Saving money is a good thing for a co-op or condo board to do, right? Sometimes it is – but sometimes it’s not.
In an effort to save money, a board may decide not to hire professionals for certain tasks. For instance, there’s a lawyer on the board who practices criminal law but knows nothing about construction. To keep costs down, the board has that lawyer review construction contracts. If the job goes badly, the co-op or condo is not protected adequately. Or say the managing agent – again to save money – writes a letter that a lawyer should have written, and as a result the co-op or condo ends up waiving its rights. Or in some cases, boards will ignore the advice of their professionals, with serious consequences.
The co-op or the condo in each case can end up in a dispute leading to finger-pointing, increased costs, even litigation. But won’t the board members be protected by the Business Judgment Rule?
Not necessarily. Section 717 of New York’s Business Corporation Law codifies the Business Judgment Rule and sets standards for decision-making. The statute requires that board members act in good faith and with the degree of care that an ordinarily prudent person would use under similar circumstances.
Those are a lot of nice-sounding words, but what do they really mean? The board members in the cases I’ve cited were acting in good faith. But did they meet the standard of care? Or, put differently, did they really exercise business judgment? The answer to that question rests in part on whether they engaged in informed decision-making. Were there deliberations? Should they have relied on the people they were relying on? Did they blindly follow them? Did they ignore people they should have listened to?
To exercise business judgment – to use the degree of care of an ordinarily prudent person – means deliberating meaningfully and with knowledge of the issues. The board is, according to the statute, entitled to rely on opinions, reports, or statements of counsel, accountants, or others in their areas of competence, such as an architect or engineer. If it does not consult, then it’s not meeting that standard. If it does consult, it’s protected – if it follows the advice. If you do this, the quality of your decision-making will be better, and the board will be protected under Business Corporation Law 717.
Phyllis Weisberg is a partner at Montgomery McCracken.