Truth and Consequences. Close-Up: Special Meetings

Editor’s Note: “Truth and Consequences,” which first appeared in our November 2003 issue, is a perfect example of the whys and hows of a shareholder-called special meeting (as discussed on pages 40-42). Although the meeting resulted in the election of a new board, the problems described in the article have only gotten worse since we reported the story. According to former president Cynthia Falco, the new board was faced with $60,000 in unpaid bills and only had $9,000 on hand. A proposed ten percent common charge increase has recently been stalled by another vocal group of residents. Falco, who stepped down after only six months on the job, says the board’s task is daunting: “There are repairs to be done and no money to do them. They’re going to have to raise the maintenance [common charges]. There’s no other choice.”

Depending on who you talk to, the Greenhouse Condominium is the best-run/worst-run, most financially stable/least financially stable property in Queens. Its former board members were a highly efficient/barely competent group of people who only did what was best/did not have a clue about what was best for the 74-unit building. “We turned that building around; we left it in great financial shape,” says Greg Cohen, a principal in Impact Real Estate Management, the property’s former manager. “It’s a mess; we’re still trying to sort things out,” says T.J. Magoulas, principal of All Area Property Management, the site’s current manager.

The one thing everyone agrees on is that there was a big battle at the Greenhouse Condominium and that nothing will ever be the same again.

Rashomon, the Akira Kurosawa movie about the nature of truth, could have been a template for this tale. It is a story of owners kept in the dark, of secrets and lies, and of a group of dissidents who seized power from a veteran board. It offers lessons in control and communication, in power-sharing and power-grabbing. And it could happen to you.

FOCUS FOR TROUBLE

The Greenhouse Condominium is a simple-looking, light-colored brick building in Queens. Built in the 1940s as a factory, in 1980 it was gut-renovated and reopened as a five-story residential condominium complex. By the 1990s, it had hit hard times, economically. It was being run by Focus Real Estate Management, whose principal had been indicted on charges of corruption in 1999 by the Manhattan district attorney.

The management firm that took over after Focus was Impact. Stuart Halper, who had been attorney for the building when Focus managed it, was a co-founder of Impact. He stayed on to advise the board afterwards and says that Impact was born out of a request from the Greenhouse’s board.

“At that time, the board came to me and said, ‘What do we do?’” recalls Halper. “At that point, I went into business with two individuals and we formed Impact. Management is an unregulated field. Having an attorney as part of your management team gives it credibility. It gives [you] someone who has to answer to a higher authority who’s licensed. It gave them a sense of security that here’s an honest person who’s accountable. If he played any games, he could lose his license. That gave them a lot of comfort [since] they had been ripped off.”

“When we took over the building in 1997,” notes Greg Cohen, a principal in Impact, “the building was pretty much falling apart. They gave a roofer $40,000, who then absconded with the deposit. They had $55,000 in unpaid bills. Esthetically and physically, we came in and pretty much turned it around.”

POWER CUT

To anyone who was interested, the building now seemed to be running smoothly. The common charges had not been raised for a decade. Space on the roof had been leased to two cellular companies to install antennas for cell phones. Everyone was so content that the board reportedly had difficulty getting a quorum or new candidates for election. “We never had a contested election,” says Halper.

Then in 2002, two events happened that mobilized a group of owners to begin asking questions. KeySpan, the supplier of gas to the property, sent shut-off notices to all the residents, saying that power was about to be terminated because of a large unpaid bill. That was soon followed by a warning, again sent to all the residents, that the Department of Environmental Protection (DEP) was threatening to put a lien on the property – and then sell the lien – for an unpaid water bill (plus penalties) of $145,000. (Cohen now says that the non-payment was standard procedure in challenging a faulty water bill; the DEP reports no record of any challenge by Impact, however.)

The shut-off question is what made Paula Braun, a resident since 1980 and a former board member, sit up and take action. “After we got the gas notice,” she recalls, “I put up a sign in the building: ‘If we’re in such great shape, why are we getting a notice for non-payment?’ I started talking to people, and said, maybe we should check into this.” She queried the board and the response was, essentially, “Don’t worry, we’re on top of it.”

That was the first of four key events that radicalized the building and led to a crisis for the Greenhouse. Not satisfied with the board’s answer, Braun and her next-door neighbor, Cynthia Falco, began circulating notes among their fellow residents. One of the reasons that the owners had been so passive was the language barrier. The population is a hodgepodge of nationalities. (Falco reports that the building residents are immigrants: 40 percent Chinese, 16 percent Korean, 10 percent Filipino, with the remainder American-born; 65 percent of the residents do not speak English.)

Braun and Falco decided to keep people informed by translating their memos into the various languages spoken by all the residents. That was the second key event because it led to an increased understanding by the owners of the questions they should be asking. “Suddenly people started perking up,” recalls Braun. Adds Falco: “People didn’t know what was going on [before] because they couldn’t read the announcements.” (Cohen’s response: “Granted, there were a lot of people who didn’t speak English. The way I look at it is we’re in America. I can’t accommodate every language.”)

