Edward T. Braverman is senior partner of Braverman & Associates, a Manhattan law firm that specializes in cooperative and condominium housing law. Reprinted with permission of Habitat magazine.

Congratulations! You have just been elected to your co-op's or condo's board of directors/managers. What? You have never served before? How should you conduct yourself? What are your duties and obligations? How can you protect your assets if you are found to have breached those duties and obligations?

Many unit-owners volunteer for their boards without understanding the obligations and possible liabilities entailed. In fact, some can serve on their boards for years and may not truly understand their obligations.

It is said that it is the business of the board to run the business of the property. And this is true, whether you live in a cooperative (a corporation) or a condominium (Generally, an unincorporated association).

A director is a fiduciary in that he, with his other directors, controls business transactions for the building, handles its money and property, participates in issuing contracts and otherwise takes part in the management of the financial and daily operational affairs. A fiduciary stands in S trust, which requires a high degree of good faith.

Accordingly, a board member cannot delegate his obligation. This means that one member cannot give a proxy to another to vote at a meeting. It also means that the directors cannot - and should not - delegate the decision-making process to the shareholders/unit-owners as a group, unless the corporate or association documents provide for that.

STANDARD OF CONDUCT

New York State, through the Business Corporation Law, has established a standard of conduct which a member of a corporate (co-op) board of directors must meet. That standard is also generally applicable to a condominium's board of managers.

The law stipulates: "A director shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances."

New York law further stipulates that, in performing his duties, a director shall be entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, prepared by others. Those "others" include one or more officers or employees of the corporation, corporate counsel, public accountants, other professionals, or even a committee upon which the director does not serve.

Moreover, in taking---or refraining from taking---action, a director shall be entitled to consider both the long- and short-term interests of the corporation and its shareholders (such as a current maintenance or common charge increase which will benefit the long-term viability of the property). However, in relying on the reports of others, the director must rely on them in good faith and believe them to be correct.

A person who performs his or her duties in this way will generally not face liability. But if he or she knows that a report submitted to him does not merit confidence and he acts upon it, he has breached his duty to the corporation and may be subject to personal liability. Conversely, if a director acts in good faith and has no reason to believe that such a report is inaccurate, he shall face no liability as a director.

Such decisions and the actions taken have come to be known as the Business Judgment Rule, and decisions so made will not be interfered with by the courts, even if those choices are wrong---provided there was good faith and a reasonable basis upon which the decision was made.

Since the fiduciary obligation of a board member is to the corporation and its shareholders (or to the condominium and its unit-owners), the fact that one may sit on the board as a representative of another entity (the sponsor) will not change the obligation to the corporation. The sponsor's representative owes his first duty and allegiance to the apartment corporation or condo.

Conflicts of Interest. Great care should be taken if the board contemplates entering into contractual arrangements with a director or a corporation in which the director has an interest or is otherwise determining an issue in which a member of the board has an interest or may obtain a personal profit or benefit.

A transaction will not fail solely because of a director's personal interest or because he was present at a meeting wherein the transaction was discussed and voted upon. However, the facts surrounding a personal interest must be made known. If there be such disclosure, the transaction cannot be challenged solely because of that. Nonetheless, it would be best for the interested director to excuse himself from any discussions, or, in appropriate instances, from the meeting itself.

Thus, a director who may be in litigation with the cooperative or condominium should not be present during strategy discussions concerning the litigation. The fact that the transaction was not disclosed may result in avoidance of the transaction or in personal liability to the director. The bottom line for all of these situations will be whether or not the board action was fair and reasonable to the co-op or condo when approved.

Meetings. Directors' meetings generally take place once a month. Unless otherwise required by the co-op or condo bylaws, there is no notice requirement for a regularly scheduled meeting. The time and place for these regular meetings can be fixed by a resolution. Special meetings require notice, as outlined in the bylaws. The notice for each can be waived by any one or by all of the directors either before or after the meeting or by attending a meeting without notice and failing to register an objection.

Minutes. Minutes of each meeting should be taken and the record should clearly indicate what issues were discussed, voted upon, and approved, and the scope and limitations of all authorizations granted by the vote. There should be a listing of those present when the meeting began, those who may have left while it was in progress, who presided, and who kept the minutes. The minutes should also list those, other than board members, who were present. An indication should also be made as to whether or not the meeting was a regular or special gathering, and, if special, a copy of the notice or written waivers should be appended.

If an issue is particularly sensitive to the members of the co-op or condo community, it would be preferable to indicate the factors which were considered by the board when making its decision. This will go a long way in showing the members of the co-op/condo community that the board gave careful and reasoned consideration to the action taken.

