Co-op/Condo Board Strategy – Dealing with Shareholder Leaks

Apartment leaks are a common occurrence and often result in a simple damage claim. But there’s an interesting case at a co-op apartment on East 51st Street that has turned out to be anything but typical. 

The problem started in 2012 with a series of water leaks coming in from outside the building. They were not adequately repaired, and mold started to take hold in the apartment, which became uninhabitable. The co-op initially did some of the right things. It got a restoration company involved and an insurance adjuster. 

But the co-op was repairing the walls with Sheetrock, even though it was required under the proprietary lease to restore the apartment to its original condition, which was plaster, because the insurance company didn’t want to pay for it. The co-op also never really identified all the sources of water penetration, which is why the mold started to explode in terms of its growth. As a result, the shareholder was out of possession of the apartment and had to move into an extended-stay hotel. 

What happened next?

The shareholder’s insurance company canceled her policy and stopped paying her relocation expenses, so she stopped paying maintenance. She also sued the board for constructive eviction since the remediation work it had done had failed to make the apartment habitable. 

The co-op responded with an answer that I can only describe as total war. The board literally denied everything. It denied meetings that are documented to have occurred. It denied water leaks that are documented to have occurred. It denied restoration work that they admittedly undertook. And then the board sent her a default notice, saying that she owed $69,000 in arrears and then filed a lawsuit. 

All of that sent a message to the shareholder and to her attorney that they were in for a fight on every single aspect of this. It was obvious to the shareholder that she was going to have to take care of herself, and to her credit she did. She got a $900,000 settlement from her insurance company, so she was armed with money to finance her lawsuit. 

And presumably the co-op was racking up legal bills as well. 

The board did get its insurance company involved, which retained attorneys for the co-op. So the board is being defended by an insurer and is not paying out-of-pocket legal fees. One of the problems is that in a property-damage insurance policy, there are always limits on the amount that the insurer will cover for each claim. Here, there were multiple water intrusion claims. It’s not clear if the insurance company was treating them as separate claims or as one claim, but the insurance company keeps paying the attorney, which is eating away at the amount of money that will be available to settle the case at the end of the day. At this point, so much has been spent on lawyer’s fees that the co-op may end up having to go out-of-pocket if there’s a settlement or a large judgment. 

This has dragged on for a very long time. Is there some point that a board should have stopped lawyering up and taken another tack?

Some decisions the board made along the way definitely came back to haunt it. At one point in 2015, there was a recommendation by one of the co-op’s consultants that it should immediately embark on an exterior brick pointing to address the water leak. The co-op’s response was: “Well, we’re in the middle of a Local Law 11 building facade restoration project, but we’re not going to get around to the shareholder’s building — the co-op has five buildings — until 2017.” That fact alone may have caused the judge to say that the board was not taking this claim seriously and that not reprioritizing the restoration work was a very callous decision.

So where do things stand now? 

The court did not issue a summary judgment, so now the case will go to trial. At this point, I think the board has to make a deal, because it’s really in a no-win situation. The best it can hope for is that some of the shareholder’s claims for reimbursement are not honored. But the board is going to get hit for failure to do proper restoration work, failure to do it in a timely fashion and possibly a breach-of-fiduciary-duty claim for treating her differently from other shareholders. 

Not all of this is going to be covered by insurance. Insurance will cover certain parts and certain claims, but in this case the board was under an obligation to repair the apartment to the condition it was in prior to the damage. 

If you’ve got a building with plaster and the insurance company won’t pay for plaster, does that mean you somehow don’t have an obligation to restore it with plaster? No, of course not. You’re self-insured for what the insurance company does not cover. I don’t know that the board understood that, because if it did and had just followed the reports of the experts it brought in, a lot of these problems would have been nipped in the bud. 

What’s the legal lesson here?

This really is a case of board testosterone run amok. At some point, you have to take a step back and say, “OK, this tactic is not working.” Board members’ time is going to be taken up with this. People are going to have to attend depositions. People may ultimately have to attend a trial. You’re putting the bill on the other shareholders or on all the shareholders in a very unproductive way.

Damage claims are personal. People’s belongings — the ring you got from your mother, the family heirlooms, pictures of your children — get damaged or lost and can’t be recovered. To an insurance company that’s a money issue. “Fine, well, give them some money, and that’ll take care of it.” To the individual, it’s not. You’re talking about things that are irreplaceable. There should have been sympathy for the shareholder’s plight, but instead the board tried to crush her. 

What advice would you offer boards in this situation? 

Settle these things early. I had a prewar building with very particular details, similar to this co-op, that had a fire. When the insurance company came in and said, “We’re not giving you plaster, we’re giving you Sheetrock with a skim coat of spackling compound,” the board said, “No, we’re going to pay the difference. We’re going to do plaster because that’s what the shareholders bought.” The 51st Street co-op seemed to treat this situation as an insurance issue and not as a personal responsibility to do right by the shareholder.