Q&A: Conflicting Interests?

Q I’m the president of our building’s board. One of our directors has recently become a licensed real estate broker, and has recused himself from interviewing any potential buyers. At first, that seemed to ward off the semblance of any conflict of interest, but the issue has become a bit more complicated recently.

The director has done a mailing to all shareholders announcing his association with a particular brokerage firm. This has raised more than a few eyebrows in the building. For starters, this director is also the treasurer which puts him in a position to influence the budget and ultimately the maintenance. Further, he is an aggressive proponent of refinancing our mortgage three years from its conclusion!

We lived for years under a board president who was involved in the sale of real estate in the building through his sister. There was no question among the residents that they had better use her or else! We are quite happy that those days are behind us. Now this. This director is a close personal friend. However, I have an obligation to the shareholders to lead a board without even the slightest hint of impropriety. What’s the wisest course of action?

A According to Jay Itkowitz of the law firm of Itkowitz & Harwood in Manhattan, “In terms of legal advice, there is nothing inherently illegal in a board officer soliciting business from fellow shareholders. The courts grant co-op boards and officers wide latitude to conduct business under the Business Judgment Rule, or BCL. Under the BCL, actions of a board are presumed to be legitimate and proper in the absence of evidence of ‘bad faith’ and/or self-dealing.

“Of the many types of decisions that boards make, the passing on an application for the sale of an apartment is the most frequent and potentially controversial decision that will impact on shareholder-tenants. Turning down an application can have a significant impact on a shareholder-tenant and engender tremendous hostility and fear among cooperators. Under such circumstances, I share your concern that such decisions should not even have the ‘appearance of impropriety.’ When a board member or officer is engaged in brokerage in the very building in which he or she lives, it tends to suggest or imply that tenant-shareholders seeking approval of such transactions might have a ‘leg up’ by utilizing that broker/board member. Such an impression, even if not true, can adversely affect the reputation of the board and the building.

“Finally, even though the courts grant cooperative boards a wide degree of latitude in conducting their business, where a board member is self-interested in the dealings of the board, needlessly expensive litigation can ensue when board decisions negatively impact the finances of their shareholders. I therefore would recommend that board members and officers should not engage in brokering apartments in the buildings in which they serve as officers and/or directors.” n

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