## Facts

- A shareholder sought to sublet her cooperative apartment to a financially qualified married couple; the prospective male subtenant was African-American.
- After learning the prospective subtenant’s race, the co-op board president communicated his discomfort about the applicant to other directors.
- The board unanimously denied the sublease application and issued the shareholder a default notice for “objectionable conduct” based on her accusations of racism.
- The prospective subtenants and the shareholder pursued federal civil-rights claims against the cooperative and its directors, including the board president.
- A federal jury found violations of the Fair Housing Act, 42 U.S.C. §§ 1981 and 1982, and New York Human Rights Law § 296(5), awarding compensatory and punitive damages; a portion of punitive damages was assessed individually against the board president.
- The federal court also found the directors’ conduct was in bad faith and not in the cooperative’s best interests.
- While post-trial proceedings were pending, the federal case settled; the board president personally paid a reduced amount treated as resolving his punitive-damages exposure.
- The board president then sued the cooperative in state court for indemnification under the cooperative’s bylaws for his personal settlement payment.

## Issues

1. Whether New York public policy permits a cooperative to indemnify a director for punitive-damages liability arising from willful civil-rights violations, including racial discrimination and retaliation.
2. Whether Business Corporation Law § 721 independently bars indemnification when an adverse adjudication establishes the director acted in bad faith or with active and deliberate dishonesty.
3. Whether a settlement payment resolving punitive-damages exposure can be indemnified when indemnification would be barred for the punitive-damages judgment itself.

## Decision

- The New York Court of Appeals affirmed dismissal of the director’s indemnification claim.
- Public policy barred indemnification because punitive damages are intended to punish and deter the wrongdoer, and shifting that burden to the cooperative would defeat that purpose and impose the penalty on innocent shareholders.
- Business Corporation Law § 721 also barred indemnification because the adverse federal adjudication established bad faith.
- The court treated the settlement payment as punitive in character because it was a negotiated resolution of punitive-damages exposure following a verdict and findings of bad faith; indemnification could not be obtained by labeling the obligation as a settlement.

## Legal Principles

- New York public policy prohibits indemnification for punitive damages imposed for intentional, willful misconduct, because indemnification would neutralize punishment and deterrence by shifting the penalty away from the wrongdoer.
- Under Business Corporation Law § 721, a corporation may not indemnify a director if an adverse final adjudication establishes the director acted in bad faith or engaged in active and deliberate dishonesty.
- Indemnification statutes and related provisions require that indemnified conduct be undertaken in good faith and for a purpose reasonably believed to be in the corporation’s best interests.
- Corporate bylaws cannot expand indemnification beyond statutory limits or public policy; broad bylaw language is unenforceable to the extent it would require indemnification for punitive damages or bad-faith conduct.
- A post-verdict settlement resolving punitive-damages exposure may be treated as punitive for indemnification purposes when it would otherwise permit circumvention of statutory and public-policy bars.

## Conclusion

The court held that a cooperative may not indemnify a director for a payment resolving punitive-damages liability stemming from willful racial discrimination and retaliation, because New York public policy preserves the personal punishment and deterrence function of punitive damages and Business Corporation Law § 721 bars indemnification where an adverse adjudication establishes bad faith.


Biondi v. Beekman Hill House Apartment Corp., 94 N.Y.2d 659, 731 N.E.2d 577 (N.Y. 2000)