Could your condo bylaws save you from a costly lawsuit? A recent Brooklyn court decision highlights the critical role bylaws play when unit owners and their Board of Managers clash.
Case Background
- Plaintiffs (unit owners) alleged negligence by the Condominium Board and individual members in addressing water damage within their unit.
- The Board argued that the condo’s bylaws provide personal liability protection to board members.
Key Legal Principles
- Business Judgment Rule: Courts generally defer to condo board decisions made within their authority and in good faith. Plaintiff must demonstrate fraud or self-dealing to overcome this protection.
- Condominium Bylaws: These form a contract between the board and unit owners. Bylaws often include provisions specifically limiting individual liability of board members for actions taken in their official capacity.
Court’s Ruling
- Negligence claims against individual board members were dismissed due to protections under the condominium bylaws.
- Board-level claims (breach of duty, negligence) remain pending.
- Additional rulings denied summary judgment for both sides, highlighting the factual issues still in dispute.
Takeaways for Boards & Property Managers
- Bylaws as Safeguards: Well-drafted bylaws offer substantial protection in lawsuits alleging negligence or breach of duty, provided board members acted within their authority and in good faith. Periodic review of bylaws is essential.
- Fiduciary Responsibility: The board still maintains a duty of care towards the condominium property and unit owners. Neglect or willful disregard of this duty may expose the board as a whole to liability.
- Proactive Maintenance: Address potential issues (e.g., water leaks) promptly to minimize damage and mitigate the risk of disputes escalating to legal action.
- Thorough Documentation: Maintain meticulous records of board actions, maintenance, and owner communications. This serves as evidence of responsible decision-making.
- Discovery Compliance: Non-compliance with discovery procedures can hinder your defense. Understand the obligations from counsel regarding the preservation and sharing of case-relevant information.
Here is the decision (Szymczyk v. Board of Managers of 363 16th Street Condominium).
The recent case of Levy v. 103-25 68th Ave. Owners, Inc. offers some valuable insights for property managers and board members within cooperative housing communities.
In June 2018, the Levys commenced this action against the co-op defendants and the occupants of the neighboring apartment, alleging, inter alia, that the co-op defendants exceeded the scope of their authority, discriminated against them for having children, and acted in bad faith.
The Business Judgement Rule
This rule affords a degree of protection to boards of directors when making decisions within the scope of their authority. Courts generally defer to board decisions if they are made:
- For the purposes of the cooperative community: Decisions should align with the overall well-being of the community.
- Within the board’s authority: Actions shouldn’t violate governing documents (e.g., bylaws, proprietary lease).
- In good faith: Board members must act without ulterior motives or personal gain.
Limits of Board Authority
The Levy case highlights that the Business Judgment Rule is not absolute but it can be used to insulate boards, along with their property manager agents, unless they
- Exceed their authority: Boards cannot take actions that contradict the cooperative’s governing documents.
- Act with discriminatory intent: Decisions cannot be based on factors like race, religion, familial status, or other protected characteristics.
- Show Bad faith: Self-interest, malice, or disregard for the community’s well-being can invalidate the protection of the Business Judgement Rule.
Best Practices
To avoid issues like management and the board did in the Levy case, it’s imperative that property managers and board members:
- Understand Governing Documents: Thoroughly familiarize yourselves with the cooperative’s bylaws, proprietary lease, and any other relevant rules and regulations.
- Document Decision-Making: Maintain clear records to demonstrate careful and informed processes behind decisions.
- Act Impartially: Treat residents fairly and avoid even the appearance of preferential treatment or discrimination.
- Prioritize Community Interests: Decisions should always prioritize the well-being of the cooperative community as a whole.
The Levy case underscores the importance of due diligence, fair treatment, and a commitment to serving the entire cooperative community. By being mindful of these principles, property managers and board members avoid liability for the entity and themselves personally. Here’s the decision.
A monumental shift has shaken the foundations of real estate law. The long-standing 6% commission that sellers typically pay real estate agents is now a thing of the past. The National Association of Realtors (NAR) made a dramatic announcement last Friday, settling significant antitrust lawsuits and ushering in a new era for real estate transactions.
What Happened?
The NAR has reached a $418 million settlement and agreed to changes in long-established industry rules. These modifications dismantle the current model where sellers pay for both their own broker and the buyer’s broker. Critics of this system alleged that it artificially inflated housing prices.
Potential Ramifications
- Significant Commission Reductions: Real estate commissions could drop by 25-50%. This could lead to thousands of dollars in savings for homebuyers and sellers.
- Alternative Brokerage Models: Flat-fee and discount brokerages, already in existence, may flourish as viable options.
- Legal Challenges: While landmark, this settlement might still face scrutiny over concerns of continued collusion and ‘steering’ behaviors within the industry.
