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Duty of Directors

Oct 02, 2018

Phyllis Weisberg, Partner, Montgomery McCracken Walker & Rhoads

Saving money is a good thing for a co-op or condo board to do, right? Well, sometimes it is, but sometimes it's not.


Let's say that in an effort to save money, the board decides not to hire professionals or decides not to follow the advice of the professionals it has hired. For example, there's a lawyer on the board who practices criminal law but knows nothing about construction. To save money, the board has that lawyer review construction contracts. If the job goes badly, the co-op or condo is not protected adequately. Or say the managing agent writes a letter that a lawyer should have written, and the co-op or condo ends up waiving its rights. Or in some cases, boards will ignore the advice of their architects or their engineers, with serious consequences.


Duty of Directors 

A director shall perform his duties, including his duties as a member of any committee of the board upon which he may serve, in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances. In performing his duties, a director shall be entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, prepared or presented by professionals. (Business Corporation Law, Sec. 717)


The co-op or the condo in each case can end up in a dispute that could lead to litigation. There's finger-pointing. It costs more than it should. The board is accused of acting improperly, the board may even be sued! The board members will be protected by the Business Judgment Rule, right?


Well, not necessarily. Section 717 of New York's Business Corporation Law codifies the Business Judgment Rule and sets standards for decision-making. The statute requires that board members act in good faith, and with the degree of care that an ordinarily prudent person in a like position would use under similar circumstances.


Those are a lot of nice sounding words, but what do they really mean? The board members and the cases I've cited are acting in good faith. But did they meet the standard of care? Or, put differently, did they really exercise business judgment? The answer to that question rests in part on whether or not they engaged in informed decision-making.


Were there deliberations? Did they have a right to rely on the people they were relying on, or did they blindly follow them? Did they ignore people they should have listened to? If they haven't fulfilled their duty and they haven't listened to the right people or followed the right advice, the co-op condo has not been well served. In addition, the board members may be at risk.


So how do you meet the standard? To exercise business judgment – to use the degree of care of an ordinarily prudent person – means deliberating meaningfully and with knowledge of the issues before you. The statute really assists us here. The board is, according to the statute, entitled to rely on opinions, reports, or statements of counsel, CPAs, or other persons in their areas of competence, such as an architect or an engineer. If you do not consult, then you're not meeting that standard. If you do consult, you’re protected – if you follow the advice.


Therefore, to fulfill the board's functions and to protect the co-op or condo, the board should hire professionals and listen to them. The quality of the decision-making will be better, and the board will be protected because it has complied with its obligations under Business Corporation Law 717.

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