New State Law Seeks to End Conflicts of Interest

Co-op boards and their property managers need to get ready to add yet another item to their ever-expanding To Do lists. On January 1, 2018, a new state law will go into effect with the laudable intention of eliminating conflicts of interest from the dealings of co-op and condo boards. But the hastily passed law is sure to create confusion.

The law, signed by Governor Andrew Cuomo on September 12, requires all co-op boards and select condo boards to prepare an annual report and distribute it to shareholders and unit-owners. The report, which must be signed by all directors, is to list all contracts or transactions that were voted upon by the board with an entity in which a director has a financial interest. The report must include information on the recipient, amount and the purpose of the contract, a record of the meetings of the directors in which the contract was voted upon – including attendance and how each director voted – plus the date of the vote, and the effective date of the contract.

Attorney Stuart Saft, a partner at Holland & Knight, was contacted by the governor’s office prior to the bill-signing, which amends the state’s Business Corporation Law (BCL) and Not-for-Profit Corporation Law (NPCL). Saft’s objections fell on deaf ears.

“Even if there was no transaction that involved an interested director,” Saft says, “the board must still prepare a document signed by all directors stating that there was no applicable contract, then send it to all the shareholders.”

He adds, “It’s unfair and another unnecessary cost. This legislation places an additional burden on boards and property managers who will have to do the work. It’s typical of the legislature’s disregard for New Yorkers who live in co-ops or condominiums.”

Even though this law is intended for all co-ops and condominiums, in reality it will affect only cooperatives formed under the BCL (virtually every co-op) and condos formed under the NPCL (virtually none). Most condominiums are unincorporated.

“I think whoever wrote the law did not know that condominiums are formed under the Real Property Law,” says Saft. “We have to assume that either the law will be amended after the legislature realizes their mistake, or the courts will assume that the reference to condominiums in the preamble is enough to include them.”

Cody Masino, vice president of David Associates Real Estate Management, is opposed to the new law for a different reason. He believes it will discourage board members from volunteering their professional expertise.

“I happen to manage a co-op where a board member is a licensed engineer,” Masino says. “This board member volunteered to address and oversee a local law filing and a roof replacement job, gratis. He was also involved in reviewing the bids and giving out the contracts. We were open about this to the shareholders, and most of them applauded the effort. While I do understand that this new law is meant to keep boards honest and transparent, I think this kind of extra broadcasting will discourage board members from volunteering their professional expertise. They will be afraid it could be construed as a conflict of interest.”

The legislature did not address such nuanced effects of the bill, according to Saft. The bill was hastily introduced to the Assembly and Senate the day before the legislature adjourned for the summer. “Legislators don’t know everything,” Saft says. “That’s why there should be hearings. But both houses enacted this law without any hearing to determine if this legislation is required or even makes any sense.”

Nevertheless, it becomes a state law on New Year’s Day. Your co-op board’s To Do list is about to get a little bit longer.