- Increased Transparency: Buyers and sellers may find greater clarity and negotiation power regarding agents’ compensation.
What This Means for Lawyers
This settlement presents both challenges and opportunities for attorneys specializing in real estate law:
- Contract Revisions: Standard real estate contracts will need revisions to reflect the decoupling of buyer and seller agent fees.
- Client Education: Lawyers will need to advise clients thoroughly about commission structures, alternatives, and potential negotiation strategies.
- Litigation Potential: Disputes over commissions and compliance with new NAR rules may become more common.
The Future
This settlement raises intriguing questions about the future of real estate and the role attorneys will play. Will commission levels stabilize? Could further legal challenges reshape the landscape? Only time will tell.
A recent New York Appellate Division decision (Cortlandt Street Recovery Corp. v. Bonderman) underscores the significance of retaining experienced corporate counsel to protect both corporations and their board members from potential liability. The court rejected the plaintiff’s attempt to hold various related entities collectively liable for the actions of one, highlighting the complex challenges in navigating potential individual liability.
Understanding Alter Ego Liability
Attempts to “pierce the corporate veil,” or hold board members personally liable for corporate actions, require plaintiffs to prove two key elements:
- Complete Domination: The plaintiff must show that an individual or entity completely dominated the corporation’s decision-making.
- Fraud or Injustice: The plaintiff must demonstrate this domination was used to commit an act of fraud or perpetrate an injustice.
In considering domination, courts consider factors such as “the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership; officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation’s debts by the dominating entity” (Tap Holdings, LLC v Orix Fin. Corp., 109 AD3d 167, 174 [1st Dept 2013] [internal quotation marks omitted])
How Corporate Counsel Protects Board Members
- Proactive Guidance: Experienced corporate counsel can proactively advise board members on best practices to maintain corporate formalities, ensure adequate capitalization, and avoid actions that could blur the lines between personal and corporate interests.
- Risk Assessment: Counsel can identify potential risks and help boards implement procedures to mitigate those risks, protecting board members from personal exposure.
- Defense in Litigation: Should a lawsuit arise, corporate counsel provides a robust defense strategy, working to shield board members from individual liability.
Key Takeaways
This decision reinforces the need for board members to prioritize working with competent corporate counsel. This proactive step is crucial to protect not only the corporation but also individual board members from the potentially severe implications of alter ego liability claims and personal liability for them where their own assets are at risk.
A recent class-action settlement addressing foreclosure procedures in New York State has significant implications for condominium and homeowners’ associations (HOAs) that have owners in arrears. The law involved only applies to foreclosures of home loans, and not condo and HOA foreclosure of common charge liens and experienced counsel need to make this clear at the initial filing of the foreclosure action or risk having the action dragged into a mandatory court process where owners could be appointed legal counsel and the action delayed.
Where condos and HOA boards took a back seat to lender foreclosure actions, simply appearing in the actions and waiting for lenders to prosecute the action, condo and HOA boards may better off starting their own foreclosure action which should not be covered by this delayed process that lenders will have to go through. This will avoid delays and the extension of the owners not paying their common charges and speed up recovery by the condos and HOAs.
The Settlement Background
- New York courts were routinely bypassing a mandatory process in residential foreclosure cases of home loans by lenders – assessing whether a homeowner qualifies for appointed legal counsel.
- This violation of state law prompted a class-action lawsuit, which the courts recently settled.
- The settlement could lead to “do-overs” for thousands of foreclosure cases by lenders, potentially delaying proceedings by lenders. Condos and HOAs have to make sure to argue against getting dragged into this delayed process which could substantially delay lender foreclosures.
- While NY Civil Procedure Laws & Rules § 3408, which is the law at issue, applies specifically to foreclosures of home loans, this settlement may embolden judges to favor homeowner rights in all foreclosure contexts and condos and HOAs must have experienced counsel argue against such a result for them.
What Condo/HOA Boards and Management Can Do
- Consult Your Attorney: Discuss whether the settlement could impact your ongoing or planned foreclosure actions. Consider any proactive or preventive measures.
- Stay Informed: Keep up-to-date on any evolving case law or procedural changes in New York related to homeowner rights in foreclosure.
This settlement underscores the complexities of foreclosure law and the evolving focus on protecting homeowners. Condos and HOAs Condo and HOA boards and management must have experienced counsel fighting for them and must be vigilant in understanding their legal rights and prepared to navigate an increasingly challenging environment.
A new Supreme Court, New York County case highlights the challenges companies face regarding intellectual property protection, Quest Partners LLC sued former member and director of research Brian Brugman. Quest alleged Brugman misappropriated and misused trade secrets and confidential information.
The court’s decision by Justice Lebovits (65514/2023), offers insights into how organizations can safeguard against similar scenarios.
Case Summary
- Brugman was accused of using Quest’s proprietary trading strategies after leaving the company to create his own hedge fund.
