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Shore Up Your Defences

Bill Morris: Welcome to Legal Talk, a conversation about governance issues that New York co-op and condo boards are tackling right now. I'm Bill Morris with Habitat, the magazine for New York co-Ops and condominium directors. And joining me this morning is Eric Goidel, a senior partner at Borah, Goldstein, Altschuler, Nahins & Goidel.
Board of directors frequently get sued. An unfortunate fact of life. And I wonder if you could just tell us, in, what is the general umbrella, the principle that is going to guide a board once they get hit with a lawsuit, either by a disgruntled purchaser, a contractor, or whoever it may be. What is the what do the boards need to keep their eyes on here?
Eric Goidel: Sure, Bill. So in preparing for this discussion, I had a bit of an epiphany and I came to the conclusion that when it comes down to individual board member liability as opposed to perhaps general corporate liability, with some rare exceptions and some outliers, a board member is either protected by the Business Judgment Rule or the board member is not protected by the Business Judgment Rule.
That is, The Business Judgment Rule is the guiding light. And what that does, the Business Judgment Rule, which is applicable to all New York corporations, is it protects the actions of board members taken in good faith. Where they try and exercise reasonable judgment in the discharge of their duties.
It can even cover mistakes, errors, and in some cases negligence. It doesn't cover though things like bad faith, self-dealing, criminality, or other types of torts. So when you look at the Business Judgment Rule and what it protects, it falls into two different categories. The categories I would call are contractual versus maybe what I'll call societal or governmental, or governmental. So in the contractual column, what you have is you have your governing documents of your cooperative or your condominium. In a cooperative, you have your proprietary lease, bylaws, house rules. And then you may have a bunch of policies that prior boards or current boards have adopted regarding sales, subletting, dealing with people with disabilities, pets, pets, et cetera.
In condominiums, you have the same kind of house rules and maybe some of the same policies. You do not have a proprietary lease, but you do have a set of bylaws and a declaration of condominium, which can have some impact. So those are what I call contractual. So if a board member who is individually sued can arguably point to something in those contracts which can defend them, can protect their judgment.
They will generally get off the hook if they are individually sued. When you get to the societal, governmental issues, those are the kind of things, Bill, I'm talking about where there's claims of discrimination and admissions, on the basis of race, religion, something like that, where there are claims for discrimination where someone wants a, a reasonable accommodation for pets because they needed an emotional support animal and they're denied that. Or someone has a physical limitation where they need some modifications to common areas of the building, right? And those are not really part of the contract, what I call the underlying corporate documents.
Those are found in legislation they're found in governmental reg, in governmental regulations et cetera. And those are the situations where board members are at the greatest risk of personal liability. So those are the things that they, that have to be the wake up calls when they're presented with those issues. Added to that,
for a moment, if I can, even internally within the corporate contractual documents are things like self-dealing. So where a board member votes against someone getting a second apartment because they're on their floor and they don't want someone to have a nicer apartment than they have. That's what I would call self-dealing.
Or they turn down a sale because they wanna buy the apartment, and then they go and approach the shareholder after they turn down the sale. So that's not protected either.
Bill Morris: Now before we go any farther, the Business Judgment Rule is a great protector for co-op and condo boards. It even protects 'em if they make bad decisions, if they make stupid decisions, provided they're done in good faith.
But as you were just saying, if they're in bad faith, if they're doing it for self-dealing, then the protections fall away. So that's, I think, very much worth remembering. Now, I wonder if you could give us some specific, cases that you've been involved with, where you saw these the liability of directors come into, under fire.
Eric Goidel: Sure. I'll mention one in a moment, which is a case that my firm specifically handled, but I just wanted to mention two or three cases, Bill, that other firms I won't give credit to the firms by mentioning their long names, like my firm's long name, but were handled by other firms. But of course, no, you had the Levandusky case, which is the Business Judgment Rule, birth of the Business Judgment Rule, basically, for co-op corporations. That went back to 1990. The Business Judgment Rule was. Strongly applied. And as everybody is familiar with the Pullman case, which was a case from 2003, where a board ba, where a court basically said that a board, in this case, in concert with shareholders, 'cause the proprietary release required both the vote of the shareholders and the board, but in many buildings only a board. A board is considered judge, jury and executioner, in a objectionable conduct case, and the court has to respect that. The real shot across the bow for co-ops and condominiums, more co-ops than condominiums, 'cause condominiums don't do admissions really was the Biondi case, Biondi versus Beekman Hill, which everybody know, I think knows that name, which was from around 2000, where board members were held personally liable for discriminating in turning down a prospective purchaser who filed a, who filed a complaint with the Human Rights Commission. There was representation in terms of D and O coverage, but there was no check written at the end of the day when board members had to pay, I believe, as much as $400,000 of their personal money. Then there's the again, well known in the industry is from 2012, the Fletcher versus Dakota case where board members were individually sued 'cause they turned down the ability of an existing shareholder to purchase an adjacent department for combination. And again, there were allegations of discrimination on racial grounds.
I, I just wanna talk about two, two or three more quick. An outlier case was the, was a case of Peloton which dealt with a discrimination case brought in court where a board made some accommodations, but not the big acom, but not the big accommodation of modifying the entryway to the building.
