Rejecting Purchase Applications

AXELROD VS. 400 OWNERS CORP.

When reviewing purchase applications, co-op boards can get into serious trouble. In the case of Axelrod vs. 400 Owners Corp., the board had received several applications from a shareholder who was trying to sell her apartment. The board kept denying the applications because the potential purchasers were of childbearing age. One board member in particular was concerned that if “those people” moved in and had children, his quiet floor would become noisy.

This case is particularly thorny for two reasons. First, the basis for the rejections is discriminatory because, under city law, having children puts you in a protected class. Second, the board breached its fiduciary duty to the shareholder who was selling by denying the applications because of the personal interests of one board member. He lived on the same floor as the for-sale apartment, and he allegedly exerted influence on the other members to deny the applications.

Fiduciary duty is a very important obligation that board members have to their fellow shareholders. When a purchase application is submitted, the fiduciary duty provisions are triggered, and that duty runs to the seller, who is the current shareholder. So a prospective purchaser couldn’t say a board breached its fiduciary duty to her because she’s not yet a shareholder. But the current owner (the seller) would have a right to sue about fiduciary duty being violated.

This is really important. There are still a great many co-ops out there, even though condos are on the rise. Some people prefer a co-op precisely because it has a board overseeing the financials of prospective purchasers and, hopefully, getting people in the building who are going to be responsible and good neighbors.

Another thing to think about is that a co-op board has the right to reject a purchaser for any reason – as long as it’s in good faith. But what happened in Axelrod is that the shareholderseller alleged that this board member thought of himself as superior to the shareholder and got the rest of the board to vote the way he wanted.

This problem comes up more often when a board member wants to buy an apartment. If that occurs, red flags need to go up. If someone else wants to buy that apartment, the interested board member should recuse himself or herself from the decision-making process. If any other reason comes up for rejection of the outside buyer and it is based on a board member’s personal interests and not the best interests of all shareholders, then the board members have to tell their fellow board member that he or she is not permitted to participate in the decision. If that person refuses and insists on participating, the only remedy is for the other other board members to vote against that interested member. Doing that will hopefully give you some insulation if there is a lawsuit.

A very drastic measure would be to have a board policy that says if a board member wants to buy the apartment or the applicant is going to be living on the same floor, the board may want to consider saying, “You can’t vote on this application.” But that would be very hard to do.

Board members and managing agents need to take a look at their application package and make sure that there is no mention of any protected class on the application – nothing about age or nationality or presence of children. It’s probably a better idea to take those off and just ask for the names and the number of people who will be living in the apartment, without mentioning age.

Deborah Koplovitz is a shareholder with Anderson Kill P.C.