Talking Points

Whether a gossipmonger or a whistle-blower, telling tales out of the board room can have serious consequences.

It can be an awkward situation at best, as one Brooklyn board member is discovering. The situation falls into a grey area: a couple in the co-op, a 300-unit building, had fallen behind in arrears. The couple had been warned, the eviction notice had been sent, and the marshals were on their way. In the nick of time, the wife found the money to pay the back maintenance, and the eviction proceedings were stopped short.

By the end of the day, however, the gossip was flowing. Everyone seemed to be talking about the couple and how they suddenly had the money for maintenance. Angry and embarrassed, the husband confronted the board president, accusing her of leaking his private information. But if someone on the board had been gossiping to selected shareholders, there was no way to prove it. In such situations, what is a frustrated board to do?

“I will usually send an e-mail to the board [members] reminding them of [their] fiduciary responsibility and reminding them of [protecting shareholder] confidentiality,” says Robert Braverman, an attorney with Braverman & Associates. Whether a board member is spreading gossip, discussing litigation strategy, or talking about how an interview went with a prospective buyer, all of it is potentially in violation of the board’s legal responsibility to safeguard the interests and personal information of the shareholders.

If a gossiping member won’t stop, fellow board members have two recourses: first, remove the offending person from any officer positions on the board. If that doesn’t end the problem, go to the shareholders. Call a special election, explain that a board member needs to be removed “for cause,” and let the shareholders vote. That typically solves the problem.

But what about the opposite situation? The majority on a board does something that a minority thinks is out-of-line and/or possibly illegal and a minority of members decide to be “whistleblowers” and leak the information to the rest of the owners.

That was the case of a building on the Upper West Side of Manhattan. After a board member violated the terms of his alteration agreement – falling behind schedule in the renovation – he balked at previously acknowledged fines and refused to pay. A majority on the board worked out a compromise. What would have been upwards of $10,000 or more in fines was reduced to roughly $1,000. A minority on the board opposed the settlement as unfair and wrong.

The board members who oppose the settlement are in an awkward position – do they take legal action? If so, what are the chances of winning? “Some judges say if the dollar amount is too excessive, they are going to treat it as a penalty and not an appropriate damage amount,” effectively throwing out the fine, says attorney David Berkey, a partner at Gallet Dreyer & Berkey, who is advising the board members opposing the settlement. On the other hand, if the board members allow the settlement to go forward, what signal does that send to the rest of the shareholders? That board members get special treatment?

Or do they act as whistleblowers and for the good of the co-op leak details of the deal and let the shareholders rise up in revolt? “What good will that do?” says Braverman, the attorney. “A better course of conduct would be to either contact the managing agent, who is holding the purse strings, and/or the attorney for the building. Because just leaking it out is not going to really stop anything necessarily.”

He adds: “If someone comes to me and says, ‘I believe that so-and-so is taking kickbacks from the contractor,’ or ‘the majority of the board is taking kickbacks,’ my first question would be, ‘What evidence do you have?’ Even if it’s the majority of the board, that’s not my client. It’s the entity. I would be duty-bound to do something about that. Take the same scenario and he blasts the evidence in an e-mail to all the shareholders – that’s not the best way to attain the goal.”

One of the options that the board members who oppose the settlement have is to put the issue to the shareholders at the next annual meeting, offers Robert Tierman, a partner at the law firm Litwin & Tierman, who is not involved in the conflict. This way, the board members who oppose the settlement are on record with the shareholders, and the shareholders can weigh in on what they feel is in the best interests of the whole building.

“It’s almost inevitable that different board members will have different opinions as to what is best for the building,” adds Tierman. Some board members are reluctant to play cop because they are determined to avoid controversy. Still others avoid it, because they are concerned about potential legal costs. Notes Tierman: “You start running up legal bills, and suddenly the legal bills become the issue more than the fine itself.”

In the long run, simpler is better. If there is something going on that makes a board member uncomfortable, he or she should write a formal letter to the board, and copy it to the corporation counsel. If the problem persists, the board member should be prepared to bring it up at the annual meeting. It may be difficult or awkward to call out another board member on self-dealing, but, finally, it may be the only thing you can do.

“Every little issue has great potential for debate,” says Tierman. The key is to make sure the shareholders are clear on who said what and when. The last thing any board member wants, warns another attorney, is to be a defendant in a lawsuit, standing accused of “wasting corporate assets and self-dealing.”