Jay Itkowitz answered a reader's question on the the propriety of board
officers soliciting business from fellow share holders in the April 2007 edition
of The Cooperator, the Co-op & Condo Monthly.
I am the president of a coop board in Gramercy Park. One of
our directors has recently become a licensed salesperson. When announcing this
to the board, he indicated that he would be recusing himself going forward from
interviewing any potential buyers.
At the time, this seemed adequate to ward off the semblance
of any conflict of interest.
Recently, however, the issue has become a bit more complicated.
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, the director is also the treasurer. Consequently, he
is in a position to influence the budget and ultimately maintenance. Further, he
is an aggressive proponent of refinancing our mortgage (three years from it's
Things get more interesting at this point. We lived for years
under a didactic and shady board president who was, no doubt, 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. I am in a bad position, as the director
in question 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 say ye?
ANSWER OF JAY B. ITKOWITZ:
In terms of legal advice, there is nothing inherently illegal
in a board officer soliciting business from fellow shareholders. The Courts
grant coop boards and officers and directors wide latitude to conduct business
under the "business judgment rule." Under such rule, actions of a board are
presumed to be legitimate and proper in the absence of evidence of "bad faith"
and/or "self-dealing". The Court of Appeals in the famous case of 40 W. 67th
St. v. Pullman, a case which upheld a cooperative's termination of a
proprietary lease, held that the "business judgment rule" requires the courts to
"exercise restraint and defer to good faith decisions made by boards of
directors in business settings." To challenge a decision by a board, a
shareholder-tenant must show that the board acted (1) outside the scope of its
authority, (2) in a way that did not legitimately further the corporate purpose
or (3) in bad faith. 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 impliedly that tenant-shareholders seeking approval of such transactions
would have a "leg up" by utilizing such broker/director/officer. Such an
impression, even if not true, can adversely affect the reputation of the
cooperative board and/or the cooperative.
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 on the finances of their
tenant-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.