Board Recall

Anger, division, raw politics: living in harmony turns into a living hell as buildings face a record number of special sessions. What can you do?

The auditorium looks like it can seat about 300 people – and it’s a good thing, too. For the place is slowly filling up with a decidedly mixed bag of participants: men and women, young and old, professionals still in their business suits, others in tattered blue jeans side by side with those elegantly dressed. There are whites and blacks, Asians and Hispanics – it is an American melting pot, with people as diverse in appearance as they are united in their emotions. And that emotion is clear cut.

They are angry.

“What happened to our $21,000? Give it back to us!” yells a man into a microphone set up in one of the aisles. Another speaker, an elderly woman, whispers into her microphone: “We trusted you. How can we ever trust you again?”

Others, most notably those wearing pink buttons displaying the phrase “Vote No,” pointedly boo and hiss at such comments. In response, a blonde woman, her body shaking with suppressed emotion, reads from a prepared statement: “I think what the three of them did is wrong. I am one of the people who called for this meeting because I don’t think we should put our heads in the sand. We cannot trust them.”

It has the appearance of a trial and even has a mystery at the center (did three board members improperly spend $21,000 of the co-op’s money on an attorney without the full board’s knowledge?) – but no one is presenting witnesses or introducing evidence. The stormy session is a show trial, a board recall meeting at a large Manhattan cooperative complex on the Upper West Side at which three directors offer a defense of their actions and the shareholders vote. But opinions seem to have been formed before the meeting. In fact, many votes have already been cast by the time the first speeches have been given. (For more on this particular recall meeting, see “From the Editor” in this issue on p. 53.)

The recall meeting – officially, the special session to remove select board members – is an event that was once a rarity but is now becoming increasingly commonplace among cooperatives and condominiums in New York City. “I’ve been involved in four of them in the last six weeks,” reports attorney Stuart Saft, a partner at Dewey LeBoeuf. “In each of the instances, we’ve been called in by the dissidents to provide some advice to them on how to proceed.”

Why so many special meetings concerning recalls? And why now? Once upon a time, most special meetings were called not for removing board members but to obtain information. Since members generally serve only one-year terms, dissatisfied shareholders would typically wait for the annual election rather than stage a session to remove them. But this is not a typical time. Increased fears about the economy have led to increased anger at boards that are seemingly “mismanaging” building assets, whether they are raising maintenance to new highs, imposing restrictive resale policies, prepaying a penalty so the building can refinance its underlying mortgage, self-dealing, acting “imperiously,” or doing just about anything that rubs enough owners the wrong way. And the board is an easy target.

Perhaps more important than the “big why?” is the “big what?” What should a board do if a petition to call a meeting for a recall is circulated and successfully signed? Taking the right steps may mean the difference between living in harmony and burning in a kind of hell.

The Recall Procedure

Most co-op and condo bylaws follow the state business corporation law, which gives shareholders or unit-owners the option to call a special meeting. Although the specifics vary from organization to organization, most corporations require that at least 25 percent of the owners request the special meeting and that the purpose be clearly stated in the petition and in the subsequent notice of the gathering.

Once that has been submitted, the secretary of the board has between 10 and 40 days to schedule the special session. To get a valid outcome, petitions must require a vote and that, too, must be specified in the announcement. Decisions made outside of the defined issues are not valid. “It must be specifically phrased, and you must have a quorum,” says attorney Bruce Cholst, a partner in Rosen, Livingston & Cholst.

Once a special meeting has been successfully petitioned, there is a great deal that board members can do to guide the outcome. The board can bring in experts to explain issues, but if the petition is properly prepared and signed by the requisite number of residents, it cannot refuse to call a special meeting.

A Brooklyn board tried to do just that when a quartet of shareholders wanted to remove four of the seven board directors. “They came to me and wanted to know how they could remove the members,” recalls attorney Mark Hankin, a partner in Hankin & Mazel. “I told them they needed to call a special election.”

To do that, the group gathered signatures from at least 25 percent of the shareholders, and Hankin then presented the petition for a special meeting to the attorney for the co-op. He was rebuffed. The attorney said, “We’re not going to call a meeting.” Hankin took them to court. After a skirmish before a judge, the dissidents won, and the special meeting was called.

