How Co-op and Condo Boards Can Fend Off Challenges to Assessments

Co-op and condo boards sometimes need to impose special assessments on the shareholders or unit-owners. Predictably, the owners may be displeased when they are assessed, especially when the assessment is unexpected or when the owners perceive it as being unnecessary or excessive. Sometimes, the owners are so unhappy that they challenge the assessment in litigation — either by filing a lawsuit against the board, seeking to invalidate the assessment, or by refusing to pay the assessment and then defending against the board’s attempt to enforce it.

Who will prevail in such a case will typically depend on whether the board is able to show that the assessment is authorized under the co-op’s or condo’s governing documents. If the governing documents (such as a condominium declaration and by-laws) empower the board to impose an assessment for a particular purpose, and the assessment is consistent with the requirements contained in the documents, a court is likely to conclude that the board’s decision to impose it is protected by the Business Judgment Rule. In that case, the owner challenging the assessment would have the heavy burden of proving that the assessment decision was made in bad faith or without a legitimate purpose. If the owner cannot make such a showing, the assessment will presumptively be upheld. On the other hand, if the governing documents do not authorize the assessment, or the procedures set forth in the governing documents were violated, the disgruntled shareholder or unit-owner is more likely to prevail.

Baxter Street Condominium v. LPS Baxter Holding Co., LLC, a recent case decided by the Appellate Division, First Department, illustrates these principles. A condominium board of managers voted to assess all unit-owners in the condo to fund needed repairs to the building and replenish the capital reserve. The assessment applied to both residential and commercial units. The defendant — the owner of four commercial units — did not pay the assessment. The condo board filed common-charges liens against these units and moved to foreclose on the liens.

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The commercial unit-owner challenged the assessment, arguing that it was inappropriate to impose the same assessment on commercial units as residential units, because some of the repairs supposedly benefited only the residential portions of the condominium. The court rejected the challenge, finding that “the board had acted within the scope of its authority and was entitled to the protection of the Business Judgment Rule.” Significantly, “[t]he condominium’s declaration and by-laws authorized the board to make repairs and to replenish the reserve fund, and the board presented evidence that the assessment was necessary to achieve those aims.” Moreover, “[t]he board also provided evidence that calculation and apportionment of the assessment was done in a way consistent with the declaration and by-laws, and that both these governing documents allowed the assessment to be levied against the commercial as well as the resident unit-owners.”

Because the board’s decision to impose the assessment was protected by the Business Judgment Rule, it could be overturned only by a showing of fraud, self-dealing or another breach of fiduciary duty. Here, the commercial unit-owner made no such showing, so the assessment was upheld.

Interestingly, the record of the case reflects that the total amount of the building-wide assessment was $150,000, with the commercial owner’s portion being only about $14,000. One can only speculate why this $14,000 dispute reached the stage of foreclosure litigation and an appeal to the Appellate Division, for which the parties’ legal fees almost certainly exceeded the amount of the commercial units’ assessment. It is fair to surmise, though, that the overall relationship between this condominium and its commercial unit-owner is not a happy one.

Ira Brad Matetsky is a partner at the law firm Ganfer Shore Leeds & Zauderer.