Believe it or not, the Appellate Division applied the Business Judgment Rule in what should have been a discrimination case. And many lawyers think that as I call an outlier the law was wrongfully applied there. Then just in the past couple of months, there was a case called Tahari versus Eight 65th Avenue, 2023, where board members turned down a sale of an apartment adjacent to an existing shareholder's apartment for the very reason I had mentioned before, which was they did not want that person to have a second apartment on a floor in which they lived. And finally, there's a criminal case, I just wanna mention, which goes back now, believe it or not 30 years.
I, I was much younger then which is People versus Premier House. Where board members and a managing agent face criminal charges for failing to properly enforce the window guard law in New York, a child fell out the window in a building in Brooklyn. Ultimately, the managing agent pled guilty to a minor misdemeanor.
The board members got off the hook, but for a while they were really twisting in the wind.
Bill Morris: So the Business Judgment Rule is a, in some cases it protects the board, like the Fletcher versus Dakota. The board prevailed in that case, as I recall. But in some of these other cases, the Business Judgment Rule is to no avail if they've acted in bad faith or self-dealing or some other improper way.
Now I wonder, Eric on the broad issue of the liability of directors, are there any lessons that boards should keep in mind here from these cases that you've cited?
Eric Goidel: Yeah, sure. First of all, I just wanna make one quick, one quick mention that. There is always D and O coverage for board members on virtually all of these types of claims.
But there's a distinction that must be made under the D and O coverage. There's a duty to defend and there's a duty to an indemnify, and the duty to defend is fairly absolute. The insurance company almost always has to provide an attorney, but at in the end, depending upon the result, if you lose, depending upon why you lost, they may not be writing a check.
And so you can't, a lot of board members say, oh, we got D and O coverage for this. You do, and you do and you don't. Okay, so what should you do to be a proactive board to get the best protections? First of all, you have to make sure that the bylaws provide for the broadest of coverage in terms of indemnification of officers and directors. In 1986, and the, and it seems it's almost 40 years ago, but in 1986, the Business Corporation Law was amended to expand indemnification provisions significantly. You'd be amazed though, Bill, I still, I interview for buildings that I don't currently represent, and I look at the bylaws and it's almost 40 years later and many buildings have never amended the by the bylaws. Arguably, the pre 1986 indemnification provisions apply if you haven't amended your bylaws. So that's the first thing a board should do. Make sure there is significant D and O coverage, but don't look at it as the absolute protector for you, right? 'Cause the, again, the duty to defend versus the duty to indemnify. Adopt corporate policies and follow them religiously. So adopt the policies, sales, subletting, di disabilities, et cetera. Because if you do that and then you get called on it in court, it gives the courts something to hang their hat on in terms of a, the Business Judgment Rule, this is what the, this is the judgment of the board.
Either this board or prior boards, which were carried over almost like stare decisis in the United States Supreme Court. And that way a judge is not gonna say the board went, went off the rails. Rely upon the advice and opinions of your professionals, your attorney your accountant, your managing agent, your engineer.
Because once again, if you go have to go into court and you say my attorney or my accountant said this or this, a judge is more apt to then say, okay, you made a mistake as opposed to a tort. The mistake was you listened to your attorney or your accountant and they gave you bad advice, but you relied upon advice.
One, one more, one more thing, Bill. If you see the board going off the rails in terms of, some type of a decision then you should ask for a roll call vote if you, if-- so that way the world knows that you are going in the other direction. And that way if the board is sued collectively or individually, you'll get off the case 'cause you did not vote that way.
The other thing it often does is when you ask for something like that and you don't do it every day, they don't wanna be the boy cried wolf. But when you ask for that, it sometimes there's a smack in the head of the other board members to sober them up and maybe they realize. Hey, maybe we're, we are going in the wrong direction here.
But finally, I think bottom line is this is all common sense.
It's not rocket science. In the end board members probably know most times when they're doing the right thing and most times when they're doing the wrong thing, and why they're doing the wrong thing, when they're doing the wrong thing. If you have any doubt, if you're doing the wrong thing, then pick up the phone or email your attorney, your managing agent, and I'm sure they'll set you in the right direction.
Bill Morris: Eric Goidel, that was a wonderful little primer on the Business Judgment Rule, its strengths and weaknesses and how boards should proceed. Thank you so much, Eric.
Eric Goidel: Bill, nice talking to you again.

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

Degrees of exposure. The business judgment rule covers two categories: contractual issues relating to governing documents like bylaws and house rules, and societal or governmental issues such as discrimination claims or violations of laws and regulations. Boards generally have more protection with the first category, while the second leaves them more exposed. Directors & Officers insurance covers board members on virtually all of these types of claims, but only up to a point. That’s because the duty to defend means the insurance company almost always has to provide an attorney if you’re sued; but if you lose, it may not be writing a check.

Security measures. That’s one reason you have to make sure that your bylaws have been updated to provide the broadest coverage and indemnification for directors and officers. Boards also need to adopt clear policies on sales, subletting, disabilities and so forth, and then follow them religiously and consistently. Doing that will give the court something to hang its hat on, so to speak, in terms of applying the business judgment rule. And it almost goes without saying that you should rely on the advice of your attorney, accountant, managing agent, engineers and other professionals. 

Added protection. If while on the board you think a decision looks like it’s going off the rails, request a roll-call vote so you and others can voice dissenting opinions. Sometimes that’s all that’s needed to make people realize. “Hey, we might be headed in the wrong direction here.” By calling for the vote the minutes will reflect that you didn’t agree, and if the board is sued collectively or individually, you will be able to remove yourself from the suit because you did not vote for the decision in question.

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