Board Members Face Personal Liability in New York Co-op Case

When your board decisions backfire …

TAKE STOCK OF HOW YOU ARE MAKING THEM

A recent New York condo case has sent shock waves through the board director community, highlighting the potentially severe consequences when boards are found to have acted in bad faith. The case, which involves a commercial unit-owner’s alteration plans, serves as a stark reminder of the personal liability risks board members can face.

WHAT HAPPENED. The trouble began when the commercial unit-owner sought to modify their space to accommodate a prospective tenant. What followed, according to court findings, was a pattern of roadblocks and delays that ultimately led the unit-owner to file a lawsuit. In an extraordinary turn of events, the judge found the board members’ conduct so egregious that he stripped them of their legal defense — a rare and severe judicial action that left the board essentially defenseless in the litigation.

LIMITED PROTECTION.  While the business judgment rule typically shields boards from judicial review of their decisions, this protection has key exceptions: bad faith, self-dealing and discriminatory conduct. In this instance, the court identified multiple instances of what it deemed inappropriate requirements and statements by the board, building a compelling case for bad faith.

Perhaps most troubling for current and prospective board members is that the board wasn’t acting alone. They had consulted with their managing agent, attorney and other professionals throughout the process. However, the courts made it clear that ultimately, the responsibility for decisions rests with board members themselves, regardless of the professional advice received. Both the lower court and appellate division expressed dissatisfaction with the guidance provided to the board, yet it’s the board members who face the consequences.

The case has spawned additional litigation, with unit-owners now suing board members personally for creating potential liability for the condominium. Should damages be awarded, the building’s insurance premiums will likely skyrocket — if coverage can be maintained at all. Even more concerning, if punitive damages are assessed against individual board members, neither the building nor its insurance would be permitted to cover these costs due to public policy restrictions.

MINIMIZING RISK.  Professional advice should generally be trusted, but board members should trust their instincts if something feels wrong. Creating a clear record of objections to board decisions can provide crucial protection if litigation arises later, which becomes particularly important as boards change membership and new members could potentially face liability for ongoing litigation that predates their tenure.

Alterations and resident requests should be approached with a solution-oriented mindset rather than a restrictive one. While not every request can be accommodated, a demonstrable good-faith effort to work with residents can help protect boards from allegations of bad faith or discriminatory conduct. Finally, for buildings involved in significant litigation, new board members should consider formally documenting their noninvolvement in disputed decisions and potentially recusing themselves. 

This case is a sobering reminder that board service carries real risks that must be carefully managed. By maintaining clear records, trusting but verifying professional advice, and approaching decisions with a collaborative mindset, members can better protect themselves while fulfilling their fiduciary duties.