In the Matter of the Estate of Mark Rothko, Deceased. Kate Rothko et al., Respondents; Bernard J. Reis et al., as Executors of Mark Rothko, Deceased, et al., Appellants-­Respondents; Attorney-General of the State of New York, Respondent-Appellant.

decided November 22, 1977

Argued October 4, 1977;

POINTS OF COUNSEL

Arthur Richenthal for Bernard J. Reis and another, appel­lants-respondents.

Bernard H. Greene and John A. Silberman for Morton Levine, appellant-respondent.

David W. Peck, John W. Dickey, David M. Olasov, Pamela S. Dwyer and David B. Tulchin for Marlborough Gallery, Inc., and others, appellants-respondents.

Louis J. Lefkowitz, Attorney-General (Gustave Harrow of counsel), for ultimate charitable beneficiaries, respondent-ap­pellant.

Edward J. Ross, James R. Peterson and James J. Sabella for Kate Rothko, respondent.

Judith A. Ripps-Goldstone, George E. DeSipio and Martin I. Gdanski for The Mark Rothko Foundation, Inc., respondent.

Paul Sarno, Gerald Dickler and Jack Schachner for Barbara B. Northrup, as guardian of the person and property of Christopher Rothko, respondent.

I. As a matter of law, there is no such conflict of interest to invoke the "no further inquiry” rule of a self-dealing transaction. (Phelan v Middle States Oil Corp., 220 F2d 593; Matter of Foss, 282 App Div 509; Van Heusen v Van Heusen Charles Co., 74 Misc 292; Matter of Sherman, 9 Misc 2d 731, 279 App Div 981; Fox v Arctic Placer Min. & Milling Co., 229 NY 124; Borden v Guthrie, 23 AD2d 313, 17 NY2d 571; Dodge v Richmond, 10 AD2d 4, 8 NY2d 829; Grace v Deepdale, 9 Misc 2d 538, 8 AD2d 965, 7 NY2d 987, 363 US 811; Meinhard v Salmon, 249 NY 458.) II. Prior court approval of the estate contracts was not required since there was no self-dealing. (Matter of Tannenbaum, 20 AD2d 808, 15 NY2d 829; Matter of Stulman, 146 Misc 861; Matter of Ebbets, 139 Misc 250; Matter of Pulitzer, 139 Misc 575, 237 App Div 808; City Bank Farmers Trust Co. v Smith, 263 NY 292; Matter of Ryan, 188 Misc 61, 272 App Div 799, 996; Matter of Foss, 282 App Div 509.) III. The testator waived any claim of impermis­sible conflict. (Matter of Dow, 32 Misc 2d 415, 3 AD2d 968, 5 NY2d 739; City Bank Farmers Trust Co. v Cannon, 291 NY 125; O’Hayer v de St. Aubin, 30 AD2d 419; Matter of Kellogg, 35 Misc 2d 541; Matter of Ahrens, 193 Misc 844, 275 App Div 588, 301 NY 701; Matter of Heidenreich, 85 Misc 2d 135; Matter of Foss, 282 App Div 509; Matter of Berri, 130 Misc 527; Matter of Hammer, 16 AD2d 111, 12 NY2d 893.) IV. The 1970 contracts were fair and in the best interests of the estate. (Borden v Guthrie, 23 AD2d 313, 17 NY2d 571; Matter of Vought, 70 Misc 2d 781, 45 AD2d 991; Sinkoff Beverage Co. v Schlitz Brewing Co., 51 Misc 2d 446; Simon v Electrospace Corp., 28 NY2d 136; Youssoupoff v Widener, 126 Misc 491, 219 App Div 712, 246 NY 174; Oglesby v Allen, 408 F2d 1154; MacDonald v Commissioner of Internal Revenue, 230 F2d 534; Propper v Commissioner of Internal Revenue, 89 F2d 617; Plaza Hotel Assoc, v Wellington Assoc., 55 Misc 2d 483, 28 AD2d 1209, 22 NY2d 846; Lawrence v Mullen, 40 AD2d 871.) V. As a matter of law it is improper to remove Stamos and Reis as executors. (Matter of Jung, 205 App Div 37; Matter of Berri, 130 Misc 527.) VI. The award of appreciation damages is legally erroneous and improperly punitive rather than compensatory. (Greiss v Royal Nat. Bank, 31 NY2d 1003; Vinlis Constr. Co. v Roreck, 21 NY2d 687; Ungewitter v Toch, 31 AD2d 583; 26 NY2d 687; Matter of Segal, 170 Misc 673; Menzel v List, 24 NY2d 91; Simon v Electrospace Corp., 28 NY2d 136; Wendt v Fischer, 243 NY 439.)

I. Levine at all times acted honestly, prudently and reasonably, and did not commit or knowingly assent to any dereliction of duty. (Matter of Clark, 257 NY 132; King v Talbot, 40 NY 76; Matter of Weston, 91 NY 502; Matter of Brower, 71 Misc 398; Wilmerding v McK­esson, 103 NY 329; Matter of McCafferty, 147 Misc 179.) II. Levine’s reasonable reliance upon counsel’s advice combined with his exercise of prudent business judgment constitutes a complete defense in this proceeding. (United States v Jackson, 55 F Supp 517; Matter of Smith, 148 Misc 585; Matter of Joost, 50 Misc 78, Matter of Ball, 55 App Div 284; Matter of Westerfield, 32 App Div 324; Matter of Niles, 113 NY 547; Matter of Silkman, 121 App Div 202, 190 NY 560; Matter of Demmerle, 130 Misc 684; United States v Benjamin, 328 F2d 854.) III. Levine’s removal would be a flagrant miscarriage of justice. (Matter of Jung, 205 App Div 37; Matter of Leland, 219 NY 387; Matter of Israel, 64 Misc 2d 1035; Matter of Berri, 130 Misc 527; Matter of Burr, 118 App Div 482; Elias v Schweyer, 13 App Div 336; Matter of Monroe, 142 NY 484; Matter of Rosenberg, 165 Misc 92.)

I. There was admittedly no self-dealing and the "no further inquiry” rule was thus improperly applied. If there was a conflict of interest, the contracts could be set aside only if proved to be unfair. (Van Heusen v Van Heusen Charles Co., 74 Misc 292; Matter of Sherman, 9 Misc 2d 731, 279 App Div 981; Skinnell v Maho­ney, 197 App Div 808; Otier v Neiman, 96 Misc 481; Matter of Hubbell, 302 NY 246; La Vin v La Vin, 283 App Div 809, 307 NY 790; Globe Woolen Co. v Utica Gas & Elec. Co., 224 NY 483; Phelan v Middle States Oil Corp., 220 F2d 593.) II. No executor had a conflict of interest. The alleged conflict on the part of Reis, assuming it existed, was sanctioned by the decedent (who also bound his executors to deal with Marlbor­ough) and was eliminated by Reis’ recusal from the contract negotiations. (Grace v Deepdale, Inc., 9 Misc 2d 538, 8 AD2d 965; Matter of Berri, 130 Misc 527; O’Hayer v de St Aubin, 30 AD2d 419; Matter of Hammer, 16 AD2d 111, 12 NY2d 893; Matter of Kellogg, 35 Misc 2d 541; Matter of Dow, 32 Misc 2d 415, 3 AD2d 968, 5 NY2d 739; Matter of Balfe, 245 App Div 22; Matter of Johnson, 14 Misc 2d 138.) III. The 1970 sales and consignment contracts were reasonable and fair. (Matter of Bloch, 189 Misc 942; Purdy v Lynch, 145 NY 462; Costello v Costello, 209 NY 252.) IV. The Marlborough appellants lacked notice of any breach of trust and have no liability as third parties. (Bonham v Coe, 249 App Div 428, 276 NY 540; Purñeld v Kathrane, 73 Misc 2d 194; Fidelity & Deposit Co. of Md. v Queens County Trust Co., 226 NY 225; Fleck v Perla, 40 AD2d 1069; Dye v Lincoln Rochester Trust Co., 40 AD2d 583, 31 NY2d 1012.) V. The award of damages was calculated on an impermissible legal theory, was grossly excessive and admittedly punitive rather than compensatory. (Wetmore v Porter, 92 NY 77; Fleck v Perla, 40 AD2d 1069; Bullis v Bruce, 274 App Div 532; Noll v Smith, 250 App Div 453; Bonham v Coe, 249 App Div 428, 276 NY 540; Jones v Morgan, 90 NY 4; Jones v National Chautauqua County Bank of Jamestown, 272 App Div 521; Filer v Creole Syndicate, 230 App Div 509, 256 NY 346; Vanleigh Carpet Corp. v Schoor’s Iron Forge, 65 Misc 2d 504.) VI. The Surrogate had no juris­diction or authority to alter the 1969 contracts between Marl­borough and Rothko. VII. The finding of contempt was clearly erroneous. (Sternberg v Zaretsky, 20 AD2d 795, 14 NY2d 842; Silverman v Oberman, 5 AD2d 927; Tierney v James, 269 App Div 348; Ketchum v Edwards, 153 NY 534; People v Balt, 34 AD2d 932; Ziegfeld v Norworth, 148 App Div 185.)

I. There was a rising curve of prices through all of the pertinent points in time. (Murray v Cooper, 268 App Div 411; Lynch v Bailey, 275 App Div 527; Youssoupoff v Widener, 246 NY 174; Weinberg v Edelstein, 201 Misc 343; Larido Corp. v Crusader Mfg. Co., 4 Misc 2d 231; Mandel v Liebman, 303 NY 88; Elco Shoe Mfrs. v Sisk, 260 NY 100.) II. The consignment of 100 of the best paintings left by Mark Rothko involved an unbroken chain of fraudulent manipulations, concealment and finally fabrication of documents involving the consigned paint­ings. III. Paintings were sold in "contempt” of court. (Korde Corp. v Casino Classics, 280 App Div 740; Matter of Black, 138 App Div 562; Jackson v Murray, 25 App Div 140; Schieffelin v Hylan, 191 App Div 324, 229 NY 633.) IV. To the extent that paintings are not returned, the beneficiaries herein can never be made whole; therefore the only appropriate measure of damages is one which most nearly provides a substitute for failure to return paintings. (Elco Shoe Mfrs. v Sisk, 260 NY 100; Polley v Daniels, 238 App Div 181; Matter of De Belar­dino, 77 Misc 2d 253, 47 AD2d 589; Menzel v List, 24 NY2d 91; Simon v Electrospace Corp., 28 NY2d 136; Buffum v Barceloux, 289 US 227.)

