New York's Cooperative and Condominium Community

Habitat Magazine Insider Guide



Fiduciary Duty

Educating Board Newbies

Bill Morris: Welcome to Legal Talk, a conversation about governance issues that New York co-op and condo boards are tackling as we speak. I'm Bill Morris with Habitat, the magazine for New York co-op and condo directors. And joining me today is Mark Hankin, founding partner at the firm of Hankin and Mazel. Good to see you again, Mark.
Mark Hankin: Same here. Bill. Always nice to see you.
Bill Morris: Say, I got a simple question for you. In your long experience when you encounter new co-op and condo board directors, do you frequently find that they have no idea what they've gotten themselves into? Yes or no?
Mark Hankin: That's a yes.
Bill Morris: Okay. Given that's a yes what do you as a lawyer have to do to get them up to speed, walk, walk us through that.
Mark Hankin: It's interesting because it all starts out with the annual meeting. You have a lot of people, individuals, either in a co-op or a condominium, and they're looking to be a part of the board. And as people have their own self-interest as to why they want to be on a board, some of them have independent interests that they think are important to the cooperative or condominium in general.
Some of them have group interests. Some of them are just worried about the finances. There's so many things that they're concerned about and they're interested in running and giving some of their ability to the board. And generally speaking, unless you've been on a board for a couple of years, they just don't know what they're in store for.
And I, when I meet the new board, we do it as a practice, my firm. We tell these new board members that there's a lot involved. Okay. That this is, it's, the fun part of running for the board is over. Okay. And that you have a lot of duties. And most important one of obviously is the conversation today.
And that's a fiduciary duty. And we spend a lot of time with them. We actually give them a code of ethics, which explains the different duties that they possibly could have on the board. And then we go in depth and we explain to them how serious it is, because they've created a special relationship and that's what a special, that's what a fiduciary duty is all about.
It's a relationship of faith, of trust, and once you become that board director, board of manager, you've given everyone else in that condominium and that cooperative, you've told them that you're gonna carry this message. Through your term as a board member, and as a board of director with your fellow board members, and you are saying to them, trust me, I can do this and I'm gonna do it legally and properly.
Bill Morris: Let me ask you this. The, a lot of people run on certain campaign promises, that's a common thing in a democracy. Do you find that there's a disconnect? They run on, we're gonna keep the maintenance flat, or whatever they might have run on, and then they get into the reality of running the corporation and they realize, whoa, we can't do that.
Is there a disconnect between the, what they think they're promising when they're running and what they find when they start actually governing?
Mark Hankin: Yeah. That's why we have 7, 9, 12 board members on a board, sometimes five. Okay. And they, what they learn is that even though they had a specific agenda for a specific item, and you bring up a good point.
When you, when we're talking about the finances of a condominium or a cooperative you're talking these days, you're talking about million dollar buildings. Million dollar budgets. Millions, okay? I remember years ago when we first started in this business some of these co-ops or condos or an HOA, they would have a hundred thousand dollars budget, okay?
It's in the millions now, and this is a serious matter because these are funds that these board members and board of managers have been entrusted to take care of. So what they're gonna find out is that it's not just their agenda. It's got to be the board's agenda. Everyone has to be on the same level and the same agenda.
Bill Morris: Now as a lawyer you're very much aware of the whole notion of conflicts of interest, but a lot of people who come onto boards don't know that. The rules have gotten a lot stricter in recent years. The law is about conflicts of interest forms that have to be filled out. Is that part of your spiel about fiduciary duties?
About the reality that they've gotten themselves into here?
Mark Hankin: Absolutely. In, in, in addition to the code of ethics that we give them, and we try to make-- look, I can't mandate them to sign the code of ethics, but I do suggest and recommend it. Sometimes they'll sign it, sometimes they'll just take it, and hopefully they'll read it.
But there's also BCL 7 13 and 7 27, which is applicable both to cooperatives, condominiums, and basically you have to inform your shareholders or your unit owners according to what type of facility you are in, as to whether or not during the, your term, during the year that you were a board member, was there any conflict of interest?
Was there anything that you did in your self-interest, okay, which could be considered to be a conflict. Did you go to your rest of your board members and disclose it? Because that's what the law says. You have an obligation to disclose any conflict of interest. Did you do that? And if you did, what was the conflict?
What was the contract that you were involved in that you may have had some type of input or received some type of compensation from? So 7 13 and 7 27 require that it annually, each board member certify as to whether there was a conflict and if there was, they have to in fact say what it was. And if there wasn't certify that there was no conflict of interest during that period of time.
Bill Morris: Well, now that's just one small, not small, that's one of many issues that you have to educate these new board members about. The idea of their fiduciary duty, that's a big basket of ideas and it's gotten a lot more complicated over the years. For example the conflict of interest legislation that they have to, they have to fill out these forms. You mentioned the budgets have gotten way bigger. The local laws have gotten way more stringent. I wonder if in closing you could just, what's the message you're giving to these new people coming onto boards? Could you, aside from the fact of educating 'em about their duties, is there a kind of a general lesson that you would pass on to people who are thinking about running or who have just run and just gotten elected?
Mark Hankin: It's, there are several lessons, okay? First of all, I tell my boards, the new boards, especially the ones that have never sat on the board before. You should read your bylaws. You should read your proprietary lease, if it's a, if it's a co-op. You should read the articles of organization and the declaration if you're a condominium from the top to the bottom.
Okay? Because believe it or not, it spells out what you're supposed to do and what you're supposed and what you're not supposed to do. You have to understand the serious nature of what it is to be a board of director, the trust that you've been given by all of the shareholders or the unit owners of a particular building.
Very important, okay, that you recognize that you are making decisions for the whole community, not for yourself. And that's a lesson in and of itself. Self-dealing is something that unfortunately does occur, okay? And when it does occur people have recourse. And they, if that's a breach of your fiduciary duty, they bring lawsuits in court and they could have you held accountable in money damages or get an injunction against you for breaching your fiduciary duty.
Look, most of the time under the business judgment rule which is the Levandusky case, which everybody is usually familiar with, okay? The bo, the courts are not gonna interfere. As long as your determinations on behalf of a cooperative or a condominium are made in good faith, they haven't been made discriminatory within the scope of an authority of what you're allowed to do, wasn't selectively enforced against one individual.
As long as those things are done and done correctly, then the courts won't get involved and you're insured. It's the ones where. You said something, you did something that was self-interest that you benefited from that you took it away from the community. Okay. Those are the ones that they consider to be bad faith.
Those are the ones that you can get sued for, and you are going to be individually and personally responsible for money damages as a result of that.
Bill Morris: Now I guess what we're talking about here, Mark, is a big wake up call that you give your new board directors. Mark Hankin from Hankin and Mazel. Thanks for that reminder about the importance and the complexity of fiduciary duties for co-op and condo board directors.
Thanks, Mark.
Mark Hankin: My pleasure.

