A Board Learns Why It Should Oversee Its Managing Agent

With no response from the managing agent (or the unwitting apartment corporation), the mortgage-holder accelerated the promissory note and commenced foreclosure proceedings. The agent ignored the service of process of the summons and complaint.

The mortgage-holder then sold the note, mortgage, and causes of action to a “vulture” lender whose business is to foreclose. With the apartment corporation failing to appear in the case, the new lender moved for a default judgment. Luckily and before the court entered a judgment, an individual shareholder in the building became aware of the pending motion.

At this late stage of the case, the board of directors engaged our firm to move to vacate the default. While the motion was submitted and a decision was pending, the case was settled with the apartment corporation, securing replacement financing.

Unfortunately, by that time, with default interest and late charges, a prepayment penalty, legal fees and other costs, the apartment corporation had incurred almost $500,000 in unnecessary expenses. The board then sued its former managing agent for damages.

The lawyer’s take. A board, in conjunction with the apartment corporation’s managing agent, accountant, and attorney, should be proactive and implement systems, policies, and practices that might serve to avoid similar situations.

A treasurer reviewing expenditures, comparing them against the current budget and against last year’s actual expenses, might have discovered the discrepancy.

When mortgaging the property, the board could have requested that the lender not only give notices of default to the managing agent but also to either an officer of the board or the corporate attorney.

Then, notwithstanding the negligence of the agent in ignoring the letters from the lender and the legal process, the board would have become aware of the problem sooner and might have been able to resolve the matter with the original lender.

Additionally, having an accounting firm review the expenses of the apartment corporation more often than merely at the time of the preparation of the annual financials might have disclosed the issue.

While this situation may be more of an exception than the rule, when such situations occur, the consequences for an apartment corporation can be dire.

Case closed. While a co-op board may engage a managing agent to perform certain corporate functions, the board cannot totally rely upon the management company. Nor does hiring a managing agent relieve individual board members of their fiduciary duties.

As fiduciaries, board members must still exercise some level of oversight with respect to the managing agent and must closely review management and financial reports. Where warranted, board members must ask pertinent questions or even perform independent investigations.

Eric M. Goidel is a partner at Borah Goldstein Altschuler Nahins & Goidel.

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