- The court dismissed several of Quest’s legal claims, including misappropriation of trade secrets, breach of fiduciary duty, unfair competition, and conversion. These were deemed duplicative of the breach of contract claim.
- The court did, however, uphold Quest’s breach of contract claim.
Key Takeaways
- Detailed Agreements are Essential: Organizations must have well-defined contracts that clearly stipulate obligations regarding trade secrets, confidential information, and non-compete clauses.
- Specificity Matters in Trade Secret Protection: It’s not enough to generally label information as proprietary. Organizations need to precisely outline the specific trade secrets being protected. This helps strengthen legal cases.
- Actions Outside of Contracts: Even with contracts, former employees might use acquired knowledge in ways that don’t directly violate agreements. Organizations should be aware of this risk and proactively monitor for potential misuse.
What Organizations Can Do
- Robust Non-Disclosure Agreements (NDAs): NDAs with departing employees should specifically address trade secret usage and non-competition periods.
- Trade Secret Inventories: Maintain detailed records of trade secrets, including their nature, how they’re used, and access control.
- Monitoring and Surveillance: Be vigilant in tracking the activities of former employees and competitors. Watch for any suspicious resemblance to company strategies or product developments.
The case underscores the importance for companies to prioritize protecting trade secrets and confidential information. Strong contracts, clear definitions of proprietary data, and proactive monitoring strategies are crucial for minimizing the risks posed by departing employees.
A recent Alabama court decision ruled the Corporate Transparency Act (CTA) unconstitutional, creating uncertainty for businesses nationwide. While the case may be appealed, here’s what boards of coops, condos, HOAs, and LLC members in New York, Connecticut and other states need to know right now.
On March 1, 2024, the Federal District Court in Alabama declared that the Act was unconstitutional. In the Judge’s words, the Act “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.” As a result, the Judge found the Act to be unconstitutional because it exceeds the Constitution’s limits on Congress’ power. The Court, however, didn’t even reach a decision on whether it violates the First, Fourth, and Fifth Amendments. The Court permanently enjoined the government from enforcing the Act against the named plaintiffs and ordered a further hearing on the award of costs of litigation.
So, what is the rest of our Country supposed to do? We are going to have to wait and see what happens when, and if, the case is appealed to the Circuit court in Alabama and then possibly to the US Supreme Court. If we don’t hear more from the courts in New York, Connecticut and the other states, then compliance with the Act is still required. The case in Alabama only applies to the parties in that case and others in that District of Alabama right now arguably. Also the decision could be read narrowly, only applying the small businesses that are a part of the trade organization in Alabama that was involved in that lawsuit. Thus, most of the corporate entities that are covered by the Act, must still comply with the Act.
Next Steps:
- Stay Informed: Monitor legal developments regarding the CTA’s status.
- Review Your Status: Determine if your organization falls under the CTA’s reporting requirements.
- Consult Counsel: If unsure about your obligations, or considering a potential challenge, seek legal advice.
Here is an Article that we previously published on the CTA. Stay tuned for more.
In a recent New York case, 72 Poplar Townhouse, LLC v Board of Managers of the 72 Poplar Street Condominium, a series of critical issues arose that have wide-reaching implications for condo, coop, and HOA boards. This case highlights the potential consequences of unclear bylaws, the importance of meticulous records, and the complex power dynamics between unit owners and boards.
The Court refused to dismiss fraud and breach of fiduciary duty claims against the individual defendants board members who were sued. The Court explained: “The individual defendants’ submissions did not demonstrate, prima facie, that they did not breach their fiduciary duties as Board members by the unequal treatment of the plaintiff under the circumstances alleged. Nor did their submissions demonstrate, prima facie, that the amount of common charges refunded to the plaintiff was the correct amount, or that they did not know that the plaintiff was being overcharged to their benefit and to the detriment of the plaintiff. ”
Understanding the Case
- Conflicting Bylaws: At the heart of the dispute were two sets of bylaws with differing formulas for calculating common charges. The bylaws in the original offering plan conflicted with the bylaws that were ultimately recorded.
- Bylaw Amendment: The Board attempted to rectify the situation by calling a special meeting, where unit owners voted to amend the bylaws.
- Disgruntled Unit Owner: A unit owner, unhappy with this outcome, filed a lawsuit, alleging breach of contract, breach of fiduciary duty, and fraud.
Lessons Learned
- Bylaw Clarity is Paramount: Ensure your association’s bylaws are drafted carefully and unambiguously. Ambiguities or conflicting provisions leave room for costly disputes.
- Record-Keeping is Essential: Maintain thorough records of all board meetings, decisions, votes, and communications. Accurate documentation is crucial when defending board actions.
- Seek Legal Counsel Early: Consult with an experienced attorney specializing in community association law to review bylaws, amend bylaws, and navigate conflicts to avoid potential legal pitfalls.
