Page 7 - New York Cooperator March 2019

QUESTIONS & ANSWERS
Legal
Q
A&
Addressing Mismanagement Issues
Q
How do you go about fi ling a com-
plaint against the board and prop-
erty management for fi nancial
mismanagement? We suspect the board has
exhausted its operating expense budget on
items that are deemed capital expenses. Th e
board is now asking for a vote on special as-
sessment to cover items.
—Shareholders Taking Action
A
“I am assuming that there was
no affi rmative wrongdoing,
such as self-dealing, fraud or
other breach of fi duciary duty by the individ-
ual board members and this is merely a case
of fi nancial mismanagement that resulted in
imposition of what should have been an un-
necessary special assessment,” says Bruce A.
Cholst, a shareholder at the New York City
law fi rm of Anderson Kill, P.C.
“In New York, the only way sharehold-
ers can recover damages in this scenario is
to prove that (a), the board’s expenditure of
operating funds was imprudent, and (b), its
lack of prudence depleted corporate funds
to the extent that an assessment which oth-
erwise would have been unnecessary to meet
expenses had to be imposed. Without proof
that the expenditures were reckless and that
the assessment would not have been neces-
sary but for the board’s careless dissipation of
the funds, the board would not be legally li-
able merely because they chose to spend their
operating budget on capital needs; such an
allocation is within the board’s management
discretion. Shareholders, of course, have a
political remedy – namely holding the board
members accountable at the next election.”
I Wanna See the Books!
Q
I am a shareholder in a coopera-
tive apartment, and I believe that
building money is being used for
personal uses. I have been denied access to
the building’s books. As a shareholder, what
can I do to see them?
—Exercising My Rights
A
According to attorney Eric
Sherman with the New York
City-based fi rm of Pryor
Cashman LLP: “Cooperative shareholders
are aff orded certain rights by statute, under
common law and possibly in the co-op’s gov-
erning documents, to inspect the books and
records of the cooperative corporation. What
constitutes a cooperative corporation’s ‘books
and records,’ however, has been the source of
much litigation in New York courts. And in
many cases, what a shareholder is entitled to
see is a function of the way in which the ma-
terials are requested.
“If a shareholder makes a general request
to review a corporation’s ‘books and records,’
then that corporation is only required to
make available materials specifi cally enu-
merated in the Business Corporation Law
(BCL)—namely: (i) a record of shareholders;
(ii) shareholder meeting minutes; and (iii)
profi t and loss statements.
“A more detailed request for inspection
(i.e., identifying categories/types of docu-
ments to be inspected), provided it is made
‘in good faith and for a valid purpose’ must be
honored by the cooperative corporation. For
example, it is clear under New York law that
seeking to investigate potential mismanage-
ment or breaches of fi duciary duties (which
could arise from the use of building money
for personal use) are appropriate grounds
for requesting inspection of books and re-
cords, provided that the inquiry is grounded
in good faith and for a valid purpose. Note,
however, that the board of directors may
condition your access to the documents on
the execution of a reasonable confi dentiality
agreement.
COOPERATOR.COM
THE COOPERATOR
— MARCH 2019
7
continued on page 25
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