The third key event was the forming of a committee of seven, which began looking into matters on its own. In the past, the residents had blithely trusted the board. No more. The new approach was similar to the X-Files’ motto: “Trust no one.”

Repeated requests to the board for more information were answered too simply (“We’re dealing with it”) or ignored altogether. At the annual meetings, the board distributed a “review,” not a certified audit. The latter, which is more costly, would have given them a clearer picture of the state of the condo’s finances.

So the dissidents, none of whom knew anything about running a condominium, sought information elsewhere. They talked to a lawyer at the office of their local councilwoman, Helen Sears. After hearing their queries, he told them that, on the surface, things looked fishy and that the only way they could really resolve things and find out what they wanted to know was to take control of the board themselves. But to do it by the book.

They hired a lawyer. In January of this year, they petitioned the board for a special meeting. The board turned them down. They held the meeting anyway, and a majority of the resident-owners showed up. They voted out the board. “They were ignoring our constitutional rights,” says Falco. “That got us more united, it got even more people involved.”

Then things turned ugly. The board said the vote was improper and filed for a temporary restraining order against the rebels. It also voted to impose a $2 million fine against each of the dissidents. All legal fees were to be billed back to the homeowners causing the trouble.

“We were not against people having a meeting,” Cohen says. “If you’re going to have a meeting, you have to follow the bylaws of the corporation and the condominium. They didn’t follow the bylaws. We can’t just have a free-for-all and have people do whatever they want to do.”

A LAWSUIT

The board then started a lawsuit against the owners, which was the fourth and final step in the radicalization of the dissidents. Rather than recognizing that there might be legitimate concerns and that the majority of the building residents wanted answers and a change, the board dug in its heels and fought every step of the way, often sticking to the letter of the law but not the spirit. When, for instance, the dissidents presented 40 signed petitions requesting a special meeting to consider their complaint, the board rejected it by saying that the bylaws required one petition with 40 signatures.

“Your statement...is a deliberate misinterpretation of the intent of the condominium bylaws, which allows a majority of unit-owners to call a special meeting when circumstances arise which require immediate attention,” wrote attorney Mel Ginsburg, a partner in Vernon & Ginsburg, in a letter on behalf of the dissidents.

The board’s lawsuits were repeatedly thrown out or defeated, but the board constantly came up with new legal challenges and/or reasons for not complying. At a special meeting called in April, for instance, Halper insisted that those without picture identifications should go back to their apartments and get them. But after a wait of 15 minutes, he claimed there was not a quorum present and adjourned the meeting.
“These were delaying tactics,” says Falco. “They said, ‘Time’s up, you lose, you don’t have the majority.’ And at that point everybody was boiling. We wanted to settle this, we wanted to vote.”

“Halper was looking to strangle the opposition with frivolous claims,” observes Michael Reich, a partner in Manton, Sweeney, Gallo, Reich & Bolz, who became the dissidents’ new lawyer in April. “He threatened foreclosure; he imposed astronomical legal fees with no authorization. And at the same time that they were expending legal fees to sue their own members, he was seeking millions of dollars in compensation. Finally, the judge said, ‘Enough of this, we’re going to let whoever is elected take control of this.’”

Things came to a head this past July when a meeting room packed full of angry owners confronted three members of the board and the two principals of Impact, and voted, again, on the ouster of the board. Previous votes – which also called for the ouster – were under legal challenge by the board, which had refused to abide by them, saying they were improperly staged. This vote, mandated by court order, was to settle the question once and for all.

The meeting room, a large, low-ceilinged space, was filled with people, old and young, mostly Asian. A tally of those present was taken but the board insisted on checking everyone’s name against his or her driver’s license, which brought grumbles from the audience.

Cynthia Falco made an impassioned speech, arguing for the board’s ouster, saying, in part: “We called for an election to remove them January 7, 2003, and they sabotaged it; they locked the social room, preventing us from having a meeting...It’s basically telling you you have no rights whatsoever. Just pay your maintenance, we’ll take care of it our way without paying the bills...This is America – most of us here are Orientals, but this is America, this is the land of freedom. They cannot just totally deprive us of our constitutional rights.”

Al Paladino, the secretary, talked about why the board should be kept in place. “What I have to say is this building – you’re talking about mismanagement of the funds, and bills, and all that, which is absolutely not true. For ten years, this building has not got an increase in maintenance. For ten years, we have paid our bills. For ten years, this management has been in place. There were increases in the expenses, increases in the utility bills, increases in the labor, increases in insurance, and just general increases in the supplies and maintenance, too. All those have been paid.” He also told everyone that the water bill had been paid in full, fines included.

In the end, Paladino’s argument was too little and too late. The board was defeated, again. Falco and her slate were eventually elected as the new board (Braun did not run). Then the clean-up began. But the battle did not end.

Impact was fired as managing agent. And although Cohen and Halper both claim to have turned over all financial records to the building, Falco, Magoulas, and Reich say it isn’t so. In addition, Reich says, the old board cleaned out the reserve fund to pay off the water bill – and left the Greenhouse financially in tatters.

