Business

Back in 2015, a condo board president’s toilet repeatedly leaked into the apartment below.  It was determined that the condominium’s pipes to the toilet were improperly pitched.  That was eventually fixed in 2015.  But, it also was determined that the seal around the base of the board president’s toilet at the floor was damaged.  It took two years till 2017 for the seal to be replaced and thereafter the leaks stopped.

The unit owner below sued the board president and the other owner of the apartment above as well as the condo board.  There was no dispute that damage occurred, but the battle became what was a common element that the condo was responsible for and what was not a common element and thus, the unit owner’s individual responsibility.

Rather than recusing himself as a board member about the issue, the board president injected himself.  The argument in the lawsuit that ensued became that the board president obstructed the investigation and breached his fiduciary duty.  The charge was against the board president as an individual, exposing his personal assets in the lawsuit.

The Appellate Division, First Department, just issued a decision on March 26, 2020, reviving the claims against the board president as an individual.  In The Lisa Goldberg Qualified Personal Residence Trust v. Board of Managers of the Madison Square Condominium.  This Court governs cases in Manhattan and the Bronx and thus condominium, cooperative and HOA board members there should be very careful to recuse themselves when conflicts of interest arise.  If they are not willing to do so voluntarily, a board usually has the power to form a committee of board members, excluding the conflicted board member, and leave that board member out of decisions on the conflicted topic.

The Madison Square Condominium board didn’t form a committee excluding the clearly conflicted board president and the board president did not recuse himself which would have kept him out of trouble.

The First Department unanimously held that claims that the board president is personally responsible for the damage incurred, can move forward to discovery.  According to the court there was evidence that the board president refused access to his unit while the board was investigating the leaks and that this conduct was in the board member’s individual capacity.  

The Court explained that “[g]iven [the board president’s] admitted refusal to recuse himself from decisions that would affect the investigation, the record presents issues of fact whether [the board president] placed his own personal interest in keeping the investigation out of his apartment over plaintiff’s interest in a timely investigation and repair of the leaks and whether the Board took appropriate steps to insulate the investigation from [the board president’s] self-interested involvement and delays.”

In sum, if a board member has a conflict of interest, that person should recuse themselves from decision making on the issue and if they are not willing to do so, then the board should take action to either convince the board member to do so or perhaps form a committee (if allowed under the governing documents) to exclude the board member.  In the end (which is not even close for the Madison Square Condominium because discovery in the lawsuit is still ahead of it five years after the dispute started), board members should be careful with conflicts of interest.

Read the case here.

Amending condominium declaration and bylaws can be difficult; particularly if boards are not guided properly.  The original bylaws when the condo was conceived by the sponsor may be outdated, incorrect or need to be changed for a myriad of other reasons.  If the board doesn’t do it correctly, the condo could get caught up in a litigation like the Towers on the Park Condominium in Manhattan.  A pro se unit owner sued years ago and the appellate court in New York just put an end to the amendment challenge.  In doing so, the Court absolved the condo from a few errors that it made in the amendment process.  The better course however is to get it right the first time so that expensive litigation and acrimony in the condo because of challenges like this do not occur in the first place.

The first step is to determine what the board wants to change in the declaration and bylaws and whether it can obtain the required number of unit owners to vote for the amendment.  Usually, such amendments require a super majority that can be difficult to obtain. There are way, however, to obtain the necessary vote, but it has to be done correctly or suffer a challenge.  

In the Towers on the Park Condominium case the Court mentioned the process used in the vote where the board left the meeting open because it did not obtain the necessary 80% at the first meeting.  This is a typical tactic employed by condo boards but it has to be done correctly at the meeting.  If not, it could be fatal to a vote, but at least this Court saw the defect as technical and absolved the board. It helped though that the challenger overlooked and did not dispute this error in her litigation papers. This is an example of getting is right the first time and avoiding the chance that another court may not be so forgiving.  Imagine if the Court threw out the amendments years later after the condo was governing under the amendments, possibly invalidating board actions under the improper amendments.