I. All the relief granted is war­ranted by the fundamental rule of undivided loyalty. (Munson v Syracuse, Geneva & Corning R. R. Co., 103 NY 59; Wendt v Fischer, 243 NY 439; Albright v Jefferson County Nat. Bank, 292 NY 31; City Bank Farmers Trust Co. v Cannon, 291 NY 125; Dabney v Chase Nat. Bank of City of N. Y, 196 F2d 668; United States v Mississippi Val. Co., 364 US 520; Matter of Hufnagel, 258 App Div 1088; Manson v Curtis, 223 NY 313; Diamond v Oreamuno, 29 AD2d 285, 24 NY2d 494; Globe Woolen Co. v Utica Gas & Elec. Co., 224 NY 483.) II. The Surrogate granted the proper relief as to Reis, Stamos and Levine. (Matter of McGillivray, 138 NY 308; Pyle v Pyle, 137 App Div 568, 199 NY 538; Matter of Wagner, 257 App Div 972; Matter of Giaimo, 73 Misc 2d 130, 41 AD2d 600; Matter of Israel, 166 Misc 156, 256 App Div 1063; Earle v Earle, 93 NY 104; Matter of Slensby, 169 Misc 292; Matter of Wester­neld, 32 App Div 324; Matter of Durston, 297 NY 64; Frontier Excavating v Sovereign Constr. Co., 30 AD2d 487, 24 NY2d 991.) III. The Surrogate correctly set aside the two contracts. (Wendt v Fischer, 243 NY 439; City Bank Farmers Trust Co. v Cannon, 291 NY 125.) IV. Marlborough is liable with respect to the two contracts. (Rippey v Denver United States Nat. Bank, 273 F Supp 718; Matter of Gauthier, 143 Misc 788; Fidelity & Deposit Co. of Md. v Queens County Trust Co., 226 NY 225; Kirsch v Tozier, 143 NY 390.) V. The facts of this estate required the executors either to distribute the paintings in kind or at a minimum to determine whether the beneficiar­ies wanted a distribution in kind or preferred a hurried disposal of all the paintings, a small amount of cash and a 12-­year interest-free receivable. (Lane v Albertson, 78 App Div 607; Matter of Hostin, 33 Misc 2d 206; Matter of Morrison, 173 Misc 503; Matter of Thompson, 41 Misc 420, 178 NY 554; Hancox v Meeker, 95 NY 528.) VI. The courts below applied the proper measures of damages. (Baker v Drake, 53 NY 211; Menzel v List, 24 NY2d 91; Meinhard v Salmon, 223 App Div 663, 249 NY 458; Simon v Electrospace Corp., 28 NY2d 136; Guckenheimer v Angevine, 81 NY 394; Kinsey v Leggett, 71 NY 387; Noce v Kaufman, 2 NY2d 347.) VII. The Surrogate correctly found that provisions of the February 21, 1969 contracts between Rothko and Marlborough were abandoned and abrogated. (Matter of Ryan, 63 Misc 2d 415.) VIII. Lloyd and Marlborough violated the temporary restraining order and injunction and were properly adjudged in contempt.

I. The lower courts correctly held Marlborough, who had knowl­edge of the executors’ breach of trust in entering into the estate contracts, liable for money damages measured by the value of the unrecoverable paintings at the date of the deci­sion. (Rippey v Denver U. S. Nat. Bank, 273 F Supp 718; Bonham v Coe, 249 App Div 428, 276 NY 540; First Nat. Bank of Paterson, N. J. v National Broadway Bank, 156 NY 459; Bullis v Bruce, 274 App Div 532; Matter of Gauthier, 143 Misc 788.) II. The courts below imposed the correct measure of money damages on the executors guilty of disloyalty and conflict of interest: the value of the unrecoverable paintings measured at the date of the decision. (Mooney v Byrne, 163 NY 86; Menzel v List, 24 NY2d 91; Simon v Electrospace Corp., 28 NY2d 136; Markham v Jaudon, 41 NY 235; Baker v Drake, 53 NY 211; Hartford Acc. & Ind. Co. v Walston & Co., 22 NY2d 672; Mayer v Monzo, 221 NY 442.) III. The Surrogate was fully justified in imposing a higher measure of damages on the two executors guilty of conflict of interest and breach of loyalty. (Meinhard v Salmon, 249 NY 458.) IV. The Surro­gate’s computation of appreciation damages was correct. (Story Parchment Co. v Paterson Co., 282 US 555; Eastman Co. v Southern Photo Co., 273 US 359; Alexander’s Dept. Stores v Ohrbach’s, 269 App Div 321; Matter of Hyde, 149 Misc 291; Madden v Atkins, 24 Misc 2d 4, 10 AD2d 989, 11 AD2d 802; Latham Holding Co. v State of New York, 16 NY2d 41; Enmac Realty Corp. v State of New York, 38 AD2d 650.) V. The estate is entitled to the monetary equivalent of the irrevocably lost paintings; no reduction may be made for hypothetical and speculative "wholesale” values, commissions or expenses. VI. Appellants’ claim of a duty to sell the estate paintings as a justification for using May, 1970 values for the computation of damages is without merit. (Matter of Bulova Fund, 30 AD2d 321, 31 AD2d 526; Matter of Schmitt, 179 Misc 83; Matter of Durston, 297 NY 64.)

I. The Rothko consignment contract is damning in its failure to protect, let alone benefit, the artist’s estate. (Matter of Cohen v Cocoline Prods., 309 NY 119; Matter of Maidman v Central Foundry Co., 27 AD2d 923; Garrett v United States, 120 F Supp 193; Smith v Dunn, 224 F2d 353; United States v Winthrop, 417 F2d 905; Brown v Commissioner of Internal Revenue, 143 F2d 468; Matter of Ullman, 56 Misc 2d 495.) II. The sales contract is grossly unfair to the estate. The price paid on a deferred basis is extraordinarily low for these outstanding 100 works. (Plaza Hotel Assoc, v Wellington Assoc., 37 NY2d 273; Thomas v State of New York, 37 AD2d 1030; Dormann v State of New York, 4 AD2d 979; Pauly v State of New York, 14 Misc 2d 314.) III. The persistent concealment by the executors and Marlborough of their activities is probative of conflict of interest and breach of loyalty which led to fraud and great waste of estate assets. (Matter of Levy, 19 AD2d 413; Matter of Perutz, 23 Misc 2d 229; Matter of Kopytkiewicz, 156 Misc 297; Harrington v Sharif, 305 F2d 333; Globe Woolen Co. v Utica Gas & Elec. Co., 224 NY 483; Bailey v Baker’s Air Force Gas Corp., 50 AD2d 129; Allen v Stokes, 260 App Div 600; Larsen Baking Co. v City of New York, 30 AD2d 400, 24 NY2d 1036; Matter of Bayside Mason Supplies v Barber Co., 31 Misc 2d 921.) IV. Appellants may not properly rely on testimony given and self-serving documents prepared by Marlborough. (People ex rel. MacCracken v Miller, 291 NY 55; Cooper v Kaufman, 13 AD2d 915.) V. The beneficiaries have every right to the third alternative remedy, appreciation damages, where there is a breach of the duty of loyalty known to a third party who benefits from it and despoils the estate by violating an injunction and by "reselling” in bulk for inadequate prices. (Hammond v Pennock, 61 NY 145; Meinhard v Salmon, 249 NY 458; Buffum v Barceloux Co., 289 US 227; Jacobs v Mulford, 197 App Div 835; Michalowski v Ey, 7 NY2d 71; Simon v Electrospace Corp., 28 NY2d 136; City Bank Farmers Trust Co. v Cannon, 291 NY 125; Matter of De Planche, 65 Misc 2d 501.)

OPINION OF THE COURT

Cooke, J.

Mark Rothko, an abstract expressionist painter whose works through the years gained for him an international reputation of greatness, died testate on February 25, 1970. The principal asset of his estate consisted of 798 paintings of tremendous value, and the dispute underlying this appeal involves the conduct of his three executors in their disposition of these works of art. In sum, that conduct as portrayed in the record and sketched in the opinions was manifestly wrongful and indeed shocking.

Rothkos’ will was admitted to probate on April 27, 1970 and letters testamentary were issued to Bernard J. Reis, Theodo­res Stamos and Morton Levine. Hastily and within a period of only about three weeks and by virtue of two contracts each dated May 21, 1970, the executors dealt with all 798 paint­ings.

By a contract of sale, the estate executors agreed to sell to Marlborough AG., a Liechtenstein corporation (hereinafter MAG), 100 Rothko paintings as listed for $1,800,000, $200,000 to be paid on execution of the agreement and the balance of $1,600,000 in 12 equal interest-free installments over a 12-­year period. Under the second agreement, the executors con­signed to Marlborough Gallery, Inc., a domestic corporation (hereinafter MNY), "approximately 700 paintings listed on a Schedule to be prepared”, the consignee to be responsible for costs covering items such as insurance, storage restoration and promotion. By its provisos, MNY could sell up to 35 paintings a year from each of two groups, pre-1947 and post-­1947, for 12 years at the best price obtainable but not less than the appraised estate value, and it would receive a 50% commission on each painting sold, except for a commission of 40% on those sold to or through other dealers.

Petitioner Kate Rothko, decedent’s daughter and a person entitled to share in his estate by virtue of an election under EPTL 5-3.3, instituted this proceeding to remove the execu­tors, to enjoin MNY and MAG from disposing of the paintings, to rescind the aforesaid agreements between the executors and said corporations, for a return of the paintings still in possession of those corporations, and for damages. She was joined by the guardian of her brother Christopher Rothko, likewise interested in the estate, who answered by adopting the allegations of his sister’s petition and by demanding the same relief. The Attorney-General of the State, as the repre­sentative of the ultimate beneficiaries of the Mark Rothko Foundation, Inc., a charitable corporation and the residuary legatee under decedent’s will, joined in requesting relief sub­stantially similar to that prayed for by petitioner. On June 26, 1972 the Surrogate issued a temporary restraining order and on September 26, 1972 a preliminary injunction enjoining MAG, MNY, and the three executors from selling or otherwise disposing of the paintings referred to in the agreements dated May 21, 1970, except for sales or dispositions made with court permission. The Appellate Division modified the preliminary injunction order by increasing the amount of the bond and otherwise affirmed. By a 1974 petition, the Attorney-General, on behalf of the ultimate charitable beneficiaries of the Mark Rothko Foundation, sought the punishment of MNY, MAG, Lloyd and Reis for contempt and other relief.

Following a nonjury trial covering 89 days and in a thor­ough opinion, the Surrogate found: that Reis was a director, secretary and treasurer of MNY, the consignee art gallery, in addition to being a coexecutor of the estate; that the testator had a 1969 inter vivos contract with MNY to sell Rothko’s work at a commission of only 10% and whether that agree­ment survived testator’s death was a problem that a fiduciary in a dual position could not have impartially faced; that Reis was in a position of serious conflict of interest with respect to the contracts of May 21, 1970 and that his dual role and planned purpose benefited the Marlborough interests to the detriment of the estate; that it was to the advantage of coexecutor Stamos as a "not-too-successful artist, financially”, to curry favor with Marlborough and that the contract made by him with MNY within months after signing the estate contracts placed him in a position where his personal interests conflicted with those of the estate, especially leading to lax contract enforcement efforts by Stamos; that Stamos acted negligently and improvidently in view of his own knowledge of the conflict of interest of Reis; that the third coexecutor, Levine, while not acting in self-interest or with bad faith, nonetheless failed to exercise ordinary prudence in the per­formance of his assumed fiduciary obligations since he was aware of Reis’ divided loyalty, believed that Stamos was also seeking personal advantage, possessed personal opinions as to the value of the paintings and yet followed the leadership of his coexecutors without investigation of essential facts or consultation with competent and disinterested appraisers, and that the business transactions of the two Marlborough corpo­rations were admittedly controlled and directed by Francis K. Lloyd. It was concluded that the acts and failures of the three executors were clearly improper to such a substantial extent as to mandate their removal under SCPA 711 as estate fiduciaries. The Surrogate also found that MNY, MAG and Lloyd were guilty of contempt in shipping, disposing of and selling 57 paintings in violation of the temporary restraining order dated June 26, 1972 and of the injunction dated Septem­ber 26, 1972; that the contracts for sale and consigment of paintings between the executors and MNY and MAG provided inadequate value to the estate, amounting to a lack of mutual­ity and fairness resulting from conflicts on the part of Reis and Stamos and improvidence on the part of all executors; that said contracts were voidable and were set aside by reason of violation of the duty of loyalty and improvidence of the executors, knowingly participated in and induced by MNY and MAG; that the fact that these agreements were voidable did not revive the 1969 inter vivos agreements since the parties by their conduct evinced an intent to abandon and abrogate these compacts. The Surrogate held that the present value at the time of trial of the paintings sold is the proper measure of damages as to MNY, MAG, Lloyd, Reis and Stamos. He imposed a civil fine of $3,332,000 upon MNY, MAG and Lloyd, same being the appreciated value at the time of trial of the 57 paintings sold in violation of the temporary restraining order and injunction.1 It was held that Levine was liable for $6,464,880 in damages, as he was not in a dual position acting for his own interest and was thus liable only for the actual value of paintings sold MNY and MAG as of the dates of sale, and that Reis, Stamos, MNY and MAG, apart from being jointly and severally liable for the same damages as Levine for negligence, were liable for the greater sum of $9,252,000 "as appreciation damages less amounts previously paid to the estate with regard to sales of paintings.” The cross petition of the Attorney-General to reopen the record for submission of newly discovered documentary evidence was denied. The liabilities were held to be congruent so that payment of the highest sum would satisfy all lesser liabilities including the civil fines and the liabilities for damages were to be reduced by payment of the fine levied or by return of any of the 57 paintings disposed of, the new fiduciary to have the option in the first instance to specify which paintings the fiduciary would accept.

