Q&A: Risky Business

Q&A: Risky Business

Q Currently, I am on a board that is involved in litigation brought about because of a resale denial. I was recently told by a lawyer that if a co-op board is sued “personally and as board members” the following is true:

The insurance company covering the directors and officers policy is only responsible for paying the lawyer and that if the case is lost the board of directors themselves have to pay the settlement.

When a board is sued personally and as individuals, they are responsible for the judgment themselves if the case is lost. And this could be a substantial amount!

All boards should keep all documents dealing with the acceptance and rejection of resales for at least five years because we, the board, have to show that the allegation is not true for a rejection rather than the plaintiff showing the accusations are true. Our lawyer had instructed us to write nothing, indicate only apartment numbers in the minutes and shred all applicants’ papers because they contain personal information that could put the applicant in risk for identity theft. We have always done this.

We, the board, really have no protection against any claims made and we are the ones who have to prove all the resale issues that we are accused of having done.

If all this and more are true, why would anyone serve on a board? And what would stop anyone from suing a board if their application for a purchase is turned down? The seller could also get into this by accusing the board of deliberately turning down the sale for any number of reasons. A resident could sue the board for any reason that he or she comes up with.

—New York Shareholder

A “Exactly what claims are alleged in the lawsuit that was filed by the plaintiff is of critical importance in responding to the questions posed,” says Albert F. Pennisi, a partner attorney with Pennisi Daniels & Norelli, LLP in Rego Park, New York. “Generally, members of a co-op board are only personally liable for acts which go beyond their duties as a board member, such as fraud, self-dealing or a crime. Actions taken by board members that are within the duties of the board as outlined and defined in the co-op’s bylaws protect the board members from personal, individual liability.

“Moreover, the board enjoys the protection of the Business Judgment Rule [as outlined in business corporation law or BCL]. The Business Judgment Rule prohibits judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes. The Business Judgment Rule protects the board’s business decisions from indiscriminate attack; yet, permits review of improper decisions as when the board’s action has no legitimate relationship to the welfare of the co-op, deliberately singles out individuals for harmful treatment, is taken without notice or consideration of relevant facts or is beyond the scope of the board’s authority.

“Finally, a board should maintain records dealing with resales and should maintain them in a locked filing cabinet so as to protect them from theft. While the burden of proving a claim is always on the plaintiff bringing the litigation, the board should have all relevant documentation to substantiate its defense. Well maintained documentation which fully supports the propriety of the board’s actions can sometimes be utilized to obtain a dismissal of the lawsuit.”

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