Shareholder Hardship: Balancing Your Fiduciary Obligations & a Helping Hand

One of our co-ops had to deal with an elderly shareholder who had no family and had stopped paying her maintenance. She was often seen wandering the streets at night half-dressed, caused fires in her apartment when trying to cook, and was often heard yelling and screaming when no one else was present in the apartment. Board members and residents took it upon themselves to provide food for her and check in on her, but they were not able to resolve all her problems, including obtaining necessary medical care or making payment of the mounting maintenance arrears.

In order to obtain the maintenance that was owed and to get the woman the help she needed, the board was counseled and agreed to begin a non-payment proceeding against her, with the express understanding that it was not the co-op's desire or intent to evict the shareholder. As it began the action, the cooperative also brought its own petition before the court for an appointment of a guardian, who would be responsible for protecting the tenant's rights and for obtaining financial and medical help for the tenant from New York State's Protective Services for Adults (PSA). Alternately, New York City has the similar Adult Protective Services (APS).

Compassionate Eviction

The cooperative worked closely with the guardian to assure that maintenance was paid (fulfilling its fiduciary obligations to the cooperative) and that the PSA provided assistance to the shareholder. A number of court appearances were required to insure that she was placed on a financial management plan and that her medical and psychiatric needs were being addressed. Eventually, PSA moved to have a new guardian appointed to manage all of the affairs of the shareholder. She was relocated to an appropriate residence, and her apartment was sold in order to provide funds for her care and maintenance.

Because the cooperative clearly took into account the needs and well-being of the shareholder, the court and the shareholder's guardian allowed the co-op to recover all of the substantial legal fees it incurred in bringing and prosecuting the proceeding. The court was grateful to the cooperative for being proactive and balancing the needs of all the parties. The manner in which all of the board members pitched in to provide for their fellow shareholder and the way in which the matter was resolved for the mutual benefit and protection of all parties truly represents how a "cooperative" is designed to work.

No matter how well-intentioned a board may want to be, it must always remember that it is bound by its fiduciary obligation to the corporation as a whole. Accordingly, there is often a right way and a wrong way to help a fellow shareholder who has fallen on hard times or has medical issues.

When Unemployment or Medical Bills Strike

Similarly, when a good shareholder has fallen on financial hardship and is unable to pay maintenance, many boards avoid taking the shareholder to court for fear of making things harder for the shareholder. Unfortunately, this often allows the arrears to build up to a level that neither the shareholder can manage nor the building can accept. When litigation is ultimately started, the shareholder often needs to assert defenses such as laches (an unreasonable delay in beginning the proceeding) or improper service of the petition, in order to buy additional time and stave off eviction. This results in increased legal fees and further delay.

We constantly tell our clients that starting a non-payment proceeding does not mean that the shareholder will be evicted or that they are precluded from being understanding and sympathetic to the tenant's predicament. More importantly, in signing a stipulation, the court will allow the board to be as generous as it wants in granting payment terms to the shareholder. Under appropriate circumstances, boards have agreed — and the court has allowed without objection — arrears to be paid over the course of years. In return, however, the shareholder waives any defense that he may have had to the proceeding.

In the event the shareholder is unable to pay, after having been given every reasonable opportunity, the stipulation will allow the cooperative to fulfill its fiduciary obligations and give it the ability to take the steps necessary to collect the maintenance owed. This not only gives the tenant every opportunity and incentive to pay his maintenance, it also satisfies the board's fiduciary obligations to the remaining shareholders.

Stewart E. Wurtzel is a partner at Deutsch Tane Waterman & Wurtzel

Adapted from Habitat November 2009. For the complete article and more, join our Archive >>