The Appellate Division, in an opinion by Justice Lane, modified to the extent of deleting the option given the new fiduciary to specify which paintings he would accept. Except for this modification, the majority affirmed on the opinion of Surrogate Midonick, with additional comments. Among oth­ers, it was stated that the entire court agreed that executors Reis and Stamos had a conflict of interest and divided loyalty in view of their nexus to MNY and that a majority were in agreement with the Surrogate’s assessment of liability as to executor Levine and his findings of liability against MNY, MAG and Lloyd. The majority agreed with the Surrogate’s analysis awarding "appreciation damages” and found further support for his rationale in Menzel v List (24 NY2d 91). Justice Kupferman, in an opinion styled "concurring in part and dissenting in part”, stated that, although he had "ex­pressed reservations with respect to various factors to be considered in the calculation of damages”, he concurred "in the basic conclusion and, therefore, in order to resolve the matter for the purpose of appeal” voted to modify as per the Lane opinion (56 AD2d 499, 505-506). Justices Capozzoli and Nunez, in separate dissenting in part opinions, viewed Menzel v List as inapplicable and voted to modify and remit to determine the reasonable value of the paintings as of May, 1970, when estate contracts with MNY and MAG had their inception in writing.

Since the Surrogate’s findings of fact as to the conduct of Reis, Stamos, Levine, MNY, MAG and Lloyd and the value of the paintings at different junctures were affirmed by the Appellate Division, if there was evidence to support these findings they are not subject to question in this court and the review here is confined to the legal issues raised (CPLR 5501, subd [b]; Simon v Electrospace Corp., 28 NY2d 136, 139; Matter of City of New York [Fifth Ave. Coach Lines], 22 NY2d 613, 620-621).

In seeking a reversal, it is urged that an improper legal standard was applied in voiding the estate contracts of May, 1970, that the "no further inquiry” rule applies only to self-­dealing and that in case of a conflict of interest, absent self-­dealing, a challenged transaction must be shown to be unfair. The subject of fairness of the contracts is intertwined with the issue of whether Reis and Stamos were guilty of conflicts of interest.2 Scott is quoted to the effect that "[a] trustee does not necessarily incur liability merely because he has an individual interest in the transaction * * * In Bullivant v. First Nat. Bank [246 Mass 324] it was held that * * * the fact that the bank was also a creditor of the corporation did not make its assent invalid, if it acted in good faith and the plan was fair” (2 Scott, Trusts, § 170.24, p 1384 [emphasis added]), and our attention has been called to the statement in Phelan v Middle States Oil Corp. (220 F2d 593, 603, cert den sub nom. Cohen v Glass, 349 US 929) that Judge Learned Hand found "no decisions that have applied [the no further inquiry rule] inflexibly to every occasion in which the fiduciary has been shown to have had a personal interest that might in fact have conflicted with his loyalty”.

These contentions should be rejected. First, a review of the opinions of the Surrogate and the Appellate Division manifests that they did not rely solely on a "no further inquiry rule”, and secondly, there is more than an adequate basis to conclude that the agreements between the Marlbor­ough corporations and the estate were neither fair nor in the best interests of the estate. This is demonstrated, for example, by the comments of the Surrogate concerning the commissions on the consignment of the 698 paintings (see 84 Misc 2d 830, 852-853) and those of the Appellate Division concerning the sale of the 100 paintings (see 56 AD2d, at pp 501-502). The opinions under review demonstrate that neither the Surrogate nor the Appellate Division set aside the contracts by merely applying the no further inquiry rule without regard to fair­ness. Rather they determined, quite properly indeed, that these agreements were neither fair nor in the best interests of the estate.

To be sure, the assertions that there were no conflicts of interest on the part of Reis or Stamos indulge in sheer fantasy. Besides being a director and officer of MNY, for which there was financial remuneration, however slight, Reis, as noted by the Surrogate, had different inducements to favor the Marlborough interests, including his own aggrandizement of status and financial advantage through sales of almost one million dollars for items from his own and his family’s exten­sive private art collection by the Marlborough interests (see 84 Misc 2d, at pp 843-844). Similarly, Stamos benefited as an artist under contract with Marlborough and, interestingly, Marlborough purchased a Stamos painting from a third party for $4,000 during the week in May, 1970 when the estate contract negotiations were pending (see 84 Misc 2d, at p 845). The conflicts are manifest. Further, as noted in Bogert, Trusts and Trustees (2d ed), "The duty of loyalty imposed on the fiduciary prevents him from accepting employment from a third party who is entering into a business transaction with the trust” (§ 543, subd [S], p 573). "While he [a trustee] is administering the trust he must refrain from placing himself in a position where his personal interest or that of a third person does or may conflict with the interest of the beneficiar­ies” (Bogert, Trusts [Hornbook Series—5th ed], p 343). Here, Reis was employed and Stamos benefited in a manner contem­plated by Bogert (see, also, Meinhard v Salmon, 249 NY 458, 464, 466-467; Schmidt v Chambers, 265 Md 9, 33-38). In short, one must strain the law rather than follow it to reach the result suggested on behalf of Reis and Stamos.

Levine contends that, having acted prudently and upon the advice of counsel, a complete defense was established. Suffice it to say, an executor who knows that his coexecutor is committing breaches of trust and not only fails to exert efforts directed towards prevention but accedes to them is legally accountable even though he was acting on the advice of counsel (Matter of Westerneld, 32 App Div 324, 344; 3 Scott, Trusts [3d ed], § 201, p 1657). When confronted with the question of whether to enter into the Marlborough contracts, Levine was acting in a business capacity, not a legal one, in which he was required as an executor primarily to employ such diligence and prudence to the care and management of the estate assets and affairs as would prudent persons of discretion and intelligence (King v Talbot, 40 NY 76, 85-86), accented by "[n]ot honesty alone, but the punctilio of an honor the most sensitive” (Meinhard v Salmon, 249 NY 458, 464, supra). Alleged good faith on the part of a fiduciary forgetful of his duty is not enough (Wendt v Fischer, 243 NY 439, 443). He could not close his eyes, remain passive or move with unconcern in the face of the obvious loss to be visited upon the estate by participation in those business arrangements and then shelter himself behind the claimed counsel of an attorney (see Matter of Niles, 113 NY 547, 558; Matter of Huntley, 13 Misc 375, 380; 3 Warren’s Heaton, Surrogates’ Courts [6th ed], § 217, subd 3, par [b]).

Further, there is no merit to the argument that MNY and MAG lacked notice of the breach of trust. The record amply supports the determination that they are chargeable with notice of the executors’ breach of duty.

The measure of damages was the issue that divided the Appellate Division (see 56 AD2d, at p 500). The contention of Reis, Stamos, MNY and MAG, that the award of appreciation damages was legally erroneous and impermissible, is based on a principle that an executor authorized to sell is not liable for an increase in value if the breach consists only in selling for a figure less than that for which the executor should have sold. For example, Scott states:

"The beneficiaries are not entitled to the value of the property at the time of the decree if it was not the duty of the trustee to retain the property in the trust and the breach of trust consisted merely in selling the property for too low a price” (3 Scott, Trusts [3d ed], § 208.3, p 1687 [emphasis added]).

"If the trustee is guilty of a breach of trust in selling trust property for an inadequate price, he is liable for the difference between the amount he should have received and the amount which he did receive. He is not liable, however, for any subsequent rise in value of the property sold”. (Id., § 208.6, pp 1689-1690.)

A recitation of similar import appears in Comment d under Restatement, Trusts 2d (§ 205): "d. Sale for less than value. If the trustee is authorized to sell trust property, but in breach of trust he sells it for less than he should receive, he is liable for the value of the property at the time of the sale less the amount which he received. If the breach of trust consists only in selling it for too little, he is not chargeable with the amount of any subsequent increase in value of the property under the rule stated in Clause (c), as he would be if he were not authorized to sell the property. See § 208.” (Emphasis added.) However, employment of "merely” and "only” as limiting words suggests that where the breach consists of some misfeasance, other than solely for selling "for too low a price” or "for too little”, appreciation damages may be appro­priate. Under Scott (§ 208.3, pp 1686-1687) and the Restate­ment (§ 208), the trustee may be held liable for appreciation damages if it was his or her duty to retain the property, the theory being that the beneficiaries are entitled to be placed in the same position they would have been in had the breach not consisted of a sale of property that should have been retained. The same rule should apply where the breach of trust consists of a serious conflict of interest—which is more than merely selling for too little.

The reason for allowing appreciation damages, where there is a duty to retain, and only date of sale damages, where there is authorization to sell, is policy oriented. If a trustee authorized to sell were subjected to a greater measure of damages he might be reluctant to sell (in which event he might run a risk if depreciation ensued). On the other hand, if there is a duty to retain and the trustee sells there is no policy reason to protect the trustee; he has not simply acted imprudently, he has violated an integral condition of the trust.

"If a trustee in breach of trust transfers trust property to a person who takes with notice of the breach of trust, and the transferee has disposed of the property * * * [i]t seems proper to charge him with the value at the time of the decree, since if it had not been for the breach of trust the property would still have been a part of the trust estate” (4 Scott, Trusts [3d ed], § 291.2; see, also, United States v Dunn, 268 US 121, 132). This rule of law which applies to the transferees MNY and MAG also supports the imposition of appreciation damages against Reis and Stamos, since if the Marlborough corporations are liable for such damages either as purchaser or consignees with notice, from one in breach of trust, it is only logical to hold that said executors, as sellers and consign­ors, are liable also pro tanto.

Contrary to assertions of appellants and the dissenters at the Appellate Division, Menzel v List (24 NY2d 91, supra) is authority for the allowance of appreciation damages. There, the damages involved a breach of warranty of title to a painting which at one time had been stolen from plaintiff and her husband and ultimately sold to defendant. Here, the executors, though authorized to sell, did not merely err in the amount they accepted but sold to one with whom Reis and Stamos had a self-interest. To make the injured party whole, in both instances the quantum of damages should be the same. In other words, since the paintings cannot be returned, the estate is therefore entitled to their value at the time of the decree, i.e., appreciation damages. These are not punitive damages in a true sense, rather they are damages intended to make the estate whole. Of course, as to Reis, Stamos, MNY and MAG, these damages might be considered by some to be exemplary in a sense, in that they serve as a warning to others (see Reynolds v Pegler, 123 F Supp 36, 38, affd 223 F2d 429, cert den 350 US 846), but their true character is ascer­tained when viewed in the light of overriding policy considera­tions and in the realization that the sale and consignment were not merely sales below value but inherently wrongful transfers which should allow the owner to be made whole (see Menzel v List, 24 NY2d 91, 97, supra; see, also, Simon v Electrospace Corp., 28 NY2d 136, 144, supra).

