“At such time, all of the co-op’s existing relationships, including its relationship with its managing agent and outside professionals, should be examined and carefully considered. With respect to the management company, the first order of business should be to look at any existing contract between the co-op and the management company, which may provide for a specified term or which may limit the grounds upon which the contract may be terminated before the end of its prescribed term.
“Your management company is an agent that owes a fiduciary duty to your co-op as a whole, and it should not favor any shareholder over another. If it is contractually free to do so, your board may be well advised to retain a new management company that does not have a divided allegiance. On the other hand, your sponsor-owned management company may be very professional and competent; its principals obviously have a proprietary interest in the co-op (as owners of 48 percent of its shares), and they may possess a unique and very useful (if not invaluable) knowledge of the property, its history and its construction. These “pros and cons” should be weighed by the board in arriving at a decision on whether to look for a new management company.
“In the case of professionals, such as the co-op’s accountant and attorney, it is probably more appropriate that the board retain professionals who possess undivided and unquestioned loyalty to the co-op. While accountants are required to adhere to certain practices, it certainly would be unfortunate if it were ever discovered that your sponsor-owned management company had mismanaged or misappropriated corporate funds, that such conduct was not uncovered by the accountant who audited the corporation’s books, and that the accountant had a relationship with the sponsor.
“The relationship that would appear to most clearly cry out for a change is that with the attorney who represents both the co-op and the sponsor. An attorney owes his or her client the highest duty of loyalty and confidentiality. Having one attorney represent both entities is fraught with peril, both from the perspective of the co-op’s interests and the attorney’s ethical obligations. That attorney most likely would have two clients with very differing interests, which would constitute a conflict of interest or a serious potential conflict of interest. This very issue was addressed in an ethics opinion issued by The Association of the Bar of the City of New York (Formal Opinion 1990-1) which concluded, after discussing various conflicts that might arise and that might require the attorney to withdraw from both representations, “that the preferable course in general” would be for the sponsor’s lawyer to decline “at the outset” to represent the co-op as well. At the very least, that attorney should have disclosed to the board the nature of this conflict or potential conflict (under ethical rules governing the conduct of attorneys, even such disclosure alone sometimes is not sufficient to allow the “conflicted” attorney to represent both entities).”
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