Mark Hankin, Founding Partner, Hankin and Mazel

Wake-up call. Generally speaking, new board members just don't know what’s in store for them and often underestimate the extent and seriousness of their roles. When I meet with people who have just joined, I tell them the fun part of running for the board is over, and now the hard part has begun. Most important is their fiduciary duty to act in the best interests of the community. We give them a code of ethics, and then explain in depth how serious it is, because they're entering into a special relationship built on faith and trust. They’re saying to their fellow shareholders or unit-owners, “Trust me. I can do this, and I'm going to do it legally and properly.” And we emphasize the consequences of breaching that duty, including potential legal action and personal financial accountability.

The foundation texts. I tell new board members to read their governing documents, be it the proprietary lease at a co-op or the articles of organization and declaration at a condo, from top to bottom. They spell out what you're supposed to do and what you're not supposed to do, which will help guide decision-making while helping to ensure that you’re adhering to legal standards, avoiding discriminatory actions, and acting within the scope of your authority, all of which will mitigate legal risks. 

A high-stakes game. What many people learn is that it's not just their agenda that matters; it's got to be the board's agenda. Everyone has to work collaboratively. I remember years ago, when we first started in this business, some of these co-ops or condos would have a $100,000 budget. It's in the millions now. This is a serious matter, because these are funds that these board members have been entrusted to take care of.

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