The decree of the Surrogate imposed appreciation dam­ages against Reis, Stamos, MNY and MAG in the amount of $7,339,464.72—computed as $9,252,000 (86 works on canvas at $90,000 each and 54 works on paper at $28,000 each) less the aggregate amounts paid the estate under the two rescinded agreements and interest. Appellants chose not to offer evi­dence of "present value” and the only proof furnished on the subject was that of the expert Heller whose appraisal as of January, 1974 (the month previous to that when trial com­menced) on a painting-by-painting basis totaled $15,100,000. There was also testimony as to bona fide sales of other Rothkos between 1971 and 1974. Under the circumstances, it was impossible to appraise the value of the unreturned works of art with an absolute certainty and, so long as the figure arrived at had a reasonable basis of computation and was not merely speculative, possible or imaginary, the Surrogate had the right to resort to reasonable conjectures and probable estimates and to make the best approximation possible through the exercise of good judgment and common sense in arriving at that amount (see Story Parchment Co. v Paterson Co., 282 US 555, 562-563; Eastman Co. v Southern Photo Co., 273 US 359, 379; Wakeman v Wheeler & Wilson Mfg. Co., 101 NY 205, 209-210; Alexander’s Dept. Stores v Ohrbach’s, 269 App Div 321, 328-329; Sutcliffe v Potts, 88 NYS2d 55, 57, affd 277 App Div 751; cf. Sheldon v Metro-Goldwyn Pictures Corp., 106 F2d 45, 51 [L. Hand, J.]). This is particularly so where the conduct of wrongdoers has rendered it difficult to ascertain the damages suffered with the precision otherwise possible (Story Parchment Co. v Paterson Co., supra, at p 563; East­man Co. v Southern Photo Co., supra, at p 379). Significantly, the Surrogate’s factual finding as to the present value of these unreturned paintings was affirmed by the Appellate Division and, since that finding had support in the record and was not legally erroneous, it should not now be subjected to our disturbance.

On February 21, 1969, decedent made a contract with MAG which provided that "Mark Rothko agrees not to sell any works of art for a period of eight years, except to Marlborough A.G. if a supplementary contract is made.” A supplementary contract made that same day recited that "Mark Rothko has the option to sell to Marlborough A.G. an additional four paintings each year at prices not below Marl­borough A.G.’s then current selling prices, the price to be paid being [90%] of the current selling prices.” The Surrogate reasoned that the fact that the 1970 agreements for the sale and consignment of paintings were voidable because of self-­dealing did not revive the 1969 inter vivos agreements and found that the parties by their conduct intended to abandon and abrogate these 1969 agreements. In turn and in effect, the Appellate Division agreed with this finding of abandonment (56 AD2d, at p 501). "A voidable contract is one where one or more parties thereto have the power, by a manifestation of election to do so, to avoid the legal relations created by the contract; or by ratification of the contract to extinguish the power of avoidance” (Restatement, Contracts, § 13). Where a contract is voidable on both sides, as where there has been a violation of the duty of loyalty and improvidence by executors knowingly participated in and induced by the other contract­ing parties (see 84 Misc 2d, at p 858), the transaction is not wholly void, since in order to prevent the contract from having its normal operation the claim or defense must in some manner be asserted and also since the contract is capable of ratification, such a contract affects from the outset the legal relations of the parties (1 Williston, Contracts [3d ed], § 15, pp 28-29). The question of whether there has been an abandonment or abrogation of a contract is usually one of fact (see Green v Doniger, 300 NY 238, 245) and the circumstances disclosed by the record, including a showing of the new agreements in 1970, contained a sufficient basis for the finding of the abandonment or abrogation of those which came into being in 1969 (see Schwartzreich v Bauman-Basch, 231 NY 196, 203).

The Marlborough corporations and Lloyd contend that there was no violation of either the temporary restraining order or the preliminary injunction by the delivery of paint­ings sold prior to the court’s restraints and that, therefore, the finding of contempt was erroneous. The Attorney-General in response contends that the "group” sales did not pass equita­ble ownership and that even if the invoices had been typed prior to said order and injunction no sale took place until after the injunction. In support of the latter position, the Uniform Commercial Code (§ 2-106, subd [1]; §§ 2-307, 2-401, subds [2], [3]) is cited for the proposition that as a matter of law the questioned sales took place on delivery to the purchas­ers which in all instances occurred after the injunction, the latter of the two court restraints. MNY, MAG and Lloyd counter with the argument that, under art market custom, invoices of paintings are sales and that the restraining order and preliminary injunction failed to clearly state what acts were prohibited. In any event, the plain and simple import of both the order and the injunction—not to sell or otherwise dispose of the paintings (cf. Matter of Black, 138 App Div 562, 565)—was violated by dispositions of them. Consequently, it is immaterial how the applicable Uniform Commercial Code provisions might be interpreted. If MNY, MAG and Lloyd had invoiced paintings and were acting in good faith, they would have advised the court of their prior commitments.

We have considered the other alleged errors urged by the parties, and find those arguments to be without merit. In short, we find no basis for disturbing the result reached below.

Accordingly, the order of the Appellate Division should be affirmed, with costs to the prevailing parties against appel­lants, and the question certified answered in the affirmative.

Chief Judge Breitel and Judges Jasen, Gabrielli, Jones, Wachtler and Fuchsberg concur.

Order affirmed, etc.

1

The decree of the Surrogate’s Court, New York County, dated January 15, 1976, was amended in this respect pursuant to an order filed April 28, 1976 by substituting "63” for "57” as the number of paintings sold and disposed of and "$3,872,000” as the amount of the fine instead of "$3,332,000”.

2

In New York, an executor, as such, takes a qualified legal title to all personalty specifically bequeathed and an unqualified legal title to that not so bequeathed; he holds not in his own right but as a trustee for the benefit of creditors, those entitled to receive under the will and, if all is not bequeathed, those entitled to distribution under the EPTL (Blood v Kane, 130 NY 514, 517; see Bischoff v Yorkville Bank, 218 NY 106, 110-111; Bankers Sur. Co. v Meyer, 205 NY 219, 223-224; but see Restate­ment, Trusts 2d, § 6; Bogert, Trusts [Hornbook Series—5th ed], p 31).

Norbert Ruttenberg and Stephen A. Cohen for appellant.

Lawrence Lauer and John Winston for respondent.

Chief Judge DESMOND and Judges VAN VOORHIS, BURKE and SCILEPPI concur with Judge FULD; Judge KEATING dissents and votes to affirm in an opinion in which Judge BERGAN concurs.

[416] FULD, J.

This case involves what appears to be a rather common practice in the taxicab industry of vesting the ownership of a taxi fleet in many corporations, each owning only one or two cabs.

The complaint alleges that the plaintiff was severely injured four years ago in New York City when he was run down by a taxicab owned by the defendant Seon Cab Corporation and negligently operated at the time by the defendant Marchese. The individual defendant, Carlton, is claimed to be a stockholder of 10 corporations, including Seon, each of which has but two cabs registered in its name, and it is implied that only the minimum automobile liability insurance required by law (in the amount of $10,000) is carried on any one cab. Although seemingly independent of one another, these corporations are alleged to be "operated * * * as a single entity, unit and enterprise" with regard to financing, supplies, repairs, employees and garaging, and all are named as defendants.^[1] The plaintiff asserts that he is also entitled to hold their stockholders personally liable for the damages sought because the multiple corporate structure constitutes an unlawful attempt "to defraud members of the general public" who might be injured by the cabs.

[417] The defendant Carlton has moved, pursuant to CPLR 3211(a)7, to dismiss the complaint on the ground that as to him it "fails to state a cause of action". The court at Special Term granted the motion but the Appellate Division, by a divided vote, reversed, holding that a valid cause of action was sufficiently stated. The defendant Carlton appeals to us, from the nonfinal order, by leave of the Appellate Division on a certified question.

The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability (see, e.g., Bartle v. Home Owners Co-op., 309 N.Y. 103, 106) but, manifestly, the privilege is not without its limits. Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, "pierce the corporate veil", whenever necessary "to prevent fraud or to achieve equity". (International Aircraft Trading Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292.) In determining whether liability should be extended to reach assets beyond those belonging to the corporation, we are guided, as Judge CARDOZO noted, by "general rules of agency". (Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95.) In other words, whenever anyone uses control of the corporation to further his own rather than the corporation's business, he will be liable for the corporation's acts "upon the principle of respondeat superior applicable even where the agent is a natural person". (Rapid Tr. Subway Constr. Co. v. City of New York, 259 N.Y. 472, 488.) Such liability, moreover, extends not only to the corporation's commercial dealings (see, e.g., Natelson v. A. B. L. Holding Co., 260 N.Y. 233; Quaid v. Ratkowsky, 224 N.Y. 624; Luckenbach S. S. Co. v. Grace & Co., 267 F. 676, 681, cert. den. 254 U. S. 644; Weisser v. Mursam Shoe Corp., 127 F.2d 344) but to its negligent acts as well. (See Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, supra; Gerard v. Simpson, 252 App. Div. 340, mot. for lv. to app. den. 276 N.Y. 687; Mangan v. Terminal Transp. System, 247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676.)

In the Mangan case (247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676, supra), the plaintiff was injured as a result of the negligent operation of a cab owned and operated by one of four corporations affiliated with the defendant Terminal. Although the defendant was not a stockholder of any of the operating [418] companies, both the defendant and the operating companies were owned, for the most part, by the same parties. The defendant's name (Terminal) was conspicuously displayed on the sides of all of the taxis used in the enterprise and, in point of fact, the defendant actually serviced, inspected, repaired and dispatched them. These facts were deemed to provide sufficient cause for piercing the corporate veil of the operating company — the nominal owner of the cab which injured the plaintiff — and holding the defendant liable. The operating companies were simply instrumentalities for carrying on the business of the defendant without imposing upon it financial and other liabilities incident to the actual ownership and operation of the cabs. (See, also, Callas v. Independent Taxi Owners Assn., 66 F.2d 192 [D. C. Ct. App.], cert. den. 290 U. S. 669; Association of Independent Taxi Operators v. Kern, 178 Md. 252; P. & S. Taxi & Baggage Co. v. Cameron, 183 Okla. 226; cf. Black & White v. Love, 236 Ark. 529; Economy Cabs v. Kirkland, 127 Fla. 867, adhered to on rearg. 129 Fla. 309.)

In the case before us, the plaintiff has explicitly alleged that none of the corporations "had a separate existence of their own" and, as indicated above, all are named as defendants. However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business. (See Berle, The Theory of Enterprise Entity, 47 Col. L. Rev. 343, 348-350.) It is quite another to claim that the corporation is a "dummy" for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. (See African Metals Corp. v. Bullowa, 288 N.Y. 78, 85.) Either circumstance would justify treating the corporation as an agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the first, only a larger corporate entity would be held financially responsible (see, e.g., Mangan v. Terminal Transp. System, 247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676, supra; Luckenbach S. S. Co. v. Grace & Co., 267 F.2d 676, 881, cert. den. 254 U. S. 644, supra; cf. Gerard v. Simpson, 252 App. Div. 340, mot. for lv. to app. den. 276 N.Y. 687, supra) while, in the other, the stockholder would be personally liable. (See, e.g., Natelson v. A. B. L. Holding Co., 260 N.Y. 233, supra; Quaid v. Ratkowsky, 224 N.Y. 624, supra; [419] Weisser v. Mursam Shoe Corp., 127 F.2d 344, supra.) Either the stockholder is conducting the business in his individual capacity or he is not. If he is, he will be liable; if he is not, then, it does not matter — insofar as his personal liability is concerned — that the enterprise is actually being carried on by a larger "enterprise entity". (See Berle, The Theory of Enterprise Entity, 47 Col. L. Rev. 343.)

