Surviving the Rough Patches Resolving Shareholder Conflict

Surviving the Rough Patches

Even among the closest friends, conflict is inevitable. It's no surprise then that the relationship between shareholders and boards can sometimes be contentious. Problems can range from small-scale squabbles to multi-million dollar lawsuits that seem to drag on forever. When conflict does occur, however, there is usually a solution to solve just about any problem.

The issues that arise between residents and board members often start out small. Perhaps an upstairs neighbor is gutting his or her kitchen and the noise of the contractor's workers has not only grown too loud, it's also starting at 6:30 on a quiet Saturday morning. Or maybe a neighbor has sublet their apartment and the parties are lasting all night long - right up until the other neighbor's contractor arrives! Problems can stem from any number of initial frustrations.

Perhaps the most divisive issue, though, has to do with our four-legged friends and neighbors. "People get very angry about pet rules," says Elliott Meisel of the Manhattan-based law firm of Brill & Meisel. He cites the case of a building that passed an unpopular resolution on dogs. The residents were suddenly up in arms over it. "There was such an uproar, the board had to retract the rule."

Raised Tensions

Tempers in co-ops are also running a bit hotter this year after a recent judgment relating to shareholder-board relations. This past June, the 40 W. 67th Street vs. Pullman decision reinforced the notion that co-op or condo boards possess wide discretion when it comes to managing the affairs of their building, so long as those decisions are not self-dealing or arbitrary. "There's been an enormous degree of attention paid to the Pullman decision," Meisel says, "but it's merely an extension of the Business Judgment Rule."

The Business Judgment Rule came into play with the 1990 court decision in Levandusky vs. One Fifth Avenue. In this case, the New York Court of Appeals held that there can be no judicial scrutiny of the actions of a co-op board as long as board members act in "good faith" and exercise "honest judgment" in the lawful and legitimate furtherance of the corporate purposes of the cooperative.

The court applied the Business Judgment Rule in the Pullman case and allowed the co-op's decision to evict Pullman to stand. Specifically, the Pullman decision states that if a majority of shareholders (or board members, depending on the building) decide that another shareholder is objectionable, they can have that person removed. And, such boards, the decision clarifies, are allowed to enforce the rules under their bylaws without having those decisions reviewed by the courts, provided the decision is made in good faith, that it forwards the interests of the cooperative, and is neither discriminatory nor vindictive. "It reinforces prior doctrine," Meisel says.

The decision is a fair one, Meisel believes. Boards are responsible for the well-being of their residents. "One of the reasons condos gained in popularity was the thought that co-op boards could be capricious," he says. "Personally, I don't believe that. I represent more than 100 co-op and condo buildings, but I've seen very few instances of boards being capricious. There's a diversity of opinion on the average board." As for the differences between co-ops and condos, he says, "Condo boards have just as much responsibility to protect their residents as co-ops do."

Overall, Meisel says, the hubbub over the decision is much ado about nothing. "A lot of attention is paid to anomalies that don't reflect the overall quiet, effective management of most buildings." In short, co-op residents shouldn't be worrying about sudden evictions just because they had their Chopin turned up a little too loud the night before.

After the Acrimony Starts

Without fail, the best way to solve a conflict is not to let it get started in the first place. The second best way is not to let a problem grow. Nip it in the bud - that's the key. "People should always try to manage these disputes at the lowest level without escalating them," Meisel says. "If it's a physical problem, the resident should be dealing with the superintendent. If it's not a physical problem, then they should deal with the board. If not the board, then the managing agent."

From the moment the first whiff of trouble surfaces, the board should be consulting with their lawyer. Communication, however, should come from an informal source for as long as possible. "Written communication should stem from a lawyer's advice," Meisel says, "but the letter itself should come from the managing agent."

If the problem still festers after informal talks, then sometimes a lawyer can help speed along the process. "If a lawyer needs to be called in, the first step should be seen as an opportunity to do some problem solving without getting legalistic," Meisel says. "If lawyers are involved, then in good faith, they should try to find a solution."

