When Boards Raid Your Bank Account: Overstepping on Automatic Payment
When shareholders authorize their co-op to electronically debit their bank account to pay their monthly of maintenance, can the co-op also debit attorney's fees that it claims a shareholder owes?
Barry Hodes is a shareholder at The Vermeer, a 352-unit co-op, originally built as a rental in 1964, at 77 Seventh Avenue, near West 14th Street. In March 2004, he authorized The Vermeer to electronically debit his account to pay his monthly maintenance. Neither party indicated that the authorization would be utilized to debit Hodes' account for any other fees.
In February 2006, The Vermeer billed Hodes $1,066 for legal fees. Hodes responded with a Feb. 6 letter to managing agent requesting that those legal fees be rescinded. Regardless, The Vermeer electronically debited Hodes' account the following month March 2006 for payment of the legal fees.
Hodes' bank refused to reverse the transaction and The Vermeer refused to return the money. Hodes instituted an action in Small Claims Court to recover the "unauthorized removal" of monies from his account.
At trial, the managing agent testified that Hodes was billed to reimburse The Vermeer for reasonable attorney's fees incurred as a result of Hodes' alleged breach of the proprietary lease and house rules prohibiting him from interfering with the "rights, comfort or convenience of the other lessees." The managing agent testified to the general history of Hodes' alleged verbal abuse and threats to other residents. By letters dated June 25, 2004, and August 8, 2005, The Vermeer's counsel advised Hodes that the co-op had received several such complaints about him. Hodes wrote back asking for the details of the alleged complaints. The Vermeer responded with affidavits from three complainants.
Going Unnoticed
None of that had any relevance, however, to whether the co-op board had the right the debit Hodes' account for fees he had not authorized.
The court explained that, in 1978, Congress passed the Federal Consumer Credit Protection Act, which governs the consumer use of debit cards and similar electronic fund transactions, and that Hodes' authorization to debit his maintenance payments fell within the purview of the act, as a regular, specific "preauthorized transfer." The act states that before the debit of a different amount can be made, the consumer must be given advance notice. Additionally, the board of governors of the Federal Reserve System promulgated a similar regulation.
Yet The Vermeer unilaterally withdrew $1,066 for payment of alleged legal fees — without either the co-op or Hodes' bank giving Hodes the requisite reasonable advance notice of the amount to be transferred and the scheduled date of the transfer. Such advance notice helps protect consumers from unauthorized, fraudulent or erroneous transfers, for which he or she may stop payment.
Other than The Vermeer's bill for legal fees, Hodes did not receive any notice of the amount to be debited or the scheduled date of the transfer. Inasmuch as Hodes was not provided this crucial advance notice, the court found that he did not have sufficient time to stop payment of the unauthorized transfer. Accordingly, the court found Hodes was entitled to a refund of $1,066, plus interest.
It is important for boards to confirm the scope of their authority before acting. Here, there was no discussion of whether the cooperative was actually entitled to collect the legal fees it sought. Rather, because the cooperative obtained those fees without sending the proper notice, it was required to return them.
Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan. Dale J. Degenshein is a special counsel for that firm.
Adapted from Habitat January 2008. For the complete article and more, join our Archive >>