By Edward T. Braverman and Robert J. Braverman

Edward T. Braverman and Robert J. Braverman are partners in the firm of Braverman & Associates, P.C., a Manhattan law firm that specializes in cooperative and condominium housing law. This article addresses practical precautions that provide a reasonable degree of protection for those who lend time to the running of a cooperative corporation or condominium association. It cannot substitute for regular interaction between a board and its knowledgeable counsel concerning operations.

Board members beware: as underscored by the recent New York case People vs. Premier House, Inc., volunteer board members of non-profit community associations should be reexamining their roles and responsibilities. If they don't, they could find themselves in court.

This past September, the New York co-op and condo community was severely shaken by a ruling handed down by Judge Kathryn Smith of the Brooklyn Criminal Court. Judge Smith refused to dismiss a criminal proceeding begun against three officers and directors of a Brooklyn co-op. The charges were brought after an alleged violation of what is commonly known as the "Window Guard Law."

In 1994, a child died after falling from an Ocean Avenue Brooklyn co-op. A subsequent investigation resulted in the nine-count prosecution, charging the co-op and its president, vice president, and secretary with failure to properly install and/or maintain window guards.

The board members, sought to have the charges dismissed, claiming (among other things) that they could not be held personally liable for the criminal violations of the co-op corporation or its agents or employees, especially without proof of their personal knowledge of, control over, or participation in the maintenance of the building.

The court, in refusing to dismiss the charges, said that under the: The owner, lessee, agent, or other person who manages or controls a multiple dwelling, shall provide, install and maintain a window guard---on the windows of each apartment in which a child or children ten (10) years of age and under reside, and on the windows, if any, in the public halls of a multiple dwelling in which such children reside. It shall be the duty of each person who manages or controls a multiple dwelling to ascertain whether such child resides therein.

The court reasoned that the individuals charged are, in their capacity as officers and directors, the ones "in control" of the premises. Furthermore, the court stated that the issues as to whether or not these defendants, as board members were "in control" and if they properly discharged their duties and responsibilities had to be determined at trial.

Although a plea bargain was worked out, that plea arrangement---in which the managing agent pled guilty and charges against the board were dropped---should in no way blunt the co-op/condo community's realization of the potential liability one undertakes when he volunteers to be a non-paying member of a co-op's or condo's board of directors---that is, as a result of your nonfeasance or misfeasance you may be subject to criminal liability and that liability is not limited to the window guard law, but extends to other administrative code and penal law provisions.

Criminal Liability Questions.

Many believed that Judge Smith's decision in the Brooklyn case represented a Draconian change. Not so. The law says that an officer or director cannot escape his individual criminal liability for violations, even though the corporation or association may also be named as a defendant.

In fact, New York State penal law provides for criminal liability for anyone acting on behalf of or in the name of a corporate entity. The law says:

A person is criminally liable for conduct constituting an offense which he performs or causes to be performed in the name of or in behalf of a corporation to the same extent as if such conduct were performed in his own name or behalf.

The three Brooklyn defendants argued that there was no evidence of their personal knowledge of, control over, or participation in the building's maintenance. The arguments made by the defense relate to whether or not a person can be guilty of a crime without knowledge or intent. The judge said that, under certain circumstances, he could be.

Generally, to constitute a crime the party whose actions give rise to the offense must be shown to have had intent or mental culpability. Without that, there can be no guilt. But New York law recognizes that some crimes do not require intent or mental state only a voluntary act (or the failure to perform an act). These types of offenses fall under "strict liability" laws.

When defining a crime, the state has the power to dispense with intent when to do so is in the public interests and where the requirement of proof of the defendants' guilty knowledge would render enforcement extremely difficult, if not impossible. The window guard statute is such a crime. In enacting the legislation, the city was trying to protect the lives of children from accidental death and injury. By statute, the obligations to comply devolves upon the "owner, lessee, agent or other person who manages or controls a multiple dwelling."

Judge Smith reasoned that the issue of whether or not the three officers and board members of the Brooklyn co-op "controlled" the multiple dwelling was for the jury to decide. The story does not end here, however, for there is still the issue of an officer's or director's civil liability.

