Along with sharing physical space, co-op and condo residents share a responsibility to pay their portion of the community’s daily operating expenses, its physical maintenance, and its reserves. As vested members of the community they help govern, board members bear the same responsibility. 

But like anyone else in a co-op or association, board members can sometimes experience financial or personal struggles that may cause them to fall behind on their monthly fees. Having any resident in arrears poses a problem for a building, but a board member who’s not paying their fair share presents an additional challenge. 

A Matter of Duty

“It is the board’s job and duty to collect arrears so the building can function and pay its bills,” says Adam Leitman Bailey of New York real estate law firm Adam Leitman Bailey, P.C. And that duty to collect arrears includes any accrued by board members themselves. Board members should never receive special treatment or have collection actions delayed on account of their position; but that being said, it is possible to approach the situation with compassion while maintaining consistent enforcement. 

​According to Leah Bloomberg, partner at New York law firm Vallely Mitola Ryan, unit ownership and board service are separate roles. An owner or shareholder retains the rights provided by law and by the governing documents of their building, subject to any lawfully imposed restrictions. Serving on the board carries the additional responsibility of acting in the community’s best interests and protecting its financial stability; it does not impart immunity to community rules, or grant board members any other special privileges, says Bloomberg. “A director or manager does not get inside information or influence over their own account,” she notes, “and their personal situation cannot shape how they vote on building business.” 

Jessica Ruiz, SVP, Head of Southeast Operations at national property management firm AKAM, advises that in the event of a board member delinquency, “The board should address the situation promptly, professionally, and through the same collection process that applies to every owner.”

Governing Documents Set the Standard

​Many buildings have provisions in their governing documents spelling out penalties for non-payment of fees—a common example of this is suspending a delinquent shareholder or owner’s ability to use the building’s amenities until their account is brought current. According to Leitman Bailey, “Such language stands a better chance of surviving a legal challenge if it has been included in the bylaws. Otherwise, the bylaws should state that the arrears owed are due the first of every month, and must be timely paid to avoid legal action.”

“At the same time,” he continues, “it’s not required for such a provision to be included in a building’s corporate documents, since every board has the legal right to collect arrears as long as everyone is charged an amount based on a formula that’s applied fairly and uniformly.”

​Ruiz adds that “the governing documents should clearly address eligibility for board service, the consequences of delinquency, and the process for filling a vacancy, consistent with applicable law. Related policies should explain collection procedures, conflicts of interest, payment arrangements, and what documentation is required.”

​A building’s bylaws also should set an objective trigger so the board isn’t forced to make a subjective judgment call about a colleague. For example, a common provision might say explicitly that a director in arrears beyond a set period of time is either suspended from voting during board meetings, or deemed to have resigned from the board until the account is brought current.

​“Many buildings also make owners in arrears ineligible to run for the board,” says Bloomberg. “In a co-op, removing a director generally requires a shareholder vote, so a self-executing provision in the bylaws is a lot cleaner than trying to remove someone after the fact.”

Voluntary Recusal

​As a governance practice, Ruiz says a board member should recuse themselves from any deliberations and votes concerning their own account, including payment arrangement, settlement, waiver of charges, or collection action. “They should not use their position to influence how management or the association’s attorney handles their delinquency,” she adds.

“I would also recommend they recuse themselves when the board discusses its arrears policy generally, engaging collection counsel, or taking up any matter where their personal interest could reasonably be seen as affecting their judgment,” says Bloomberg. “As for the process, the director/manager discloses the conflict at the start of the discussion, leaves the room or exits the call, and does not vote. The minutes should also reflect the recusal.”

If a member refuses to recuse themselves, Leitman Bailey recommends including it in the minutes immediately afterwards. “I recommend giving the person who doesn't believe they need to be recused the right to speak,” he says, “and then holding a vote on whether it’s proper that they be recused.” 

Steps Towards Settlement

​When starting the settlement process, management or building counsel should set the terms for repayment, put them in writing, have the disinterested directors approve them, and include clear consequences in the event of a default. 

In smaller, tight-knit buildings where relationships are often more personal, it may be tempting for boards with a member in arrears to handle repayment more informally. But treating defaults on a case-by-case basis puts boards at risk, warns Bloomberg. “If a building has never offered a payment plan to anyone and suddenly offers one to a board member, that would be preferential treatment,” she says. “In New York, courts give a great deal of deference to boards under the business judgment rule, but that deference is non-existent when decisions or actions appear to be self-dealing. The cleanest approach is having a formal written payment plan policy and a consistent practice that applies to all owners,” regardless of whether they’re on the board or not.

