Business Judgment Rule and Board Member Protections in Condo and Co-Oop Disputes

ONE WIN, TWO LOSSES  Many boards sleep well at night because of the business judgment rule, which shields them from second-guessing and legal challenges provided they act in good faith and in the lawful and legitimate furtherance of the corporation. But you need to remember that the protections of the rule have their limits. We had a situation at a condo in Queens that was performing facade repairs, and the engineers said that various balcony enclosures had to come down. Three unit-owners refused, so we brought cases against them on behalf of the board. In one case, the judge ruled in favor of the board; in the other two, he ruled against it. The reasoning was that in the first case, the board of managers had approved the installation of the enclosure and therefore had the ability to revoke the approval The board was not protected in the other cases because the original installation predated the unit-owners taking title to their apartments, and the board did not get involved in addressing the issue when they purchased their apartments. So while the enclosures had to be removed to perform the façade work, they were allowed to be replaced.

NOT BULLETPROOF The business judgment rule will not apply to any co-op or condo decisions outside the board’s authority as defined in the underlying documents — for example, adopting a flip tax, unreasonably withholding approval of alterations, or requiring people to have property insurance without approval by a majority of shareholders or unit-owners to amend the proprietary lease or bylaws. Even if you make a mistake or are somehow a bit negligent, there usually is coverage for that so long as you have the building’s best interest in mind.

It almost goes without saying that the rule doesn’t protect you against board decisions made in bad faith. We’ve dealt with situations where a board turned down a sales application because a director felt that might create an opportunity for him to jump in, scoop up the apartment perhaps at an even slightly lower price, and then do an apartment combination. The board was open to a lawsuit there because that was self-dealing and didn't involve a legitimate corporate interest. 

INSURANCE COVERAGE Board members are typically protected by their D&O policy since the carrier’s duty to defend in the event of a complaint is generally absolute. But you have to distinguish that from the duty to indemnify – that is, who is actually writing the check at the end of the day if a case is lost. A carrier will not and cannot cover a claim where there is an affirmative court or agency award of damages for discrimination.

PROCEED CAREFULLY Rely upon the opinion of your experts, attorney, accountant, your engineer, architect and managing agent and keep records. If a shareholder or unit-owner objects to something and sues, having those records will show the court that you wrestled with the issue and made your decision after careful consideration. To avoid that situation altogether, try to engage in a dialogue with the aggrieved unit-owner or the shareholder to convince them that the action that the board has taken is not personal and there was a good business reason to do so. Litigation should always be a last resort, because nobody really wins.