New Requirements for NY Coops & Incorporated Condos regarding Board Member Conflicts of Interest
A new law (effective January 1, 2018) was just passed unanimously by Senators throughout New York which will make it more difficult for cooperative and condominium managers and boards to deal with board member conflicts of interest when it comes to contracts. Conflicts of interest in contract making can no longer be overlooked and must be reported to condo owners and coop shareholders. The New York Legislature is clearly pushing coops and condos to be transparent with owners and shareholders.
The first new requirement is that condos and coops must give each board member a copy of the applicable law at least once annually. For an incorporated condominium, Section 715 of the Not-for-Profit Corporation’s law and for incorporated coops, Section 713 of the Business Corporation Law. Those sections could be confusing without explaining to board members what an ‘interest in a related party transaction” is when it comes to condo board members’ interests and what a “substantial financial interest” of a coop board member is. If those standards are implicated, a disclosure must be made. Boards and management need a way to track when board members are given copies of these laws as it will be essential to prove such sometime in the future. Compliant record keeping is essential.
Imagine a board deciding to enter into a vendor contract and the board president’s brother-in-law is the vendor. This interested transaction must be reported as it presents a potential conflict of interest. Fast forward two years from then and the board and board member are sued relating to the contract and the conflict of interest that was not reported. The board showing that the proper documentation was provided to each board members at least annually in accordance with the new law and that the board and board members other than the president had no idea of the president’s conflict would be essential in establishing a defense in a lawsuit. Otherwise, the board is exposed to potential liability for not complying with the law.
In addition to providing the right documentation to board members at least annually, board members have to provide an Annual Report to the coop shareholders or condo owners representing that either there were no actions taken by the board that fall within Section 519-A of the Not-for-Profit Corporation Law for the incorporated condominiums or within Section 727 of the Business Corporation Law for incorporated cooperatives. The Annual Report must be signed by each of the board members. If there were such actions by the board during the year, then the board must provide information on any contracts made, entered into, or otherwise voted on by the board that were considered related party transactions in the case of incorporated condominiums, or where one or more of the board members were interested.
Further, the Annual Report has to include a list of all contracts voted on by the board including information on the contract recipient, contract amount and the purpose of entering into the contract, the record of each meeting including board member attendance, voting records for the contract and how each board member voted on such contracts, and the date of each vote on each contact and the date the contract would be and remain valid. The law is a bit ambiguous as to whether the board has to report this information on each and every contract, or just the ones that involve board member conflicts of interest.
In view of these new requirements, it is essential for board and their management to keep track of all of this information in a proactive way. Many boards have failed to keep track of votes and which board member voted for or against a contract. Boards often recorded a passed or not passed record in their minutes, and no record of how each board member voted. Based on this new law, in order to prepare the Annual Report, minutes on votes on contracts have to identify which board members were in attendance for a vote and how each board member voted.
Unfortunately the lawmakers didn’t provide the consequences of noncompliance. We will have to wait for the inevitable lawsuits to start and Court will have to decide the appropriate consequences of noncompliance. As explained above, in a lawsuit where a board and its members cannot point to good record keeping and Annual Reporting in compliance with the new law, they will likely find themselves on the wrong side of liability and perhaps unable to establish the applicability of defenses like the often cited Business Judgment Rule. It is critical for boards and management to be proactive in complying with this new law.
Click here to read this significant law change.
Members Get Burnt by Bad Board Members Using Association $500k for Themselves
Board Members who misspend is one thing. This Palm Beach, Florida group of Board Members used their association’s money as their own personal piggy bank and now have to face the music in criminal court. The Whitehall Condominium’s owners now have to figure out how to make up the $500,000 plus that the Board Members dissipated.
It is alleged that an estimated $357,200 was spent by the Board Members on their own personal expenses. The members sat idle while the Board Members spent association money on themselves. Records weren’t kept so its hard for the owners to piece it all together. This happens a lot in community associations. A small group of owners run the Board and everyone else sits back and hopes that Board Members are doing the right thing. This association bet on a loser of a Board and now has to pay the price.
The condominium owners should have been demanding regular financial reports and reviewing association records that they are entitled to review under the bylaws and state law. They didn’t demand that the Board have official records which satisfy legal requirements and now they will all pay the price. An Office of the Board would have kept the Board Members honest or exposed their scheme and fraud long before $500,000 was spent and now long gone.
You should not blindly trust your fellow board members
This time a treasurer of a Florida homeowners’ association decided to use her association’s bank account as a personal piggy bank. From 2003 when she became treasurer till 2015 she and her son took $123,000. Once again we see these situations throughout the country where volunteer Board members do not have unfettered access to association records and are not satisfying their fiduciary obligation as Board members.
