Dealing With Dissidents

Hayden Coleman has four words of advice for people who serve on co-op and condo boards: beware of watchdogs. Not real canines. The human kind.

Coleman, an attorney, sits on his Manhattan co-op’s board and serves on its legal committee. He recently helped persuade his fellow shareholders that a move to put big-ticket items to a vote of all shareholders would have been unwise. The board had to mount its own information campaign to counter misinformation that was spreading among shareholders.

“When people really thought the concept through, they realized it would have been an absolute disaster,” says Coleman. “In practice, it was going to hamstring the board from acting quickly.”

Yet, Coleman can empathize with the desire of some shareholders and unit-owners to have a greater say in the running of their co-ops and condos. “This is the worst of all possible worlds,” he says. “The prices of apartments are dropping and taxes are killing co-ops right now – they’re going up more than 20 percent. People are getting squeezed – they feel very out of control, so they’re grasping for ways to get control. But the worst thing you can do is try to reorganize the way the corporation operates. What you should be doing is getting the best, most qualified people on the board. And once you have them, give them your full support.”

Coleman’s remarks are timely, to say the least. With the city’s real estate market growing more bearish by the day, a growing number of co-op and condo board members report that their neighbors are suddenly turning into watchdogs. Some of these neighbors hope to create a shadow board to monitor the elected board’s every move. Others want their boards to put major expenditures to a vote of all residents. And some, panicked by the softening real-estate market, want to set minimum resale prices.

“Now what you have is people reacting to the stress of the times by trying to control one of the few things in life that they can control, namely their co-op,” says Theresa Racht, a partner in the law firm Racht & Taffae. “I see it happening right now – shareholders being willful, wanting to go down a path that could be legally disastrous for them.”

“Everyone’s into populism right now,” adds Phyllis Weisberg, an attorney at Kurzman Karelsen & Frank, who represents numerous co-op and condo boards in the city. “People in co-ops very often think it should be a participatory democracy rather than a representative democracy.”

And they’re wrong, as far as Weisberg, Racht, and many other real estate experts are concerned. At one Manhattan co-op Weisberg represents, shareholders recently tried to institute a policy that would have required approval from a majority of shareholders for any capital outlay greater than $100,000. Weisberg spoke out forcefully against the proposal.

“It sounded like a good idea – shareholders would have had more say,” Weisberg says. “But when you look closely, it doesn’t make any sense. It interferes with the board’s ability to do its job. If there’s an emergency, the board has to be able to react quickly. Don’t hamstring a board because then the board can’t act.”

And don’t make voluntary board service even more rigorous than it already is. “People might be unwilling to serve on boards if their discretion is taken away,” Weisberg says. “Who needs the aggravation if you can’t do the job?”

Some condo bylaws already specify that additions, alterations, or improvements above a certain dollar amount must be put to a vote of all unit-owners. Some co-ops, particularly very small ones, have similar provisions in place. And while co-op boards have the legal authority to cede certain powers to shareholders, Weisberg usually advises against it. Shareholders, she reasons, are more likely to vote out of self-interest than out of concern for the good of the whole corporation.

Rather than establishing a watchdog group, Weisberg urges disgruntled shareholders and unit-owners to work within existing bylaws and proprietary leases to remove board members who they deem unsatisfactory. Better yet, she says, dissidents should run for the board themselves.

James Samson, a partner at the law firm of Samson Fink & Dubow, says the gloomy economy has pushed many co-op and condo boards and wary residents to seek safeguards that are counterproductive. In some cases, they actually do more harm than good.

“In this bad market, I’ve seen more and more proposals over the past three months on tightening sublet rules, tightening financial restrictions on potential buyers, and setting minimum resale prices,” Samson says. “But that’s the exact opposite of what boards should be doing. It will only lead to foreclosures. One co-op cannot stop the avalanche of price reductions.”

At one Brooklyn condo Samson represents, residents have set up the Unit-Owners Association, with its own elected officers and its own bylaws. Samson likens the group to a “shadow cabinet.”

“It’s a reaction to stress,” he says. “There are always people who want to look over the board’s shoulder and second-guess. They’re concerned, but they don’t understand the relations between the managing agent and the board, [and] between the staff and the unit-owners.”

Of course, watchdogs are nothing new to New York City’s co-ops and condos. They were around long before the current economic slump set in, and they’re sure to be around long after it’s a dim memory. But in tough times, the impulse to second-guess a board becomes especially powerful.

Jerry Fingerhut knows what it’s like to deal with watchdogs. Back in the spring of 2005, a large portion of a retaining wall at his co-op, Castle Village in upper Manhattan, collapsed (see Habitat, “The Wall Came Tumbling Down,” October 2006 and “FYI: The Wall Redux,” November 2007). Fingerhut, an accountant, helped many of his fellow shareholders file insurance claims that covered all or part of ensuing assessments. Then, after winning election to the board in late 2005, he helped fight off dissidents who wanted to oust four of the seven members, himself included.

“Dissidents are usually a very small but very vocal minority,” says Fingerhut, who is now president of the 585-unit co-op’s board. “They appeal to people who are ill-informed.”

Lynn Schulson, a leader of the dissident group at Castle Village, says she and other shareholders were upset by the $25 million price tag on the wall repairs, and they felt cheaper options should have been pursued. Beyond that, Schulson hoped to bring about greater oversight of board actions.

“A co-op board can basically do whatever it wants, and there should be checks and balances beyond board elections,” says Schulson, an administrative assistant at a market research firm. “Doctors have the AMA [American Medical Association]. Lawyers have the bar association. There should be some sort of system that’s responsible for the ethics of the way boards are run. I feel there’s very little I can do to affect change.”

Richard Dattner, an architect who served on the board’s architects and engineers committee at the time of the wall collapse, observes: “If you’ve ever been on a co-op board, there is always disagreement. There are always people who subscribe to the theory that there’s some plot and people on the board are making money from this. [The dissidents] said the engineering [of the new wall] should be a group decision. I said, ‘Look, you can vote for a candidate in a political election, but you can’t vote on an engineering procedure, just like you can’t vote on how your doctor takes out your appendix.’”

To fight off the petition drive, Fingerhut and his fellow board members relied on two tried-and-true tools: information and communication. “The most important thing is to gain the trust of the majority of the shareholders,” Fingerhut says. “You do that by putting out information and meeting regularly. We kept people unbelievably well-informed about what was going on. We held many informational meetings during the wall reconstruction, and still hold one or two informational meetings a year in addition to our annual meeting. It takes me a month to prepare for these informational meetings. That educational process continues to this day.”

The drive to oust the directors ultimately failed, and Fingerhut believes the board has finally won the confidence of most shareholders. But he is under no illusion that the co-op’s watchdogs have been silenced forever. As Dattner notes, disagreement is a fact of life for anyone serving on a New York City co-op or condo board. “That,” agrees Fingerhut, “is the nature of the beast.”