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Hello:
I know that the Board of Directors in cooperatives has two basic legal obligations. The Board must follow the co-op's internal rules (as set forth in the by-laws, and the proprietary lease), and house rules. A shareholder in our building contacted the building's attorney because the shareholder had an unresolved issue of disrepair flooring in the apartment above, noise, etc. The attorney wrote back to the shareholder stating that after contacting the board it appears that all what can be done was done by the board and that if the shareholder persists in complaining the shareholder may be liable for fees associated with the matter.
Again, the shareholder wrote back to the building's attorney since the shareholder felt that misinformation was given to the attorney by the board. There was no response, but on the next month's maintenance stub the shareholder was billed $900.00 for legal fees plus $25.00 late fees in subsequent months because the shareholder refuses to pay the legal fees. The shareholder argues that there was never any agreement for fee-for-service or implied compensation with the attorney and therefore feels the legal fee of $900.00 to be illegal.
The governing documents of the corporation do not state that a shareholder is responsible for the legal fees incurred as a result of contacting by letter the corporation's attorney. The shareholder had the local assemblyman review the matter, and he too, came to the same conclusion that the board has no legal right to pass on legal fees that was charged to the board by the co-op's attorney. Too, if the Board objects to paying the legal fee then it should take up the matter with the attorney because the attorney engaged in the matter with or without approval from the Board, so it appears. The board argued that it is policy to pass on fees incurred as a result of a shareholder's actions. The shareholder argues that policy does not supersede the proprietary lease or the by-laws.
Is there anyone out there who has more information at hand and can comment on this matter of whether or not the shareholder is responsible for the legal fees and late fees?
Thanks,
George Urbano
Hi, George,
Bill is correct. The corporate lawyer works for the corporation, i.e. the board. If a shareholder chooses to hire the lawyer on his/her own (and engaging a lawyer, at his/her office, in a legal question is in fact hiring a lawyer), then the shareholder should pay for the lawyer's time.
Look at it another way. If the board has an electrical firm they always hire to do electrical work, and I decide to call that electrical firm to re-wire my apartment, who should pay -- the co-op or me?
Think of it this way. If the shareholder turns up her/his nose and chooses not to pay, who does? The shareholder AND every other shareholder in the building! (That's because the co-op's income comes from shareholders paying their maintenance fees.) If I lived in your building, I most definitely would NOT want to pay for my neighbor's legal questions!
If shareholders were free to contact the board lawyer without paying the legal fees, any shareholder who wanted "free" legal advice would do the same thing. Of course, it's not free, because the board would have to raise your maintenance fee to cover the dramatically increased legal bills.
On another point, allow me to clarify a misunderstanding in your posting, George, You write that a board "must follow the ... house rules." Well, yes, but the board is the group that sets the house rules, so it's really a moot point -- especially since the house rules cover residents. It's the bylaws that cover the board. I would also suggest that neither of these is one of the "basic legal obligations" of the board. The single and paramount obligation of any board is its fiduciary duty to the owners. Wouldn't you agree?
Hi there's no free lunch:
Since the coop's attorney freely engaged in communicating with a shareholder without disclosing any potential fee associated then the shareholder is not responsible. Too, there are no provisions in the governing documents and at the last shareholders meeting an amendment was shot down to cover such activity. The coop's attorney was responsible in declaring that he does not represent shareholders and needs to get board approval to engage in corresponding with a shareholder. None of this was done so it is a matter strictly between the attorney and the board to work out compensation.
Read: Recovering legal fees, by Bruce Cholst, Esq. The Cooperator. "Another limitation set forth in the typical proprietary lease clause regarding collection of attorney's fees is that it does not allow the recovery of any attorney fees prior to the commencement of a formal action or proceeding. Thus any pre-action analysis, correspondence, etc would not be recoverable."
So you see the shareholder has no liability for legal fees especially when the attorney made it clear to the NYSBA that he billed the coop and not the shareholder.
Any additional thoughts on this?
GU
Hi, GU,
I stand by my previous response.
The exception to Bruce Cholst's point is this. There is no "action" taking place in the original commenter's note. Instead, the shareholder was, evidently, trying to get an alternate point across.
After all, if no individual shareholder is responsible for the fees associated with getting legal advice, then what's to stop all shareholders from doing so?
And remember that the individual shareholder, even if she isn't charged for the entire fee, will in fact end up paying for the legal fee: her maintenance check will go toward paying the bill, as will every other shareholder's maintenance.
