Bad-Faith Actions

In a federal case called Broome vs. Beekman Hill House Apartment Corp., a prospective subtenant alleged discrimination. Compensatory and punitive damages were awarded against a number of board members, including the president, Nick Biondi. The Court of Appeals then denied Biondi’s claim for indemnification.

There was a finding that Biondi acted in bad faith, and under New York law, compensation or indemnification for bad-faith acts is void. Additionally, directors-and-officers insurance does not allow for indemnification for bad-faith acts.

In New York City, there are currently 17 protected classes, including race, ethnic group, and religion. Also protected are lawful occupation, lawful sources of income, or being a war veteran or in active military service. When discrimination is alleged before the Human Rights Commission, the burden shifts to the apartment corporation and board members to show an absence of discrimination. This does not mean that you need to approve every prospective purchaser in a protected class, but you cannot turn down somebody because they are member of that protected class.

In order to avoid charges of discrimination, board members need to adopt an admissions policy and an interview practice. As a first step, there should be screening of a purchase or sublet application by the managing agent. This should involve such things as financial due diligence, credit checks, criminal background checks, and running whatever test the corporation has with regard to finances. Additionally, the application should be scrutinized to see who will be occupying the apartment. So there’s no need to review an application where eight people plan to live in a studio.

If the application does not meet these threshold tests, it should be rejected by the management office and not even be presented to the board. If the threshold tests are met, the application should be sent to the board and any admissions commit-tee via a secure website. Hard copies should not be disseminated.

Many buildings do not have a formal admissions committee. They will have several committee members who attend every meeting, plus a couple of people who just show up if they’re available on a given night. That can be a prescription for disaster since that is where the admissions process sometimes goes off the rails.

There should be an education process for admissions committee members that includes educating them about the 17 protected classes and cautioning them against making innocuous conversation with a candidate, who might give a response that leads to a protected-class claim. For example, if someone on the board is Russian and he or she observes that the applicant is Russian, the board member might say, “What part of Russia are you from?” If the applicant answers that question and then gets turned down, it might give rise to a discrimination claim.

Before the application is sent by the manager to the board, we encourage the manager to sanitize the application. For example, it’s often possible to surmise someone’s ethnic group, race, or religion from his or her last name. If the manager sends an application to a board with the names redacted, then this reduces the likelihood that someone will already have formed an opinion.

When the interview is complete, any copies of the application should be collected by the managing agent and destroyed. There should be only one copy, preferably in the cloud, which is preserved for record-keeping.

If the full board or a quorum has met the candidate, then the board can vote on the application. If, however, there is an admissions committee that does not consist of board members, then that committee needs to make a presentation to the board. The board must then either approve or reject the sale based upon the recommendation of the committee. We also suggest that a board member serves as a chair of the admissions committee so that non-elected shareholders don’t make up the entire committee.

When the committee recommends approval, the chair of the admissions committee will report on the interview at the next board meeting. The board can rubber-stamp that. But when there is a recommendation to turn down a prospective purchaser or subtenant, the board should be very careful in how it proceeds. The board should ask the admissions commit-tee representative to explain why the committee recommends rejection.

The board should be thinking ahead as to what happens if a discrimination complaint is filed. “What are we going to tell the Human Rights Commission or court why this prospective purchaser or subtenant was rejected?” If the board is not satisfied with the answers it receives from the admissions committee, the board has two options: it can overrule the admissions committee and decide to accept the prospective purchaser, or it can ask the prospective purchaser or subtenant to come in for a second interview before the entire board.

Now that can be a bit of a double-edged sword. If the board stands by the recommendation of the admissions committee to turn down the sale, it may have created some additional ammunition for the rejected purchaser or subtenant. But that is better than rubber-stamping a recommendation by a committee when the board has not been privy to the inter-view process.

The bottom line is that the board and the admissions committee should be using purely objective criteria in mak-ing a determination whether to accept a candidate for admission as a share-holder or a subtenant. While you cannot prevent someone from bringing a suit or filing a complaint, you can avoid liability. And even if there is liability, if it’s demonstrated that you acted in good faith, you would, unlike Nick Biondi, be entitled to indemnification.