But the board in that cooperative ended up prevailing. Hankin recalls that the board, undaunted by the defeat, campaigned for re-election and gathered proxies in its favor. The dissidents, however, felt that forcing the special meeting was enough and didn’t campaign more or review the voting procedures. The co-op employed cumulative voting and, under that procedure, the dissidents had only enough votes to remove one of the three targeted members. The lesson for boards: when you’re challenged, line up the votes.

But there’s another lesson in the story of this Brooklyn board. Flush with its success in beating back the dissidents, the board eventually filled an empty seat with a controversial appointment: the director who had been removed at the special meeting. Besides showing a streak of arrogance, this action defied the wishes of a significant number of residents, essentially saying to them, “Tough luck, losers!” Indeed: such actions could start another removal petition against other members of the board. And if there was anger before, there would be even more anger the second time around. You are only fanning the flames.

In fact, a board can get carried away with its power and sometimes crush a revolt through technicalities. For instance, since owners – not subtenants or relatives – must sign petitions for special meetings, you can reject a petition on that basis. The names on the petition would then be checked against the number of shares they represent. Some bylaws require that a majority of shares be represented by the names on the petition. But there is a potential price to pay if you play rough. Eventually, the shareholders are going to fulfill the requirements, and they will probably be angry about your obstructionism when they finally confront you.

You can also use the “special meeting” provision to remove members – indirectly – from your ranks. Although only shareholders/unit-owners are allowed to vote out members, boards have been known to urge surrogates to create a petition and gather signatures, “forcing” a special session at which a case is presented for removal. Again, be careful: this may backfire and the meeting may return the targeted people to office and even eliminate someone else who is on your side. After the meeting, you’ll also probably have a difficult time trying to work with someone you wanted to kick out.

Preemptive Strike

The best way to deal with recall petitions is to avoid them altogether. That means that boards should be proactive, staying aware (and dealing with) any controversial (or potentially controversial) decisions, and keeping the residents informed through newsletters, memos, and even special meetings. By calling special meetings on their own, boards can define the agenda (excluding a vote, for instance) and give the residents an opportunity to state their opposition or support.

“I think such efforts go a long way towards diffusing any long-standing resentment against decisions the board makes,” Cholst says. “The residents may not thoroughly embrace the rationale, but most will perceive that there is a rationale and that the decision is not a product of whimsy. People appreciate straight talk.”

Once opposition has crystallized, the board can send out leaflets, newsletters, or go door-to-door and explain why removal is unwarranted. But make sure that such efforts don’t get out of hand. At the large Manhattan complex where three board members were up for a recall vote, information – in the form of fliers and e-mails – was distributed by both sides, leading many residents to complain at the session about how divisive the issue had become. “It has gotten excessive,” complained one shareholder at the meeting. “We got 20 fliers under our door in just one week,” a long-time shareholder said. “It seems like a lot of money and energy has been expended on this, on the lawyers, and on the meeting space. In a time of belt-tightening, is this the best way to spend our money?”

Such sentiments were also expressed at the gathering. Many complained about the cost: three of the co-op’s lawyers were present – who could, by some estimates, average from $500 to $750 an hour each at a meeting that ran upwards of three hours. And the rental of the hall, estimated some residents, could run anywhere from $1,500 to $2,000 – although the board wouldn’t release any figures (one shareholder claimed it was $1,500, which she added, “was quite reasonable”).

Many residents questioned the wisdom of calling such a meeting. “Shame on you,” one man at the microphone said, addressing the current president, who was not at the podium but who was in the audience. “I see that all these board votes were 6-5 to proceed on this recall. It was not an overwhelming majority. Mr. President, you brought this on. You let it be made public rather than deal with it internally. You helped create all this divisiveness. Shame on you.”

“I have lived here since the building became a cooperative. I was one of the people who handled the conversion. I served as board president,” said a white-haired senior. “I think this whole gathering is ridiculous. We are spending all this money. And for what? The board should have dealt with this internally. You are behaving like children. I don’t trust any of you anymore.”

Scoldings, argument, division, hostility. Before it gets to that point, you owe it to your residents to stage a preemptive strike. Saft notes that he does that with all his boards, trying to anticipate problem areas and keeping minor complaints from ballooning into major problems. “As soon as it becomes apparent that there is unhappiness with the board, I meet with the board and discuss options they can take and look at the kind of decisions they’re making and whether there is some justification for the unhappiness of the shareholders,” says the attorney. “If that doesn’t work and, ultimately, the election is held, we try to reasonably explain the actions that have been taken. Using that approach, I haven’t seen one recall where the board wasn’t re-elected.”