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Bad Faith Actions

Oct 03, 2018

Eric Goidel, Senior Partner, Borah Goldstein Altschuler Nahins & Goidel

In a federal case called Broome v. Biondi, et al., a prospective subtenant alleged discrimination. Compensatory and punitive damages were awarded against a number of board members, including the president, Nick Biondi. The Court of Appeals then denied Biondi’s claim for indemnification.


There was a finding that Biondi acted in bad faith, and under New York law, compensation or indemnification for bad-faith acts is void. Additionally, where there is directors’ and officers’ insurance coverage, the policy does not allow for indemnification for bad-faith acts.


Bad Faith Actions 

This case involved a board member having his request for indemnification from the apartment corporation denied for damages arising out of a federal court case entitled Broome v. Biondi where a jury found that he along with several other directors had discriminated against prospective subtenants.  Finding that Biondi acted in bad faith, the New York Court of Appeals held that under such circumstances indemnification is void against public policy. (Biondi v. Beekman Hill House Apartment Corporation)


In New York City, there are currently 17 protected classes, including race, ethnic group, and religion. But there are others, such as lawful occupation, lawful sources of income, or being a veteran of a war or in active military service. So, essentially, in New York City, just about everybody is in at least one of the protected classes.


When discrimination is alleged before a human rights commission, the burden quickly shifts to the apartment corporation and board members to show an absence of discrimination. This does not mean that you need to approve every prospective purchaser in a protected class; but you cannot turn down somebody because they are member of that protected class.


In order to avoid charges of discrimination, board members need to be extremely proactive and adopt an admissions policy and an interview practice. As a first step, there should be initial screening of a purchase or sublet application by the managing agent. This should involve things like financial due diligence, credit checks, criminal background checks, and running whatever test the corporation has with regard to finances. Additionally, the application should be scrutinized to see who will be occupying the apartment. So there's no need to review an application where eight people plan to live in a studio.


If there is no meeting of these threshold tests, the application should not even be presented to the board.. It should be rejected by the management office. If the threshold tests are met, the application should be sent to the board and any admissions committee via a secure website. Hard copies should not be disseminated.


Many buildings do not have a formal admissions committee. They will have several committee members who attend every meeting, plus a couple of people who just show up if they're available on a given night. That can be a prescription for disaster since that is where, sometimes, the admissions process goes off the rails.


There should be an education process for admissions committee members that includes educating them about the 17 protected classes and cautioning them against making innocuous conversation with a candidate, who might give a response that leads to a protected-class claim. Even the best-intentioned questions could go awry. For example, if someone on the board is Russian and they observe that the applicant is Russian, they might say, “What part of Russia are you from?” If the applicant answers that question and then gets turned down, it might give rise to a discrimination claim.


When the application is sent by the manager to the board, we encourage  the manager to sanitize the application – to take out references that might lead one to be aware of certain protected-class issues. For example, you can often tell by someone's last name their ethnic group, race, and perhaps their religion. If he sends an application to a board with the names redacted, then the first contact that a board or admissions committee has where they actually see the applicant’s race is at the interview. It reduces the likelihood that someone will already have formed an opinion.


When the interview is complete, copies of all the applications should be collected by the managing agent and destroyed. There should be only one copy, preferably up on the cloud, which is preserved for record-keeping.


If there is a full board or at least a quorum of the board that met the candidate, then the board can just vote with respect to the candidate. If, however, there is an admissions committee that does not consist of board members, then the admissions committee needs to make a presentation to the board. Then the board has to either approve or reject the sale based upon the recommendation of the admissions committee. We also suggest that at least one board member serve as a chair on the admissions committee so that regular shareholders don’t make up the entire committee.


When the committee recommends approval, at the next board meeting the chair of the admissions committee will report on the interview. The board can basically rubber stamp that. However, when there is a recommendation to turn down a prospective purchaser or subtenant, the board should be very careful in how it proceeds. The board should ask the admissions committee representative to explain why they suggest rejection.


The board should be thinking ahead as to what happens if a discrimination complaint is filed. What are we going to tell the human rights commission or court as to the reason why this prospective purchaser or subtenant was rejected? Again, it can't be because the person belongs to one of those 17 protected classes. If the board is not satisfied with the answers it receives from the admissions committee, the board has two options. One, they could overrule the admission of the admissions committee and nevertheless decide to accept the prospective purchaser; or two, they can ask the prospective purchaser or subtenant to come in for a second interview before the entire board.


Now that can be a bit of a double-edged sword. If the board stands by the recommendation of the admissions committee to turn down the sale, they may have created some additional ammunition for the rejected purchaser or subtenant. However, I think that is better than rubber-stamping a recommendation by a committee where the board has not been privy to the interview process.


But the bottom line is that the board and the admissions committee should be using purely objective criteria in making a determination whether to accept a candidate for admission as a shareholder or a subtenant. While you cannot prevent someone from bringing a suit or filing a complaint, you can avoid liability. And even if there is liability, if it's demonstrated that you acted in good faith, you would, unlike Nick Biondi, be entitled to indemnification.

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