Q&A: Corporate Conflicts?

Can a designated trustee of a co-op apartment serve as a member of a co-op board  in any role?  

 —Upper East Side Shareholder  

A “The general answer to the question is yes provided that the bylaws of the  corporation or the certificate of incorporation do not prohibit it,” says Martin Kera, a partner with the Manhattan-based law firm of Kera & Graubard. “The answer to the question for a particular co-op depends on the specific  wording of the co-op’s bylaws and certificate of incorporation and the nature of the trusteeship. I  am assuming that title to the shares of stock is in the name of a properly  organized trust or the trustee and that the same trust or trustee is the  proprietary lessee.  

 “The underlying question is who may be a director of a corporation. New York law is sparse. Section 701 of the Business Corporation Law (BCL) states the following:  

 “ … the business of a corporation shall be managed under the direction of its board  of directors, each of whom shall be at least eighteen years of age. The certificate of incorporation or the bylaws may prescribe other  qualifications for directors.”  

 “Bylaws in common use during the first big wave of co-op conversions in the 1980’s didn’t specify who could become a director. However, at that time section 216 of the Internal Revenue Code, which controls  the deduction of interest and real estate taxes by shareholders, prevented  anyone but individuals from being a tenant-shareholder (with some exceptions  carved out by case law and revenue rulings of the IRS). Therefore, some certificates of incorporation and (some bylaws) contained  provisions limiting stock ownership to individuals. Section 216 was amended in 1986 by substituting “person” for “individual” with the intent of allowing a trust and a corporation to own stock.  

 “Many co-ops have amended their bylaws to specify who may become a director. Some bylaws state that only resident shareholders can be directors. Others allow non-resident shareholders to serve on the board of directors. Although it is not the question asked, some co-ops prohibit a trust or trustee  from owning shares notwithstanding the Internal Revenue Code provisions. In the question asked, the trust already owns the shares so the trustee should  be able to serve as a director if there is no language in the bylaws or  certificate of incorporation that prohibits such service.”  

 

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Comments

  • First of all, I have been recommending for a long time that HOAs and Condo Associations make some efroft to assure that votes are counted and one way to do that is to have the inspector or manager contact people whose ballots will not be counted (if the return address is present so they know what property is involved) and provide some means of having them come in and correct the error which OFTEN is that they did not sign the outside envelope. Yes, it is true that owners tend to either ignore the instruction or forget to sign the outside envelope. Many boards feel that is the owner's fault for not following instructions but some are willing to set up a process whereby the owner can come in and sign their ballot envelope. However, do not interpret this suggestion as meaning the owner can retrieve the ballot package and take it away from the inspector. Once in the hands of the inspector it is not revocable. And depending on who the inspector is, and how difficult, cumbersome or costly it is to set up such a process, it may not even be feasible.I would caution HOAs and Condo Associations that do not take these measures however. In a fairly recent Superior Court case (not a published opinion but indicative of what a court might do when there are uncounted ballots), the judge did not respond favorably to a Civil Code 1356 petition to approve restated CC&Rs because, in part, of the fact that there were 100 uncounted ballots. If a board is trying to pass an important or very material ballot measure, it would make good sense to do whatever is reasonbly possible to encourage owners and to assist even those who do not follow instructions in a way that makes sure as many ballots as possible are counted.