New Line of Defense

In 2011, Brenda Pomerance, a patent lawyer and unit-owner at the Link condominium at 310 West 52nd Street, began a lawsuit to gain access to board documents. Pomerance, who suspected the board of serious mismanagement, said she wanted to get the contact information of all unit-owners in the building and also extensive access to condo records, including monthly financial statements.

Three years later, after suing the board over a renovation dispute at his co-op at 425 East 86th Street, J. Armand Musey discovered what seemed to be financial irregularities. “The building took on a very large facade renovation project [that] went 90 percent over budget with no coherent explanation,” says Musey, whose apartment was once the home of the late celebrity restaurateur Elaine Kaufman. Musey began seeking access to pertinent co-op documents.

For boards in such situations, what are the risks and protections when granting access? “Many times, there are troublemakers who just want to get documents,” observes Adam Leitman Bailey, an attorney at his eponymous firm. “They may be unhappy because the board didn’t approve an alteration in their apartment, or they wanted permission for a roof deck and they didn’t get one, so now they’re looking for documents to fuel a lawsuit. On the other hand, it can be a good thing. After all, it’s a democracy. In that sense, who are we to withhold documents?”

It’s a debate boards should have, says Bailey, as boards, in the aftermath of rulings in the lawsuits brought by Pomerance and Musey, face the question of how they can allow increased access while still protecting the properties and residents through such devices as non-disclosure agreements (NDA). “The rights of an owner to review books and records must be balanced with maintaining the integrity of confidential information,” says attorney Rob Braverman, a principal at Braverman Greenspun and board counsel for the Link.

The Cases

The Pomerance v. McGrath case, decided in appellate court, reiterated that under existing law, condo unit-owners have the right to see financial reports, invoices, minutes of board meetings, and redacted legal invoices “so long as [it is] in good faith and for a valid purpose … at the managing agent’s office, during convenient weekday hours.” But now – citing precedent that said case law already allowed condo owners the right to make paper copies – the court affirmed a lower court’s ruling that said they also have the right to make “electronic copies.”

In addition, the ruling declared that condo unit-owners have the right to see lists of owners and their contact information, a right co-op shareholders already have. And addressing confidentiality concerns, the court said unit-owners could be required to sign a confidentiality agreement.

While that ruling concerned only condos, the Musey v. 425 East 86th Street Apartments Corp. decision a few months later cited Pomerance as precedent to determine that co-op shareholders also are allowed to copy documents, which they never could before, and that boards also can require a confidentiality agreement. “I think the courts have been going in this direction for a while, allowing broader inspections, consistent with common law,” observes attorney Jesse Schwartz of Kagan Lubic Lepper Finkelstein & Gold, who represented the board of the Pomerance condo.

These rulings are important for boards and owners, who should be aware of the specific documents that are affected by the law. Boards need to know what protections, such as non-disclosure agreements, they can put in place to safeguard the privacy of these documents, and what steps they should take if an owner violates an NDA.

Owners have had some inspection rights all along. “Historically what would happen is that a shareholder or unit-owner would make a request to see documents and submit a good-faith affidavit, which a board is entitled to ask for,” says Braverman. “If the board believed there was no nefarious reason for reviewing the documents, an appointment would be made at the managing agent’s office and the documents would be reviewed. But until these cases, if a shareholder or unit-owner said, ‘We want photocopies made and to take them home with us,’ the answer would have been no.”

Such requests are unusual, says Brian Scally, vice president of Hudson North Management, who was not involved in either case. “Sometimes people feel they have an issue with their particular unit or floor or with the common space, and they want to see how the board voted. Like, are they planning on fixing the elevator, or putting an assessment in place? Not many people do it to start lawsuits – it’s more for informational purposes.”

“Residents have a right to see the documents, to clear up any suspicion,” adds Bailey, the attorney. “For example, if they think the maintenance is too high and they want to go through the records, that’s a good-faith reason. We go to all ends to give them what they need.” He adds: “You may have boards that are out of control and run the place like they’re dictatorships in Venezuela, and there may be things they’ve done wrong or they don’t want to show.”

