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Alan Goldberg talks about an intriguing case his firm recently handled.
When an illegal Jacuzzi is installed, who’s on the hook?
Alan Goldberg, Special Counsel
When asked about his title, attorney Alan Goldberg sounds a bit like a film noir character: “They call me the Special Counsel,” he says simply. With more than 36 years of experience, Goldberg hangs his hat at Rosen, Livingston & Cholst, where he handled the Hermitage at Napeague Ltd. v. Robert M. Hirsh, a case his firm won in December 2015.
Let’s talk about the Hermitage-Hirsh case, which involved the 56-unit Hermitage at Napeague, a seasonal co-op in Amagansett that’s mostly open during the spring and summer.
Briefly, a shareholder at the co-op started performing apartment renovations without telling the board. He was discovered by the manager, who said, “You’re supposed to submit an alteration application. The board has to give consent.” He then gave an application but didn’t mention that he had already installed a Jacuzzi. The board then had to decide what to do. They had not had a Jacuzzi in any apartment, and they had various concerns, including that the vibrations from it might cause leaks, structural damage to the building, and excessive noise. They later had an architect inspect the Jacuzzi. They approved the [other] renovations, but then passed a house rule banning Jacuzzis in apartments.
Was it an old building?
I don’t know the year, but it was fairly old, and the type of wood is not the kind that can withstand heavy shaking.
What is the board like?
They are always curious. In this case, they had various opinions about the situation, and sometimes those opinions had nothing to do with this shareholder. This wasn’t a personal thing. They said to me: “We are truly concerned. We don’t know what a Jacuzzi would do.” They were willing to listen.
They had hoped that maybe it could be resolved amicably. It turned out that wasn’t the case, but they tried. Not only would a resolution save money, it would save time and a lot of annoyance and anger. The board met with Hirsh, the shareholder with the Jacuzzi, a few times to try to resolve the issues [without a lawsuit], but he refused to remove the Jacuzzi. Litigation’s not pleasant for anyone. But the board had no choice.
How long did the case take?
We worked on it about two years. It’s not because this case is so much more complex than any other case, it’s just the nature of Supreme Court actions.
Tell me about your strategy in the lawsuit.
We based much of our argument on a few points. First, this shareholder, who was also a board member, should have known better. He must have known that he was breaching his fiduciary duty in installing the Jacuzzi without consent. Then, he refused to remove the Jacuzzi when the board asked. We said to the court that this whole case revolves around the reasonableness standard, not the Business Judgment Rule, because the lease stated that the board could not unreasonably withhold consent to any apartment alteration. We argued that the reasonableness standard has nothing to do with whether the Jacuzzi would, in fact, damage the building or be harmful in any way. It went to the frame of mind of the board. An architect from RAND inspected the Jacuzzi and issued a report, and he concluded that, yes indeed, the Jacuzzi could, through its shaking, possibly cause structural damage to the building, and could also cause flooding, and excessive noise.
What did the shareholder say in response?
He brought counterclaims not only against the co-op, but against all of the individual board members, the managing agent, and even against the architect and his architectural/engineering firm. His arguments were that the board members had breached their fiduciary duties, and that they knew the Jacuzzi was safe, and that they had actually approved the Jacuzzi. The reason he claimed that they approved it is that when they voted, instead of just saying yes or no, some of them expressed concerns. They were just expressing their opinions. He belittled their concerns. He also alleged “abuse of process,” claiming that the lawsuit was brought in bad faith and that the board never should have brought the lawsuit.
The court apparently disagreed.
The court found that the board had not acted unreasonably. The installation of the Jacuzzi violated the bylaws, the proprietary lease, and the house rules. The court directed the shareholder to remove the tub. It dismissed all of his counterclaims and scheduled a hearing on the co-op’s legal fees and damages for breach of fiduciary duty.
What can other boards learn from this case?
You have to look ahead. Whether it’s possible litigation, or whether it’s physical damage, you have to have some kind of procedure for when people want to renovate their apartments. Bottom line, people don’t always use common sense. They may violate the building code without realizing it. They may get a shoddy plumber or electrician, and they could potentially cause fires, leaks, and other problems. The board needs to know what’s going on and needs to investigate the proposed renovations because, otherwise, it could be very harmful to the co-op and the people in it.
If it did cause damage, the board would be paying the price later. Shareholders would be screaming at them and possibly suing them. You make a situation worse by doing nothing. Also it might even breach their fiduciary duty. The whole idea is people elect these folks to the board so that they will exercise a fiduciary duty to look out not for their own interests but for the interests of all the shareholders, of the whole co-op. That’s the bottom line.
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