ABSOLUTE POWER

Two scenarios, two boards, one question

Scenario No. 1: The board in a Bronxville co-op forbids subletting. A unit-owner, incensed and feeling that the board has overstepped its authority, sues. After 14 months of litigation, the court finds that the board behaved properly.

Scenario No. 2: A board member running for reelection sent out a mailing to all the owners, soliciting their proxies. It was a large property with a great number of investors. Another owner, also campaigning but not on the board, asked for a list of the owners so he could solicit proxies as well. He was told, however, that the information was confidential. When he complained about the list going to the “insider” but not to him, the board ignored him.  No one sued, and the member was reelected.

Two scenarios, two boards, one question: when is a board abusing its authority? To some, abuse is in the eye of the beholder – one man’s dictator is another’s great leader – but to many experts, abuse can and should be recognized and dealt with quickly. Otherwise, the consequences can be serious: widespread discontent, dysfunction, lawsuits, and even financial disaster.

EYE OF THE BEHOLDER

Abuse comes in all shapes and sizes. There is clear-cut legal abuse, and then, there are more murky gray areas, in which the board is within its rights, but clearly out of bounds. For instance, there was the case of the board of directors of the Manhattan cooperative that felt it was simply doing its job. The building’s facade needed repointing, so the directors hired a contractor. He started work – and, then, abruptly, had to stop. A group of shareholders had gotten a court injunction to halt the job, claiming it was a “misappropriation of funds” and that the repointing was unnecessary.

“They alleged, specifically, that two of the board members were wasting corporate assets on projects like this,” says Steven Wagner, the building’s attorney and a partner in Manhattan-based Wagner, Davis & Gold. “Ultimately, the dissidents could not show an example of anything that was done wrong, even after the books were audited. But they still caused legal problems.”

            Indeed: if a lawsuit is filed, the board must defend itself, no matter how frivolous. “You often find that wealthier buildings are the ones sued by owners,” notes attorney Robert Tierman, a partner in Manhattan’s Salon Marrow & Dyckman. “You get a lot of  battles over leaks, over the use of terraces, over damages to penthouses. I am counseling a shareholder right now who lives in an Upper East Side building. Without getting into the details, he’s thinking about suing because he feels that the co-op is interfering with his ability to use the terrace.”

There are five types of abuse that boards often fall into:

Self-Dealing.Clearly illegal, self-dealing is frequently practiced by boards or board members who either don’t know better, or do but go ahead anyway. “Some things are absolutely egregious, like taking advantage of your board position for personal gain,” notes Herbert J. Cooper-Levy, a management consultant with Herbert J. Cooper-Levy & Associates in Arlington, Va..

In one particularly blatant example, a strong-willed board president in New Jersey pushed to have a relative who ran a contracting business do a capital improvement job. After some analysis of bids, the board agreed to hire him, laying out in the contract the terms and conditions of the job. After that – and before the contract was signed – the board president reportedly altered the terms of the contract to make them more favorable for his relative. The board, apparently cowed by the president’s forceful personality, learned of the changes but did nothing to correct them.

Less obvious scenarios happen more frequently: a board member with a pet fights to keep pet restrictions from being imposed, or a member with a large apartment fights to keep common charges/maintenance low – even though an increase is needed – because he has one of the largest apartments and the increase will affect him the most.

“In making any decisions, you never want to advance the interests of a single director over other owners,” says Frederick Mehlman, president of JRD Management in TK. “Board members have a fiduciary right to the needs of the whole building.”

Acting unilaterally and in isolation.Some dub this “The Nixon Model,” referring to former United States President Richard Nixon, who often made secret decisions without respecting the wishes of the electorate. While a board cannot consult with the owners on every decision – nothing would ever get done – never doing so is equally wrong.

The most common example of this, say professionals, is in a lobby redesign. In one widely reported case, the 1,700-unit Seward Park Cooperative in Manhattan faced a crisis brought on by the board’s unilateral actions. The board decided to begin a series of capital and aesthetic improvements designed to improve resale value. On their hit list: a series of innocuous murals completed in 1959, which offered a pantheon of liberal heroes: Presidents Thomas Jefferson, Abraham Lincoln, and Franklin Roosevelt, as well as scientist Albert Einstein and images of small children at play. In October 1997, they had voted to destroy murals and modernize the lobby.

The project probably would have gone forward without a hitch if word hadn’t leaked. David Rubel, a long-time resident who happened to be an urban planner, got wind of the board’s intentions. An admirer of the murals, he wrote the directors and asked them to reconsider. He got no reply, so he contacted the Landmarks Preservation Commission and asked them to landmark the building – and the murals.

The board sent out a terse letter to the owners, stating that destruction of the murals was one of three possibilities. A number of disgruntled residents contacted The Villager, a local newspaper, which ran a story about the brouhaha. The board then decided to run for cover and polled the owners, asking them whether they wanted to keep the murals or see them go. Of the 1,700 cooperators, roughly half responded to the survey, and a slim majority voted in favor of preserving the murals.