At this stage in the present litigation, we are concerned only with the pleadings and, since CPLR 3014 permits causes of action to be stated "alternatively or hypothetically", it is possible for the plaintiff to allege both theories as the basis for his demand for judgment. In ascertaining whether he has done so, we must consider the entire pleading, educing therefrom "`whatever can be implied from its statements by fair and reasonable intendment.'" (Condon v. Associated Hosp. Serv., 287 N.Y. 411, 414; see, also, Kober v. Kober, 16 N Y 2d 191, 193-194; Dulberg v. Mock, 1 N Y 2d 54, 56.) Reading the complaint in this case most favorably and liberally, we do not believe that there can be gathered from its averments the allegations required to spell out a valid cause of action against the defendant Carlton.

The individual defendant is charged with having "organized, managed, dominated and controlled" a fragmented corporate entity but there are no allegations that he was conducting business in his individual capacity. Had the taxicab fleet been owned by a single corporation, it would be readily apparent that the plaintiff would face formidable barriers in attempting to establish personal liability on the part of the corporation's stockholders. The fact that the fleet ownership has been deliberately split up among many corporations does not ease the plaintiff's burden in that respect. The corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle which struck the plaintiff, are insufficient to assure him the recovery sought. If Carlton were to be held individually liable on those facts alone, the decision would apply equally to the thousands of cabs which are owned by their individual drivers who conduct their businesses through corporations organized pursuant to section 401 of the Business Corporation Law and carry the minimum insurance required by subdivision 1 (par. [a]) of section 370 of the Vehicle and Traffic Law. These [420] taxi owner-operators are entitled to form such corporations (cf. Elenkrieg v. Siebrecht, 238 N.Y. 254), and we agree with the court at Special Term that, if the insurance coverage required by statute "is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature." It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N. Y. Const., art. X, § 1) and it may not be fairly implied, from any statute, that the Legislature intended, without the slightest discussion or debate, to require of taxi corporations that they carry automobile liability insurance over and above that mandated by the Vehicle and Traffic Law.^[2]

This is not to say that it is impossible for the plaintiff to state a valid cause of action against the defendant Carlton. However, the simple fact is that the plaintiff has just not done so here. While the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it is barren of any "sufficiently particular[ized] statements" (CPLR 3013; see 3 Weinstein-Korn-Miller, N. Y. Civ. Prac., par. 3013.01 et seq., p. 30-142 et seq.) that the defendant Carlton and his associates are actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations "without regard to formality and to suit their immediate convenience." (Weisser v. Mursam Shoe Corp., 127 F.2d 344, 345, supra.) Such a "perversion of the privilege to do business in a corporate form" (Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95, supra) would justify imposing personal liability on the individual stockholders. (See African Metals Corp. v. Bullowa, 288 N.Y. 78, supra.) Nothing of the sort has in fact been charged, and it cannot reasonably or logically be inferred from the happenstance that the business of Seon [421] Cab Corporation may actually be carried on by a larger corporate entity composed of many corporations which, under general principles of agency, would be liable to each other's creditors in contract and in tort.^[3]

In point of fact, the principle relied upon in the complaint to sustain the imposition of personal liability is not agency but fraud. Such a cause of action cannot withstand analysis. If it is not fraudulent for the owner-operator of a single cab corporation to take out only the minimum required liability insurance, the enterprise does not become either illicit or fraudulent merely because it consists of many such corporations. The plaintiff's injuries are the same regardless of whether the cab which strikes him is owned by a single corporation or part of a fleet with ownership fragmented among many corporations. Whatever rights he may be able to assert against parties other than the registered owner of the vehicle come into being not because he has been defrauded but because, under the principle of respondeat superior, he is entitled to hold the whole enterprise responsible for the acts of its agents.

In sum, then, the complaint falls short of adequately stating a cause of action against the defendant Carlton in his individual capacity.

The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, the certified question answered in the negative and the order of the Supreme Court, Richmond County, reinstated, with leave to serve an amended complaint.

KEATING, J. (dissenting).

The defendant Carlton, the shareholder here sought to be held for the negligence of the driver of a taxicab, was a principal shareholder and organizer of the defendant corporation which owned the taxicab. The corporation was one of 10 organized by the defendant, each containing [422] two cabs and each cab having the "minimum liability" insurance coverage mandated by section 370 of the Vehicle and Traffic Law. The sole assets of these operating corporations are the vehicles themselves and they are apparently subject to mortgages.^[*]

From their inception these corporations were intentionally undercapitalized for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet having cars out on the street 24 hours a day and engaged in public transportation. And during the course of the corporations' existence all income was continually drained out of the corporations for the same purpose.

The issue presented by this action is whether the policy of this State, which affords those desiring to engage in a business enterprise the privilege of limited liability through the use of the corporate device, is so strong that it will permit that privilege to continue no matter how much it is abused, no matter how irresponsibly the corporation is operated, no matter what the cost to the public. I do not believe that it is.

Under the circumstances of this case the shareholders should all be held individually liable to this plaintiff for the injuries he suffered. (See Mull v. Colt Co., 31 F. R. D. 154, 156; Teller v. Clear Serv. Co., 9 Misc 2d 495.) At least, the matter should not be disposed of on the pleadings by a dismissal of the complaint. "If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If capital is illusory or trifling compared with the business to be done and the risks [423] of loss, this is a ground for denying the separate entity privilege." (Ballantine, Corporations [rev. ed., 1946], § 129, pp. 302-303.)

In Minton v. Cavaney (56 Cal. 2d 576) the Supreme Court of California had occasion to discuss this problem in a negligence case. The corporation of which the defendant was an organizer, director and officer operated a public swimming pool. One afternoon the plaintiffs' daughter drowned in the pool as a result of the alleged negligence of the corporation.

Justice ROGER TRAYNOR, speaking for the court, outlined the applicable law in this area. "The figurative terminology `alter ego' and `disregard of the corporate entity'", he wrote, "is generally used to refer to the various situations that are an abuse of the corporate privilege * * * The equitable owners of a corporation, for example, are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from the corporation at will * * *; when they hold themselves out as being personally liable for the debts of the corporation * * *; or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs". (56 Cal. 2d, p. 579; italics supplied.)

Examining the facts of the case in light of the legal principles just enumerated, he found that "[it was] undisputed that there was no attempt to provide adequate capitalization. [The corporation] never had any substantial assets. It leased the pool that it operated, and the lease was forfeited for failure to pay the rent. Its capital was `trifling compared with the business to be done and the risks of loss'". (56 Cal. 2d, p. 580.)

It seems obvious that one of "the risks of loss" referred to was the possibility of drownings due to the negligence of the corporation. And the defendant's failure to provide such assets or any fund for recovery resulted in his being held personally liable.

In Anderson v. Abbott (321 U. S. 349) the defendant shareholders had organized a holding company and transferred to that company shares which they held in various national banks in return for shares in the holding company. The holding company did not have sufficient assets to meet the double liability requirements of the governing Federal statutes which provided that the owners of shares in national [424] banks were personally liable for corporate obligations "to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares" (U. S. Code, tit. 12, former § 63).

The court had found that these transfers were made in good faith, that other defendant shareholders who had purchased shares in the holding company had done so in good faith and that the organization of such a holding company was entirely legal. Despite this finding, the Supreme Court, speaking through Mr. Justice DOUGLAS, pierced the corporate veil of the holding company and held all the shareholders, even those who had no part in the organization of the corporation, individually responsible for the corporate obligations as mandated by the statute.

"Limited liability", he wrote, "is the rule, not the exception; and on that assumption large undertakings are rested, vast enterprises are launched, and huge sums of capital attracted. But there are occasions when the limited liability sought to be obtained through the corporation will be qualified or denied. Mr. Justice CARDOZO stated that a surrender of that principle of limited liability would be made `when the sacrifice is essential to the end that some accepted public policy may be defended or upheld.' * * * The cases of fraud make up part of that exception * * * But they do not exhaust it. An obvious inadequacy of capital, measured by the nature and magnitude of the corporate undertaking, has frequently been an important factor in cases denying stockholders their defense of limited liability * * * That rule has been invoked even in absence of a legislative policy which undercapitalization would defeat. It becomes more important in a case such as the present one where the statutory policy of double liability will be defeated if impecunious bank-stock holding companies are allowed to be interposed as non-conductors of liability. It has often been held that the interposition of a corporation will not be allowed to defeat a legislative policy, whether that was the aim or only the result of the arrangement * * * `the courts will not permit themselves to be blinded or deceived by mere forms of law' but will deal `with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require.'" (321 U. S., pp. 362-363; emphasis added.)

[425] The policy of this State has always been to provide and facilitate recovery for those injured through the negligence of others. The automobile, by its very nature, is capable of causing severe and costly injuries when not operated in a proper manner. The great increase in the number of automobile accidents combined with the frequent financial irresponsibility of the individual driving the car led to the adoption of section 388 of the Vehicle and Traffic Law which had the effect of imposing upon the owner of the vehicle the responsibility for its negligent operation. It is upon this very statute that the cause of action against both the corporation and the individual defendant is predicated.

In addition the Legislature, still concerned with the financial irresponsibility of those who owned and operated motor vehicles, enacted a statute requiring minimum liability coverage for all owners of automobiles. The important public policy represented by both these statutes is outlined in section 310 of the Vehicle and Traffic Law. That section provides that: "The legislature is concerned over the rising toll of motor vehicle accidents and the suffering and loss thereby inflicted. The legislature determines that it is a matter of grave concern that motorists shall be financially able to respond in damages for their negligent acts, so that innocent victims of motor vehicle accidents may be recompensed for the injury and financial loss inflicted upon them."

The defendant Carlton claims that, because the minimum amount of insurance required by the statute was obtained, the corporate veil cannot and should not be pierced despite the fact that the assets of the corporation which owned the cab were "trifling compared with the business to be done and the risks of loss" which were certain to be encountered. I do not agree.

The Legislature in requiring minimum liability insurance of $10,000, no doubt, intended to provide at least some small fund for recovery against those individuals and corporations who just did not have and were not able to raise or accumulate assets sufficient to satisfy the claims of those who were injured as a result of their negligence. It certainly could not have intended to shield those individuals who organized corporations, with the specific intent of avoiding responsibility to the public, where the operation of the corporate enterprise yielded profits sufficient to purchase additional insurance. Moreover, it is reasonable [426] to assume that the Legislature believed that those individuals and corporations having substantial assets would take out insurance far in excess of the minimum in order to protect those assets from depletion. Given the costs of hospital care and treatment and the nature of injuries sustained in auto collisions, it would be unreasonable to assume that the Legislature believed that the minimum provided in the statute would in and of itself be sufficient to recompense "innocent victims of motor vehicle accidents * * * for the injury and financial loss inflicted upon them".

The defendant, however, argues that the failure of the Legislature to increase the minimum insurance requirements indicates legislative acquiescence in this scheme to avoid liability and responsibility to the public. In the absence of a clear legislative statement, approval of a scheme having such serious consequences is not to be so lightly inferred.