If the board member in arrears also happens to be the treasurer, Leitman Bailey again recommends that the person not participate in any vote or meeting concerning the matter until their arrears are paid in full. “I do not see how the check-signing power and financial oversight duties affect the arrears owed,” he says, “unless the board believes there exists a risk of the treasurer using building funds to pay for the arrears.”

Given that arrears are usually the result of some sort of financial hardship, and given that the board’s objective is not to punish the member in arrears, but to collect the monies duly owed to the building or association, working with the delinquent board member to map out a feasible payment plan is often the most prudent and productive course of action. But again, legal pros caution that this should be done in strict accordance with both the law and the community’s own governing documents, and the terms of any payment plan should be applied equally to all community members dealing with delinquent payments.    

“A reasonable payment arrangement can be appropriate when it is legally permissible, financially sound, and consistent with options available to similarly situated owners,” says Ruiz. “The agreement should be in writing, and should establish payment deadlines, address ongoing assessments, and explain what happens if payments are missed. A payment plan also should not be assumed to eliminate delinquency or preserve eligibility for board service. Counsel should confirm its effect before the association makes that representation.”

The association would start by verifying the amount and age of the delinquency, and distinguishing between mandatory loss of board office and optional restrictions on ownership rights. “Management should first verify the balance and payment history,” says Ruiz, “then provide the board member with a clear accounting and the applicable notices. A useful guiding principle is that board members should receive the same fair process as every other owner, while meeting the additional responsibilities that come with leadership.”

Bloomberg concurs. “The same notices should be sent on the same schedule, and the account should move through the building’s standard collection process,” she adds. “And again, this particular director or manager would be recused from any board conversations on this topic. Given the connection to the board, it might make sense for another board member to speak with the director privately, because most of the time the problem is temporary and gets resolved quickly.”

Litigation 

​Unfortunately, there are times when that’s not the case, and the delinquent member either cannot or will not settle or pay their share. In these instances, the only way to collect—or if necessary, commence eviction proceedings—is to file a lawsuit and bring the case to court. Before initiating litigation or an eviction/collection process against a delinquent shareholder or owner, including a board member, the board must hold a formal vote and record a resolution authorizing the lawsuit in the official meeting minutes. 

“There have been numerous cases where the cooperative or condominium loses a case because they didn’t have a resolution approving the vote, or have the vote recorded in the minutes,” explains Leitman Bailey. “The decision gets overturned, because as there was no vote, the co-op or condo didn’t actually have the authority to bring the case. That’s very powerful and real. We do not start a litigation without having a resolution on file.” 

Awkward and unpleasant as it can be to take action against a colleague who is also a neighbor and may even be a personal friend to other board members, Leitman Bailey emphasizes the importance of moving promptly to address arrears. “Housing Court, where a lawsuit would be filed to collect cooperative arrears, as well as foreclosure actions for condominium arrears, is taking record time for cases to be completed,” he notes, “Property managers should instruct the board of directors to have their attorneys start sending out notices as early as one or two months delinquent. Because it takes almost a month of notices to even get into court, if the shareholder/owner pays promptly, the actual petition or lawsuit will never actually be commenced.” 

The one thing the board should not do is look the other way. “Owners notice,” says Bloomberg, “and it undermines the board’s credibility the next time it has to enforce against anyone else.” 

Restoring Responsibilities

In order to have their governing responsibilities and full board participation restored (if it was previously limited), the board member must bring their account current. Management should promptly verify that payment has been received, update the account and voting records, and provide written confirmation of any restored owner privileges. 

But this alone doesn’t automatically restore board membership. That process should be laid out in the governing documents. “Restoration [to the board] should be as mechanical as the suspension itself,” says Bloomberg. “Once the account is brought current and management confirms it, the board notes it in its minutes, and the director resumes their role. If the bylaws deem the seat to be vacated, it does not restore automatically. Under the bylaws, the board would have the right to fill the vacancy themselves, and the former director would be free to run to regain their seat at the next board election.”

Transparency 

Because unpaid fees affect the entire building’s financial health and ability to function, and because a delinquency is between the non-paying member and the association, board members in arrears cannot expect or demand that their situation remain confidential. “[Delinquencies are] documented in the minutes, and in the accountant’s financial records,” says Leitman Bailey​, “and every shareholder has a right to see almost every document that the board or co-op or managers possess.” So, embarrassing as it may be for a board member to be behind on their obligation to their neighbors, those neighbors have the ability—and the right—to know about it if it happens. 

Having a board member or members in arrears can be a delicate situation, but with a set precedent of treating everyone in the building equally, it can be handled with grace and discretion, moving towards a prompt resolution so everyone can get back to the business of serving their community. 

Kate Mattiace is Associate Editor of CooperatorNews.