Punishing a President

Schechter & Brucker
Andrew Brucker, Partner

The board at one of our co-ops is very split. Board members argue about everything. There was even a problem in agreeing to refinance the mortgage on the property. The board took additional funds from the lender to pay for capital improvements for the next few years. Two of the board members were against it, claiming that the additional money and the additional debt service were unnecessary. Now, two years later, the president of the co-op (who was president then, too, and who was a proponent of the transaction) is selling her unit and moving. The two board members who were very much against the refinancing are now refusing to consent to the sale, even though the purchaser is well qualified. Their stated reason for objecting to the sale is their belief that the president should stay in the building and “suffer” along with other shareholders because of the mortgage (and high debt service) that the president so strongly advocated.

Legal Lesson

Our mantra in advising boards is that their decisions should always be reasonable, consistent, made in good faith and with a view as to what is best for the shareholders and the corporation. We preach this to the individual board members as well. We do not want anyone to accuse the board, or any of its members, of “bad faith.” Even the Business Judgment Rule, which protects board decisions from judicial review, requires that decisions be made in “good faith.” In our case, the two board members acted out of vengeance only. There was no concern for the actual financial background of the purchaser. There was no concern for the specific transaction, or for the good of the cooperative. The only concern these two shareholders had was to make the president miserable, and to disrupt her life. This sort of thinking is dangerous, and can only lead to problems.