If legal intervention and informal discussion fail, the next step is Alternative Dispute Resolution or (ADR). The first part of the process is mediation. As the word suggests, mediation involves sitting down with a third party and talking. At an agreed upon time and place, both parties meet with a mediator. He or she will then have both sides - either separately or together - explore where possible conflict lies and try to narrow it down to find the best solution. "Mediators are very skilled in finding the real element of dispute and finding ways to solve the issue," says Paul Schachter, co-director of the Center for Creative Mediation in Manhattan.

Mediation is completely voluntary - both sides have to agree to participate, and either party can end the mediation session if they don't agree with the direction the discussion takes.

"Generally, mediation is very successful," Schachter says. In his experience, "the success rate is perhaps around 90 percent." Often, when people agree on mediation, it already shows that they are willing to discuss things and work them out.

"Mediation is quick and very cost-effective," Schachter adds. "And far more beneficial to both parties than most court appearances. In court, even if you win, there's still the time it takes to collect your judgment. There's also the added acrimony involved."

At around $200 an hour, mediation sessions are indeed far gentler on the pocketbook than court fees. Costs are split between both parties. "Most sessions take three to four hours," Schachter says. "After three or four hours, you know whether it's going to be successful or not."

If mediation fails, you may proceed to arbitration. Whereas a mediator will make recommendations that must voluntarily be accepted by both parties, arbitration is slightly different. "Arbitration is a binding procedure where the arbitrator will do a full-blown hearing and make a judgment that's legally binding," Schachter says. Meaning that no matter what the decision, it must be obeyed, much like a court judgment. An arbitration appearance, though, is still preferable to a trip before the bench. "It's still better than court," Meisel says. In arbitration, although the decision is binding, the activity still involves two-way discussion and is less formal. "In arbitration, people are not rigidly bound by rules of evidence. Arbitration also can accelerate the time between the occurrence of the dispute and the time when they can tell their story," he says. That means no yearlong waits between the flare up over the new pet rule and a final decision in court.

Meisel says that most conflicts actually are settled before they come down to lawyers standing before a judge. "Avoiding court is a major objective," he says. What most arguments finally come down to is the fact that no one wants to pay lawyer fees or deal with the court system. In the end, most people are willing to try to talk it out.

The key, Schachter says, to making mediation or arbitration work is "don't go in there fixed on the idea that there's only one possible solution. People often come in and think there's only one answer, but often they'll see that what happens (following mediation) is better than what they thought they wanted in the first place."

Don't Even Start

Of course, the best way to avoid conflict is to stop it before it even starts. Or at least, stop it early on. If tempers do flare, the best thing a board can do is listen. The board should make sure that no one feels brushed off or ignored, Meisel says. "It's important to remember that everyone has a right to be heard and voice their opinion. The lack of a sympathetic ear can cause a situation to escalate prematurely.

"It's important to be proactive," he adds. "Some boards think of calling an attorney only after it's a full-blown problem." This is one of the reasons why it's a good idea for boards to have a lawyer on retainer. Knowing that an attorney is basically "on call" and that fees won't start adding up over panicky phone calls from board members, often helps those same members feel more comfortable picking up the phone in the first place.

Attorneys can help boards think creatively, too. "A lot of times a board may be willing to accommodate the shareholder, but they're afraid of setting a precedent," Meisel says. There are ways to do this without making a long-term binding change - ways that will please the shareholder or resident without affecting the building's method of operation.

If things do get ugly, it is vitally important not to personalize the dispute. "Remember that you're out to solve a problem, not beat somebody," Meisel says. "That's why it's best not to go to court because there, someone always feels like they've won and someone always feels like they lost."

It's important, too, not to take those angry feelings back into the building's environment after an issue has been settled. If a resident loses, they should not have to feel any tension between themselves and building staff, and if a board loses, its members should not have to feel that a victory is being lorded over them.

In short, the key to successful conflict resolution is discussion and a dedication to everyone acting like adults. That can be difficult when tempers and hurt feelings are involved, but it beats standing in front of a judge.

Liz Lent is a freelance writer and a frequent contributor to The Cooperator.

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