New York's Cooperative and Condominium Community

Habitat Magazine Insider Guide

HABITAT

ARCHIVE ARTICLE

Arthur I. Weinstein, Law Office of Arthur I. Weinstein

Arthur I. Weinstein, Principal

Arthur I. Weinstein

 

 

The client’s tale. Blatant theft by a managing agent – it’s upsetting, but each time it happens, we are presented with a different set of facts and a different methodology of the theft. A co-op, which I’ll call “Luxury Estates,” retained me after its previous counsel retired. A multimillion-dollar building façade project was underway and soon there were questions about the quality of a subcontractor’s performance.

The managing agent routinely learned of Luxury Estates’s concerns about the subcontractor. A check on the website of the New York secretary of state showed that there was no corporate record for the poorly performing subcontractor.

With this hint of trouble, a broader internet search was made. The subcontractor turned up as a corporation incorporated in another state. The name of the incorporator listed in that state’s documents was Luxury Estates’s site agent! The contractor who hired the subcontractor acknowledged that it had been recommended by the site agent.

The board contacted the agent to make inquiries, and soon after that, he disappeared; cell phone, home phone, and e-mails were not answered. Immediate actions were taken to conduct a full examination of Luxury Estates’s records: as the co-op’s attorney, I notified the co-op’s insurance carrier of the situation, assisted the co-op in hiring a forensic accountant to analyze the co-op’s financial records to find and evaluate any other losses, and put the management company on notice that the co-op would hold it responsible for all losses and related costs.

The investigation eventually disclosed a variety of six-figure co-op payments to the subcontractor owned by the site agent as well as contracts and purchase orders that could not be tied to proper vendors of services and materials actually received by Luxury Estates.

 

The lawyer’s take. Fortunately, the management company immediately agreed to cover all losses incurred by Luxury Estates because of the site agent. Luxury Estates’s legal fees relating to the thefts and the cost of the forensic accountant were reimbursed, even though those costs may not be included in the theft insurance maintained by the co-op. Even if some of the losses were covered by the building’s insurance, there may be a deductible of thousands of dollars for which the co-op would not be reimbursed. Trusting co-ops should note that many management companies refuse to include an indemnification provision in their contracts. Those provisions would obligate the company to reimburse the co-op for all losses, including incidental or “consequential” costs, incurred by the co-op as a result of thefts by an employee of the managing agent. The incidental losses would include insurance deductibles. Some management companies refuse to have their management agreements include provisions requiring that their co-op or condo clients be included as “additional insured parties” on the various insurance policies maintained by the management company.

Co-ops and condos should not hire a management company until all of the terms of the management agreement are reviewed and negotiated by the building’s attorney and understood and accepted by the co-op or condo board. As part of the negotiations, the building should receive evidence that the prospective site agent’s credentials have been fully vetted by the management company.

There is no substitute for an effective co-op or condo treasurer and board insisting on receiving detailed monthly operating reports from management requiring that the reports contain information about everything paid and refusing to accept at face value any of the information included in the report. One treasurer described the practice as “periodically counting the quantity of garbage bags actually delivered to the building.”

Another learned lesson: all co-op and condo contracts for goods and services over some specified amount should be reviewed by the building’s attorney; and part of that review should be a review of the “bona fides” of the contracting party.

 

Case closed. An old radio storyteller’s line is apt in this story: “In God we trust, all others pay cash.” Many co-ops and condos place enormous trust in their management companies and site agents and accept, without real review, reports of the expenditures of co-op funds and a wide variety of financial recommendations. Making matters worse, many buildings have neither made provisions nor instituted routine defensive procedures and practices to protect themselves from possible significant losses from miscreants.

 

Subscriber Login


Ask the Experts

learn more

Learn all the basics of NYC co-op and condo management, with straight talk from heavy hitters in the field of co-op or condo apartments

Professionals in some of the key fields of co-op and condo board governance and building management answer common questions in their areas of expertise

Source Guide

see the guide

Looking for a vendor?