What recourse do co-op shareholders have when the board makes a decision that the majority deem is financially irresponsible?

They informed shareholders they are increasing staffing levels. They told us it is 16 additional hours per week and thus won’t involve union costs. However, they will cover holidays an vacations which, due to contractual obligations, will incur substantially greater costs than indicated by the board. Over half the shareholders object to the decision. It will be implemented without funds budgeted and before funds for needed repairs etc. are allocated. Shareholders realize increased the staffing will result in substantial budget shortfalls. The board has refused to reconsider. What recourse do we have?

Asked on July 31, 2012 under Real Estate Law, New York

Answers:

Mark Siegel / Law Office of Mark A. Siegel

Answered 8 years ago | Contributor

Legal challenges to the actions taken by a coop or condo board are within the jurisdiction of NY's state supreme court. The form of the legal action can vary, and are sometimes brought as shareholder derivative suits, actions which seek injunctive relief, and what are known as Article 78 proceedings. An Article 78 proceeding is a legal proceeding against a body or an officer, which the NY statute states "...includes every court, tribunal, board, corporation, officer, or other person, or aggregation of persons, whose action may be affected by a proceeding under this article..."

In NY the question of what judicial authority courts should have in legal actions challenging the decisions of residential coop & condo boards was determined in a judicial opinion issued by NY's highest court, the Court of Appeals.

In legal actions challenging the decisions of coop or condo boards, NY's highest court applies what it calls: "...more limited judicial review embodied in the business judgment rule..." NY's highest court has stated that: "...the board owes its duty of loyalty to the cooperative — that is, it must act for the benefit of the residents collectively. So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the board's. Stated somewhat differently, unless a resident challenging the board's action is able to demonstrate a breach of this duty, judicial review is not available".

This is not to say that boards are free from any form of judicial review. As the NY high court stated, the application of this limited form of the business judgment rule: "...permits review of improper decisions, as when the challenger demonstrates that the board's action has no legitimate relationship to the welfare of the cooperative, deliberately singles out individuals for harmful treatment, is taken without notice or consideration of the relevant facts, or is beyond the scope of the board's authority."

The Court's decision set up a single standard for determining whether a board's action is proper. So in a legal challenge to a coop board's action, the NY high court has said that "...board action undertaken in furtherance of a legitimate corporate purpose will generally not be pronounced "arbitrary and capricious or an abuse of discretion"...in article 78 proceedings, or otherwise unlawful in other types of litigation..."

The specific facts of your coop matter, in conjunction with a review of relevant coop documents & applicable law would have to be evaluated by an attorney in order to conduct a proper legal analysis of your coop issues. I hope you find this information useful.  

 

 

 

   


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