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Non-Disclosure Agreements Defend Against Fishing Expeditions

Frank Lovece in Legal/Financial on September 5, 2017

New York City

Non-disclosure Agreements
Sept. 5, 2017

In 2011, Brenda Pomerance, a patent lawyer and unit-owner at the Link condominium at 310 West 52nd Street, began a lawsuit to gain access to board documents. Pomerance, who suspected the board of serious mismanagement, said she wanted to get the contact information of all unit-owners in the building and also extensive access to condo records, including monthly financial statements. 

Three years later, after suing the board over a renovation dispute at his co-op at 425 East 86th Street, J. Armand Musey discovered what seemed to be financial irregularities. “The building took on a very large facade renovation project [that] went 90 percent over budget with no coherent explanation,” says Musey, whose apartment was once the home of the late celebrity restaurateur Elaine Kaufman. Musey began seeking access to pertinent co-op documents.

For boards in such situations, what are the risks and protections when granting access? “Many times, there are troublemakers who just want to get fuel a lawsuit,” observes Adam Leitman Bailey, an attorney at his eponymous firm. “On the other hand, it can be a good thing. After all, it’s a democracy. In that sense, who are [boards] to withhold documents?”

In the aftermath of the Pomerance and Musey rulings, boards face the question of how they can allow increased access while still protecting the properties and residents through such devices as non-disclosure agreements (NDA). “The rights of an owner to review books and records must be balanced with maintaining the integrity of confidential information,” says attorney Rob Braverman, a principal at Braverman Greenspun and board counsel for the Link.

The Pomerance case reiterated that condo unit-owners have the right to see financial reports, invoices, minutes of board meetings, and redacted legal invoices “so long as [it is] in good faith and for a valid purpose … at the managing agent’s office, during convenient weekday hours.” But now – citing precedent that said case law already allowed condo owners the right to make paper copies – the court affirmed a lower court’s ruling that said they also have the right to make “electronic copies.”

In addition, the ruling declared that condo unit-owners have the right to see lists of owners and their contact information, a right co-op shareholders already have. The court also said unit-owners could be required to sign a confidentiality agreement. While that ruling concerned only condos, the Musey decision a few months later cited Pomerance as precedent to determine that co-op shareholders also are allowed to copy documents, which they never could before, and that boards can require a confidentiality agreement.

“I think the courts have been going in this direction for a while, allowing broader inspections, consistent with common law,” observes attorney Jesse Schwartz of Kagan Lubic Lepper Finkelstein & Gold, who represented the board of the Pomerance condo. 

Owners have had some inspection rights all along. “Historically what would happen is that a shareholder or unit-owner would make a request to see documents and submit a good-faith affidavit, which a board is entitled to ask for,” says Braverman. “If the board believed there was no nefarious reason for reviewing the documents, an appointment would be made at the managing agent’s office and the documents would be reviewed. But until these cases, if a shareholder or unit-owner said, ‘We want photocopies made and to take them home with us,’ the answer would have been no.”

Such requests are unusual, according to Brian Scally, vice president of Hudson North Management. “Sometimes people feel they have an issue with their particular unit or floor or with the common space, and they want to see how the board voted,” he says. “Not many people do it to start lawsuits – it’s more for informational purposes.” 

Robert Ferrara, president of Ferrara Management Group, agrees. “I think most shareholders or unit-owners understand the ramifications if they were to disseminate information,” he says. “They generally just want to know what’s going on in their own building for knowledge reasons. If boards follow their legal counsel’s advice, have an NDA in place, and take appropriate minutes, then they should feel comfortable providing their owners the documented information requested. It’s still very new, though, so it’s going to be interesting to see how it goes.”

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