Reserve Fund Shenanigans

A developer bought up several small buildings near a Midtown East co-op in order to erect a large tower. The co-op board has siphoned hundreds of thousands of dollars from the reserve fund to finance a fight to change neighborhood zoning rules and block construction of the tower. Is this a legit use of the co-op’s reserve fund?

“If you have a reserve fund that is set aside to put a new roof on the building and all of a sudden the board is dipping into it to pay a lobbyist, that’s a problem,” real estate attorney Andrew I. Bart tells the Ask Real Estate column in the New York Times.

Disgruntled shareholders should review the co-op’s governing documents. The rules might state that shareholders are required to vote on such discretionary spending, or that the board needs the approval of a special committee or a majority vote of board members. A review of the corporation’s records, including board minutes, should reveal if rules were broken.

If they were, shareholders could call for a special meeting to confront the board. If the board acted in bad faith, the shareholders could take the board to court, and any board members who violated their fiduciary duty could be held personally liable.

A word to the wise board: Before you spend co-op funds outside the building, make sure it’s permitted in the governing documents.