Apparently startled by the results, the board backtracked and stated that the vote had been “non-binding” and therefore the co-op would go ahead with the lobby renovation. According to Rubel, in December, the board voted again to destroy the murals. An ad hoc residents’ group was formed to save the murals. Outsiders became involved. A web site was begun (http://newdeal.feri.org.). The New York Times wrote a story about the controversy. And the board hung tough, refusing to communicate with anyone. Finally, there was word that the mural issue had been “deferred” while other capital work was performed.

“You can’t make major decisions, such as lobby redesign, in a vacuum,” explains Arthur Davis, a Manhattan-based management consultant. “There has to be a level of communication between the board and the owners. If not, there is an imperiousness about the board. The people have to know that the board is working for you 24 hours a week. It’s not just gross illegalities to ignore the owners; it’s disrespect.”

Richard Nixon, the ultimate unilateralist lost public support, was impeached for abuse of power, and was finally driven from office in disgrace.

Letting board members make decisions on their own.  By the same token, a board that does not keep its members in check is equally irresponsible. When a president or treasurer acts without consulting the full board, that is a clear abuse of authority. 

“I’ve seen cases where presidents make decisions without consulting the full board,” says attorney John LaGumina, a partner in Quinn & LaGumina in TK. “In routine matters, that may be alright, but for major issues, they cannot act on their own.”

Experts say that misuse of power by an individual is more common than board abuse. “You’ll find a board member who directs management to spend money on behalf of the property, ordering goods and services that are not authorized by the board or the budget,” says Alvin Wasserman, director of Fairfield Property Services in Commack, N.Y.  “Say, for example that a board member decides that the property needs additional plantings of shrubs and flowers. He calls up a landscaper and hires him to do the work. The landscaper, meanwhile, is not aware that he has not been hired by the board. In other cases, a board member will call management and instruct the manager to impose fines against individuals for infractions against the house rules. Sometimes that is appropriate because they have been given authority. But in cases where it is not authorized, that is a clear abuse.”

In one instance, a two members of a New Jersey condominium board met on their own to decide on issues that needed to be settled and then took action without consulting the full board. “They were not trying to pull a fast one,” says Larry Silverman, TITLE. “They just didn’t have the patience to wait three weeks between meetings. They felt like they were [President Bill] Clinton with the troops: they felt they could act as they wanted for the good of the property.”

Similarly, board members who bypass the manager and give orders directly to service staff sow the seeds of confusion – and can help weaken the power structure of a poverty. “That creates a weakness in the chain of command,” Gold says.

Wielding a heavy hand on the rules. Just because you have the power to do something, doesn’t mean you have to exercise it. Some call this the bureaucrat’s disease, with good reason. “You’ll see a board member who acts with a petty bureaucrat’s mentality,” observes Wagner. “He has a little power and consistently tries to demonstrate that he has it.

“But the role of the good bureaucrat is to try  to assist and help rather than say no,” the attorney adds. “My view is that the board should try to get to yes. If you’re saying no to too many people on too many issues, even if you think you are right, you could be creating a style of doing  business. It becomes a culture of us against them, which is counterproductive to the well-being of the co-op both internally and as viewed outside.  You can hurt value of co-op if it’s viewed as a difficult board.”

Such an abuse can be seen in such “discretionary areas” as the imposition of fines, and (in co-ops only) in subletting rules, resale approvals, and alteration agreements. Boards that set impossibly high financial standards for resales, or incredibly rigid insurance requirements for alterations, or unreasonably high levels for fines are asking for trouble.

“Some boards tend to abuse power [in these areas] because it becomes an ego issue,” says Steve Greenbaum, director of management at Mark Greenberg Real Estate in Port Washington, N.Y. “They get tyrannical and throw their weight around, bullying the staff or other neighbors. The power gets to them.”

Ignoring professional advice.Those who forget the past are destined to repeat it. Professionals have useful knowledge gleaned from past experiences with other properties. Boards that ignore their advice do so at their own peril. “It’s frustrating when a board tries to save money on professional fees by not talking to the professional,” says Jeffrey Levy, TITLE.

The manager cites cases where the elevator keeps breaking down, and rather than talk to an engineer, they talk to a contractor who recommends replaying the says replace controllers. “It may not need it. Very often, boards are trying to keep expenses down, but they end up spending more than they have to.”

“Boards sometimes make mistakes without realizing it” says attorney Dennis Casale, a partner, in Jamieson, Moore, Peskin, & Spicer, in Princeton, N.J., “because they are doing things that are not allowed within the governing documents or governing statue. Whenever there is a gray area, they should consult with advisers, the management company or counsel. An awful lot of what I do as a board attorney is making sure that what the board wants to do is done properly.”

 

I HAVE SEEN THE ENEMY

Abusing power is one thing. Those are stepping over the line may have trouble recognizing that. How does a board know it is in trouble? Some signs:

Constant arguments at meetings.If you are constantly fighting, without ever agreeing on anything, that is a sign of disharmony.

Frequent complaints.If you are hearing frequent complaints in the hallways, on the grounds, from the manager, and at annual meetings, you should take heed. “A board should speak to its agent and ask what complaints he is getting,” says Davis. “And then ask how quickly is the agent responding to complaints? If someone says, ‘I spoke to a member six months ago and nothing happened, that’s an abuse.”

