Board Members of Cooperative Buildings Are Not Immune From Legal Liability

Board directors are volunteers, and it's important to not face lawsuits at every turn. Fortunately, there are numerous levels of protection, both in the New York Business Corporation Law and in co-op bylaws. As long as boards act within their authority, in good faith and follow proper procedures, board directors are generally held harmless and indemnified for both legal fees and any loss that would occur in the ordinary course of business. However, intentional harmful acts or wrongful acts or acts without authority may not be protected.

LIMITATIONS  You open yourself up to liability in situations where you act outside of the scope of your authority. In addition, if a board enters into a contract but there was no bidding process and no board meeting to discuss the decision, there may be liability. Equally, if only one board member was involved in or only one board member signed a contract, that’s a red flag. Even more so if the board member benefited from that contract or there’s a conflict of interest.

If a board member blatantly discriminates against a protected class, there are limitations to the protections. In situations where a board plans to reject a potential purchaser, it's always worth consulting with counsel and making sure the entire board has voted. In other words, very often there's a resale committee or an admissions committee that makes the decision and the board rubber stamps it. I believe this should go before the whole board and a full vote. This allows you to document the how, when and why of that rejection. Very often the reason for a rejection is financial, otherwise there could be an accusation of discrimination. You don’t have to disclose the rejection reason to the applicant, but if you get into litigation you have to give a reason. And all your emails, documents and minutes become discoverable. 

INSURANCE  Very often co-ops and condos have directors and officers liability policies. The duty of the insurance company to defend the board members is broader than their duty to indemnify. In most circumstances you will have a defense from the insurance company, but they may not indemnify you — in other words, the contract of insurance may not cover you. In the case of discrimination, a finding of punitive damages is not covered by insurance. So a board member who makes a blatantly discriminatory action may have personal financial consequences.