The defendant contends that the court will be encroaching upon the legislative domain by ignoring the corporate veil and holding the individual shareholder. This argument was answered by Mr. Justice DOUGLAS in Anderson v. Abbot (supra, pp. 366-367) where he wrote that: "In the field in which we are presently concerned, judicial power hardly oversteps the bounds when it refuses to lend its aid to a promotional project which would circumvent or undermine a legislative policy. To deny it that function would be to make it impotent in situations where historically it has made some of its most notable contributions. If the judicial power is helpless to protect a legislative program from schemes for easy avoidance, then indeed it has become a handy implement of high finance. Judicial interference to cripple or defeat a legislative policy is one thing; judicial interference with the plans of those whose corporate or other devices would circumvent that policy is quite another. Once the purpose or effect of the scheme is clear, once the legislative policy is plain, we would indeed forsake a great tradition to say we were helpless to fashion the instruments for appropriate relief." (Emphasis added.)

The defendant contends that a decision holding him personally liable would discourage people from engaging in corporate enterprise.

[427] What I would merely hold is that a participating shareholder of a corporation vested with a public interest, organized with capital insufficient to meet liabilities which are certain to arise in the ordinary course of the corporation's business, may be held personally responsible for such liabilities. Where corporate income is not sufficient to cover the cost of insurance premiums above the statutory minimum or where initially adequate finances dwindle under the pressure of competition, bad times or extraordinary and unexpected liability, obviously the shareholder will not be held liable (Henn, Corporations, p. 208, n. 7).

The only types of corporate enterprises that will be discouraged as a result of a decision allowing the individual shareholder to be sued will be those such as the one in question, designed solely to abuse the corporate privilege at the expense of the public interest.

For these reasons I would vote to affirm the order of the Appellate Division.

Order reversed, etc.

---------

[1] The corporate owner of a garage is also included as a defendant.

[2] There is no merit to the contention that the ownership and operation of the taxi fleet "constituted a breach of hack owners regulations as promulgated by [the] Police Department of the City of New York". Those regulations are clearly applicable to individual owner-operators and fleet owners alike. They were not intended to prevent either incorporation of a single-vehicle taxi business or multiple incorporation of a taxi fleet.

[3] In his affidavit in opposition to the motion to dismiss, the plaintiff's counsel claimed that corporate assets had been "milked out" of, and "siphoned off" from the enterprise. Quite apart from the fact that these allegations are far too vague and conclusory, the charge is premature. If the plaintiff succeeds in his action and becomes a judgment creditor of the corporation, he may then sue and attempt to hold the individual defendants accountable for any dividends and property that were wrongfully distributed (Business Corporation Law, §§ 510, 719, 720).

[*] It appears that the medallions, which are of considerable value, are judgment proof. (Administrative Code of City of New York, § 436-2.0.)

In the Matter of Ronald Levandusky, Respondent, v One Fifth Avenue Apartment Corp., Appellant.

decided April 5, 1990

Argued February 14, 1990;

POINTS OF COUNSEL

Joel David Sharrow and Arthur F. Abelman for appellant.

Irwin Brownstein for respondent.

OPINION OF THE COURT

Kaye, J.

This appeal by a residential cooperative corporation concerning apartment renovations by one of its proprietary lessees, factually centers on a two-inch steam riser and three air conditioners, but fundamentally presents the legal ques­tion of what standard of review should apply when a board of directors of a cooperative corporation seeks to enforce a mat­ter of building policy against a tenant-shareholder. We con­clude that the business judgment rule furnishes the correct standard of review.

In the main, the parties agree that the operative events transpired as follows. In 1987, respondent (Ronald Levan­dusky) decided to enlarge the kitchen area of his apartment at One Fifth Avenue in New York City. According to Levan­dusky, some time after reaching that decision, and while he was president of the cooperative’s board of directors, he told Elliot Glass, the architect retained by the corporation, that he intended to realign or "jog” a steam riser in the kitchen area, and Glass orally approved the alteration. According to Glass, however, the conversation was a general one; Levandusky never specifically told him that he intended to move any particular pipe, and Glass never gave him approval to do so. In any event, Levandusky’s proprietary lease provided that no "alteration of or addition to the water, gas or steam risers or pipes” could be made without appellant’s prior written con­sent.

Levandusky had his architect prepare plans for the renova­tion, which were approved by Glass and submitted for ap­proval to the board of directors. Although the plans show details of a number of other proposed structural modifications, including changes in plumbing risers, no change in the steam riser is shown or discussed anywhere in the plans.

The board approved Levandusky’s plans at a meeting held March 14, 1988, and the next day he executed an "Alteration Agreement” with appellant, which incorporated "Renovation Guidelines” that had originally been drafted, in large part, by Levandusky himself. These guidelines, like the proprietary lease, specified that advance written approval was required for any renovation affecting the building’s heating system. Board consideration of the plans—appropriately detailed to indicate all structural changes—was to follow their submission to the corporation’s architect, and the board reserved the power to disapprove any plans, even those that had received the archi­tect’s approval.

In late spring 1988, the building’s managing agent learned from Levandusky that he intended to move the steam riser in his apartment, and so informed the board. Both Levandusky and the board contacted John Flynn, an engineer who had served as consulting agent for the board. In a letter and in a subsequent presentation at a June 13 board meeting, Flynn opined that relocating steam risers was technically feasible and, if carefully done, would not necessarily cause any prob­lem. However, he also advised that any change in an estab­lished old piping system risked causing difficulties ("grem­lins”). In Flynn’s view, such alterations were to be avoided whenever possible.

At the June 13 meeting, which Levandusky attended, the board enacted a resolution to "reaffirm the policy—no reloca­tion of risers.” At a June 23 meeting, the board voted to deny Levandusky a variance to move his riser, and to modify its previous approval of his renovation plans, conditioning ap­proval upon an acceptable redesign of the kitchen area.

Levandusky nonetheless hired a contractor, who severed and jogged the kitchen steam riser. In August 1988, when the board learned of this, it issued a "stop work” order, pursuant to the "Renovation Guidelines.” Levandusky then commenced this article 78 proceeding, seeking to have the stop work order set aside. The corporation cross-petitioned for an order com­pelling Levandusky to return the riser to its original position. The board also sought an order compelling him to remove certain air-conditioning units he had installed, which allegedly were not in conformity with the requirements of the Land­marks Preservation Commission.

Supreme Court initially granted Levandusky’s petition, and annulled the stop work order, on the ground that there was no evidence that the jogged pipe had caused any damage, but on the contrary, the building engineer had inspected it and believed it would likely not have any adverse effect. Therefore, balancing the hardship to Levandusky in redoing the already completed renovations against the harm to the building, the court determined that the board’s decision to stop the renova­tions was arbitrary and capricious, and should be annulled. Both counterclaims were dismissed, the court ruling that the corporation had no standing to complain of violations of the Landmarks Preservation Law, particularly as the building had not been cited for any violation.

On reargument, however, Supreme Court withdrew its deci­sion, dismissed Levandusky’s petition, and ordered him to restore the riser to its original position and submit redrawn plans to the board, on the ground that the court was pre­cluded by the business judgment rule from reviewing the board’s determination. The court adhered to its original ruling with respect to the branch of the cross motion concerning the air conditioners, notwithstanding that the Landmarks Preser­vation Commission had in the interim cited them as viola­tions.

On Levandusky’s appeal, the Appellate Division modified the judgment. The court was unanimous in affirming the Supreme Court’s disposition of the air conditioner claim, but divided concerning the stop work order. A majority of the court agreed with Supreme Court’s original decision, while two Justices dissented on the ground that the board’s action was within the scope of its business judgment and hence not subject to judicial review. Concluding that the business judg­ment rule applies to the decisions of cooperative governing associations enforcing building policy, and that the action taken by the board in this case falls within the purview of the rule, we now modify the order of the Appellate Division.

At the outset, we agree with the Appellate Division that the corporation’s cross claim concerning Levandusky’s three air-conditioning units was properly dismissed, as the appropri­ate forum for resolution of the complaint at this stage is an administrative review proceeding. That brings us to the issue that divided the Appellate Division: the standard to be applied in judicial review of this challenge to a decision of the board of directors of a residential cooperative corporation.

As cooperative and condominium home ownership has grown increasingly popular, courts confronting disputes be­tween tenant-owners and governing boards have fashioned a variety of rules for adjudicating such claims (see generally, Goldberg, Community Association Use Restrictions: Applying the Business Judgment Doctrine, 64 Chi-Kent L Rev 653 [1988] [hereinafter Goldberg, Community Association Use Restric­tions]; Note, Judicial Review of Condominium Rulemaking, 94 Harv L Rev 647 [1981]). In the process, several salient charac­teristics of the governing board homeowner relationship have been identified as relevant to the judicial inquiry.

As courts and commentators have noted, the cooperative or condominium association is a quasi-government—"a little democratic sub society of necessity” (Hidden Harbour Estates v Norman, 309 So 2d 180, 182 [Fla Dist Ct App]). The propri­etary lessees or condominium owners consent to be governed, in certain respects, by the decisions of a board. Like a munici­pal government, such governing boards are responsible for running the day-to-day affairs of the cooperative and to that end, often have broad powers in areas that range from finan­cial decisionmaking to promulgating regulations regarding pets and parking spaces (see generally, Note, Promulgation and Enforcement of House Rules, 48 St John’s L Rev 1132 [1974]). Authority to approve or disapprove structural altera­tions, as in this case, is commonly given to the governing board. (See, Siegler, Apartment Alterations, NYLJ, May 4, 1988, at 1, col 1.)

Through the exercise of this authority, to which would-be apartment owners must generally acquiesce, a governing board may significantly restrict the bundle of rights a prop­erty owner normally enjoys. Moreover, as with any authority to govern, the broad powers of a cooperative board hold potential for abuse through arbitrary and malicious decision-­making, favoritism, discrimination and the like.

On the other hand, agreement to submit to the decisionmak­ing authority of a cooperative board is voluntary in a sense that submission to government authority is not; there is always the freedom not to purchase the apartment. The stability offered by community control, through a board, has its own economic and social benefits, and purchase of a cooperative apartment represents a voluntary choice to cede certain of the privileges of single ownership to a governing body, often made up of fellow tenants who volunteer their time, without compensation. The board, in return, takes on the burden of managing the property for the benefit of the proprietary lessees. As one court observed: "Every man may justly consider his home his castle and himself as the king thereof; nonetheless his sovereign fiat to use his property as he pleases must yield, at least in degree, where ownership is in common or cooperation with others. The benefits of condo­minium living and ownership demand no less.” (Sterling Vil. Condominium v Breitenbach, 251 So 2d 685, 688, n 6 [Fla Dist Ct App].)

It is apparent, then, that a standard for judicial review of the actions of a cooperative or condominium governing board must be sensitive to a variety of concerns—sometimes compet­ing concerns. Even when the governing board acts within the scope of its authority, some check on its potential powers to regulate residents’ conduct, life-style and property rights is necessary to protect individual residents from abusive exer­cise, notwithstanding that the residents have, to an extent, consented to be regulated and even selected their representa­tives (see, Note, The Rule of Law in Residential Associations, 99 Harv L Rev 472 [1985]). At the same time, the chosen standard of review should not undermine the purposes for which the residential community and its governing structure were formed: protection of the interest of the entire commu­nity of residents in an environment managed by the board for the common benefit.

We conclude that these goals are best served by a standard of review that is analogous to the business judgment rule applied by courts to determine challenges to decisions made by corporate directors (see, Auerbach v Bennett, 47 NY2d 619, 629). A number of courts in this and other states have applied such a standard in reviewing the decisions of cooperative and condominium boards (see, e.g., Kirsch v Holiday Summer Homes, 143 AD2d 811; Schoninger v Yardarm Beach Home­owners’ Assn., 134 AD2d 1; Van Camp v Sherman, 132 AD2d 453; Papalexiou v Tower W. Condominium, 167 NJ Super 516, 401 A2d 280; Schwarzmann v Association of Apt. Owners, 33 Wash App 397, 655 P2d 1177; Rywalt v Writer Corp., 34 Colo App 334, 526 P2d 316). We agree with those courts that such a test best balances the individual and collective interests at stake.