Decisions deferred. In fact, a clear sign of trouble is the deferral of major decisions. “Isolated boards want to be friends with everybody,” Davis notes. “But that’s not a way to make difficult decisions.”

Lawsuits.. A clear sign of a board misusing its authority is a string of lawsuits. “If the property is embroiled in several lawsuits, I’d take that as an indication that something is off,” Wasserman notes.

 

COPING MECHANISMS

Once you’ve recognized the signs – or even before that – how can you cope? What sort of safeguards can you put in place to protect yourself and your owners?

Know your responsibilities.The most important step is to educate yourself about your fiduciary responsibilities. Be familiar with the house rules and the bylaws. “The key is for board members to acquaint themselves with the bylaws of the building, and even reading up on Robert’s Rules of Order,” observes Kevin Kennedy, president of Kennedy Realty in Hartsdale, N.Y.

“The most dangerous situation is when someone thinks he knows something and he doesn’t” adds Wasserman. “That is a problem at times when individuals are voted onto the board with little or no experience. Then, by virtue of having attained a position, they act as if they have the knowledge available to them to make decisions.”

Listen to your professionals.Seek out advice from professionals, and if you don’t use it, have a good reason for that. Certainly, it is the board’s responsibility to make decisions about whether money should be earmarked for certain projects. “Whether or not to repair or replace roof, to throw good money after bad, should be a situation where you solicit the opinions opinions of experts,” Levy says.

Boards may also want to seek out the experience of other properties in their neighborhood to get the benefit of their experiences. “When one co-op is having difficulty it’s good to talk to members of others,” notes Cooper-Levy. “Then you can find out if it is a perceptual problem or if you are off the mark. It’s a way of setting benchmarks.”

“Check in.” Get a sense of your constituent’s wishes. Avoid isolation. Experts say that boards must be proactive and to talk with owners, asking for feedback.

“You want to ‘check in’ to see that you are not out of touch,” says Davis. “All problems must be time-logged so you know when the complaint came in and when it was dealt with. The worst thing that can happen is to have someone stand up at an annual meeting and say, ‘I complained about this problem six months ago and nothing was done.’”

Set a public, not personal agenda. Do what is right for the community as a whole – not just what you want personally. If the two conflict, opt for the public over the personal good. “The first duty of a board member is to the owners,” says Mehlman.”

Adds Greenbaum: “Sometimes people have private agendas. They get on the board because of an issue, like subletting or a house rules. But it’s not about what affects them personally, it’s about what affects the building as a whole.”

Communicate.Above all else, communicate within the board and outside it. Consensus among the community may not be required, but it helps to get the backing of those who elected you. Explanations and a record of efficiency can help smooth over potential problems.

When subleasing got out of hand at one Manhattan co-op on the Upper West Side, for instance, the board instituted a policy immediately banning sublets. After it was announced, however, the directors faced a revolt, and were nearly swept out of office. The policy was reversed. Five years later, with no sales and a good real estate market, the board tried again. Learning from its past mistake, it carefully researched subleasing practices at other properties and then announced a gradual reduction of subleasing with a careful explanation of why the policy was being instituted.

The letter from the president talks about the successes of the board (“As those who live in the building know, we recently completed a top-to-bottom repainting of the entire interior of the structure. The property looks beautiful”) before getting into the main issue: sublets.

“On the downside,” writes the president, “we also had a break-in and robbery. The tenant of Apartment 1D had a computer, bicycle, and other valuable items stolen. The tenant of Apartment 6C also had items taken. This highlights one of the main problems we have faced in the last few years: of the 22 units in our building, only 6 are occupied by shareholders. Generally, renters are less conscientious about security than owners.

“Subletting also creates difficulties for you: if things continue as they have, you will never be able to sell your unit. Ever. As it is, you can sell now – but just barely. Most lenders refuse to grant or refinance individual co-op mortgages – which is what is needed to make most sales – when more than 20 or 25 percent of a co-op building’s apartments are rented out.  Besides the refinancing issue, the high number of rentals is seen by many outsiders looking to buy in as a sign of instability, making the building more hotel than home.

“Consequently, we are changing the subleasing policy. We are sympathetic to the plight of the non-resident owners, but we have to act in the best interests of the building as a whole. To help you sell, we have found two brokers who say they can get buyers. We have found one lender, the National Cooperative Bank, who will make loans. And we are advised that this is a good time to sell, since the market has improved. The new policy and other matters will be discussed at the meeting. We hope you can attend.”

Although many owners showed up at the gathering, not one protested the policy which was passed without a hitch. “Most of these issues are cases where reasonable people can disagree,” Tierman notes. “Frequently, disputes are based on incomplete information or may  result from misconceptions about the legal responsibilities of the owners. The board can prevent problems by educating the owners.”

“One of the biggest problems starts with a classic lack of communication,” Davis notes. “When the board does not extend itself or the information it has to the shareholders, it is the beginning of an isolationist mentality on the. And once you lose touch with your shareholders, once you stop trying to communicate with them, your decisions become inbred and the potential for abuse becomes greater.”

 HABITAT, JULY/ AUGUST 1999