Civil Liability Questions.

An officer's and director's civil liability encompasses two areas:

• The duty and obligation he owes to the corporation and its shareholders or the condominium association and its unit-owners.
• The officer's and director's civil liability to third persons.

Under New York law, an officer or director is obligated to perform his duties in good faith and with that degree of care which a prudent person in a like position would use in similar circumstances. In performing those duties, the board member may rely on information, opinions, reports, or statements prepared by other officer or directors believed to be reliable, and by professionals.

A person who performs his duties in this way will have no liability to the co-op or condo. This is the basis of what is commonly knows as the Business Judgement Rule. Under that, courts are prevented from second-guessing a director's actions when such action is taken in good faith---even when the decision or action may be shown to be wrong.

Liability to Third Parties.

In New York, the general rule is that officers or directors are not personally liable for a corporation's or association's actions. Accordingly, an officer or director would not be responsible for the building's failure to pay a debt or carry out the terms of a contractual obligation.

But officers and directors will be held responsible to third parties for losses or injury resulting from conduct engaged in by an officer or director who acts without the authority of the corporation or who has committed an act separate from that committed by the corporation. If such should be the case, the immunity otherwise accorded to the officer/director for acts done in the name of the corporation will no longer be viable and the office/director shall be held civilly accountable.

A board member must be ever-vigilant, expeditiously attend to his duties and, at all times, follow prudent business practices. However, even the most careful person may stumble along what can be seen to be a treacherous road. What then? How can an owner serve his community while, at the same time protecting his interests?

There are a number of measures available:

• Directors and officers liability insurance.
• Indemnification of liability from the co-op/condo.
• Co-op and condo operating documents prohibiting suits against directors.
• Regular use of a knowledgeable attorney who knows your co-op/condo.

Liability Insurance.

Co-ops and condos can purchase what is know as "directors and officers" (D&O) liability insurance policies. This type will protect them from personal liability while serving in their official capacity. These policies are ostensibly made up of two parts; the obligation to defend and to pay any settlements and/or judgements. With today's high litigation costs, this coverage is indispensable.

Care must be taken in obtaining proper coverage, both as to the reputation of the carrier and as to the exclusions and/or limitations which may be contained. It is also important that the D&O be on an "occurrence," as opposed to a "claims made" basis, or, if the former is unavailable, that the policy contain an endorsement permitting a pro-longed reporting period. By doing that, coverage will be extended for acts committed during the policy periods, even if claims are made thereafter. These policies will also provide for a defense and indemnification of the co-op/condo for its specified acts of wrongdoing.

In response to the prosecution of the three Brooklyn board members, many New York officers and directors have inquired as to whether or not their liability coverage will provide protection, not only for civil matters but also for the coverage of criminal proceedings. New York Sate has long held that it is against public policy for insurance companies to indemnify any part for a fine or penalty resulting from a criminal prosecution. However, it is still an open issue as to whether or not an insurer can offer a defense in a criminal prosecution.

Indemnification Issues.

In 1986, New York law was amended to expand and broaden the rights of directors and officers of a corporation to receive indemnification from their co-op. Indemnification is a means by which one party secures another against loss or damage. These broadened rights can and should be included in the bylaws of every co-op and condo. Notwithstanding the expansion, there are two restrictions:

• If a judgement adverse to the director or officer establishes that his acts were committed in bad faith or were the result of active and deliberate dishonesty, or that he personally gained a financial profit or other advantage to which he was not legally entitled.
• If it is inconsistent with a provision of the building's organizational documents or an agreement.

If possible, every co-op/condo should offer its officers and directors the fullest indemnification possible so as to encourage the shareholders/unit owners to serve on the building's board.

No Right to Sue.

Effective in 1987, New York State provided that a corporation's certificate of incorporation may contain a provision shielding its directors from a suit instituted for breach of duty. This shield prevents suits both by the corporate body, as well as by individual shareholders. However, the provision cannot protect a director from lawsuits stated by third parties.

As with the expansion of the right of indemnification, New York State enacted this legislation to encourage more qualified person to serve on boards. The protection is limited, however, and does not include acts or omissions undertaken by a director in bad faith or involving intentional misconduct, a knowing violation of law, or an act designed for personal gain.

