Q&A: Sponsor Conflict

Q After serving on my board for the past two years as a vice president, I have now been elected president of my 83-unit Manhattan co-op. The equity sponsor (and 14 percent shareholder) has always been on the board, and for the last three years, has also served as treasurer. The sponsor also has a long-standing relationship with our managing agent, accountant, and attorney. Next week, we finish officer elections, and with the support of the majority of the board, I will be voting the sponsor out as treasurer and putting some “new blood” in the position. My question is: what issues should I be concerned with and what if any conflicts exist with having the sponsor as treasurer, given his relationship with the building’s other professionals?

—Manhattan Board President

A According to Eric Goidel, an attorney at Borah Goldstein Altschuler Schwartz & Nahins, “it is surprising that a sponsor with only a 14 percent equity interest in the apartment corporation would have had or been allowed to have the degree of control over the Board of Directors to which you allude. Your quarrel might not be with the sponsor and its representatives, but rather with your fellow shareholders who allowed this to occur. In the absence of concrete information supporting your suspicions, it should not automatically be assumed that by virtue of being a sponsor representative on the board as well as the apartment corporation’s treasurer, coupled with a relationship between the sponsor and the apartment corporation’s managing agent, accountant and attorney, that there has been any form of impropriety. Those professionals owe a duty of loyalty to the apartment corporation as a whole and not to any particular board member or faction.

“Since the composition of the board has significantly changed, it might be a useful exercise to have separate meetings with the various professionals assisting the apartment corporation, and if there is any concern as to where their loyalty is placed, steps should be taken over time to replace those professionals. Even, however, if it is determined that all of the professionals should be replaced, there should never be a wholesale replacement of an apartment corporation’s managing agent, accountant and attorney at the same time. Replacements should be performed over a period of many months, if not several years, as a whole host of institutional memory and records may be lost forever when all professionals are changed at one time. Regardless of who was the treasurer of the apartment corporation, there should have been, or now should be created a system of checks and balances which prevents one board member from effectively controlling all financial aspects of the corporation.

“The requirement of dual signatures on checks, supporting bills accompanying checks and duplicate statements mailed to other officers are terrific starts. If there are any concerns about improprieties of the sponsor/treasurer, the first place that I would look as either an accountant or board member is at the line items of maintenance collections on the income side and repairs/maintenance on the expense side; the former to confirm that the sponsor has truly made all payments due for the apartments which it owns, and the latter to make sure that the sponsor has not used funds of the corporation to defray repairs and renovations within sponsor apartments. Remember however that sponsor is not a four-letter word and the number of honorable sponsors with the best interests of the apartment corporation at heart far exceeds the de minimus number of sponsors attempting to run apartment corporations for their own self interest.”

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