Himmelfarb & Sher, Partner
Ronald A. Sher
The client’s tale. The chairwoman of the admissions committee advised the board of directors that the application to purchase was denied without an interview since the prospective purchasers were not financially qualified. She noted that the amount of the loan was 90 percent loan-to-value (LTV) ratio (which was permitted under the resale guidelines), although all other purchasers were currently obtaining loans of 80 percent LTV. The chairwoman, also a member of the board of directors, was adamant in her objection and refused to even entertain any suggestions by the other committee members, who were in favor of approving the applicant – under the condition of a substantial maintenance escrow and/or financial guarantee – and scheduling the interview. The seller’s attorney subsequently contacted our office and reported that the chairwoman allegedly called the seller to say that their application was rejected. She then attempted to purchase the apartment for her daughter at a similar price (and without broker fees).
We advised the president of the corporation of the allegation and recommended a special meeting of the board of directors to review both the purchase application and the allegation of impropriety. During the special meeting, the chairwoman strenuously opposed the recommendations of the other admissions committee members. The president confronted her with the allegation of impropriety. She acknowledged it but steadfastly denied any wrongdoing, insisting that she and her daughter were stronger financial candidates for the corporation since the purchase would be in cash. The board disagreed with these misguided assertions and approved the purchaser’s application (contingent on a maintenance escrow). It also unanimously removed the chairwoman from the admissions committee and demanded her resignation from the board.
The lawyer’s take. The board did the right thing. The chairwoman’s misconduct constituted a material breach of her fiduciary duties and exposed the corporation to liability for “impermissible self-dealing and tortious interference with contractual rights” (i.e., she was illegally putting her needs ahead of the building’s rules and the law).
The criteria for the selection of prospective purchasers should be determined on a case-by-case basis, following the provisions of the proprietary lease and bylaws as well as the resale guidelines. All applicants must have favorable financial documentation. The board must act in a proper, lawful, nondiscriminatory manner in compliance with the human rights law and Fair Housing Act. Finally, the committee should submit its recommendations to the board for any proposed rejection or denial of a sale or sublet. This will provide an opportunity for the board to review the process behind the committee’s recommendation.
Case closed. The board may be the captain of the co-op ship, but the admissions committee is the first mate and charts the course, trims the sails, and steers the rudder. And hopefully, it doesn’t cause a shipwreck or have the directors walk the plank.