While condominiums are not in the corporate form they should endeavor to institute changes in their documents to provide similar protection. Once implemented, the prohibition will go a long way in preventing "spite" suits.

The area of officer and director liability is intricate and treacherous even for the most worldly of board members. Board should work closely with counsel who specializes in cooperative and condominium housing law.

Relief on the Horizon.

This past June, Congress found that unwarranted litigation costs, as well as frivolous, arbitrary, or capricious lawsuits were affecting the willingness of volunteers to offer their services as members of boards for non-profit public and private organizations. On June 18, 1997, the federal "Volunteer Protection Act of 1997" was passed, becoming law 90 days later.

The new law provides that no volunteer of a non-profit organization or government entity shall be liable for harm caused by an act or omission of the volunteer on behalf of the organization. Unfortunately, it will not be applicable to co-ops and condos since they are neither non-profit (within the formal meaning of the term) nor government entities.

One local legislator has already submitted a bill in Albany to protect the co-op and condo community, however. Modeled upon the new federal law, this legislation will be an important addition to the rules needed to protect officers and directors. Boards should contact their state representatives to lobby for passage.

Areas of Liability - A Checklist

With the Brooklyn window guard case on the tip of every board member's tongue, the big question of the house is what should boards be doing to avoid criminal liability? "What's different about this is the criminal component," says Neil Davidowitz, vice president of Orsid Realty in Manhattan. "So the focus initially should be on compiling a list of components that have the potential for criminal penalties."

Here's a checklist of areas every prudent board should be concerned about:

• Window guards. The city's window guard law was passed in 1976. In rentals, landlords are responsible for installing them in hallways and apartments where children under age 10 reside. In condominiums, management is responsible solely for the hallways. In co-ops, it is the duty of the building's management, or whoever is running the building, to notify the shareholders about the law and see that they comply.
• Windows. Windows are the responsibility of the board. If the tenant breaks the window, the board must fix it and can bill it back to him. Otherwise, the board must pay for repairs.
• Elevators. The city inspects elevators every two to five years and if they are not operating properly, the board could get a fine---or even go to jail. "You have an obligation to file safety reports," Davidowitz says. "These are on an annual and/or five-ear basis." Check with our manager.
• Boilers. Boilers must be operating properly at inspection time. There are also specific requirements for signs.
• Façade/Building Maintenance. In New York City, Local Law 10 requires periodic inspection of your façade. There are other building maintenance issues. A co-op in Queens was evacuated and then taken to court by the city because of construction problems that the board had taken too long to remedy.

If not attended to, each of these areas can result in heavy fines and/or criminal penalties. "There is no one who questions the fact that the owner of a building should be responsible for the health and welfare of the people in the property," says Robert Tierman, an attorney with Salon Marrow & Dyckman in Manhattan. "At some level, all these areas have criminal misdemeanor sanctions attached to them."

Boards need to put a program in place to keep on top of these issues. "Our recommendation is that you must put together a comprehensive list of all the different legal and regulatory requirements at the state, federal, and city level that apply," Tierman says. "Use a variety of sources---lawyers, engineer, all your professionals. You should assign someone on the board, or be sure that the board as a whole is watching to see that the managing agent is complying."

Boards must act swiftly. Tierman points to a shareholder who refused to install window guards because he claimed that would hurt his ability to sell his apartment. The co-op threatened to put him in default.

Finally, be sure you do not defer a task simply because you don't' have the funds. "If something is worng a board must exercise due diligence," says Barry Manson, president of ABM Management in Great Neck, N.Y. "If the elevator is out of order or anything like that, you must act quickly. When it comes to safety issues, act swiftly. Don't wait three months because you don't have funds. Get them, either through a special assessment or a maintenance increase. Boards have to just do it. (Tom Soter)

Reprinted with permission of Habitat magazine.

Site Directory:
Welcome | Firm Overview | Attorney Profiles | Practice Areas | Publications | Contact Us | Representative Cases | Opening Photo Page

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

Copyright © by Braverman & Associates, P.C. . All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.