Board Powers Are Immense, but Not Limitless

The Toren Condominium, designed by the estimable firm of Skidmore, Owings & Merrill and featuring a striking “rhombus-shaped tower,” generated a lot of oohs and ahhs when it opened in downtown Brooklyn in 2010. The 38-story, 240-unit luxury tower also generated so many complaints about construction defects that the board sued the developer-sponsor, BFC Partners. In October 2015, BFC reached a confidential settlement with the condo board to fix the defects.

But the Toren’s troubles weren’t over. Back in 2013, Michael Salzhauer, a principal of the commercial real-estate company GDLC, became the Toren's largest commercial tenant when he paid $6.75 million for a retail condominium unit. The purchase entitled him to a seat on both the condo board and the condominium's commercial board.

Despite this, the other board members declined to make Salzhauer aware of the settlement with BFC, gave him no input into it, and denied him access to condo documents. Salzhauer was also denied access to the condominium's 2015 and 2016 financial statements, its 2016 budget, and a RAND Engineering & Architecture report used in the litigation.How did the other board members justify their decision? By claiming that letting Salzhauer see those documents wasn't required by law, but was simply something they could do at their discretion. They claimed that the Business Judgment Rule gave them the authority to make this decision, and that the settlement with the developer-sponsor was confidential. Salzhauer sued the board in New York Supreme Court in August, claiming the board had acted in an “unlawful and underhanded” manner in denying him access to documents “without any legitimate justification.”

Last month, Judge Arlene Bluth agreed. In her decision, she wrote that “Salzhauer is entitled to inspect and copy the books and records, including the settlement agreement and the RAND report. In order to fulfill a board member's fiduciary obligations, board members need unfettered access to the books and records of the condominium."

Bluth also ruled that the confidentiality agreement that the board signed with the developer did not give the board the right to deny access to documents. “The same fiduciary duties that compel Salzhauer to inspect these documents would also compel him to maintain any confidentiality terms contained in the settlement agreement," Bluth wrote. If he fails to do so, the judge said, the board has legal options to address that.

If there's an overarching lesson here, it is this: The Business Judgment Rule gives co-op and condo boards immense powers, but those powers are not unlimited. The majority of a board can’t deny a duly elected board member access to building documents. It’s an abuse of power, and it’s illegal.