Board members should make sure they have such access and regularly review the records. Thefts like this could be prevented or at least discovered early and minimized. There is just no excuse for Board members to sit idle and not satisfy their fiduciary obligations. This time for 12 years cost this HOA $123,000.
Read the story here.
Board transparency requirements are increasing. Boards need to be legally ready.
There is increasing pressure towards Board transparency and member entitlement to records. This is yet another example. A New York City Appeal Court’s recent decision addressed in the article requiring greater access to Board records and the right to make paper and electronic copies of records subject to a confidentiality agreement is a huge transparency shift that Boards have to be prepared to deal with.
Read this Article from Habitat Magazine.
Condo Board Member Treasurer Embezzles $183,000 – Would you trust those two with overseeing your money?
This time it happened in a 72-unit condominium in Massachusetts. The Board Member Treasurer did things like writing checks to her contractor son for made up work and none of the other Board Members or owners were reviewing condo records like bank statements. When other Board Members stumbled upon the records years later, the fraud was revealed but it was too late; the money was gone, there was no insurance available and the owners were left without $183,000.
It really is important for organizations to have framework, policies and procedures in place for their Boards. Board Members need to oversee their organization’s business but also their fellow Board Members. They are fiduciaries who are charged with looking out for the best interest of their members. There is no excuse for a Board Member of any type or size organization not to have unconditional and ready access to organization records and not to regularly review those records (like bank statements) and allow such a fraud to happen. This case also highlights what happens when volunteer organizations skimp on insurance that may have covered some of the damage for this inexcusable loss.
If you’re a volunteer Board Member you should ask yourself where are my organization’s records? How do I access them? When was the last time I looked at them? I may be responsible for the actions of my fellow Board Members and others running my organization so I’d better start overseeing them before its too late.
Second Hand Smoke is a Real Problem for Community Association Boards
In buildings that are not smoke free, smoke-odor complaints are commonplace. Someone in an apartment smokes and the smoke finds its way in vents, through walls or floors, into adjacent apartments. In cooperatives, there is a warranty of habitability issue and in condominiums, a nuisance issue. The obligation of the cooperative corporation or the condominium association to deal with the complaint is a difficult one. Assuming they are responsible for stopping the odor condition, how do they do it? Very difficult. Maybe create a rule deeming a coop shareholder’s conduct (smoking and allowing secondhand smoke to eminate out of the apartment) objectionable or maybe a condo rule making a unit owner’s like conduct a nuisance. Trying to stop the odor from emanating can be quite a task and almost impossible. Sometimes convincing the offender to use an air purifier or other device to “eat” the smoke may help; particularly if the offender is ultimately responsible and may suffer exposure.
This situation manifested itself in a NYC cooperative called Connaught Tower over the last several years and a Supreme Court Judge in Manhattan decided to punish the cooperative Board for not doing much of anything to cure the condition. The punishment being disgorgement of maintenance back to 2007, amounting to $120,000 plus interest and attorneys’ fees. It appears that the cooperative’s general liability carrier was defending the case but it is not clear whether there was a reservation of rights in place by the insurance carrier so that the cooperative is on its own in paying the damage.
The Connaught Tower’s Board’s big mistake was not taking any reasonable action to try to intervene and abate the odor condition that a unit owner, Mrs. Reinhard was living with for years. The Supreme Court Justice on the case was a former law assistant to a Judge and was disturbed by the Board’s lack of action to the tune of over $120,000. The key for a Board faced with a second-hand smoke complaint is, at the very least, some action to try to intervene and stop the odor condition. We often intervene as negotiators or mediators to try to avoid these types of odor complaints from escalating as it did at Connaught Tower.
Good Record Keeping is Essential
Whether you’re a community association trying to collect arrears, a business trying to force a vendor to comply with a contract, or anyone else trying to enforce their rights, good record keeping is essential. Waiting until a dispute arises or suit is necessary or ends up served on you, is too late in many instances to pay attention to record keeping.
The time to focus is the present. It is best to proactively manage what you keep and how you keep it so when its time to prosecute or defend a matter, you’re ready. Consider a well thought out record retention schedule. Which emails should you keep and how long. What documents, electronic or paper, should be kept or purged. Consulting with counsel to make sure your business and personal record keeping complies with the law and protects you is a question your attorney should be able to answer. Remember that being protective in keeping good records will not only protect you and your business, it will end up saving you a lot of aggravation and money in the long run.
