Understanding the fiduciary duty that your Coop Board has to the shareholders can help you determine if they acting within the parameters of the law. This article from The Cooperator will help you understand the role of those who sit on your Board.
Having an apathetic, uncommunicative board is a big issue in many buildings and associations, but the opposite situation—a board that oversteps its authority—can be just as problematic. When a board does something it should not do, or fails to do something it should (like holding a meeting), it can cost a community in money spent on lawsuits, bad press, and discord among neighbors.
That’s why understanding the parameters of a board’s powers can help a co-op or condo community’s residents keep a close eye on their chosen administrators. All residents can benefit from recognizing precisely what it is that an effective board should be doing. And after acquiring a little knowledge, informed residents will be able to spot potential missteps by board members, and maybe even correct them before they happen.
Being a smart constituent is all about being observant and knowing why or how to object if there is a problem with a board’s actions. But first, a resident must understand a board member’s role.
Leading in Good Faith
Knowing what your building’s board of directors should be doing might sound complicated, but it’s really pretty straightforward. Allowable actions for board members are clearly detailed in every building’s governing documents, and any curious resident can learn a lot with a little reading. And above all other residents, a board member should be familiar with the boundaries of his or her powers, at the very least by reading those pertinent documents.
A board member not knowing their role is akin to them not doing her job—or at least not doing all of what should be their job. Directors have a responsibility—a ‘fiduciary duty’—to act in the best interests of their community, and to not allow personal disputes to get in the way of good management of the building. When volunteering as a board member, a director is expected to put the overall good of the community above his or her own interests.
If they understand their building’s governing documents, board members should know exactly what they legally can and cannot do in their management roles, since a board’s authority and jurisdiction is spelled out in those documents. But whenever board members are in doubt about this, they can check with the building’s bylaws or their legal counsel, or both.
Co-op boards are governed by the state of New York’s Business Corporation Law (BCL), and also by the community’s own bylaws and proprietary lease. The BCL requires that a co-op have an annual shareholders’ meeting, among other things. The building’s bylaws must comply with corporation law, and other requirements of state and federal laws, including such mandates as the Americans with Disabilities Act (ADA). Bylaws also often specify in what month the board’s annual meeting will take place, and how residents must be notified of the meeting.
“In general, the power of the board is to act within the scope of their authority and to act in good faith,” says Robert Silversmith, a partner with Silversmith & Associates Law Firm, PLLC in Manhattan. “If you violate that role, you violate the business judgment rule,” he says. “A board member shouldn’t act in self-interest, and shouldn’t engage in a transaction that benefits himself.”
A board’s powers do not differ much between co-ops, condos, and HOAs, although of course, co-op boards can approve or deny sales of apartments, while condo boards generally do not have that right. But regardless of which kind of residential community he or she lives in, a good board member essentially serves the same role: as an objective, professional steward of the community with a fiduciary responsibility to care for the community’s property as well as they can.
“The simplest definition of ‘fiduciary’ is ‘one who holds property for another,’” says Steven Wagner, a partner with the New York law firm of Wagner Berkow LLP. “Board members have to do everything in good faith. It has to be in the best interest of the co-op or condo.”
That means no personal agendas—no board presidents saying they have more rights than any other board member (pro tip: they don’t), and no board treasurers refusing to cut a check for a building expense just because they don’t agree with it—or other shenanigans in which some board members occasionally might be tempted to engage in. Whenever conducting board business, the entire board needs to be acting in the best interests of the entire community.
“Whether in a co-op or condo, a board’s basic powers and duties are the same. They are fiduciaries under the law,” says Robert Griffin, a partner with the law firm of Griffin Alexander, P.C. in Randolph, New Jersey, with offices in New York City and New Brunswick. “They are responsible for collecting money and for using it how they say they will use it.”
But there are notable distinctions between the board’s powers in different communities. Those distinctions come partly from the founders of the community, who dictated how the community would operate, through the language in the original governing documents. Those documents can define all sorts of things, including rules and regulations, and the rights of residents to use facilities.
“A co-op board’s powers differ based upon the specific bylaws of the co-op,” says Marc Schneider, managing partner of the law firm of Schneider Mitola, LLP, which has offices in Manhattan and in Garden City. “There are nuances in an individual building’s bylaws—regarding amenities like parking facilities.”
Other nuances in one’s governing documents might include the ability of the board to choose to make the building entirely non-smoking, or to prohibit residents from keeping pets. In some communities, no pets or no smoking could become the will of the majority of residents, even if it was not the majority’s wish when a resident and smoker moved into the community many years before.