Developed in the context of commercial enterprises, the business judgment rule prohibits judicial inquiry into actions of corporate directors "taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.” (Auerbach v Bennett, 47 NY2d 619, 629, supra.) So long as the corporation’s directors have not breached their fiduciary obligation to the corporation, "the exercise of [their powers] for the common and general inter­ests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.” (Pollitz v Wabash R. R. Co., 207 NY 113, 124.)

Application of a similar doctrine is appropriate because a cooperative corporation is—in fact and function—a corpora­tion, acting through the management of its board of directors, and subject to the Business Corporation Law. There is no cause to create a special new category in law for corporate actions by coop boards.

We emphasize that reference to the business judgment rule is for the purpose of analogy only. Clearly, in light of the doctrine’s origins in the quite different world of commerce, the fiduciary principles identified in the existing case law—pri­marily emphasizing avoidance of self-dealing and financial self-aggrandizement—will of necessity be adapted over time in order to apply to directors of not-for-profit homeowners’ coop­erative corporations (see, Goldberg, Community Association Use Restrictions, op. cit., at 677-683). For present purposes, we need not, nor should we determine the entire range of the fiduciary obligations of a cooperative board, other than to note that the board owes its duty of loyalty to the cooperative—that is, it must act for the benefit of the residents collectively. So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the board’s. Stated some­what differently, unless a resident challenging the board’s action is able to demonstrate a breach of this duty, judicial review is not available.

In reaching this conclusion, we reject the test seemingly applied by the Appellate Division majority and explicitly applied by Supreme Court in its initial decision. That inquiry was directed at the reasonableness of the board’s decision; having itself found that relocation of the riser posed no "dangerous aspect” to the building, the Appellate Division concluded that the renovation should remain. Like the busi­ness judgment rule, this reasonableness standard—originating in the quite different world of governmental agency decision-­making—has found favor with courts reviewing board deci­sions (see, e.g., Amoruso v Board of Managers, 38 AD2d 845; Lenox Manor v Gianni, 120 Misc 2d 202; see, Note, Judicial Review of Condominium Rulemaking, op. cit., at 659-661 [discussing cases from other jurisdictions]).

As applied in condominium and cooperative cases, review of a board’s decision under a reasonableness standard has much in common with the rule we adopt today. A primary focus of the inquiry is whether board action is in furtherance of a legitimate purpose of the cooperative or condominium, in which case it will generally be upheld. The difference between the reasonableness test and the rule we adopt is twofold. First—unlike the business judgment rule, which places on the owner seeking review the burden to demonstrate a breach of the board’s fiduciary duty—reasonableness review requires the board to demonstrate that its decision was reasonable. Second, although in practice a certain amount of deference appears to be accorded to board decisions, reasonableness review permits—indeed, in theory requires—the court itself to evaluate the merits or wisdom of the board’s decision (see, e.g., Hidden Harbour Estates v Basso, 393 So 2d 637, 640 [Fla Dist Ct App]), just as the Appellate Division did in the present case.

The more limited judicial review embodied in the business judgment rule is preferable. In the context of the decisions of a for-profit corporation, "courts are ill equipped and infre­quently called on to evaluate what are and must be essentially business judgments * * * by definition the responsibility for business judgments must rest with the corporate directors; their individual capabilities and experience peculiarly qualify them for the discharge of that responsibility.” (Auerbach v Bennett, 47 NY2d, supra, at 630-631.) Even if decisions of a cooperative board do not generally involve expertise beyond the usual ken of the judiciary, at the least board members will possess experience of the peculiar needs of their building and its residents not shared by the court.

Several related concerns persuade us that such a rule should apply here. As this case exemplifies, board decisions concerning what residents may or may not do with their living space may be highly charged and emotional. A coopera­tive or condominium is by nature a myriad of often competing views regarding personal living space, and decisions taken to benefit the collective interest may be unpalatable to one resident or another, creating the prospect that board decisions will be subjected to undue court involvement and judicial second-guessing. Allowing an owner who is simply dissatisfied with particular board action a second opportunity to reopen the matter completely before a court, which—generally with­out knowing the property—may or may not agree with the reasonableness of the board’s determination, threatens the stability of the common living arrangement.

Moreover, the prospect that each board decision may be subjected to full judicial review hampers the effectiveness of the board’s managing authority. The business judgment rule protects the board’s business decisions and managerial author­ity from indiscriminate attack. At the same time, it permits review of improper decisions, as when the challenger demon­strates that the board’s action has no legitimate relationship to the welfare of the cooperative, deliberately singles out individuals for harmful treatment, is taken without notice or consideration of the relevant facts, or is beyond the scope of the board’s authority.

Levandusky failed to meet this burden, and Supreme Court properly dismissed his petition. His argument that having once granted its approval, the board was powerless to rescind its decision after he had spent considerable sums on the renovations is without merit. There is no dispute that Levan­dusky failed to comply with the provisions of the "Alteration Agreement” or "Renovation Guidelines” designed to give the board explicit written notice before it approved a change in the building’s heating system. Once made aware of Levan­dusky’s intent, the board promptly consulted its engineer, and notified Levandusky that it would not depart from a policy of refusing to permit the movement of pipes. That he then went ahead and moved the pipe hardly allows him to claim reliance on the board’s initial approval of his plans. Indeed, recognition of such an argument would frustrate any systematic effort to enforce uniform policies.

Levandusky’s additional allegations that the board’s deci­sion was motivated by the personal animosity of another board member toward him, and that the board had in fact permitted other residents to jog their steam risers, are wholly conclusory. The board submitted evidence—unrefuted by Le­vandusky—that it was acting pursuant to the advice of its engineer, and that it had not previously approved such jog­ging. Finally, the fact that allowing Levandusky an exception to the policy might not have resulted in harm to the building does not require that the exception be allowed. Under the rule we articulate today, we decline to review the merits of the board’s determination that it was preferable to adhere to a uniform policy regarding the building’s piping system.

Turning to the concurrence, it is apparent that in many respects we are in agreement concerning the appropriate standard of judicial review of cooperative board decisions; it is more a matter of label that divides us. For these additional reasons, we believe our choice is the better one.

For the guidance of the courts and all other interested parties, obviously a single standard for judicial review of the propriety of board action is desirable, irrespective of the happenstance of the form of the lawsuit challenging that action.* Unlike challenges to administrative agency decisions, which take the form of article 78 proceedings, challenges to the propriety of corporate board action have been lodged as derivative suits, injunction actions, and all manner of civil suits, including article 78 proceedings. While the nomencla­ture will vary with the form of suit, we see no purpose in allowing the form of the action to dictate the substance of the standard by which the legitimacy of corporate action is to be measured.

By the same token, unnecessary confusion is generated by prescribing different standards for different categories of is­sues that come before cooperative boards—for example, a standard of business judgment for choices between competing economic options, but rationality for the administration of corporate bylaws and rules governing shareholder-tenant rights (see, concurring opn, at 545). There is no need for two rules when one will do, particularly since corporate action often partakes of each category of issues. Indeed, even the decision here might be portrayed as the administration of corporate bylaws and rules governing shareholder-tenant rights, or more broadly as a policy choice based on the economic consequences of tampering with the building’s pip­ing system.

Finally, we reiterate that "business judgment” appears to strike the best balance. It establishes that board action under­taken in furtherance of a legitimate corporate purpose will generally not be pronounced "arbitrary and capricious or an abuse of discretion” (CPLR 7803 [3]) in article 78 proceedings, or otherwise unlawful in other types of litigation. It is prefer­able to a standard that requires Judges, rather than directors, to decide what action is "reasonable” for the cooperative. It avoids drawing sometimes elusive semantical distinctions be­tween what is "reasonable” and what is "rational” (the con­currence rejects the former but embraces the latter as the appropriate test). And it better protects tenant-shareholders against bad faith and self-dealing than a test that insulates board decisions "if there is a rational basis to explain them” or if "an articulable and rational basis for the board’s decision exists.” (Concurring opn, at 548.) The mere presence of an engineer’s report, for example—"certainly a rational explana­tion for the board’s decision” (concurring opn, at 548)—should not end all inquiry, foreclosing review of nonconclusory assertions of malevolent conduct; under the business judgment test, it would not.

Accordingly, the order of the Appellate Division should be modified, with costs to appellant, by reinstating Supreme Court’s judgment to the extent it granted appellant’s cross motions regarding the steam riser and severed and set down for assessment the issue of damages and, as so modified, affirmed.

*

We of course do not disregard the form of action. In determining whether appellant’s decision was "arbitrary and capricious or an abuse of discretion” (CPLR 7803 [3]), we would use "business judgment,” the concur­rence some form of "rationality” or "reasonableness.” By analogy, we hold today in Akpan v Koch (75 NY2d 561, 574 ([decided today]) that because a governmental agency took the required "hard look” under the State’s environmental protection laws, its action cannot be characterized as arbi­trary and capricious or an abuse of discretion under CPLR 7803 (3). So too here, board action that comes within the business judgment rule cannot be characterized as arbitrary and capricious, or an abuse of discretion.

Titone, J.

(concurring). I concur in the majority’s decision to modify, and I agree with much of its reasoning. Indeed, like the majority, I conclude that in fashioning standards for review of decisions made by cooperative apartment boards we should be guided by the need to afford these boards the greatest possible degree of deference, since excessive judicial interference would unquestionably undermine their effective­ness. My disagreement with the majority thus lies not in its rejection of a test of "reasonableness” that would embroil the courts in second-guessing the wisdom of every cooperative board decision, but rather in its choice to formulate the proper standard in terms of the "business judgment rule.” That standard, which is most often applied to review of manage­ment’s business decisions and use of corporate assets, is ill-­suited to the entirely different task of reviewing manage­ment’s implementation of the bylaws and rules governing shareholders’ rights and duties. Accordingly, I write sepa­rately to express my own views as to the proper standard for judicial review in these cases.

My own analysis begins with the fact that the shareholder’s challenge to the cooperative board’s action in this case was made through the procedural vehicle of a CPLR article 78 proceeding. That procedural choice was not a mere "happen­stance” or accident of nomenclature (majority opn, at 541). Petitioner was not making a claim of waste or self-dealing by corporate management of the type that would ordinarily be cognizable in a derivative action brought pursuant to Business Corporation Law § 626. Rather, petitioner was alleging misfea­sance in the administration of the bylaws and rules governing shareholders’ rights to use and enjoy their apartments.

In the past, similar claims involving the administration of shareholders’ rights and duties vis-á-vis the other sharehold­ers, the corporation’s management and the corporation as a discrete legal entity have been treated as matters cognizable under article 78 (see, e.g., Matter of Crane Co. v Anaconda Co., 39 NY2d 14; Matter of Auer v Dressel, 306 NY 427; see also, 5A Fletcher, Cyclopedia Corporations § 2214 [Perm ed 1987]). As one commentator has noted, "[m]andamus to review the discretional acts of a private corporation is commonplace since the corporation is a creature of the state” (McLaughlin, Prac­tice Commentaries, McKinney’s Cons Laws of NY, Book 7B, C7802:l, at 276 [and cases cited therein]; cf., Matter of Carr v St. John’s Univ., 12 NY2d 802 [decisions of educational corpo­rations also subject to review for arbitrariness under article 78]). The justification for article 78 review in these circum­stances is, quite simply, that the authority of corporations and their directors to act is derived directly from franchises issued by the State (McLaughlin, Practice Commentaries, op. cit., at 276). Since the decision of which petitioner complains was a discretionary act affecting shareholders’ rights and was made by a board of directors acting pursuant to the bylaws and rules of a franchised corporation, article 78 review was plainly the proper remedy.

