HABITAT

BOARD OPERATIONS

Ask the Attorney: Can a Lawsuit Hold Board Members Individually Liable?

Steven D. Sladkus in Board Operations on September 27, 2012

New York City

Sept. 27, 2012

The acts and determinations of directors of a cooperative apartment corporation and members of a condominium board are generally shielded from judicial review by the Business Judgment Rule. In essence, this rule serves to prevent directors and board members from being discouraged from taking actions that are in the best interest of the condo or co-op and its unit-owners / shareholders for fear of facing personal liability.

Judge Not

In order to take a legal claim outside the protection of the Business Judgment Rule, a plaintiff claiming a breach of fiduciary duty against individual members of a board is required to assert specific allegations of independent tortious conduct to demonstrate that the board members acted in bad faith or with a discriminatory purpose — that is, acts that are separate and apart from their duties as condo or co-op board members.

Thus, for example, a board member may have engaged in independent tortious conduct if, when considering an alteration application submitted by a shareholder/unit-owner, the board member votes to reject the application based on the applicant's ethnicity or the board member's personal animus toward the applicant.

Disclose Line

Similarly, a board member could be held personally accountable if he or she were to hire a specific contracting firm in which the board member had a financial interest to perform work at the building while intentionally not disclosing that financial interest to the rest of the board.

On the other hand, co-op / condo board members should not fear being held personally accountable for the outcomes of their determinations while serving on the board so long as they act and conduct themselves strictly as board members, not engaging in independent action in their personal capacities.

Often, the personal interests of individual board members will overlap with those of the building community as a whole. In such circumstances, conduct by board members predicated on the general well-being of the building's residents is proper. But unavoidably, sometimes the board member may have a personal, not necessarily applicable, feeling about the subject: the board member may not particularly like the shareholder/unit-owner, or may be faced with a situation where the board member would suffer greater personal inconvenience if he or she voted to approve a particular project or proposal even if it benefits the co-op/condo. Situations like these can give rise to a claim that the board member did not act as a board member, but independently, for a non-corporate reason.

The lesson we can take away is that board members should carefully filter out of their decision-making all considerations that may be self-serving, focusing solely on what is best for the co-op/condo and the other residents. By adapting this strategy, the board member can effectively perform his or her board functions without having to fear personal liability.

 

Steven Sladkus is a partner at Wolf Haldenstein Adler Freeman & Herz.

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