Legal Lessons: Admissions
Choosing an attorney for your building requires a series of steps. First is taking the task at hand and figuring out what legal skills are required to solve your problem. Then comes the hunt, often through word of mouth, for the lawyer possessing those skills. In the past, many boards have used Habitat’s annual attorney survey to identify potential firms and lawyers. This year, to make that resource more valuable, we have increased the scope of what we asked participating lawyers to provide. Besides the basics (fees, size, areas served, etc.), we asked them to write about typical issues or cases they have encountered and then to offer advice and comment. In doing this, we hoped to capture each lawyer’s unique thinking and tone. And we took some additional steps, too, visiting every attorney’s office and taking photos of him or her so you could see who was telling the legal tale. Digesting the advice and legal cautions will take some time, but for board directors who monitor the legal lines, it’s a good investment.
Rejecting the Right Way
Hankin & Mazel
ISSUE What are the “do’s” and “don’ts” when a board decides to reject a prospective shareholder?
BACKSTORY A cooperative board of directors recently consulted with my firm regarding a prospective shareholder application. The applicant had many positive features including: strong income; good recommendations; strong job history. Despite these credentials, there were some glaring problems. First, there was the issue of occupancy. It seemed that the applicant was buying this apartment for a college-aged sibling and it did not appear that the applicant would be living in the unit. The applicant owned another cooperative apartment in another part of the New York City and the move did not make sense to the board.
The bigger issue was that the applicant claimed to own several rental properties, yet on the tax return submitted with the application, no income was indicated from these properties – even though the application indicated that these properties provided substantial income.
The board members were extremely uneasy about this issue. To make matters worse, two of the board members were in the accounting profession and were worried about their professional ethical obligations.
The board decided to reject. At this point, the applicant had not even been interviewed. They were extremely hesitant because they had heard through the broker that the applicant had some sort of disability but were not actually aware of any. To be certain it was acting properly, the board contacted our firm at the point it was about to send a letter of rejection.
A letter was eventually sent, without any explanation for the rejection. The applicant’s attorney did send a letter to the board accusing it of unlawful discrimination based on the applicant’s disability. Our firm interceded and was able to convince the applicant’s attorney to drop any claim. During our discussions with the applicant’s attorney, no reason for the rejection was ever disclosed.
COMMENT Even though no lawsuit or claim ensued, many valuable lessons can be drawn from the situation described above. First of all, this board did many things right. It reviewed the prospective application carefully and fairly. This applicant looked like a shoo-in from the outset. Despite some excellent credentials, the board members found a significant discrepancy between the applicant’s tax returns and the income that was submitted on the board application. This could mean one of two things: the applicant was exaggerating income on the board application so as to secure admission to the cooperative; or the applicant was submitting tax returns with incomplete information. The board in this situation did its due diligence and was within its rights to reject.
The board also acted properly in understanding that rejection of any prospective shareholder exposes it to potential liability. Any time a board rejects an applicant, it may be subject to a human rights complaint for discrimination. By getting an attorney involved early in the process, the board can receive counsel throughout and may avoid or minimize a potentially devastating lawsuit. In this instance, the board’s attorney did all the negotiating and wrote any necessary correspondence, all with an eye to try to avoid or minimize a discrimination claim.
The board did not do everything correctly. Perhaps the biggest problem was on this issue. In these modern times, e-mail is the preferred method of communication. In the event a claim is made by the prospective shareholder, the e-mails may be the subject of a subpoena. What a board member may have thought were private communications may become evidence in a legal proceeding. So, the lesson to be learned is that when dealing with shareholder applications, boards should communicate the old-fashioned way: talk to each other.
—Geoffrey R. Mazel
Two for One
Schechter & Brucker
ISSUE Must a co-op board permit a financially qualified existing shareholder to buy an additional apartment in the building?
BACKSTORY The board contacted our office about a problem. A married couple who lived with their children in an apartment on the first floor were treating the lobby as though it were part of their unit. The wife would frequently walk through the lobby in her bathrobe and slippers. They permitted the children to play in the lobby, often running around and making a lot of noise. On several occasions, the wife changed the baby’s diapers in the lobby, using the recently recovered couch as her changing table and also nursed the baby in the lobby. Others had complained.
After staff and management’s requests to stop this behavior produced no improvement, we wrote several letters to the shareholders advising them that they were using the lobby improperly and directing that they stop. The letters provoked apologies and the behavior would improve for a time, but it would then fall back into the old pattern. The children were climbing on the lobby furniture, playing with a ball in the lobby, and more diapers were changed on a lobby table. We were reluctant to recommend a lawsuit against the shareholders because the conduct was intermittent, and while annoying might not rise to the level that a court would prohibit it – and the board did not want to incur the expense unless there was a high likelihood of winning.
After a few years had passed, the shareholders approached the board for approval to purchase the apartment next to theirs and enlarge their living space by combining the two apartments. There was no question that the shareholders had the financial wherewithal to purchase and carry the second apartment. The board asked us for advice.
We reviewed the proprietary lease and determined that the requirement for board consent applied both to the purchase of the neighboring apartment and the apartment combination and there was no provision under which an existing shareholder was entitled to special consideration. The board had the absolute right to turn down the proposed sale. We advised the board to reject the sale, arguing to the board that if the shareholders needed more space and couldn’t get it in their current apartment, there was a good chance they would move out, exactly the result that the board wanted to accomplish.
Despite our advice, the board decided to approve the sale. When pressed, the directors explained that these were their neighbors, that they were financially qualified, and that they had promised to follow the rules in the future. They also did not want to appear arbitrary to the rest of the building. The shareholders purchased the neighboring apartment and performed the alteration.
Needless to say, the additional space did not stop their offensive conduct. They had another baby shortly after the alteration was completed and shortly thereafter resumed their use of the lobby as though it were part of the new, larger apartment.
COMMENT This is only one example of a board that missed the opportunity to solve an annoying problem by exercising its full legal rights. It is important for boards to approach their function from a business-like perspective. While we frequently find ourselves counseling boards to avoid arbitrary action, even when that might be legally permitted, failing to use the board’s legal rights to resolve issues that have otherwise proved intractable is simply bad business. Boards are given discretion over many decisions that affect the other shareholders. Part of agreeing to serve on the board is accepting the responsibility that comes with that authority. Boards should not be afraid to use their discretion when the best interests of the building will be promoted, even if the decision may seem unpopular or unusual.