The other step that the Towers on the Park Condominium didn’t take correctly was recording the declaration and bylaw amendments with the City Register.  Amendments to declarations and bylaws have to be recorded against each unit in the condominium after the amendments is properly approved by owners.  This is another important step.  The Towers on the Park Condominium board did not record the amendment right away but did do so before the lawsuit to challenge the amendment was filed with the Court.  As so, the Court forgave the condo board again.  The law in NY is that such amendments are not effective until recorded with the City Register against each unit. Thus, the recording should be planned in advance and done right after the necessary vote is obtained.  

Realizing that amendments are difficult, it is important to get the language of the amendment correct.  Once that is nailed down, as long as proper procedure is taken, the road should be smooth for a board.  With Towers on the Park Condominium, the road was not so smooth tying it up in litigation for years.  But, now that the clouds have passed, the changed declaration and bylaws should serve the condo well for years to come.

Read the Reynolds v. Towers on the Park Condominium decision.

A classic example of board leaders acting badly because there is no oversight by other board members, just happened in New Jersey.  A little league board President and Treasurer teamed up and took over $100k from the organization.  How did they do it?  None of the other board members were overseeing the organization’s finances and business.  

There was no framework available for the board members to do so.  The President and the Treasurer had all the organization’s bank and other records, so they took what they wanted without anyone looking.  Some might say that the board was derelict in its duty to the organization by not putting a system in place to be able to do so.  Now they shouldn’t wait. 

Applications like Office of the Board can be up and running in minutes and cost as little as $360 a year.  If the youth sport’s board had an Office of the Board, the President and Treasurer could have been deterred, spotted and/or stopped.  

Whether you’re a member of a youth-sport’s board, booster board, homeowners’ association, condo, coop board, church board, nonprofit board, or any other board run by volunteers, do not make the same mistake that these other boards made. Oversight and transparency are really easy to have immediately.  Read about the NJ little league board.

Whenever cooperative, condominium or HOA board members are sued individually in a lawsuit, the first thing counsel will try to do is get the case dismissed against the individuals.  The general principle is that if the board members did not commit tortious acts independent of their decision making as board members, then they shouldn’t be named in the lawsuit.  If the board members self-served themselves, for example, then the court will likely not dismiss the case against the individuals.

The next thing counsel for the board members or the cooperative, condominium or HOA will try to do is get rid of certain claims based on the business judgment rule.  If the board members and board acted within their authority, in good faith and in the best interest of the entity and all of the owners or shareholders then the business judgment rule is a great defense which can be used to end certain claims summarily on dismissal or summary judgment motions.

The First Department, Appellate Division, which oversees appeals in the Manhattan and Bronx Supreme Courts, just decided to leave cooperative board members individually in a lawsuit for trial, holding that the business judgment rule does not support dismissing claims against the board members and the cooperative, and that they should remain in the case through trial.

The Court in Nainan v. 715-723 Sixth Avenue Owners Corp. (read the decision by selecting it), issued a decision on November 19, 2019, explaining that “A board’s decision is not entitled to protection under the business judgment rule, however, when the action taken ‘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’ (citation omitted)”.

The facts in the Nainan case made it difficult for the Court to side with the board members or cooperative.  Indeed, Plaintiffs there “argued that the board ignored the coop’s bylaws by deciding to enter into a contract for the sale of the coop without obtaining shareholder approval and that the board members used scare tactics to force the shareholders into agreeing to sell the coop. Plaintiffs contend[ed] shareholders were prohibited from selling their apartments while two of the board members were permitted and proceeded to sell theirs. Plaintiffs claim[ed] that the board failed to negotiate the best possible price for the sale. Moreover, plaintiffs allege[d] that one director acted as the broker for the transaction, thereby obtaining an independent financial benefit from the transaction, a fact that was not disclosed to the shareholders.”  These type of facts were enough for the Court to leave the individual board members in the case as well as most of the claims against the cooperative which are going to have to be decided at trial.

The lesson from the case however is that board members can be subjected to individual liability and have to defend themselves in lawsuits particularly if they make decision or take actions that serve the board member’s own personal interest.  Boards should be careful to make a record establishing that their decision making is covered by the business judgment rule and that they are acting in the best interest of all owners or shareholders and certainly not their own personal interest as seems to be the case with the Nainan board members.