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What risks do board members face?
AUTHORMarc Luxemburg, Gallet Dreyer & Berkey
Serving on a board is a terrific volunteer opportunity, but it does come with risks.
There are two generic kinds of risks that board members face. The first is what’s called institutional liability. That is conduct or lack of conduct that may cause the cooperative or the condominium to have liability imposed on it. Then there’s personal liability, when the conduct of a board member may cause personal liability.
So we’re talking about not doing enough, doing perhaps too much or doing the wrong thing. It seems like almost any action a board takes could result in some kind of liability. What are the most common pitfalls?
The three high-risk areas are discrimination claims, disputes involving apartment alterations, and the physical upkeep of the building.
With discrimination, there are two categories that you have to worry about. The first is turning people down when they’re applying to purchase or sublease an apartment and they are members of a protected class. The number of protected classes these days is so large that almost everybody falls into one or the other. So boards have to be careful about saying no and rejecting people right from the outset, because even one false step at the beginning of the process can get you into a lot of trouble. The second category is a request for reasonable accommodation by people with disabilities. Boards need to get into a discussion with the person requesting the accommodation right off the bat in order to come to a mutually acceptable conclusion.
What are the liability issues with alterations?
They’re a particular problem because a shareholder will come in with plans, they’re reviewed by an engineer, and the board and managing agent sign off on the alteration agreement, but they often don’t follow what happens next. Sometimes the shareholder does whatever they want, whether it’s in the plans or not. And then at a certain point the board finds out about it, says, “Wait a minute — you can’t do that.” And the shareholder says, “Well, you let me do it.” The board then is pushed into the position of trying to force the shareholder to undo something that they’ve already done, which frequently ends up in litigation.
And building upkeep? What do boards need to know?
The board must maintain constant awareness of the structure of their building. Fortunately, Local Law 11 requires inspections of the exterior of the building, which have been made more and more rigorous. But a board also has to be aware of the upkeep of building systems. For example, elevators are a frequent source of accidents. Another big one is the sidewalks and trip-and-fall liability cases. So everything has to be maintained. That means regularly consulting with managing agents and having managing agents consult with engineers. You want to keep tabs and get ahead of the curve and try to avoid situations where somebody is going to have a serious complaint or get hurt.
If a board consults professionals and gets the all-clear about the condition of the building, does that reduce the board’s liability if something goes wrong?
It doesn’t reduce liability, just the possibility of liability. But the first line of defense for any board member, both corporately and personally, is to be sure that the experts are consulted early on. If a potential discrimination issue arises, you need to get your attorney involved the minute it looks like it may become a conflict and ask how to handle it, because it’s very easy to ask questions that you’re not allowed to ask.
As far as personal liability, the courts have been pretty good about not holding directors individually liable if you act in your capacity as a director on behalf of the corporation or condominium, even if a decision turns out to be discriminatory or negligent. But if you step outside your role as a director and do something individually, like confront somebody in the hallway and get into an altercation, that kind of conduct is more likely to result in personal liability.
I should point out that individual board members are protected, because they are entitled to be indemnified by the entity for their actions as a director, unless they really acted maliciously.
I know the boards like to save money, but it’s in the best interest of the building to spend a few dollars now to get good advice and not get yourself involved in litigation and all the time, cost, effort and angst that goes with it.
WHO’S SUING WHOM
Board Directors Must Treat Shareholders Equally
The plaintiffs began this action after a bedbug infestation, which allegedly originated in the apartment across the hall and continued for about 10 months before they hired an exterminator to take care of the problem. The plaintiffs alleged numerous causes of action against the co-op and its board. For example, they said that one of the board’s directors had received $25,000 to repair water damage in his apartment while the board unfairly refused to reimburse them for their bedbug expenses. Further, the plaintiffs said that the the board deliberately conspired to conceal the unsafe conditions caused by the bedbugs, which had spread throughout the building, and improperly prioritized some maintenance and repair obligations. The fact that the co-op had paid for the water damage to a director’s apartment but refused to pay the plaintiffs’ bedbug expenses was evidence of unequal treatment here. Further, the fact that the director who got the $25,000 payment and then participated in the unequal treatment of the plaintiffs was enough to show that he, individually, breached his fiduciary duty. Unequal treatment of shareholders is sufficient to overcome the directors’ insulation from liability.
Stinner v. Epstein
June 13, 2018