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Formal procedures matter – just try and win a lawsuit if you haven’t followed them.
AUTHORPhyllis H. Weisberg
Just because your board is made up of a group of neighbors doesn’t mean that you can ignore corporate formalities with no penalties.
Montgomery McCracken Walker & Rhoads, Partner
Phyllis H. Weisberg
The client’s tale. A condominium board had instituted litigation against the sponsor. The sponsor moved to dismiss, claiming that the board did not have the authority to act. The court, in analyzing the facts, found that the board had clear statutory authority to institute litigation, but held that because the board had not adhered to the proper procedure – it had not called a meeting to authorize the litigation – it did not have the authority to file suit. As a result, the suit was dismissed.
The lawyer’s take. In some buildings we have represented, the board consists of two factions. This often happens when the board is controlled by tenant-shareholders or unit-owners, and the sponsor or holder of unsold shares has a minority of the seats. In those situations, the majority has acted without a formal meeting without notice to all board members. In some buildings, the resident board members view themselves as the “resident board” – even though no such entity exists – and see no need to include the sponsor in discussions. They reason that a meeting including sponsor board members is a mere formality, since the outcome of the vote on many issues is known in advance.
This recent case proves that process matters and that even the best-intentioned board may be tripped up by a failure to follow the process outlined in the law and the governing documents (a condo’s bylaws and declaration or co-op’s bylaws and proprietary lease). In general, and without unanimous written consent of all board members, all board action must occur in the context of a meeting that is properly called and where action is by a formal vote. Otherwise, the board’s actions may be invalidated. If that happens, as in this case, board members could be responsible for any damages that result. And while an executive committee can take action between meetings, if the committee is used routinely as an excuse not to hold meetings, then its actions, too, can be invalidated with the same potential result.
These concerns are not the only reason to adhere to corporate formalities. Observing proper procedure ensures that the decisions of the board will be viewed as legitimate and therefore more likely to be accepted, even if the decision is unpopular.
Case closed. Many boards believe that since their buildings are made up of groups of neighbors, they can act informally. As a result, they do not see a need to abide by corporate formalities. To ignore these formalities is to court danger.