The question is really this: does every shareholder chip in to pay for one person's legal bill, or does the individual? If I lived in the building, and if I hadn't agreed to let my neighbor ring up legal bills, I certainly wouldn't want to have to pay for them. Would you, GU?
Hi:
What's to stop shareholders from contacting the coop's attorney? Plain and simple: the attorney! From the start the attorney should disclose any cost associated with engaging in communication or simply not respond. Period.
In this instance, the Board might also fault the attorney for not contacting the Board immediately for instructions. He/she is responsible to the Board, and is hired/contracted with by the Board, not its individual Shareholders.
I'd advise the Board president/managing agent to try to work out a compromise with the attorney.
Of course -- the attorney should disclose fees, but maybe the attorney a) assumes that people who are sophisticated enough to buy real estate/invest in a co-op in NYC are also sophisticated enough to know that there's no such thing as a free lunch, and b) is motivated not to explain the free-lunch cliche because he has mortgage payments just like you and me. I mean, if there's a shareholder in this day & age who believes attorneys work for free, well, maybe this is the tough-love way to learn.
It's like I said before. If my co-op has a go-to electrician, and I call that electrician to re-wire my apartment, who should pay the bill? And if the electrician just assumes I know that I have to pay it and so doesn't explain it in advance, does that mean my neighbors should pay the bill instead?
I would say no, and I think my neighbors would too.
How ridiculous making assumptions on behalf of an attorney, totally speculative! And, if anyone employs an electrician an estimate on potential work is done.
Hi, George,
Allow me to point out that not all electricians in New York have the scruples you suggest, although I certainly wish each did. As I mentioned, the case of the electrician was meant as a figurative comparison. Estimate or not, would you want to pay your neighbor's electrical bill?
I don't want to get into a shouting match with you, George, so let me conclude this discussion by referring to my original reply to your question.
The fundamental obligation of any board is its fiduciary responsibility to its shareholders. Any board that charges the expenses that one shareholder racks up to all of its shareholders is treating all the others unfairly.
In the state of New York corporations are required by law to treat all shareholders equally. If your board allows one shareholder to charge her bill to her neighbors, the board must charge all individuals' expenses to all shareholders. If the board allows exceptions, it risks violating the law.
The attorney charged the coop, period!
Read your PL regarding "coop recovery of charges".
It is my personal opinion that recovery of charges may be a grey area in issues of repairs, since the co-op needs to resolve them to the greastest satisfaction possible and, in doing so, unavoidable legal charges may be incurred.
The process of resolving issues pertaining to co-op /shareholder responsibilities start IMMEDIATELY and as follows:
(1) When the incident takes place, the managing agent writes a report to all involved stating the facts and delcares who is responsible for the damages. The co-op attorney gets a cc for information only.
(2) If you do not get a letter within the first week of the icident, then YOU take the initiative to write the letter documenting the issues, who responded for the co-op, the day, and what you were told.
(3) Shareholders should communicate with the Board through the Management Agent for resolution if they do not agree with the letter received or what you were verbally told.
(4) Shareholders may even request to speak with the Baord at a monthly meeting to further explain the situation if no satisfactory answer is given.
(5) The board should follow the visit with the results of the deliberations and copy all the time the co-op attorney.
(6) If the shareholder is not in agreement and feels that he has the right, as it was expressed before, he/she should have hired its own attorney. A letter from the attorney representing the shareholder is important enough for the board to reconsider the case and actively engage the co-op attorney.
(7) The board reconsiders the matter with the co-op attorney and denies or accepets to pay for the issue. You pay your attorney, the co-op pays for its counsel. There is no recovery.
(8) No resolution: Then the shareholder may be free to start a court case at its own expense for repairs.
In such cases there are no charges that may be recovered because clarification of responsibilities and PL matters are being debated.
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In our co-op the by-laws stipulate that the shareholder can be assessed attorney fees, period, win or lose.
But in some cases, the behavior, e.g.: contacting our attorney, contacting a supplier with whom we have a contract, etc., can, under certain circumstances, be deduced as tortuous interference. One needs to assess the situation to see if this behavior incurs the tortuous interference rules.
Yes, we have taken action against a shareholder who enters into such behavior.
Yes, we have imposed legal fees upon a shareholder under circumstances permitted by the by-laws.
Further, in our co-op, our attorney never answers a shareholder letter, unless the board is contacted and the board agrees. After all, one needs to understand that the attorney is the corporation’s attorney, not the shareholder’s attorney.
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