- Understand Fiduciary Duty: Boards owe a fiduciary duty to act in the best interests of the entire association. Remember, decisions shouldn’t solely favor the board or certain members.
- Consider Mediation: Before escalating disputes to litigation, pursue alternative dispute resolution, which can potentially save time and money for all parties involved.
The Bottom Line
The 72 Poplar Townhouse, LLC case underscores the need for condo, coop, and HOA boards to be proactive in their governance. By taking heed of these lessons, boards can build a more transparent, accountable, and less legally vulnerable association.
Here’s the decision for more information.
As a board member or property manager for a condominium, cooperative or HOA, you shoulder significant responsibility. You make decisions impacting the finances, safety, and quality of life for a whole community. Your actions are, of course, guided by your entity’s governing documents – but were these documents designed to protect the association and its members in the best way possible?
Having experienced counsel review your governing documents isn’t just a good idea; it’s a critical step in safeguarding your association from costly disputes and potential liabilities. Let’s examine why:
1. Clarity and Consistency: Keeping Up with the Law
Governing documents – like your bylaws, declarations, and rules – may contain outdated language or internal inconsistencies that invite misinterpretations. Laws governing community associations change over time. An attorney can ensure that your documents are:
- Clear and Unambiguous: Are your rules around noise restrictions specific enough to be enforceable, or too vague to hold up in a dispute? Precision matters.
- In Line with Current Laws: Did a new state law change the requirements around virtual board meetings or electronic voting? Your attorney will catch potential conflicts.
- Internally Consistent: Do your bylaws conflict with your declaration of covenants on a key point, such as short-term rental allowances? This opens loopholes.
2. Protecting the Association’s Interests
Your governing documents are your shield from potential legal challenges. A savvy attorney will spot areas where you may be vulnerable and suggest strengthening them through amendments. For example:
- Enforcement Provisions: Do your documents allow the board to effectively levy fines or pursue legal remedies against rule-breakers?
- Dispute Resolution: Is there a clear procedure outlined for mediating disputes between residents, or between residents and the board? Predefined processes save time and costs.
- Insurance Requirements: Are there gaps in your coverage when it comes to board liability or a specific requirement that owners/shareholders maintain certain insurance? Your attorney identify areas that need to be improved to mitigate risk to the entity and board.
3. Avoiding Costly Mistakes
Proactive legal review is far less expensive than a lawsuit. Here are some common scenarios an attorney’s guidance can help prevent:
- Unenforceable Rules: Imagine spending time and resources enforcing a rule that turns out to be poorly worded and thus invalid.
- Discrimination Claims: Inadvertent use of language in your rules that could be perceived as discriminatory could open the door to costly litigation, even if no ill intent was present.
- Financial Mismanagement: Without clear guidance on board spending authority, your association risks financial trouble.
An Investment, Not an Expense
A clear, legally sound set of governing documents provides the solid foundation your entity needs to thrive. Don’t leave your community’s future to chance. Your proactive approach will pay dividends in peace of mind and long-term stability.
Last year, the Circa Central Park condominium decided to spend $60,000 to make the building’s many windows more visible to birds. The board decided to add translucent dots to the windows so the birds would see them and not crash. If this was your condo board, would you get unit owner approval before doing that project?
The answer is in your condo’s declaration and bylaws and should be analyzed before moving ahead and making a board decision, much less hiring a contractor and entering into a contract that the board can’t get out of if the answer to the approval question isn’t what the board thought it was going to be.
In New York City, condominium boards generally are authorized to maintain, repair and replace the common elements of their buildings, but when it comes to improving them the unit owners typically have to approve before the board can proceed. A threshold question is whether the windows are even common elements or are they defined as a part of the unit and thus, the windows in the unit owned by each unit owner. There are parts of the condo’s governing documents that address these issues and other parts that address other ones like whether the board has the authority to spend $60,000 of the unit owner’s money without the unit owners approving. If the condo doesn’t have the money and has to borrow, there are other parts of the governing documents addressing borrowing authority of the board.
Another consideration is whether there are ordinances addressing bird-safe building design or window modifications. In 2019, NYC passed the country’s first comprehensive collision-proofing legislation, requiring builders to use bird-friendly material in all new construction and large renovations. The NYS lawmakers are trying to pass a law (“Feathered Lives Also Count”) requiring bird-friendly material to be used in more buildings throughout NYS.
Counsel can advise the board on its authority and how all of this may impact board decision making. If the board has to first obtain unit owner approval, the board will be armed with sound advice so that it can achieve desired results.
Failing to obtain owner approval for improvements may lead to legal ramifications for the condominium board. Unit owners who disapprove of an improvement or spending without proper authorization, may take legal action against the board, potentially resulting in financial damages or injunctions against the project.