Given that conclusion, our choice of an appropriate stan­dard for judicial review must be guided by CPLR 7803, which describes with particularity "[t]he only questions that may be raised in a[n article 78] proceeding”. It is well established that the four "questions” set forth in CPLR 7803 (l)-(4) are the exclusive measures of the judiciary’s power of review in matters cognizable under article 78 (see, e.g., Matter of Pell v Board of Educ., 34 NY2d 222). It is equally well established that the standard for reviewing discretionary decisions of "bodies or officers” is whether the challenged decision was "made in violation of lawful procedure” or was "arbitrary and capricious or an abuse of discretion” (CPLR 7803 [3]). It is that test which should be our starting point here.

The "arbitrary and capricious” standard of CPLR 7803 (3), used judiciously, would be more than adequate to accomplish the primary goals identified by the majority, i.e., providing some check on the potential for abusive exercise of the power of cooperative apartment boards, while, at the same time, minimizing the type of judicial interference that could impair the ability of these boards to govern effectively (cf., Matter of Olsson v Board of Higher Educ., 49 NY2d 408, 413-414; Matter of Fiacco v Santee, 72 AD2d 652; Matter of Edde v Columbia Univ., 8 Misc 2d 795, affd 6 AD2d 780, cert denied 359 US 956 [all noting judicial reluctance to interfere with academic decisionmaking and applying minimal "arbitrary and capri­cious” scrutiny to such decisions]). Indeed, the cornerstone of article 78 review under the "arbitrary and capricious” test is that "a court may not substitute its judgment for that of the board or body it reviews unless the decision under review is arbitrary and unreasonable” (Matter of Diocese of Rochester v Planning Bd., 1 NY2d 508, 520).

Given the suitability of the statutory "arbitrary and capri­cious” standard, I cannot concur in the majority’s decision to reach out and embrace the "business judgment rule”, a stan­dard that was developed to address an entirely different class of problems. The "business judgment” rule to which the majority refers is most relevant, and has most often been applied in the past, to shareholder derivative actions brought to challenge the propriety of management’s business decisions including such diverse matters as investment choices, the making of contractual commitments, long-range corporate planning and the decision as to whether it is in the corporate interest to pursue an action against a director for waste (see, e.g., Auerbach v Bennett, 47 NY2d 619; Kalmanash v Smith, 291 NY 142; Pollitz v Wabash R. R. Co., 207 NY 113). In fact, the classic formulation of the rule is closely tailored to the open-ended decisionmaking within a virtually limitless uni­verse of economic options that typifies business choices: "Ques­tions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to [the directors’] honest and unselfish decision, for their powers therein are without limitation and free from restraint” (Pollitz v Wabash R. R. Co., supra, at 124, quoted in Auerbach v Bennett, supra, at 629). Concomitantly, review under the "business judgment” rule is limited to determining whether the challenged action is "taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes”, because "courts are ill equipped * * * to evaluate what are and must be essentially business judgments * * * [as to which] there can be no avail­able objective standard” for measuring their correctness (Auerbach v Bennett, supra, at 629, 630; see, Fe Bland v Two Trees Mgt. Co., 66 NY2d 556, 565).

This test may have some utility by analogy in a limited class of cases involving cooperative apartment boards. In Schoninger v Yardarm Beach Homeowners’ Assn. (134 AD2d 1), for example, the court used the business judgment rule to rebuff a shareholder’s challenge to a decision by a cooperative board to pursue a particular program of repair and rehabilita­tion in preference to the program suggested by the share­holder and her experts. Application of the rule to this problem was appropriate because the challenged action was, in essence, a business judgment, i.e., a choice between competing and equally valid economic options, albeit one not necessarily motivated by the desire to make a profit.

The justification for applying the business judgment rule to cooperative apartment board decisions falls short, however, in cases such as this one, which involves the administration of the corporate bylaws and rules governing shareholder-tenant rights (cf., Schoninger v Yardarm Beach Homeowners’ Assn., supra, at 8-9 [distinguishing between the two categories of decisionmaking and recognizing that different standards of review should be applied]). First, in contrast to cases involving sheer business choices, our courts’ extensive experience in reviewing licensing, zoning and other discretionary adminis­trative matters renders them well suited, rather than "ill equipped,” to deal with questions such as the rationality or arbitrariness of a board decision to grant or deny a sharehold­er’s application for permission to renovate. Second, this test provides an objective standard and thereby minimizes the risk of excessive judicial intervention and entanglement in what, as the majority notes, are often highly emotional disputes.

In contrast, the standard of review mandated by the tradi­tional business judgment rule focuses principally on the hon­esty and integrity of the decisionmaker, and the presence or absence of self-dealing or fraud in the decisionmaking process (see, e.g., Auerbach v Bennett, supra, at 629-630; Pollitz v Wabash R. R. Co., supra). However, questions of pure venality or dishonesty on the part of board members rarely enter into disputes about the use of residential cooperative apartment units. The more common sources of disputes in this area are the alleged arbitrariness of a particular board decision or, as here, the alleged existence of a vendetta or other personally malicious motive (see, e.g., Matter of Boisson v 4 E. Hous. Corp., 129 AD2d 523).

By its own admission, the majority’s adoption of the "busi­ness judgment” rule for these intramural controversies is motivated largely by its own view that the courts ought to mediate in the latter class of cases. It is this choice that most clearly differentiates my position from the majority’s and renders our disagreement more than a simple "matter of label” (majority opn, at 541). Unlike the majority, I believe that a rule which authorizes judicial inquiry into the personal motives and potentially vindictive aims underlying otherwise rational decisions is fundamentally unsound—for precisely the same reasons that have led the majority to reject the "reason­ableness” test that the Appellate Division apparently used.

As the majority notes, these disputes over the use of the shareholder’s own living space often pit neighbor against neighbor under circumstances that are likely to generate bitterness and distrust. Further, the very nature of coopera­tive apartment living, which throws relative strangers to­gether, requires them to reside in close proximity and forces them to cede a degree of personal freedom to the collective good, provides a fertile breeding ground for festering resent­ments and long-standing feuds. Thus, claims of "bad faith,” in the sense of personally directed animus, will be relatively easy to make in these cooperative board disputes—and will be equally easy to support with factual allegations dredging up the details of the parties’ old grievances. The likely conse­quence will be more claims capable of surviving a motion to dismiss (see, e.g., Matter of Boisson v 4 E. Hous. Corp., supra)1 and more judicial interference with management decisionmak­ing than the “reasonableness” standard the majority rejects would produce.

Moreover, a standard that would authorize our courts to explore the board members’ ulterior personal motives is, in my view, both impractical and undesirable as a matter of judicial policy. It is impractical because many, if not most, of the challenged decisions will involve a mixture of malevolent and legitimate motives. Exposing, separating and then mea­suring the role that the various motives played in the deci­sionmaking process is a daunting, and probably unrealistic, inquiry. Further, the undesirability of focusing on the parties’ subjective motives is plain, since such a focus will encourage the combatants to bring all of their dirty laundry into the courtroom and will place the court in the distasteful role of arbiter of a myriad of petty accusations and grievances.2

Because of these serious pitfalls, I would simply apply the “arbitrary and capricious” standard of article 78 to these cases and hold that discretionary decisions of the cooperative board regarding individual shareholder-tenants’ rights are not actionable if there is a rational basis to explain them. Con­trary to the majority’s suggestion (majority opn, at 541-542), there is nothing undesirable, or even particularly unusual, about applying differing standards of judicial review to cases involv­ing different types of issues. Indeed, CPLR 7803 mandates the use of different standards for disputes between citizens and the State, depending upon the category of issue to be consid­ered (CPLR 7803). Similarly, there is no sound reason to insist upon a single standard for judicial review for cases presenting diverse legal problems simply because they arise within the setting of cooperative apartment corporations. Again, this is not a matter of mere "happenstance” or "labeling,” but rather of claims which present fundamentally different problems requiring the use of different analytical tools. Disputes in which shareholder-tenants seek to vindicate their group inter­ests as against the board of directors are analogous to Busi­ness Corporation Law § 626 derivative actions and lend them­selves readily to the "business judgment” standard of review. In contrast, disputes which pit an individual shareholder-ten­ant against the other shareholder-tenants, acting either as a group or through their elected board, are more amenable to analysis under the CPLR 7803 (3) "arbitrary and capricious” standard. The distinction is not difficult to apply and is no more confusing than the well-understood distinction between representative shareholder actions for waste and mismanage­ment and those brought by individual shareholders to vindi­cate their personal rights.

Finally, despite the majority’s assertions to the contrary, the arbitrary and capricious standard, when properly applied, does not entail an inquiry into the "reasonableness” or the wisdom of the challenged decision. To the contrary, as in the case of article 78 review of discretionary administrative deter­minations, the judicial role in these cases is limited to ascer­taining that an articulable and rational basis for the board’s decision exists.

Here, for example, the board’s stated concern—and its ostensible basis for refusing petitioner’s request for permission to tinker with a steam riser—was the risk of creating unfore­seen problems elsewhere in the building’s old, well-worn pipe system. This concern, which was articulated by the building’s engineer, was certainly a rational explanation for the board’s decision and was therefore sufficient to remove that decision from the category of "arbitrary and capricious” determina­tions that are cognizable under article 78. This conclusion should, and would, end the inquiry under the test I propose.

In sum, the business judgment rule, with its attendant focus on the honesty of the decisionmaker, is a poor fit in the context of discretionary administrative decisions such as this one. Further, I can see no reason to stretch the contours of that rule’s standard of review for these cases, because a more apt test lies readily at hand, i.e., the standard set forth in CPLR 7803 (3). Since application of that test leads me to the same ultimate conclusion as the majority has reached by its somewhat more circuitous route, I concur, but only in the result.

Chief Judge Wachtler and Judges Simons, Alexander, Hancock, Jr., and Bellacosa concur with Judge Kaye; Judge Titone concurs in a separate opinion.

Order modified, with costs to appellant, in accordance with the opinion herein and, as so modified, affirmed.

1

The majority’s decision to reject petitioner’s claims without an eviden­tiary hearing is difficult to reconcile with its expressed unwillingness to foreclose review of allegations of "malevolent conduct” (majority opn, at 542). Petitioner’s papers contained factual allegations that one of the board members "has for several years been * * * causing problems for any other cooperator who needs something from the Board” and that this board member "is causing problems for [petitioner] because [he] said publicly that she had violated her proprietary lease by hooking up a sink in the rooftop greenhouse of her apartment.” Petitioner further claimed that the full board knew about this violation but was "afraid to do anything because of the threat of becoming victim of [the board member’s] vendettas.” Although the majority describes petitioner’s claims on this point as "wholly conclu­sory” (majority opn, at 540), these allegations seem to me to be sufficiently specific to survive a motion to dismiss under a test that looks beyond the objective rationality of the decision and mandates an inquiry into the subjective motivations of the decisionmaker. Indeed, the allegations here are indistinguishable in principle from those made in Matter of Boisson v 4 E. Hous. Corp. (129 AD2d 523), in which the court concluded that a hearing into bad faith was warranted on the basis of an alleged "vendetta” arising from a prior incident involving the petitioner and the current board presi­dent.

2

These difficulties do not arise in the more conventional applications of the "business judgment” rule to shareholder’s suits involving the actions of business corporation boards, since the focus in these applications is on the alleged ulterior financial motives of the directors—a matter which is suscep­tible to objective verification.