts, which kept them from reaching their listings and conducting business.

The plaintiffs sued on Feb. 7, 2022. In a Sept. 19, 2023, order, Justice Joseph Risi of Supreme Court, Queens County, dismissed the first four causes of action but let the negligence, fiduciary-duty and unjust-enrichment claims proceed. The defendants appealed, and the plaintiffs cross-appealed.

On the fiduciary-duty claim against LIBOR itself, the panel relied on settled precedent that "[A] corporation does not owe fiduciary duties to its members or shareholders." As to the three individuals, the court turned to Not-for-Profit Corporation Law Section 717(a), which requires directors, officers and key persons to act "in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances." Among the authorities it cited for the conclusion that those duties run to the corporation were two Manhattan trial-court decisions, People v. National Rifle Association of America and People v. Trump.

The court likewise rejected the negligence theory, finding that the claim was a contract dispute under another name. Despite the plaintiffs' labeling, the panel wrote, "their allegations actually sound in breach of by-laws or breach of contract." While a contract can sometimes give rise to an independent duty of care whose breach supports a tort claim, the court said, "here, the allegations were based solely on the contractual relationship between the parties."

The unjust-enrichment claim, an equitable theory that lets a plaintiff recover a benefit unfairly retained by a defendant, failed because the complaint did not allege that the fine or the plaintiffs' lost business benefited the individual defendants, or that LIBOR received any improper benefit. Quoting earlier case law, the panel noted that "[u]njust enrichment is not a catchall cause of action to be used when others fail." It added that "the plaintiffs cannot, in effect, collaterally attack LIBOR's determination, which led to the imposition of the fine for the plaintiffs' failure to comply with the terms of the determination."

On the cross-appeal, the court agreed with the trial judge that the fraud claim failed for lack of justifiable reliance, a required element meaning the plaintiff reasonably relied on the misrepresentation. The plaintiffs alleged that the defendants misrepresented An's enrollment in the Jan. 1 ethics course, but LIBOR's determination called for a different course by an earlier date. "The plaintiffs had the means available to them of knowing, by the exercise of ordinary intelligence, that the 'Ethics Notification' course on January 1, 2020, would not satisfy the requirement in LIBOR's determination," the panel wrote. With the fraud claim gone, the conspiracy and aiding-and-abetting claims fell with it.

The claim under General Business Law Section 349, New York's consumer-protection statute barring deceptive business practices, failed because "the complaint failed to sufficiently allege consumer-oriented conduct," the court held. The statute requires acts or practices that "have a broader impact on consumers at large," according to the case law the panel quoted.

The injurious-falsehood claim was untimely under the one-year statute of limitations in CPLR 215(3), the court held. The plaintiffs, it said, failed to show that the clock stopped while a small-claims action, filed before the current suit and discontinued under a stipulation, was pending.

The panel said the defendants' remaining contentions did not need to be addressed and awarded one bill of costs to LIBOR and the three individual defendants. The decision, which is uncorrected and subject to revision before publication in the Official Reports, does not address claims against a further defendant named in the caption who was not part of the appeal.

Alfred M. Fazio of Capuder Fazio Giacoia LLP represented LIBOR and the individual defendants. Jeceaca An of Kasowitz Benson Torres LLP represented James An and Re/Max Frontier.