Showdown at Sherwood Village

It is probably among the strangest exchanges between an outgoing management firm and an incoming management firm that you’ll ever see.

“We will not release anything until the corporation’s accountant has performed a complete audit of all files,” wrote Rachel Manhim, property manager at Rachlin Management for Sherwood Village B, a Queens co-op. She was responding to an e-mail from Abdullah Fersen, the president of Newgent Management, the incoming firm. He had written Manhim a number of letters requesting payroll documents, and paperwork with various city agencies, arrears statements, vendor bills, and also access to the co-op’s money.

Fersen was frustrated and surprised. Rachlin had been fired nearly a month before by the new board of Sherwood Village B, and it was dragging its feet.

Fersen, a veteran manager, says he has never seen anything like it before – most transitions are perfunctory – and adds that he was forced to recreate many of the records by diligent research among shareholders, vendors, and various city agencies. “We had to go with our plan and recreate everything from scratch,” he says.

Was Rachlin being unreasonable? From the board’s point of view, it was. Yet, if there is one thing that is clear about the past few years at Sherwood Village B, it is that nothing is crystal clear – except that the board was factionalized, the issues had become personal, and that (often contradictory) accusations were flowing freely from those on, and off, the board.

This is the story of what happens when warring factions begin to lose perspective and end up nearly destroying a co-op while purportedly trying to save it. “There was bad blood between the parties,” recalls Emanuela Lupu, senior associate at Smith, Buss & Jacobs and the building’s current attorney. “There [were] politics. It happens sometimes in buildings where you have different factions.”

“They had been split for a long time,” agrees Abbey Goldstein, a partner at Goldstein & Greenlaw, who had been the co-op’s attorney for about seven years. “Depending on who was running and who might get elected, it could change the balance of power. And many of the shareholders were bordering on paranoid [over there, thinking that] everybody is a crook. I’m a crook, the accountant is a crook, the managing agents are all crooks. The board was split down the middle ever since the day I was involved.”

This transition wasn’t pretty. It was a nightmare.

Accusations

Sherwood Village B was born in 1960 when the federal Department of Housing and Urban Development (HUD) insured its 40-year underlying mortgage. For the next four decades, the co-op had to adhere to strict HUD guidelines. A longtime resident describes the early years of the co-op – 135 units in two six-story brick buildings – as “peaceful.” Speaking on the condition of anonymity, a former board member observes: “It started to change when one individual started accusing the board and the professionals of being thieves. And it never stopped.”

Meet the Desrosiers family, Joseph and Olga, who moved into the building in 1988. Joseph served as the board’s treasurer from 1991 to 1995 and immediately began stirring things up. Convinced that the co-op was riddled with corruption and “fictitious billing,” he got HUD and the Queens district attorney’s office to open formal investigations. Neither found any evidence of financial wrongdoing. Goldstein says that after a while crying out “Corruption!” became tired. “I’m not saying there’s no such thing as corruption or that boards shouldn’t be wary,” he observes. “[But] some members of the board have been saying ‘corrupt, corrupt, corrupt’ for a long period of time, without citing any evidence.”

Indeed, during this period, Sherwood Village cycled through three management firms, with each company starting out as the new White Knight, and then departing some months later as the blackest of villains, corrupt to the core, joining the string of lawyers, accountants, and contractors who had been similarly accused by Joseph Desrosiers.

Brief Unity

About ten years ago, at least partly because of the toxic atmosphere, the co-op’s annual meetings stopped attracting a quorum, and the elections to the nine-member board’s staggered three-year terms ceased. The board degenerated into two sharply split, warring factions, each with its own legal representation. On one of the factions sat Olga Desrosiers, Joseph’s wife, who had been elected to the board in 2005. “[We didn’t have a] board that [was] all on the same page,” she recalls. “It was a board of five or six [on one side] to three or four on the other.”

In 2011, though, the board members managed to put their differences aside long enough to hire Rachlin Management. Some were very pleased. Jonas Winograd, a current board director, recalls that the property “had 25 violations when we hired Rachlin. They cleaned up all the violations and saved us a lot of money.” But others insist that the new manager made things worse. “Rachlin Management is a complete disaster,” asserts Joseph Desrosiers. “We have never seen a management company as bad as this management company.”

Despite the Desrosiers’s complaint, Danielle Rachlin, president of Rachlin Management, recalls that “things were going extremely well until about 2013.” That was when, as she puts it, “the person on the board who was the voice of reason had some personal issues [and was not involved anymore], and the opposing side of the board jumped in and started to run the board the way they wanted to.”