That’s why residents need to pick their battles. Or better yet, avoid confrontations with the board, simply by knowing how the group works, and why it does what it does. While a resident might not like all of the board’s actions, those actions may be entirely legal and defensible and hence, are not worth fighting over. And no one wants a costly, drawn-out legal battle that isn’t absolutely necessary.
On What Authority
Co-op and condo boards operate under the authority of local and state government, and under the authority of the community’s governing documents. The building’s bylaws almost always require that a certain number of board meetings be held each year. Most bylaws also will mention who can serve as a board member, as well as how often elections will be held and how long board members’ terms will be. And the Business Corporation Law of New York sets remedies that are available to residents, if the board doesn’t call an annual meeting.
The governing documents of a building or of an association intersect with federal, state and local laws by complying with them. Which law takes precedence if there’s a conflict, depends upon the nature of the conflict. But generally, federal law trumps state law, which trumps local law, which trumps community bylaws.
If a board acts improperly, either out of ignorance, or out of deliberate malfeasance, residents and property managers can address the situation in a few different ways. A resident can show up at a board meeting and question the board about it, or send a letter to the board detailing their concerns with the decision. A resident also can consult the bylaws to see if the board’s decision was legal. Failing all other remedies, the resident can file a lawsuit against the board to overturn the decision they do not like or which he thinks is illegal.
“They can sue, or bring a claim if the claim is for discrimination,” Schneider says. “I’ve seen boards that will not call a meeting that should be called, and some of these instances are because of a lack of knowledge. It’s important that boards make use of their professional consultants, and try to avoid any claims.”
Being a board member does not enable a resident to break the rules, although industry experts say board members often must be reminded of this fact. Ken Jacobs, an attorney and partner at the law firm of Smith Buss & Jacobs LLP, in Yonkers, recounts the story of a co-op board that changed the building’s bylaws to prohibit anyone who did not have a high school diploma from being on the board.
The rule would’ve been improper regardless, but the board adopted it specifically to prevent a certain resident from running for a board seat. That shareholder took the board to court, arguing that the change was unlawful, and he won the lawsuit. The disagreement cost the co-op a lot of money that needn’t have been spent on a legal battle that the building’s leaders should have known they would lose—and they would have known, had they asked the right questions of their attorney, or paid attention to their own bylaws.
When it comes to being a good board member or shirking at the job, ignorance is no excuse for doing half a job of it. Even though most board members are not real estate professionals, they can learn a lot by accessing resources that help boards and managers stay lawful when it comes to their community duties. The most important of these assets are the building’s attorney, and its managing agent. Local chapters of professional organizations like the Federation of New York Housing Cooperatives & Condominiums (FNYHC), the Council of New York Cooperatives & Condominiums (CNYC), the New York Association of Realty Managers (NYARM), and organizations like the Community Associations Institute (CAI) chapter in your area, are excellent resources to learn about best practices. And of course there’s The Cooperator, which has hundreds of articles archived online, covering many areas of co-op and condo management and providing a trove of industry knowledge that is available at a reader’s fingertips.
But never overlook those experts who are closest and most familiar to the board. “The biggest resource is having effective and knowledgeable counsel for your co-op. The most important thing for a board to be in compliance with the law is to hire a good managing agent, and an attorney who specializes in co-ops and community associations,” Schneider says.
Such professionals will do their best to steer a board in the right direction, especially if the board is straying from the fiduciary straight and narrow.
“The hardest thing is when boards do not act as boards—people go off individually, or somebody takes it upon themselves to ignore the rest of the board. That’s when trouble starts,” Griffin says. “People sometimes forget that their job is to act as a fiduciary and to run the community as a business which maintains property at a reasonable price, and which allows members to be heard regarding association duties.”
While board members don’t always agree, the forum for argument are the board meetings, Griffin says.
“At the end of the day, they vote. Once the vote is over, you are still always to speak as one board. You’re not going to win all of your issues. But once the vote is over, the whole board should support their decision,” Griffin says.
And each board member must do their very best to ensure that the decisions they make are the best they are capable of making. As with any professional occupation, being a board member requires hard work and sometimes, it also calls for study and reflection on the part of the board member. And like many professions, such a job can be faked; but ultimately the faking will be revealed.
“I tell my clients they are responsible for doing their homework and making a good faith decision. As long as they try to make a decision based on that, then they are fulfilling their fiduciary responsibility,” Wagner says. “If they do that, they are protected under the Business Judgment Rule, even if it’s a terrible business decision.