Subscribe for Daily Updates!
We are a 120-unit coop, with a community that represents a mix of affordable housing and market rate.
Recently we were faced with the decision of whether to take a line of credit to repair ongoing (ten years) developer construction defects, as well as local law 11 façade work. Some on the Board wanted to appeal to local politicians to put pressure on the developer without the co-op acquiring financing to address the defects. This would still leave our responsibility to perform the local law 11 repairs. Also, our reserves are low, and it was argued that some of the loan would be used to replenish them.
Long story short, we took the issue to the shareholders. We held two financial meetings to explain the details up front and had ample time to discuss the pros and cons of both approaches. This was followed by a shareholder vote on the issue.
The majority of the shareholders, on both a unit and share basis, voted to go with a line of credit, as did the majority of the Board.This decision brought out unforeseen hostilities from the opposing members.
At a recent meeting, when we discussed the possible sale of a unit, one Board member stated, “I vote no. He voted for the line of credit,let him stay and pay for it”.
To complicate matters, our Board president, who voted for the line of credit, has her unit listed for sale. While this in itself is not an issue (two past members, including a Board officer, held their Board seats while their units were listed), an opposing member chose to make it one,stating in an email:
" I think we should all make sure that you stay here and contribute your share of the debt. Since you wanted it, you should want to be part of it."
It is customary to accept a Board decision, even if you disagree with the outcome. In this case, it seems that some members are poised to retaliate. The majority of the Board believes that this opens the apartment corporation up to liability issues, and that the two Board members are in violation of their fiduciary duty. My question is, how should we proceed to address this? Does anyone else have any experience with issues like this one, and any advice? Thank you.
It would have been a good idea to have a series of meetings over a few month period before deciding on a line of credit for a financially strapped corporation. Was there enough representation at the meetings? Were all issues addressed? Did the shareholder's have adequate information and an adequate timeframe in which to answer? A sale can be turned down for no reason at all so where is the violation of any fiduciary duty?
You mention that the majority of the board believes that the corporation is open up to liability issues. Was this said at a board meeting or a shareholder meeting? If it was a board meeting, then how and why would anyone know? Bantering at board meetings are commonplace. If the majority of the board leak this, it is they who are in violation. Board members should be allowed to express opinions without fear of others leaking this to shareholders.
You state that two past members held their seats, did these past members also inflict a huge debt on shareholders and then decide to leave? That's a question.
Morally, one who creates a huge debt especially on affordable housing, which seems to be most of the building, that's generally the case on mixed housing, (they generally have restricted income floors), should morally not create such debt or recuse oneself if one will not be there to assume such debt. On the affordability, during economic times this should be carefully looked into. If votes were taken were they the ones on the floors with the most shares? That would be unfair. That will always counteract the votes on the restricted floors with less shares.
To M.C.
How much is the LOC? We can better answer if we had this information.
I am not a lawyer, but from the nature of the issues and questions being raised, it sounds to me as if you need to speak with an attorney about all of this, to know where you stand and what your options are. One obstinate board member cannot block a sale (unless your bylaws require a unanimous vote), and Co-op boards are protected to an extent by the business judgment rule.
Though I'm not a lawyer, it's a fundamental principle of co-ops that shareholders have to be treated equally. A board absolutely cannot condition its approval of a sale on how a shareholder voted on a particular issue. I can't imagine such a decision would pass muster under the Business Judgment Rule, since it's a classic example of a bad-faith decision.
And what's this weirdness about sticking around to pay the debt? A shareholder has no such obligation, moral or otherwise. If the debt is large, then the value of the apartment will be reduced. The shareholder doesn't get off scot-free and the debt doesn't disappear. It's effectively figured into the sales price.
For future reference, please keep in mind that you were under no obligation to put this to a shareholder vote. The board has the power to arrange financing, so long as they don't breach their fiduciary duty. Transparency is great in general -- and you should certainly be 100% up-front with your shareholders -- but I'm wondering if this would have been less divisive if the board had presented the line of credit as a fait accompli.
Bottom line: consult your attorney right away.
A sale can be turned down for cause or no cause. Is this a line of credit or another mortgage. What type of building is it? Some say there are restricted income floors, does this building have anything to do with the City? Was it built under a program of sorts? If so, there is more to it than meets the eye. Was there funding involved, credits and such? It might not be a straight forward co-op. I don't know about the value of an apartment being reduced? There are many issues to this large debt.
The anonymous poster wrote, "A sale can be turned down for cause or no cause." You have to be EXTREMELY careful with that statement. There are reasons for which a sale can NOT be turned down. Not only would it be illegal to reject a sale for these reasons, but the board members could be held personally liable and subject to damages. On top of that, New York law prohibits the co-op's Directors and Officers insurance from covering punitive damages in these cases.
The best-known example, of course, is discrimination based on any of the 14 protected classes, including race, age, and whether or not a person has children. Refer to the well-known case of Broome v. Biondi, in which board president Biondi was hit with six-figure punitive damages and had to sell his apartment to pay for them.
Most cases along these lines involve claims of illegal discrimination against the prospective purchaser. But a shareholder has additional grounds for a lawsuit based on NY Business Corporation Law (BCL) -- especially Sec. 501(c), which requires that "each share shall be equal to every other share of the same class." So if you treat shares that were voted in favor of the line of credit as unsellable, you're in egregious violation of this law.
It's not going to help you to claim that the purchase application was rejected for no reason, or a made-up reason that doesn't hold water. If the court finds that your real reason was a different and illegal one, then the board has acted in bad faith and is not protected by the Business Judgment Rule. Just ask Mr. Biondi.
To reiterate: CONSULT YOUR ATTORNEY. You're going down a very dangerous path.
Introduce yourself to other members of Board Talk! Log in below or register here.
Board Talk members who registered prior to March 9th, 2016 will need to reset their password.
Michael, this is a lovely email, but it's 128 units and if the person has an accepted offer and contracts are out on the apartment, which is most probably a ploy, why would she vote to put all shareholders in extreme debt. Why would this board member vote for such a huge debt and then leave? What does that tell anyone?
Thank you for rating!
You have already rated this page, you can only rate it once!
Your rating has been changed, thanks for rating!
Board Talk members who registered prior to March 9th, 2016 will need to reset their password.