Q&A: Addressing Mismanagement Issues

Q. How do you go about filing a complaint against the board and property management for financial mismanagement? We suspect the board has exhausted its operating expense budget on items that are deemed capital expenses. The board is now asking for a vote on special assessment to cover items.

                     —Shareholders Taking Action

A. “I am assuming that there was no affirmative wrongdoing, such as self-dealing, fraud or other breach of fiduciary duty by the individual board members and this is merely a case of financial mismanagement that resulted in imposition of what should have been an unnecessary special assessment,” says Bruce A. Cholst, a shareholder at the New York City law firm of Anderson Kill, P.C.

“In New York, the only way shareholders can recover damages in this scenario is to prove that (a), the board’s expenditure of operating funds was imprudent, and (b), its lack of prudence depleted corporate funds to the extent that an assessment which otherwise would have been unnecessary to meet expenses had to be imposed. Without proof that the expenditures were reckless and that the assessment would not have been necessary but for the board’s careless dissipation of the funds, the board would not be legally liable merely because they chose to spend their operating budget on capital needs; such an allocation is within the board’s management discretion. Shareholders, of course, have a political remedy – namely holding the board members accountable at the next election.”

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