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BCL - Conflict of Interest AmendmentsFeb 08, 2018

I have a question about the new conflict of interest amendments to the New York Business Corporation Law (https://www.nixonpeabody.com/en/ideas/articles/2017/09/20/new-conflict-of-interest-laws-for-condos-and-co-ops-in-new-york). Specifically, I'm hoping you could clarify what, precisely, constitutes a conflict of interest for a Co-op Board.

For example, does the Board approval of a sale of a unit/shares to the owner of the hired Management company for a price far below the market value of the co-op unit constitute a potential conflict? Similarly, would approval of a similar sale to a member of the Board constitute a potential conflict?

I have recently identified numerous transactions of this nature in my Brooklyn Cooperative. None of the units in question were advertised as being for sale, and appear to all have been sold in private transactions between the Management Company or Board Member and the shareholder or the shareholder's estate. All have sold far below the market value, even when accounting for the physical condition of the unit.

Thank you in advance for your response.

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Conflict of Interest - Steven424 Feb 09, 2018

I am definitely not an attorney, and the value of an "legal advice" your receive on here is worth exactly what you pay for it. But I'll give it a shot.

Members of a board of directors have a fiduciary obligation to put the interests of the co-op corporation and it's shareholders ahead of any personal gain. The most common examples of conflicts of interest usually involve boards hiring or giving contracts to companies they have a financial interest in and can reap benefits from payments to the contractor or company.

The sale of co-op shares is usually a private transaction between the current owner of the shares and the prospective purchaser. The board is usually not involved in any of the price negotiations.

Once the contract is signed, the board should only become involved in ways designed to protect the co-op corporation and the shareholders. To protect the co-op corporation, the board reviews the ability of the purchasers to meet their current and future financial obligations (i.e. monthly maintenance and assessments). If there are any concerns during the financial review, there may be discussion between the board and the purchaser to put in place protections for the co-op corp. These are usually in the form of a maintenance guarantor, or holding a certain number of month's worth of maintenance in escrow. Each situation is different.

To protect the shareholders, the board usually does a background and credit check on the purchasers. They may ask the purchasers questions such as "do any of the occupants play loud musical instruments" or "do any of the occupants have any sort of diplomatic status or immunity". There are a lot of restrictions on the kinds of questions a board can ask. At the purchaser interview, the board does a final reality check on ability of the purchasers to integrate into the co-op community.

From what you describe, the board should not have been involved in any price negotiations between the owner of the management company and the estate's executor/administrator. In particular, the estate executor/administrator has her/his own fiduciary responsibility to the beneficiaries of the estate, and will have to answer to them if she/he sells the shares at below market value. Now, if the executor/administrator was somehow informed that the board would block the sale of the estate's shares unless they were sold to the managing agent at the price demanded, that would not only be a conflict of interest, but probably also be extortion or some other criminal activity.

There is no requirement that apartments for sale have to advertised, and all sales transactions are private by nature. So if the board were on the up-and-up, and the owner of the management company negotiated in good faith with the estate, then as far as I can tell there is no conflict of interest.

Remember, this is not any sort of legal advice. Based on what I wrote, if you feel there is a conflict, you should do a google search to see which NYC department could deal with your concerns. I don't know which exactly, but a good place to start would be attorney general's office. If you feel that you and/or your apartment ownership may somehow be harmed by what you described, than you need to contact an attorney who specializes in co-op and real estate law.

I hope this helps. Good luck!

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> Join the conversation Comments (1)
Conflict of Interest Amendments - Marty Feb 09, 2018

I agree with Steven, but my first question is why did the Board approve all of these sales when they were way below market value? What was the rationale? This is a valid question IMO.

Were the estate apartments on the market for 5 years or longer and the estate just wanted to get rid of them? The Board needs to explain these decisions to its shareholders.

To me, there should be no issues if the sale of an apartment is between a buyer and a seller who have no relationship with each other.

For all other situations (Sale involves Mgt company, Board member, etc), I see a potential can of worms for Board members because they are not "arms length" transactions.

Even though technically it may not be a conflict of interest as defined by law, it certainly raises questions about the transactions and how they were made.

The purpose of the COI law seems to be to make sure that no Board member profited by the hiring of any contractors and the like.

Even though this new law concerns itself with COI, I can see disgruntled shareholders (we all have experience with them) using this new law as a general path to start digging into other Board decisions/actions not supposedly covered by the COI.

I can imagine shareholders questioning ALL Board financial decisions under the guise of "was there any COI involved" even if no contractors were involved in a particular decision - simply because they don't approve of the a specific expense authorized by the Board.

An honest Board will have nothing to fear/hide, but I see a potential for a humongous increase in our workloads and aggravation.

I hope not, but we'll have to see how this new law affects our daily decision making processes.

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