Deborah Koplovitz, Shareholder, Anderson Kill

Co-op boards can get into serious trouble when reviewing purchase applications. In the case of Axelrod v. 400 Owners Corp., the board had received several purchase applications from a shareholder who was trying to sell her apartment. The board kept denying the applications because the potential purchasers were of child-bearing age. One board member in particular was concerned that if  “those people” moved in and had children, his quiet floor would become noisy.

This case is particularly thorny because it presents two situations. First, the basis for the rejections is discriminatory. Under city law, children are in a protected class. Second, the board breached its fiduciary duty to the shareholder who was selling by denying the applications because of the personal interests of one board member. He lived on the same floor as the for-sale apartment, and he allegedly exerted influence on the other members to deny the applications.

Their fiduciary duty is a very important obligation that board members have to their fellow shareholders. When a purchase application is submitted, the fiduciary duty provisions are triggered, and that duty runs to the seller, who is the current shareholder. So a prospective purchaser couldn't say a board breached its fiduciary duty to her because she’s not yet a shareholder. But the current owner (the seller) would have a right to sue about fiduciary duty being violated.

This is really important. There are still a great many co-ops out there, even though condos are on the rise. One of the reasons some people prefer condos is because they don't have to go through the same type of scrutiny on a purchase application; on the other hand, some people prefer a co-op precisely because it has a board overseeing the financials of prospective purchasers and hopefully getting people in the building who are going to be responsible and good neighbors.

Another thing to think about with this case is that when a person is purchasing, if the financials are good, the board members are going to convene and they’re going to think about whether this person or people are going to be accepted. A board has the right to reject someone for any reason – as long as it's in good faith. But what happened in Axelrod is that the apartment owner alleged that this board member thought of himself as superior to the shareholder and got the rest of the board to vote the way he wanted them to vote.

So that's the problem. And what is the solution? This comes up more often than not when a board member wants to buy an apartment. If that occurs, the other board members need to have really keen senses and red flags need to go up. If someone else wants to buy that apartment, the interested board member should recuse him- or herself from the decision-making process. At the same time, if any other reason comes up for rejection of the outside buyer, and the board members think it’s based on a board member’s personal interests and not the best interest of the shareholders and the community, then the board members have to be very strong and they need to tell their fellow board member that he or she is not permitted to participate in the decision. If that person refuses and insists on participating, the only remedy then is for the other other board members to vote against that interested member. Doing that will hopefully give you some insulation. If there is a lawsuit, then you can at least say to a judge, “Hey, I didn't agree. I voted yes. I wanted that person in our building.”

So that would be sort of the workaround for that. A very drastic measure that I don't think would necessarily work for most buildings would be to have a board policy that says if, for example, a board member wants to buy the apartment or the applicant is going to be living on the same floor, the board may want to consider saying, “You can’t vote on this application.” But that would be very, very hard to do.

Lastly, how do boards deal with the possible claim of discrimination on purchase applications? Board members and managing agents need to take a look at their application package and make sure that there is no mention of any protected class on the application – nothing about age or nationality or presence of children, or any of those things. And I know most applications unwittingly ask for the age of the person or number of children. It's probably a better idea to take those off and just ask for the names and the number of people who will be living in the apartment, without mentioning age.