Board power is a tricky thing. To someone on the outside, it could seem like most problems in co-ops and condos are the result of abuses of power. But boards are granted power for a reason, and it’s to be expected that most good boards would want to do their jobs in the simplest way with the fewest interruptions. This was not always the case. In 1990, a man named Ronald Levandusky wanted to remodel his kitchen at One Fifth Avenue. In the process, he changed the position of a two-inch steam pipe, which led to his neighbors objecting and the board issuing a stop-work order on the grounds that he had violated the building’s renovation guidelines. (Ironically, Levandusky was on the board when those same guidelines were written.) Levandusky suedto get the order lifted, but eventually lost.
What started out as a simple disagreement between a shareholder and the board, though, rippled in a way few decisions do. As Habitat wrote in 2007: “The New York Court of Appeals ruled unanimously that co-op and condo boards could not be second-guessed – and dragged into court – by shareholders and tenants who believed that their board had failed to act ‘reasonably’ in a dispute. From then on, the court ruled, the burden shifted to the shareholders and unit-owners to prove that the board had breached its fiduciary duties.”
Grateful board members owe their thanks to the brilliant writing of the late Court of Appeals Chief Judge Judith Kaye, who established the threshold issue for courts to permit lawsuits against boards in Levandusky v. One Fifth Avenue Apartment Corp. This suit was especially important because of how it explained the foundation of – and need for – the general powers of a board. The court noted that the residents in a co-op or condo give their consent to be governed by the decisions of a board. Like the leaders of a municipal government, the board is responsible for running the day-to-day affairs of the building. To that end, boards have broad powers in areas that range from financial decision-making to promulgating regulations regarding pets and parking spaces. As with any authority to govern, the broad powers of a board hold the potential for abuse.
The stability a board offers, though, has its own economic and social benefits, and the purchase of an apartment represents a voluntary choice to cede certain privileges of single ownership to a governing body. The board, in return, takes on the burden of managing the property for the benefit of all residents. “Allowing an owner who is simply dissatisfied with a particular board action a second opportunity to reopen the matter before a court, which – generally without knowing the property – may or may not agree with the reasonableness of the board’s determination, threatens the stability of the common living arrangement,” wrote the court. “Moreover, the prospect that each board decision may be subjected to full judicial review hampers the effectiveness of the board’s managing authority. The Business Judgment Rule protects the board’s business decisions and managerial authority from indiscriminate attack.”
The Court of Appeals has held that unless there is a showing of bad faith, self-dealing, or discrimination, the courts will not even consider a lawsuit against the board or its members. Therefore, the board can vote to enter into a contract, order windows, or paint the building purple, but unless there is a showing that the board acted in bad faith, self-dealt, or discriminated, there is no basis to sue.
In the almost 30 years since the court of appeals decided Levandusky, decisions against boards have been rare. And those usually involved extreme situations where the board was clearly acting beyond the scope of its authority, or in bad faith, or was discriminating. Generally speaking, board members are not evil overlords looking to abuse their power. People join boards to make their homes better, or to fix something that’s gone wrong. Giving boards nearly unfettered power can be risky, but until a screening process for power-hungry megalomaniacs is invented, shareholders have to trust that the people running for the board are just that – people, neighbors who, like everyone else, want to improve their community.