Settling a Sponsor Dispute

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John J. LaGumina, Partner, The LaGumina Law Firm. What is the best approach for a board to take to settle a dispute with a sponsor?

BACKSTORY My firm was involved in two separate sponsor-related disputes recently. In each case, the board was justifiably upset with the sponsor and felt that litigation was necessary. However, the approaches that each client followed were very different. In one case, a cooperative had not been paid maintenance for many months on an apartment owned by the sponsor because of an underlying dispute that the sponsor was having with the sponsor’s tenant. The sponsor had not kept its promises of payment, and the cooperative grew frustrated over the delays and the mounting arrears. The cooperative board, which included an attorney, debated bringing a lawsuit against the sponsor for the unpaid maintenance. Meanwhile, the cooperative’s new property manager attempted to establish a relationship with the sponsor in hopes of avoiding costly litigation and negotiating an acceptable resolution.

Yet, while some communication took place, no money was received. The board was at odds on how to proceed and asked my opinion. In spite of the breach by the sponsor and clear grounds for litigation, I supported the approach of the property manager since it appeared that lengthy and costly litigation could result. The cooperative board accepted my advice, although not without some dissent from members who apparently saw my advice as a sign of weakness. They even suggested that the board should hire another attorney who was a “tough” litigator.

Ultimately, the managing agent was able to come to an acceptable resolution with the sponsor. The resolution involved virtually no legal fees, and the economic benefit to the cooperative far exceeded what a lawsuit would likely have produced.

Another condominium client was involved in a dispute with the sponsor of an adjoining development over the use of shared common areas. After attempts to mediate the dispute short of litigation were unsuccessful, my firm was hired to start litigation.

We first analyzed the case and explained that while there were solid grounds for bringing and eventually prevailing in a lawsuit, it might not result a speedy resolution to the situation and would likely involve a costly trial since there did not appear to be any written agreements about the shared arrangements. I went over the potential cost of litigation and suggested that our client first attempt to open up direct communications with the sponsor to see if an acceptable resolution could be arrived at. I learned that attempts had been made but that the sponsor had rudely cut them off. Because of the acrimonious manner in which the sponsor had rebuffed the managing agent, our client declined my suggestion and requested that the litigation promptly proceed. They were beyond the point of negotiations and felt a judge was needed. The lawsuit has since proceeded to the preliminary pretrial discovery stages with the trial not expected until next year. The co-op is now concerned about the costs of discovery and a potential trial and would like to see if some compromise is possible.

COMMENT The first approach was more prudent. The property manager was able to convince the board of the benefits of direct communication and compromise despite the urging of some on the board to get tough and litigate. My years of experience with these types of disputes and litigation made it easy for me to see that this approach made sense even if some questioned this advice. However, the decision to adopt this conciliatory approach is not an easy one to make for boards whose rights have been breached and that have grown frustrated with a sponsor’s seeming disdain or disregard for the board. While such frustration and anger may be justified, a board has a duty to be realistic and pragmatic when faced with the decision of whether to litigate.

From the Desk of JJL:

I defended a lawsuit brought by a cooperative shareholder challenging a cooperative’s fine for the shareholder’s subtenant leaving garbage and debris scattered in the hallways. The shareholder argued that the debris did not belong to his apartment and questioned how the cooperative could know whose debris it was. I then reached into my files and offered into evidence the key to the case – a portion of the subtenant’s garbage that included a soiled piece of the subtenant’s junk mail.