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Overseer or Overlord? Decision Due Soon on Dutchess County Case

In a case that may well have far-reaching implications both in New York City and beyond, the state Appellate Court, 2nd Department, is currently crafting a judgment that may give the state Attorney General increased oversight in how co-op and condominium boards operate.

The initial case of the People of the State of New York vs. Ashil Hyde Park was decided against the multiple respondents by Justice James D. Pagones of the Dutchess County Supreme Court in August of 2002. Ashil Hyde Park, a residential real estate concern, is the owner of 190 units in the Hyde Park Condominium development, which the company purchased in the mid-to-late 1990s from the original sponsor in a bankruptcy settlement. A balcony on the building collapsed in 1998, and upon inspection, other balconies were found in need of repair. It was also determined at that time that Ashil Hyde Park was behind in paying not only its common charges, but also the water, gas, and electric bills in its 190 company-owned units. The Attorney General's office subsequently went after Ashil Hyde Park and others in the case, charging that the company violated their fiduciary duty to the condo - and seeking injunctive release and monetary damages from the respondents.

Controversy arose, however, when the Attorney General's office chose to prosecute the case using Section 63(12) of New York State law, which has historically been a considered a consumer protection statute, intended to shield buyers of goods and services from deceptive business practices. Respondents in the case also objected when Justice Pagones, in his original decision, ordered the entire Hyde Park Condominium board of directors replaced, and barred Ashil Hyde Park, as sponsor, from voting in the subsequent special meeting to elect a new board - and in all other unit owners' meetings for five years, or until the sponsor held no more than ten units. The court also ordered the respondents to turn over all their books and financial records and ordered that all rents on Hyde Park apartments be paid to the petitioner - the Attorney General, in this case - and kept in a segregated account, to be used to pay all common charges and outstanding bills until the numbers for damages and restitution could be worked out.

The Long Arm"¦Or the Wrong Arm?

In their appeal, attorneys for the respondents charge that the Attorney General applied an irrelevant statute to the case, and that as nothing was bought or sold from Ashil Hyde Park and the other respondents during the period relevant to the suit, applying Section 63(12) is, in the words of one defendant's legal counsel, "absolutely unique, and totally unjustified."

The major concern over the precedent that could be set with the People vs. Ashil Hyde Park is not whether the respondents were remiss in not paying their water bill and neglecting to fix a few balconies; as the respondents see it, the outcome of their appeal could affect the breadth and depth of the Attorney General's power over co-op and condominium boards statewide. If the Dutchess County Supreme Court's decision is upheld on appeal, the Attorney General will have the power to extend Section 63(12) as a basis for prosecuting alleged breaches of board members' fiduciary duty to their co-op corporation or condo association, and thus extend the Attorney General's oversight of co-ops and condos in general.

For example, if a board were to make a decision that adversely affected its building's finances - hiring an unlicensed contractor whose poor work resulted in hefty damage or injury claims, for example - the Attorney General could invoke Section 63(12) and investigate. While some argue that such a possibility might encourage boards to do their homework before making major financial decisions and to carefully investigate before engaging outside contractors, opponents of the Attorney General's motion feel that expanding the office's power in such a way could lead to hamstrung boards and a landslide of litigation over everyday decisions that - while made in good faith - somehow had detrimental effects on the board's building.

Historically, co-op and condo boards are protected against prosecution by the Business Judgment Rule, which supports the decisions - even poor ones - of directors and officers as long as they can be shown to have been made in good faith, with the best interest of the shareholder/owners in mind. Further simplified, this rule provides that the courts will not interfere unduly with how a business concern is conducted, nor will they substitute their judgment for that of the business's directors - unless those directors can be proven to have acted improperly.

The appeal currently wending its way through the state Appellate Court will either finally bring boards to task for making hasty or poorly-considered decisions, or it will constitute an undermining of co-op and condo board's authority to run their own affairs without constant government scrutiny - depending on one's point of view. The results of the appeal are expected to be handed down by the end of 2002, and The Cooperator will follow the final outcome.

Hannah Fons is Associate Editor of The Cooperator. We thank the Attorney General's press office and Braverman & Associates, a Manhattan law firm representing the respondents, for their input regarding this case.

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Comments

  • Has a decision been reached? I am VP of a civic association that has, in its community, about 30 co-op buildings. Would there be anyone interested in addressing our group regarding the fiduciary responsibilities of co-op boards and recourse that shareholders have?