Boards

The cooperative at 118 East 60th Street in Manhattan got lucky.  Its books and records including alteration records were maintained at its management firm’s office – Matthew Adam Properties.  When sued, the cooperative and management was demanded to turn over alteration records but was unable to do so because of water damage at management’s office.  The other reason raised was a 7 year document retention policy which the cooperative and management claimed was followed and thus the requested records were no longer available.

Plaintiff’s counsel argued that the cooperative and management, including the individual board members named as defendants, spoiled the evidence and thus, they should be sanctioned in the suit.  The Court refused to do so based upon the photos of the water damage that management presented along with what the Court considered a reasonable document retention policy which it had no reason to believe was not followed.

This is all fine for this lawsuit, but what about all the other books and records that were destroyed by the water damage.  Maybe some of those books and records were needed by the cooperative and not having them safe kept from such casualty was a bad idea.  In today’s digital age, digitizing documents is easy and if property maintained, can withstand casualty.  Once the records are in electronic form, they can be maintained (and proven to be maintained) in accordance with a document retention policy.  

The Court in the the 118 East 60th Owners Inc. case didn’t speak about individual board member records regarding alteration decisions.  Perhaps plaintiff’s counsel did not go after the individual records just yet.  In many cases, board members inadvisably use personal email to conduct board business including alteration and other decisions by the board.  Maybe the destroyed records are located in the emails.  If the cooperative had an electronic office like and Office of the Board (www.officeoftheboard.com), all of those records would be contained in the Office and all of them could have been either maintained to withstand casualty and/or purged and gone forever as a part of a document retention policy.  Stay tuned on the lawsuit, there are probably appeals and future decisions to come.  Read the decision here.

Last year, a new law (effective January 1, 2018) was passed unanimously by Senators throughout New York aimed at cooperative and condominium board member conflicts of interest and transparency regarding them.  Hopefully boards and/or their managers have been complying and are ready to make their first report to shareholders/owners.

The first new requirement was 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 were implicated, a conflict of interest disclosure should have been made.  

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.  

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.  

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.  Boards and management to be proactive in complying with this new law.

Since this is a new requirement, it may be prudent to consult counsel at least for the first reporting cycle and certainly if there is any question as to whether there is a conflict of interest requiring disclosure.  The best course seems to be to err on the side of transparency unless there is another legal reason not to do so.

Click here to read this significant law change.