As a result of this shift, the board began hiring contractors on its own. “We were trying to do some capital work in the building, [so] we decided to bring in our own companies; we had got bids from them,” Olga Desrosiers says. “We had an electrical project to do. [Rachlin] told us that we needed to hire an engineer, and each building would be about $150,000, because it was an upgrade to the electrical system. There was no such upgrade. It was just changing the electrical panels. We got it done for $32,000.” She adds that “the bids would go to the board, and the board would pick which one they wanted.”

Before long, Rachlin Management was getting requests for payments from vendors it had never heard of, including plumbers, electricians, contractors, and a security camera company. “We had no idea who they were – and they wanted payment,” says Rachlin. “They said they were hired by Joseph Desrosiers. We told the board we needed their approval to pay these vendors, and we needed proof that they were licensed and insured.”

Changes

The way it stood in the fall of 2014, though, made it increasingly more difficult to govern. Olga Desrosiers, the current president, admits that the issue of “personalities” was the deeper problem. “It went personal, that’s what it was,” she says. “It was no longer business.”

There were now two board factions evenly split among eight directors. That changed when a former board member who had resigned took back her resignation, siding with Winograd and his supporters. With a five-to-four majority, this group declared Winograd the new president, replacing Olga Desrosiers.

Olga Desrosiers did not go quietly, and she and her supporters claimed the rescinding of the resignation was not valid. “I contacted [our] attorney, and I said, ‘She resigned, how could she now rescind her resignation three days later?’ The attorney told us they could not do that. Once the person resigns, it becomes effective immediately. But she kept going to the board, and kept making decisions.”

The ousted president and her followers subsequently boycotted the board meetings, while Winograd’s disputed majority tried to replace Lupu with Eric Goidel, a partner at Borah, Goldstein, Altschuler, Nahins & Goidel. (Goidel says he was never formally retained but offered “some advice” to the Winograd board.)

“There was a lot of disagreement on the board for some time,” recalls Lupu. “At my insistence, and at the insistence of Goidel, I said, ‘You guys can’t go on like this. You need to at least have an election.’ They had staggered terms. They hadn’t received a quorum in years. Because of their particular bylaws that don’t allow proxies it becomes difficult to achieve a quorum.” The two sides finally agreed to hold a long-overdue annual meeting with a legal quorum – and conduct a valid election of a new board of directors.

The meeting was set for December 3, 2014. Olga Desrosiers and her side, then the minority, campaigned fiercely as the election neared. “Our faction put up posters; we went door to door,” she says. “Our message was that we could more efficiently manage the co-op’s funds.”

Finally, the big night arrived. A quorum was present, although many in attendance were new shareholders from Asia who didn’t speak English. The majority faction, fearing trouble from Joseph Desrosiers, had hired an armed security guard to attend. On her way to the gathering, Danielle Rachlin got a phone call that the security guard had been ordered to leave the meeting by the “owner” of the building, even though the corporation’s shareholders are the legal owners of the building. The New York Police Department was called, and officers arrived.

“It became chaotic, a really ugly scene,” says Rachlin. “Olga stood up and said we stole $150,000.” From there, the sequence of events becomes unclear. Both sides agree that Rachlin Management was not wanted at the meeting and that the police were called. Once a quorum was finally confirmed, the vote took place. After the ballots were counted, Olga Desrosiers’s side had won eight seats, becoming a solid majority.

One of the first actions the board took was to fire Rachlin, and hire Newgent Management. In light of the accusations, Rachlin’s attorney advised the management company to demand a forensic audit before handing over the books to Newgent, but the board ignored this request.

“We told them they would have to have someone go through the files and sign off that what’s supposed to be there is there,” Rachlin says. After nearly a month, “someone from [Newgent] came and signed off and took the files. We kept the list and got it notarized as an affidavit. Every penny is accounted for.”

Emotions Run Amuck

It usually goes without saying, but in this case it needs to be said: when you’re on a co-op board, you need to act in a business-like manner. “Emotions should not be part of the equation,” says an accountant who did some work for the co-op and spoke on the condition of anonymity, fearing reprisals from the current board. “You should deal in facts, not rumors. Having factions and politics does not make for a pleasant working environment or living arrangement. That’s not the way to do business.”

A former board member adds: “The problem was that one individual wanted to do things their own way – regardless of what the bylaws said.”

Switching to new management is often difficult, and one of the largest tasks is accounting for all the documents. “It’s overwhelmingly normal that I have issues where documents are ‘missing,’” Lupu observes. “I think that the jury’s split on whether or not those documents are really missing, or just can’t be found. You get 40 boxes of documents, and who is digging through them? I have to say to the managers: ‘Did you guys actually go through every single paper and every single box that came to you?’”

In the end, she says, the battle of the boards and the showdown at Sherwood could have been avoided by applying less heat and more common sense. When making a management transition, experts say, it pays to be reasonable. Concludes Lupu: “It’s about professionalism, nothing more.”