Board Members Shielded by Business Judgment Rule in Co-Op and Condo Legal Disputes

Legal challenges are an unfortunate reality for some co-op and condo board members, whether it’s a disgruntled purchaser, contractor or some other party. At the core of protections for board members is the business judgment rule, born out of the Levandusky case in 1990. This rule serves as a protective umbrella for board members, provided they act in good faith and exercise reasonable judgment in fulfilling their duties. It is applicable to all New York corporations and extends protection even in cases of mistakes or errors, but it does not shield actions rooted in bad faith, self-dealing, criminality or other wrongful conduct.

Contractual issues. The governing documents of a co-op or condo, which are essentially contracts, can form the basis for defending board decisions in legal disputes. So, if board members facing a lawsuit can defend their position by identifying a contractual defense for their actions, they will typically be successful and be protected by the business judgment rule. In a co-op, the governing documents include the proprietary lease, bylaws, house rules and any policies prior boards or current boards have adopted regarding, for example, sales and subletting. In condominiums, there are similar house rules and maybe some of the same policies. There isn’t a proprietary lease, but you do have a set of bylaws, and added to that, you have a declaration of condominium. 

Societal issues. An additional area where a board member may be at risk of personal liability is when it comes to societal or governmental issues. This might involve claims of discrimination on the basis of race or religion. Another example is a discrimination claim where someone wants reasonable accommodation for an emotional support animal and is denied that right, or someone with a physical limitation that needs some modifications to the building. There’s legislation to address these issues. 

Self-dealing also falls in this category: For example, a board member turns down a sale, seeking to buy the apartment, and then approaches the shareholder. That's not protected by the business judgment rule. These societal or statutory issues can present risks for board members. A common sense approach to board governance is to adopt corporate policies regarding sales, subletting and disabilities, and to follow them.

D&O insurance. There is always directors & officers (D&O) coverage for board members but although there’s a duty to defend with the insurance company providing an attorney, indemnification isn’t guaranteed. A proactive board should make sure the bylaws provide for the broadest coverage in terms of indemnification of officers and directors. The Business Corporation Law was amended in 1986 to expand indemnification provisions, but many buildings have never amended their bylaws. It makes sense to amend them to ensure there is significant D&O coverage. 

Other safeguards. Board members should rely on the professional advice of the building’s attorney, accountant, managing agent and engineer. If you have to go into court and you say, "Well, my attorney or my accountant said this or that," a judge is more apt to then say, "Okay, you made a mistake as opposed to a tort." In addition, if you have concerns about a decision by the board, you should ask for a roll call vote; that way, the world knows that you are going in the other direction. Then, if the board is sued collectively or individually, you can show you did not vote that way. In the end, board members probably know most times when they're doing the right thing and when they're doing the wrong thing. If you have any doubt, pick up the phone or email your attorney or your managing agent, and they'll set you in the right direction.