In 1854, Abraham Lincoln, then just a country lawyer, said it simply but correctly: “Discourage litigation.” What was true then is equally true now. We live in an extremely litigious society in which litigation or the threat of it has replaced cooperation, compromise, and conciliation as the basis for everyday dispute resolutions. Although litigation is sometimes necessary, it is something that should be avoided because it is expensive and time-consuming, and the result is rarely satisfactory. Of course, if you are sued, it is difficult to avoid litigation, although there are ways to make it a less desirable alternative for potential plaintiffs. What are the actions boards can take or avoid that will reduce the likelihood of being be sued? Note to boards that might want to litigate over issues of principal: it’s usually not a good idea. Start litigation only in cases where you are trying to collect maintenance, common charges, or assessments (and then only when every other recourse has failed) or where the defendant is a resident who is disturbing the neighbors.
However, even in those circumstances, there are less expensive and more efficient methods of coping. The problem with starting litigation is that, once begun, it frequently takes on a life of its own (anyone remember the famous, albeit fictional, 20-year case Jarndyce vs Jarndyce in Charles Dickens’s Bleak House?). Moreover, suing a shareholder or unit-owner can and will result in the defendant raising as a defense anything that he or she thinks was done improperly. Therefore, boards should litigate only when no other option is available.
For years, I have attempted to have cooperatives and condominiums adopt binding arbitration as a method of alternative dispute resolution. If the proposal is defeated, it is usually because the shareholders or unit-owners believe that they are being deprived of their right to litigate with the board when, in fact, it provides an inexpensive and expeditious method of resolving disputes. The board, of course, retains its right to litigate nonpayment and quality-of-life issues, but arbitration provides an effective mechanism for dealing with disputes between neighbors.
For many years, the boards I represent were constantly threatened with lawsuits by irate purchasers or residents or were sued over issues that were entirely within the boards’ discretion; however, the fear of litigation or the cost of litigation caused the board to act in a way that might not have been in the best interests of the shareholders and unit-owners. Not surprisingly, the plaintiffs in these actions were often lawyers who could bring the action at no cost to themselves but at great cost to the shareholders or unit-owners. As a solution, I devised the “Liability for Litigation Costs” amendment to the cooperatives’ or condominiums’ bylaws. The idea behind the provision was to deal with frivolous lawsuits by making the plaintiff pay the cooperative’s or condominium’s costs if it were determined that the action was not brought in good faith. Here is the text of the provision:
“If any Shareholder, subtenant, purchaser or an applicant to purchase or sublease an apartment, institutes any action or proceeding against the Corporation, its officers, directors, agents or employees, relating to the Proprietary Lease, the By-Laws, the House Rules or the affairs of the Corporation and if there is an adverse determination by the court against the Shareholder, subtenant, purchaser or applicant or the action or proceeding is dismissed, then on a determination by the court that such action or proceeding was not brought in good faith, (a) such Shareholder, subtenant, purchaser or applicant shall reimburse the Corporation for the attorneys’ fees and disbursements incurred by the Corporation in such action or proceeding or in the enforcement of this provision, and (b) the Corporation shall have the right to collect the same as an assessment against the Shareholder or rent against the subtenant.
“By applying to purchase or sublease an apartment, an applicant agrees to be bound by this provision. The effective date of this provision is the date that it is approved by two-thirds of the Shareholders and all actions and proceedings brought or new causes of action alleged in then existing actions or proceedings subsequent to such date shall be expressly subject to this provision.”
The purpose of the provision is to level the playing field by making anyone who brings a frivolous lawsuit against the board pay the board’s expenses if it is determined that the action was not brought in good faith. This provision can be used against purchasers, tenants, subtenants, shareholders, unit-owners, or others who decide to litigate. Without such a provision, there is nothing in the typical set of bylaws or proprietary lease allowing the cooperative or condominium to be reimbursed for legal fees.
What about nonpaying shareholders or unit-owners? Is there anything the board can do to get paid without risking the vagaries of litigation, especially the frequently arbitrary results in landlord-tenant court, where the courts’ actions sometimes give the impression that cooperative shareholders and condominium unit-owners are rent-stabilized or rent-controlled tenants rather than being “landlords.” The courts fail to recognize that when a shareholder or unit-owner fails to pay his or her maintenance or common charges, it is not some wealthy absentee landlord that is hurt but the other residents of the building. For years, we have argued for an expeditious way of dealing with these cases, but presently there is none. Accordingly, before bringing an action, the board should consider the following alternatives:
(1) Notify the resident’s lender.
(2) Cut services to the nonpaying unit-owner (you cannot eliminate his or her electricity, but you can prevent him or her from using the gym or garage or having deliveries made to their apartment unless the resident files for bankruptcy protection).
(3) Amend the proprietary lease to increase the late fees and default interest and legal-fee reimbursement to a significantly higher amount (those who look at their bylaws or lease and see no provision for late fees or legal-fee reimbursement, will be unhappy to know that they will not be able to collect any of their costs, and if the lease provides for interest at the “highest rate permitted by law,” that is interpreted to mean only nine percent per annum).
(4) Refuse to review a sale, sublease, alteration, or financing package until all fees are paid.
(5) Announce that henceforth any one who is more than two months in arrears will have this or her name published in the cooperative or condominium’s newsletter. If this is to be done, please make certain that the information is correct and is not distributed to anyone but shareholders or unit-owners.
Shareholders or unit-owners who create difficulties for their neighbors by making noise or disruptions or by destroying property can be dealt with by sending them an “Objectionable Conduct Notice,” providing notice that if there is a repetition of the objectionable behavior, they can and will have the lease to their apartment terminated. This can also be done in condominiums if the unit-owners vote to amend their bylaws to provide the board with the requisite authority.
Although some of these suggestions may seem draconian, they can save the board and therefore the owners hundreds of thousands of dollars in legal fees. As a lawyer, I’d be pleased to lose that kind of work.