Not Exactly a Walk in the Park
Board Membership Equals Big Responsibility
All too often, individuals hastily volunteer to become a member of the board of directors in their condo or co-op building. Although these people should be commended for their effort and enthusiasm, often lost upon the typical board member are the complex responsibilities - and potential liability - that come along with their position.
The most important thing for a board member to keep in mind when considering the potential liability arising from the business role or function of the board is simply that there is a business role or function. According to Hyatt and Rhodes' "Concepts of Liability in the Development and Administration of Condominium and Home Owners Associations"¯ (Wake Forest Law Review, 1976), "Too often, Board members approach their Association responsibility as if they were on the committee of a social club, religious group, or other similar organization."¯
A board member must understand and appreciate that they head an organization that is often responsible for millions of dollars in assets, and while it is admirable to even consider assuming this time-consuming, sometimes thankless task, a board member's most important responsibilities lie not in ensuring the sociability of the board itself, but in upholding the character, use, and occupancy of the co-op or condo community. Each potential board member must come to respect the potential for serious liability inherent in any position of such broad power and scope.
There are critical roles and duties expected of co-op and condo board members and significant pitfalls that may arise from the board - or individual director's - failure to fulfill his or her role. A dearth of authoritative New York state case law on this topic, combined with the ever-growing number of residential boards in the region, makes this an area of law fraught with uncertainty. In light of that, the issue of board member responsibility and liability will inevitably be addressed by our judiciary - and the resultant decisions will greatly impact thousands of individuals, both residing in and sitting on the governing boards of New York-area co-ops and condos.
Enforcement of Governing Documents
There is perhaps no greater insurance towards the preservation of a co-op's character than strict enforcement of its governing documents, which typically include the corporation's bylaws, covenants, and restrictions, and are designed to regulate and govern the use of the property.
Enforcement of a building's use restrictions is vital to the protection of the interest of shareholders and unit owners and fosters a stable, planned environment. Residents depend upon them for the integrity of their investment and to help members of the community retain a sense of control over their living arrangements. Enforcing use restrictions protects a property from deteriorating physically, increases its value, enhances the desirability of living in the building, provides personal security, and maintains an essential harmony and attractiveness for both the economic and personal well-being of the owners.
When considering both the board's duty to enforce its own governing documents and the individual shareholder's duty to abide by them, it's imperative to remember that these documents are a contract governing the legal rights between the association and the owners. Through the acquisition of their respective units, members of the co-op or condo make a commitment to abide by the requirements of the governing documents and the restrictions spelled out in the covenants. According to Kim in Involuntary Sale: Banishing an Owner from the Condominium Community, "Such a commitment is fundamental to the protection of both the community and the individual members. If this commitment is ignored or breached, then the very fabric of the community is threatened with unraveling."¯
Notwithstanding the grave importance of the proper administration and enforcement of the association's governing documents, all too often boards are reluctant to address sensitive issues and feel that as volunteers, they have less of a duty to insist upon compliance with the building's governing rules and regulations. In failing to enforce its covenants, the board undermines the financial and social success of the community and - in much broader terms - the essential nature of the common interest community lifestyle. Board members should never feel that their authority and responsibility is diminished by virtue of their being volunteers. Their position exists to uphold and enforce the rules and covenants of their building for the good of all. If a board fails to heed the guidelines for rule enforcement, the result can be extra expenses, project delays, ill will among shareholders and owners, and potential liability on behalf of the board - and perhaps even individual members themselves.
On Fiduciary Duty
The immense responsibility vested in every board and the board's special relationship to its members manifests itself most clearly in the execution of fiduciary duties and the requirements of due process, equal protection, and fair dealing with both fellow directors and residents alike.
To further illustrate the point, the Not-for-Profit Corporation Law of the State of New York (NPCL) - to which most associations are subject - states in relevant part:
""¦The directors and officers shall discharge the duties of their respective positions in good-faith and with the degree of diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances in like positions."¯ (See Article I, Section 1 and 2 Ā§717 of the NPCL)
In defining this duty, the courts of New York State have consistently held that the directors of a corporation under the NPCL act are charged with the duties of a trustee, and are bound to care for its property and manage its affairs in good faith. If violation of that duty results in waste of assets, injury to property, or unlawful gain to themselves, board members are liable to account in equity as ordinary trustees. Thus, corporate directors - like the trustees of any corporation - are bound by all rules of conscientious fairness, morality, and honesty of purpose, which the law imposes as guides for those under fiduciary obligations.
Because officers and board members owe a fiduciary duty to the owners and shareholders in their building, they must act in a manner reasonably related to the exercise of that duty, and failure to do so will result in liability for both the board and for the individual directors themselves.
Vigilance over the board's fiduciary duty is crucial because the assets of a co-op are exposed and large sums of shareholders' money can be lost if improper decisions are made about what to do with it - or if board member apathy contributes to the physical or financial devaluation of the property. In that respect, many courts across the country have set their firm imprimatur on the well-settled, almost proverbial rule of law that a board's proper exercise of its fiduciary or quasi-fiduciary duty requires strict compliance with the association's bylaws, covenants, and restrictions - which were initially set down to preserve not just quality of life and building character, but also shareholder investment. While each individual board member is responsible for acting in compliance with his or her duties, failure to act in discharge of that duty to properly administer the rules of the corporation can be held liable for the consequences of their malfeasance to those whom the duty was owed - namely, the shareholders and/or owners.
Failure to act can take many forms, and so can the ensuing damages and liability. Refusal, inability, or failure to enforce a co-op or condo's covenants can erode the value of the properties within the building, the confidence and pride of residents in their home and leaders, and the corporation's ability to secure credit for future projects and maintenance. It is axiomatic that a well-anchored system that enforces its rules greatly enhances the value of the property in question.
The right - if it has been acquired - to live in a district un-invaded by business, and where alterations to the external appearance of a building must be approved by the board should be highly guarded, and remains a valuable right. How much enforcement of the covenants is worth in dollars, or how much the violation of the governing documents would diminish the value of a shareholders' property has yet to established within decisional authority; but it is clear that restrictions in covenants generally constitute a property right of distinct worth.
Accordingly, the developer, officer, director, manager, and attorney involved in the creation, administration, and operation of a co-op or condo's governing board must deeply respect and appreciate this aspect of the liability concept. For unless each member of the board or the association clearly understand the responsibilities inherent in their position - and acts in accord with that responsibility - the millions of dollars in assets that board governs can be seriously compromised. Once such assets and savings are put at risk, board members can be sure that litigation cannot be far behind.
Nativ Winiarsky is an attorney with the Manhattan law firm of Kucker & Bruh, LLP.