Dissent. A director is always entitled to have his views and position entered in the minutes. This right is especially important when a director believes that the action to be taken is inappropriate and may ultimately lead to liability. To protect himself, a director should make certain that his dissent is noted on the record. If he fails to note such dissent at the time, he should do so promptly after adjournment by sending such dissent by registered mail to the secretary of the corporation.

A director who is absent from a meeting of the board is presumed to have concurred in its decisions, unless, within reasonable time after learning of such action the director sends or delivers a written dissent to the secretary of the corporation by registered mail or the director causes such dissent be filed with the board minutes. Failing such formal dissent, the director will be held responsible for inappropriate actions taken by the board.

CORPORATE INDEMNIFICATION

In 1986, the New York State legislature, in an effort to encourage individuals to serve as officers and directors, expanded the ability of a corporation to indemnify those officers and directors who are alleged or adjudged to have breached their duty to the corporation. The statute now permits the bylaws of an apartment corporation provide for reimbursement to its officers and directors for reasonable expenses, including attorneys fees, actually and necessarily incurred as a result of claims or actions against them. This expanded coverage also includes payment of judgments, fines, and settlements.

Each board member should make certain that the bylaws of his corporation reflect the expanded coverage permitted by law. Many bylaws, which came into effect prior to 1986, do not contain such expanded coverage. Under this coverage, reimbursement for defense and payment of judgments and fines will be made even if the director or officer is found to have breached an obligation to someone or some entity, other than the corporation, as long as he committed the act in good faith and with a reasonable belief that it was not opposed to the best interests of the corporation.

This new coverage even includes criminal actions. However, there will be no indemnification for a director or officer if it is found that his acts were:

• Committed in bad faith
• The result of active and deliberate dishonesty
• Material to the claim adjudicated
• Personally and illegally profitable to him

The expanded indemnification provisions can easily be incorporated into the corporate bylaws by a mere majority vote of the directors. No confirmation of the expanded indemnification provision is needed by the shareholders of the corporation. Once passed, however, notification of the indemnification provision must be given.

Directors who serve on condominium boards should similarly assure themselves that their bylaws contain the expanded coverage similar to those now permitted by the New York State Business Corporation Law.

In 1987, the New York State legislature, in its continued effort to make voluntary service upon a board more palatable, again amended the Business Corporation Law to provide that a certificate of incorporation may set forth a provision limiting the personal liability of directors to the corporation or its shareholders for damages for any breach of duty.

This expanded protection excludes those situations wherein a director's acts or omissions were committed in bad faith or involved intentional misconduct or a knowing violation of the law, or that he personally gained, in fact, a financial profit or other advantage to which he was not legally entitled. Moreover, this limitation on the suit against a director cannot be for acts committed before the adoption of such a change in the certificate.

Several things should be noted concerning this expanded protection, which differs markedly from the indemnification provisions mentioned above:

1. It will only cover directors and not officers.
2. It requires an amendment to the certificate of incorporation and thereby needs an affirmative vote of the shareholders.
3. It does not protect a director against possible liability to non-shareholders of the corporation.

As with the provisions for indemnification, boards of managers should seek to expand their organizational documents to afford similar protections made possible to corporations by the New York State legislature.

Even prior to the 1986 and 1987 amendments to the Business Corporation Law providing for indemnification and elimination of liability, boards realized that the only way to attract qualified directors to serve voluntarily was to secure a Directors and Officers (D&O) Liability Insurance Policy.

While it is against public policy and unlawful to issue insurance against criminal acts and intentional defalcations, fines, penalties, and punitive damages, carriers in the New York metropolitan area are issuing policies to insure that directors and officers who are found to be personally liable for mismanagement, improper allocation of a co-op and condo's funds and resources, libel, or slander, do not put themselves and their assets at risk when they serve on their building's board.

These D&O policies will give a director peace of mind and security in knowing that, if he were acting within his capacity as an officer or director of his board, the insurance carrier will pay the cost of his defense and any judgment (exclusive of punitive damages) issued by a court.

Even if your co-op or condo has established expanded indemnification, it is just as important to make sure that your co-op or condo has secured the D&O coverage discussed. This will insure that an officer or director will be protected, notwithstanding the possible insolvency of his co-op or condo; its lack of cash flow; or the fact that a subsequent board may not choose to comply with a demand for indemnification (in fact, it may be the current board which has begun an action against an officer of director who previously served).

In the end, each board member should be aware of some of the many obligations one accepts when nominated to serve on a building's board of directors and what possible protections exist to insulate one's assets from liability. When questions arise, board members should always first consult the co-op or condo's counsel so that the corporate and/or organizational documents can be reviewed in conjunction with applicable statutes. It is only by applying the specifics of a situation to the organizational documents and the applicable law that accurate legal assessments can be formed.

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