Do Boards Have to Reveal Their Plans?

What is a board member’s responsibility to advise a condominium unit-owner about planned work in the building, particularly if that work will have an impact on the unit-owner? That issue was considered in 345 East 50th Street LLC vs. The Board of Managers of M at Beekman Condominium. The M at Beekman consists of two buildings constructed around 1900 that contain 23 apartments. The two penthouse owners have roof decks for their exclusive use. 

One of the penthouse units is occupied by Shelly Brown. There were leaks emanating from the roof below Brown’s deck. Even so, she decided to renovate portions of her roof deck and received required permission from the board to do so. The problem arose when the board decided to repair the roof in order to address the leaks, which required Brown to remove the just-installed deck at her own expense. 

Brown sued, claiming, among other things, that the board and its members knew about the planned roof replacement when they approved her installation but failed to tell her about the proposed work, breaching their fiduciary obligations. She also claimed that the individual board members committed fraud by making misrepresentations about roof repairs or, alternatively, by omitting facts that should have been disclosed.

According to Brown, the board members actually encouraged her to make the deck improvements. In the lawsuit, Brown asserted that the board had singled her out for unequal treatment. The other roof deck is owned by a board member who, Brown claimed, received certain courtesies and considerations not given to Brown, including paying to have the neighbor’s roof deck removed. Brown stated that, if the board had told her of its plans, she would have delayed her deck work until after the roof installation. The individual board members challenged Brown’s claims. They said that the board’s decision was made after substantial discussion with the board’s engineer and managing agent. The leaks could not be remedied other than with a roof replacement.

Further, the board claimed, Brown was not singled out, and the other roof deck owner was not treated differently; his deck replacement was not paid for by the condominium, and the method of work for his deck’s removal (about which Brown also complained) was not substantially different. The court viewed the board members’ actions through the prism of the Business Judgment Rule: were their acts made in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of the condominium?

Board members have a fiduciary obligation to unit-owners. In order to prevail on a breach of fiduciary duty claim, Brown would have had to show the existence of a fiduciary relationship (which there clearly was), misconduct, and damages. As the court explained, unit-owners must be treated fairly and evenly so that if there were ever a departure from precisely uniform treatment, a breach of fiduciary duty could be discovered. Ultimately, the court ruled in favor of the board members. Their decision to replace the roof was deemed reasonable, cost-efficient, and designed to protect the integrity of the condo.

But the court also reprimanded the board as irresponsible for failing to notify Brown of the plans to replace the roof. However, there was no indication that the board had acted outside the dictates of the Business Judgment Rule or had violated its fiduciary obligations to Brown. As to Brown’s claim of fraud, there was no indication that the board members made any misrepresentation when the board approved her roof deck replacement. 

Brown appealed to the appellate court, which ruled that the roof was replaced “to further the condominium’s interest, even if plaintiff may have been damaged as a result, and there was no evidence of bad faith.” More to the point, perhaps, the status of Brown’s renovations was “not relevant to the board’s interest in maintaining the integrity of the building.”

Reading the Ruling 

Board members are permitted to – and should be permitted to – operate their buildings as they see fit. They do, however, have obligations to all unit-owners (or shareholders in a co-op), including one to make repairs to the envelope of the building when required. While the board members did not act improperly, the court noted that, when Brown’s application for the roof deck work was submitted, the board could have let her know that a roof replacement was being considered. While failing to notify her may have been irresponsible, it was not actionable. The lesson for unit-owners is that when they are about to perform renovations of the type discussed here, they may want to ask the board if it is considering repairs that would affect the renovation. Unit-owners may even want to read the board minutes. That may seem like an unnecessary burden, but it also is a simple enough way to avoid situations like this one.

Attorneys: For Plaintiffs: Seyfarth Shaw
For Defendants: Gartner & Bloom

Dale J. Degenshein is special counsel at Stroock & Stroock & Lavan.