Another reason some boards are reluctant to share documents is a simple matter of economics. Explains Bailey: “A lot of buildings don’t have a lot of money; they don’t want the hassle of paying their accountants or lawyers to look into this. They feel that getting the documents takes too much time or money.”

Inspection Section

Owners and shareholders could always view documents. With condos, New York State’s Real Property Law allows viewing records “of the receipts and expenditures arising from the operation of the property” and “the vouchers authorizing the payments” during convenient weekday hours. With co-ops, the Business Corporation Law says that a shareholder who gives at least five days’ written notice has the right to examine during business hours the minutes of shareholder (as opposed to board) meetings. They can also access shareholders’ names, addresses, and number and class of shares. Court rulings and case law based on common law have expanded these rights over the years.

Pomerance now explicitly allows condo owners “in good faith and for a valid purpose” the right to examine four types of documents:
•    monthly financial reports
•    building invoices
•    minutes of board meetings, and
•    “appropriately redacted” legal invoices.
But Pomerance also specified that while condo boards must make documents available, that does not mean they have to “create and deliver” them to owners requesting them.

Requirement Reading

Despite the rulings, there are still restrictions on the viewing of documents by shareholders and unit-owners. In addition to what’s already in the law, such as the co-ops’ five-day written notice requirement, the most notable changes come down to two things: document scope, and a nondisclosure agreement.

The first is straightforward. “Some documents are outside the scope of what the law requires,” notes Schwartz. “One thing boards can do is make sure any inspections are consistent with just the documents listed in the bylaws, the Condominium Act, and case law,” such as the four types of documents listed in Pomerance.

The second – non-disclosure agreements – is a more complicated issue and seems destined for additional litigation. Requiring an NDA seems simple enough. “The concern on the board side,” explains Braverman, “is, ‘What if this person were to make mischief with the documents? We don’t want our financials posted on Facebook, or if there are people in arrears we don’t want that information disclosed.’ So now if a document is requested to be reviewed, it is marked confidential and the unit-owner or shareholder signs a confidentiality agreement. They are bound by the agreement not to disclose the contents of that information.” Robert Ferrara, president of Ferrara Management Group, says, “We’ve actually already used [NDAs] in the past when a shareholder or unit-owner comes in to review certain documents.”

Yet in letting boards require NDAs, the court left open a critical question: how much can an NDA demand? While most boards will probably use standard NDAs like those corporations have used for years, some boards will demand more specific protections.

Take the Musey case, for instance. When Musey began seeking access to pertinent co-op documents, he went to court. Eventually the board allowed him to inspect some documents at the management company’s office, which he did on May 25, 2016. What he saw prompted more questions, and on August 23 he wrote to the board president, asking for a specific list of additional documents. On May 2, 2017, the court ordered the board to comply with Musey’s request within 30 days. On June 1, the co-op’s managing agent sent Musey an electronic copy of the court-ordered materials, along with a non-disclosure agreement.

Musey was not pleased. “They’re trying to get me to sign a non-disclosure agreement that is basically not signable, where anytime there’s a concern that records have been leaked, they could hire a lawyer and investigate and I have to pay for it even if I’m shown not to be responsible – so they can run up my bill,” Musey says. “It also prevents me from using the documents’ information in court or relating it to other shareholders. I did sign a standard court non-disclosure agreement – the New York City Bar Association has a business-litigation non-disclosure agreement. But I guess the board wants their own.”

Braverman counters, “Musey refused to sign, or to advise what changes to the agreement he desired.” So the question remains: can a board require a unit-owner or shareholder to sign an NDA so onerous that, in practical terms, no one would? “Generally speaking,” says Braverman, “if someone comes back to us with reasonable comments on a confidentiality agreement, we will take a look and consider same.” But the attorney worries that if a confidentiality agreement is breached, the person who breaches it may suffer no consequences. “Penalties very often are not enforceable as a matter of law.”

“I think most shareholders or unit-owners understand the ramifications if they were to disseminate information,” says Ferrara, the property manager. “They generally just want to know what’s going on in their own building for knowledge reasons. If boards follow their legal counsel’s advice, have an NDA in place, and take appropriate minutes, then they should feel comfortable providing their owners the documented information requested. It’s still very new,” he notes, “so it’s going to be interesting to see how it goes.”