Condo Board's Bad Faith Exposes It to Massive Legal Liability

Co-op and condo board decisions get questioned all the time. If aggrieved parties take a board to court, the court will examine the decision from a couple of perspectives. Did the board carry out its fiduciary duty? And was the decision made in good faith? If a board fails to fulfill these responsibilities, a court can step in and overturn a board decision.

"The fiduciary duty has essentially two components," explains Scott Pashman, a member at the law firm Cozen O'Connor. "They are the same components if you're serving on a condominium or cooperative board or as a director of a corporation: first is the duty of care, and second is the duty of loyalty."

The duty of care requires board members to educate themselves about relevant information before making decisions. "It doesn't have to be ultimately the right decision, but you at least have to demonstrate that you took steps to understand what the issues were," Pashman says. In practice, this often means seeking advice from management companies, accountants, lawyers, architects, engineers, or other professionals who can provide guidance on complex matters.

The duty of loyalty means that "the board should be making decisions that serve the best interests of the condominium or cooperative as a whole," Pashman continues. "There should be no self-dealing by board members. There should be no favoritism shown to any party over another. The guidepost should be: 'What is going to serve the best interests of the building as a whole?'"

Closely related to fiduciary duty is the business judgment rule, which protects board decisions from judicial scrutiny if those decisions were made in good faith and with proper care.

The Parc Vendome condominium case provides a compelling example of what can happen when a board fails in its fiduciary duty. The case involves a commercial unit-owner, Park 56 LLC, which purchased the ground floor and basement of the Midtown Manhattan condominium in March 2020. A few months later, Park 56 entered into a long-term lease with a tenant who wanted to operate a daycare facility.

Park 56 needed the board to take certain actions before the lease could become effective. It asked the board for four items: to waive its right of first refusal for the proposed lease; to enter into an alteration agreement; to amend the certificate of occupancy; and to approve submitted alteration plans. When the requests were not met, Park 56 sued.

The court’s decision was stark. It found that the board had acted in bad faith.

Why did the board act the way it did? Perhaps, Pashman speculates, the board was concerned that amending the certificate of occupancy would trigger Department of Buildings inspections, potentially forcing costly upgrades to common elements in the 1920s building. The board tried to shift these potential costs to the commercial unit-owner through provisions in a proposed eighth amendment to the condominium declaration, but the amendment failed to be adopted by the unit-owners. 

There was another complication. "One of the things that clearly did not help them was that when there was a previous owner of the commercial unit, they had been through this whole exercise once before and had apparently approved everything for that prior owner," Pashman says. "So a lot of the court's anger directed at the board here was based on the fact that this stuff had all been previously signed off on."

Once the court ruled against the board and condominium, the unit-owners were hit with the chilling realization that they could be on the hook for the damages and legal costs, which could run as high as $18 million. To protect themselves, the unit-owners filed their own lawsuit against the board, claiming its members violated their fiduciary duty and acted in bad faith.

"What they're really seeking here is to make all of the members of the board individually responsible for what could be very substantial damages to the commercial unit-owner, as well as the costs of all of that prior litigation," Pashman says. "Most people don't believe they're subjecting themselves to [this level of personal liability] when they join a board."

The Parc Vendome board members are among the people who do believe.