“They paid but they wiped out the reserve fund,” says the attorney. “They also paid the late charges and penalties when we could have attempted to negotiate that. They did that right before the recall meeting to take that issue off the table, but they hurt everyone by doing it. At that point, you just don’t go and pay it when half the bill is late charges and penalties.”

Impact disputes every one of these claims. “The building is actually in good financial health,” says Halper. “We’re completely professional. We have turned over all the documents. There isn’t a request that anything is missing. They basically have everything they need to operate.”

The current board disagrees. The present management is currently sifting through old vendor invoices in an attempt to piece together the budgetary picture, and has come up with a list of 15 vendors who are owed money (including, ironically enough, Halper). “We have $61,596.82 in unpaid invoices from 2001-2002 and now no money to cover them,” complains Falco. In addition, the antenna contracts have no escalation or cancellation clauses, standard in the industry, and give rights to the suppliers for a period of 20 years.

AVOIDANCE

In the end, could anyone have done anything differently to make things run smoothly and avoid these battles? The former board president and former management executives claim they did all anyone could do. They staged open board meetings. No one came. They sent out newsletters and memos about policies. No one paid attention. They didn’t raise common charges for a decade. No one cared. They were financially prudent in seeking out supplemental sources of income. No one knew.

To Halper and Cohen, the problems started with Paula Braun, in their view, a disgruntled ex-board member who was set on revenge for her ouster from the board. Never mind that Braun says she quit because she was about to sue the building over an injury sustained on the grounds, claiming “board negligence” (she won). And never mind that Braun isn’t even on the current board.

“She saw an opportunity,” asserts Halper. “Essentially, this went down along racial lines. This was the Asian vote. She went out and sought the Asian vote. It was a matter of a lack of communication in the building. She’s the one who orchestrated this entire thing. These were individuals who never followed the [by]laws of the condominium and they seized control at this point. I don’t think it could have been corrected. This board, quite frankly, dedicated a lot of time and effort into the [running of the] building. And when someone comes at you and starts spreading vicious lies, you know, it’s politics. This is what happens. These people didn’t want to hear anything because Paula Braun had them under her spell. Cynthia Falco is Paula Braun’s puppet.”

“We did represent the residents well,” argues Ashok Mathias, the former president. “If you don’t believe it, look at the way we managed it, without raising maintenance, going back ten years. Wages have gone up, utilities have gone up, insurance has gone up, yet we still maintain it at the old maintenance rate. It’s a waste of time dealing with these people.”

And therein lies the former board’s problem. It saw the populace not as a group who needed to be leveled with, communicated with, and treated with respect. It saw them as a large, impersonal mass who could be easily manipulated by one person: Braun.

“During the meetings, it became clear that we were invading their territory, basically, and we were threatening them,” observes Kuo Heng Fung, an owner for nearly three years, and currently a board member. “From the outset it was all very offensive. They were telling us what we could or could not do, that they had the right to make all the decisions. They’re aggressive to the actual people who they’re supposed to serve – but they’re not doing their job. How come they’re not paying the bills? Where is the money going to instead? Obviously, you’re collecting our fees, but you’re not paying out the fees, so there’s some kind of loophole here, right?”

On an even more basic level, experts not affiliated with the case point out that the board should probably not have allowed Halper to serve in two positions: as attorney for the corporation and as a co-owner of the management firm. It indicated a potential conflict of interest. How could Halper, the lawyer, have advised the board on actions undertaken by management, of which he was a part? Or vice versa? When Halper advised the board to sue the dissidents, for instance, how could the management company, which Halper co-owned, have advised against it?

“I fault the board for not understanding the problem,” observes James Samson, an attorney with Bangser Klein Rocca & Blum, who was not involved in the case. “In effect, they hired their managing agent to be their lawyer.”

“You had a board of managers that was working hand in glove with the managing agent,” says Reich. “And the managing agent fought like mad to keep the rest of the building from taking control. This whole litigation was brought about by Stuart Halper and his company. Even though he was there in court ostensibly representing the board of managers, he had a vested interest because he owned the management company.”

Beyond that, the board was secure in the residents’ ignorance, which is something the new board is changing. Falco reports that the new team is questioning everything and everyone, not settling for less than full disclosure. When the members were unhappy with the performance of their new site manager, they spoke up and got a replacement. The new board is aggressively pursuing everything, meeting three times a month in two-hour sessions to sort through the financial chaos that the previous board had left behind.

Finally, what is the truth at the Greenhouse Condominium? It is the same truth for any property, co-op or condo. Trust but verify. Educate yourself and speak up. Above all else, boards should listen, communicate, and remember that their role is to run the building for everyone. To be a representative democracy, not a dictatorship.

“You have to be on top of the management company,” Falco notes. “You cannot just leave everything to the management company while being a board member; you have responsibilities. You have to be strong and firm and let them know what needs to be done. This is a voluntary job and if you don’t spend time, nothing is going to happen. You have to act as a board, not as one person.”

Adds Braun: “You really need to see something. We were lulled to sleep. Now we know you can’t trust the management company; you have to oversee them, and you have to see what the board is doing. You have to be informed. You have to be involved.”