A Co-Op Board’s Member’s Responsibilities and Duties (and What Constitutes a Breach of that Trust)

(Photo:lumierefl/Flickr/CC)

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This is part 2 of a 3-part series on the basics of building co-op democratic self-management. We examine the ins and outs of managing your building responsibly. For part 1 of this series, click here.

Homeownership is the single largest source of wealth creation for Americans.  Paying a mortgage creates  ‘forced savings’ and The Joint Center for Housing Studies at Harvard University released a study that quantified the difference in family wealth between renters and homeowners:

“[R]enters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600—about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.”

In NYC, because up to 80% of apartments available for purchase are in cooperative buildings, many mortgage payers are co op shareholders. Co op board members are neighbors and too often not trained or experienced in matters of business and finance.  These individuals eagerly volunteer to become a member of the board of directors in their condo or co op without giving careful consideration to the complex responsibilities - and potential liability - that come along with the position. They are responsible for the administration of the cooperative’s assets - often millions of dollars of shareholders’ money.

This business role or function of the board is often overlooked. According to Hyatt and Rhodes’ Concepts of Liability in the Development and Administration of Condominium and Home Owners Associations (Wake Forest Law Review, 1976), “Too often, Board members approach their Association responsibility as if they were on the committee of a social club, religious group, or other similar organization.”
Shareholder vigilance over the board’s fiduciary duty is crucial.

(Photo:lumierefl/Flickr/CC)

(Photo:lumierefl/Flickr/CC)

Many courts have set a board’s authority to act on a rule of law addressing a board’s proper exercise of its fiduciary duty and requiring strict compliance with the association’s bylaws, covenants, and restrictions. This “business judgment rule” is a United States case law-derived concept holding that the “directors of a corporation . . . are clothed with the presumption accorded to them by law, of being motivated in their conduct by a bona fide regard for the interests of the corporation whose affairs the stockholders have committed to their charge”.

Bylaws and rules are meant to preserve quality of life, building character, and shareholder investment.  Each individual board member is held responsible for acting in compliance with his or her duties.  When a failure to act or lack of concern of a board member is found to contribute to the physical or financial devaluation of the property, this is a failure to properly administer the rules of the corporation and cannot be legally justified as it is in direct conflict with that law.

A 1990 Court of Appeals decision found that, while the business judgment rule protects the board’s business decisions and managerial authority from indiscriminate attack, it permits review of improper decision making.  The courts have already condemned three broad categories of misconduct as a breach of fiduciary duty when board members use their position to
•    derive profit or otherwise promote personal interest at the expense of its constituent shareholders;
•    as a means to further personal vendettas against particular shareholders;
•    promote favoritism among shareholders.

Self dealing occurs when a board member or members are negotiating for themselves at the same time they’re negotiating for the cooperative. The textbook example involves the kickback. Vendor A wants to get a service contract in a building that’s worth a small fortune. To make sure their bid is successful, Vendor A promises to give Board Member X a suitcase full of unmarked twenties for throwing the contract their way. Board Member X makes sure Vendor A is retained.

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