The Buck Doesn’t Always Stop at the Same Place

Matthew Goldberg

Partner, Hankin & Mazel

Broad brush. When a co-op apartment is damaged through no fault of its own, the issue often winds up in court with many parties being sued. Usually the named parties include the co-op board, and often the managing agent. Two court cases illustrate what can happen, and what boards should learn from them.

Not my fault. In one case the damage to the shareholder’s apartment was significant, and the shareholder sued for negligence, breach of contract and breach of warranty of habitability for water intrusion, mold and damage to personal property. The shareholder had reported the issue to the management company multiple times. Repairs were attempted, but never successfully. The board issued a counterclaim against their management company, claiming that it was responsible for the repairs. While the court found that the co-op was ultimately responsible, it said that the managing agent had breached its contract and found it 50 percent liable for the damages.

Our decision was informed. In the second case the building has some facade issues and, after discussion with their managing agent, decided to do a patchwork fix rather than replacing the entire facade. A few years later, however, the fix became ineffective and the board decided to do a full facade replacement, raising the money through an assessment. One of the shareholders sued the board for breach of fiduciary duty. The shareholder also wanted to sue the management company on behalf of the board. Here the court said the board was protected by the business judgment rule, and that it had made an appropriate business decision. The court also said that suing the management company would essentially be a runaround of the business judgment rule, and it wouldn’t allow that.

Bottom line.  Making decisions that are informed is expected of a board, and relying on the advice of a building’s management agent helps with this. However, it is important that your management contract clearly lays out the responsibilities the managing agent has, and your board understands what this includes.