Admit One?

Bruce Cholst is a partner in the law firm of Rosen & Livingston.

What’s wrong with this picture? An unmarried couple with marginal financial qualifications is in the midst of an admissions interview. One of the board members turns to the woman and asks: “Do the two of you intend to marry? Will you be having children? Will you continue working after they are born? How will you be able to balance your career as a lawyer with raising children?”

Plenty was wrong, according to the Human Rights Commission, which overruled the board’s rejection of this couple and assessed money damages on the grounds that its decision was motivated by illegal discrimination. The commission completely disregarded the couple’s weak financials, and was unmoved by the interviewer’s explanation that he was “just trying to put the young lady at ease with small talk because she appeared nervous.”

The admissions process is a perennial breeding ground for lawsuits. Liability can arise from any of three types of conduct: actual or perceived illegal discrimination, self-dealing, or negligence in screening prospective purchasers.

Illegal Discrimination

Traditionally, courts have recognized the prerogative of co-op shareholders to determine with whom they wish to share their community and have therefore upheld boards’ right to reject prospective purchasers or subtenants for any reason or for no reason. However, federal, state, and municipal legislative bodies have identified a total of 14 different “protected classes” of housing applicants and have decreed that boards’ refusal to approve a prospective resident on the grounds that he or she falls within any of these categories constitutes illegal discrimination.

In my experience, negative admissions decisions are seldom based on an applicant’s being a member of one of the “protected classes.” Rather, they are typically the result of a determination that the applicant is financially unqualified or just does not “fit in with the community.” These are legitimate and frequently cited reasons for rejection.

However, when the applicant happens to fall within a “protected class” and some act by the board raises a perception that the rejection was the result of his or her status, courts and Human Rights administrators are often prone to conclude that the stated legitimate rationale for the rejection was merely a pretext. They then assess liability for discrimination. There are several ways boards may be able to prevent this.

First and foremost, the list of 14 “protected classes” should be emblazoned in every board member’s mind. These are race, color, religion, creed, national origin, alienage, citizenship, gender, sexual orientation, marital status, age, military status, disability, and (in New York City) occupation.

Board members must be keenly aware that everything they say and do with respect to the admissions process will be viewed with suspicion by applicants who fall within any of the protected classes. Interviewers must be circumspect in their conversation with applicants and refrain from any comment that may be construed as reflecting bias against any of the protected classes. In the example cited earlier, the interviewer’s motives may well have been pure, but his statements were perceived as discriminatory concerning gender, marital status, age, and occupation.

To avoid the possibility of any impromptu remarks or acts being misperceived, board members should insulate themselves as much as possible from direct contact with applicants. They should not meet them unless and until the board package is complete and the admissions committee is absolutely satisfied that the candidate’s financials are in order. If a board can legitimately reject an applicant on financial grounds without having met him or her, it can more easily prove that it did not know that the applicant is a member of a protected class, and the rationale for its decision cannot be viewed as a pretext.

Board members should have their managing agent (or attorney if the building is self-managed) serve as a buffer between themselves and applicants. The managing agent or attorney should handle all direct contact between the board and the applicant other than the interview itself. Above all, the agent or attorney, rather than a board member, should be the one to communicate the board’s decision on the application.

Under no circumstances should the reason for a rejection be communicated to an applicant. The law does not currently require that a reason be provided, and furnishing one only gives the unsuccessful candidate potential fodder for a discrimination claim. The managing agent or attorney should simply convey the board’s approval or rejection and, when pressed, say, “It is not the board’s policy to discuss the reason for its decision.” Of course, if a lawsuit is actually started, the board will have to justify its decision, but until then, there is no reason to give the applicant a possible rationale for suing.

Admissions committee members should be carefully selected; “loose cannons” should be avoided. Non-board members should not be tapped for service on the committee since they are far less likely to be trained in the pitfalls of the admissions process, and their missteps may well subject the board to liability. Before an admissions committee formalizes a rejection, it should elicit the full board’s input since the decision could subject every director to liability. Boards might also want to consult counsel before going ahead.

No notes should be taken at, or subsequent to, the interview since written material regarding a particular admissions decision is subject to discovery in a lawsuit and can be used against the board. If documentation of the rationale for rejection is deemed necessary, a memorandum can be addressed to corporate counsel “in anticipation of litigation.” Such a document is protected by the attorney-client privilege.

Finally, the board must maintain meticulous records of which applicants have been approved over the years. Documentation as to the acceptance of other members of the same protected class as the rejected applicant can be very effective in refuting a discrimination charge.

Liability Blues

Board members who manipulate the admissions process in order to take personal advantage of buying opportunities within the building have been held individually liable in money damages for their “self-dealing.”

Additionally, board members expose themselves to personal liability for breach of fiduciary duty when they misuse their rejection power to prosecute vendettas against particular sellers or vary their admissions standards to assist friends who may be selling their apartments.

Board members have a legal obligation to their shareholders to exercise due care in the performance of their duties. This means that board members can be held accountable to shareholders for damages incurred as a result of their carelessly admitting an applicant who should not be permitted to reside in the building. For example, if a serial arsonist whose record could have been discovered through routine investigation before he was accepted starts a fire that causes his neighbor significant property damage, the board would be liable to that neighbor for his loss.

Similarly, board members can be held liable for damages incurred in the course of evicting a shareholder who has an easily uncovered record of chronic arrears with prior landlords. Such liability can be avoided through thorough investigation of each applicant’s financial history and general background. Documentation supporting the existence of all claimed assets must be reviewed. All reference letters, including those from employers and landlords must be reviewed. Candidates’ tax returns must be carefully analyzed for inconsistencies with other portions of their application.

Each and every member of the admissions committee must perform this review and draw his or her own conclusions as to the merit of the application independently of the other committee members; board members who simply rubber-stamp a faulty review and judgment of their colleagues can themselves be held liable for their colleagues’ negligence.

The Business Corporation Law allows board members to immunize themselves from any liability to shareholders for negligent performance of their duties through an amendment to the cooperative’s certificate of incorporation. Such an amendment requires the approval of holders of a majority of the cooperative’s outstanding stock, and the amendment can help convince shareholders as a means of inducing volunteers to agree to serve as board members.

However, from the perspective of the cooperative’s best interests, finding a way to excuse board members from liability is no substitute for the proper performance of the admissions duty.