Serving on the Board Graduating to the Head of the Class

With annual meeting season upon us lots of shareholders contemplate leaving the sidelines behind to join the ruling class. Before you decide to cross over, be forewarned that the grass isn't always greener on the other side. To help you make an informed decision, I offer the following crash course in director basics culled from The New York Co-op Bible (where you can go for a more advanced degree).

On the positive side, elevation to the board brings power -- lots of it. The fix comes from the Business Judgment Rule (established in the landmark decision, Levandusky v. One Fifth Apartment Corp., 75 N.Y.2d 530 (1990)), that allows board members of co-ops and condos to act virtually unchallenged on most everything that affects the lives and pocketbooks of their constituents, from dictating rules on mundane matters to determining which would-be owners make it past the palace gates. Since then courts have expanded the scope of the (golden) rule, most recently granting directors the ultimate power to send shareholders packing for engaging in objectionable conduct. In the much heralded Pullman decision the ouster was voted upon by the board and nearly 75 percent of all outstanding shares (40 West 67th St. Corp v. Pullman, 100 N.Y.2d 147 (2003)). A lower court went further, permitting board members on their own to terminate a shareholder who, among other transgressions, went to the compactor room wearing only a shirt and a sock and had unauthorized sex in the shower of the co-op's health club (London Terrace Towers, Inc. v. Davis, 2004 WL 2827658 (N.Y. Civ. Ct. 2004)). Right now, board power, along with apartment prices, is at an all-time high, though whether directors should be able to bypass judicial forums and boot objectionable owners is a different question.

It's not a one way street. With power comes responsibility -- and potential liability. You owe your constituents so-called fiduciary duties -- the obligation to put their interest before your own (a concept that doesn't necessarily come naturally, especially when there's no other compensation). That means you can't get anything they don't, you have to treat everyone equally, you can't act out (or, as the law would say, engage in bad faith), and, at the very least, you must disclose any conflicts of interest, though you'd be safer to avoid them altogether.

Righting the Wrongs

As a board member you're a lightning rod for any building-related wrong, real or imagined, brought by insiders or outsiders. A prospective purchaser complains you shouldn't have turned down his application and takes you to court, the roof contractor says you didn't pay him what he's due, a shareholder claims you didn't fix the leak and now he's living in a flood plain. That's why just as important as your looking after the building's shareholder flock is the building protecting you.

Check out the bylaws to be sure the co-op or condo will indemnify any board member who by reason of carrying out his or her responsibilities is named a party to an action. Remember that indemnification is like the morning-after pill; it only affords after-the-fact relief. Before it kicks in you might have to foot the substantial bill yourself. Better would be a requirement that your building pays upfront -- and if that's not what the bylaws say you should consider amending them once you're on board.

Does the building have adequate Directors and Officers' liability insurance? Ideally, the policy should pay both for the cost of counsel to defend you in any covered action and indemnify you for any judgment. Most policies have liability limits of $1 million a year, which sounds like a lot, but with today's runaway verdicts isn't that much, though you should still be OK, provided beyond this limit your building's umbrella policy takes over. And directors should be covered individually and collectively, as one board discovered after a shareholder sued over a sublet dispute only to find that it wasn't entitled to defense or indemnification because the policy limited recovery to claims against individual directors (85-10 34th Ave Apartment Corp. v. Nationwide Mutual Insurance Co., 283 A.D.2d 604 (2d Dept. 2001)).

Do Your D&O Diligence

Even the most comprehensive bylaws and D&O policy can't provide absolute protection because you're on your own in certain circumstances. If you do something really bad (what the law calls "egregious")--like waiting for years to fix a leak--you can get socked with so-called punitive damages, a form of monetary punishment in an amount that really hurts. By far the most painful punitive damage sting was felt by the president of a Beekman Place co-op whose board, at his insistence, rejected the sublet application of a financially-capable couple on racial grounds. Not only did the court award punitive damages against him that ultimately totaled $125,000, but it made him pay out of his own pocket (Biondi v. Beekman Place Hill House Apartment Corp., 257 A.D.2d 76 (1st Dept. 1999), aff'd, 94 N.Y.2d 659 (2000)). Thanks to this Mr. President, the law is clear that neither the building, nor its insurance, can pick up the punitive damage tab against the director of a co-op or condo, something you should keep in mind if you ever consider putting off the problems of difficult shareholders.

As a board member you could also find yourself a convicted criminal. That's what almost happened when a Brooklyn co-op and three of its directors were charged with violating the City's Health Code after a child fell to his death from a window with faulty guards (People v. Premier House, Inc., 174 Misc.2d 163 (Crim. Ct. Kings Co. 1997)). Although the case was settled without criminal liability the decision still stands, allowing for the future possibility that as a co-op or condo director you could be held criminally responsible for violating one of the many laws applicable to building maintenance, even if you didn't know the law had been broken. And insurance wouldn't indemnify you for any resultant fines or penalties, nor is it certain that the D&O policy would kick in to provide defense coverage. Ultimately, you are your own best insurance policy. Keep in mind those fiduciary duties, don't do anything you'll regret, and odds are you won't find yourself out on a financial or criminal limb.

On top of everything, you'd better have a thick skin if you want to be a board member because shareholders can say what they like (or dislike) about your performance with impunity. You'll be happy to know that the law gives them what's called a "common interest privilege" to speak their minds about what's going on in the building (See, e.g., Pusch v. Pullman, NYLJ, Nov. 5, 2003, p.18, col. 1 (Sup. Ct. N.Y. Co.)). Even if they've defamed you, there's nothing you can do about it unless they acted with malice, which is practically impossible to prove, so if you can't take the heat stay out of the kitchen.

Now that you know what you're getting into, the real question is: Are you up to the challenge? Only you know for sure.

Sylvia Shapiro is an attorney specializing in real estate law, a Manhattan board president and the author of The New York Co-op Bible.

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2 Comments

  • Are the actual shareholders and the managing agents allowed to read the votes at an annual election. These ballots have the shareholders name and number of shares?
  • when are new canidate allow to get proxies to canvas there shareholders for there vote is 30 days pryer to the annual meeting or 10 days 20daywhat is the legal law