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Ask an Expert: How do we fight corruption in a small co-op?

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Q.   We have proof that the treasurer of our 10-unit co-op has withdrawn over $25,000 in cash from our bank account.  Two shareholders who are on the board with her will not do anything due to the amount of years they've known this person. They still allow her to collect maintenance and handle our building funds.

There are only five shareholders total--including the treasurer and her two friends on the board. If two of us would like to have an officer removed from the board with good reason can we do it? How can we stop this? 

A. "This question highlights one of the major concerns when buying an apartment in a co-op with only a few units," says co-op and condo attorney Dean Roberts of Norris McLaughlin & Marcus. "It's a lot more personal and an outsider--that is, a new shareholder--can find themselves in this type of situation." 

Handcuffing your treasurer's criminal activity may be difficult but not impossible, say our experts, who outlined a few approaches.

"Most  bylaws do not allow for the removal of a director by the board unless there is cause," says Roberts. "Here, however, there appears to be cause but no willingness on the part of the board for the removal. Therefore, the concerned shareholders could petition the board for a special shareholders meeting for the specific purpose of removing the director in question."

Bylaws usually require that 25% of the owners must call for the meeting and that a majority of shareholders at the meeting must vote to remove a board member, says real estate attorney  Jeffrey Reich of Wolf Haldenstein Adler Freeman & Herz.

Alternatively, suggests co-op and condo attorney Scott Greenspun of Braverman Greenspun, any shareholder can also demand that the board itself commence an action against the treasurer.  

If the board fails to act, explains Greenspun, the shareholder may begin a 'derivative action' against the treasurer to get back the allegedly stolen money misappropriated "and possibly against other board memebers who refused to take action against the treasurer despite their knowledge of the misconduct."

You could also file a complaint with the attorney general's office, or, "since it involves the apparent misappropriation of funds, the District Attorney's office as well," says Roberts.

Asset manager and real estate broker Roberta Axelrod of Time Equities, who has sat on dozens of boards as a sponsor's representative, says the mere threat of criminal action is often  a compelling motivator.

"Practically speaking, the quickest way to address this is to immediately call an emergency board meeting to tell the board member in question that if she does not resign from the board, give up all access to bank accounts and collection of funds, and immediately repay the missing money, the matter will be referred to the district attorney's office for investigation and possible criminal charges with the risk of the 'friends' on the board possibly being charged as accessories to a crime," says Axelrod. 

A sensible person, she notes, "will be very glad to resign and find a way to pay back funds so as not to go to jail," even if means selling their apartment to come up with the money.

If the board doesn't take immediate action, she says, it "exposes itself to the risk of being sued by the unit owners for a breach of their fiduciary duty and acting in bad faith."

Axelrod also recommends that an independent accountant do a full audit of books and records going back to when your treasurer first had access to the bank accounts and records, because the problem may be even more serious than you think.

"A title report should be run to see if there are any liens that have been put on the building as a result of a failure to pay bills--such as real estate taxes or contractors--due to funds that may have been pocketed," she says.

The building should to consult an attorney to discuss the best way to ensure the receipt of the missing money, says Axelrod.

In addition, says Greenspun, "We would also encourage the shareholders to contact the co-op’s insurance broker and request that the building’s insurers be placed on notice of the allegations because the co-op may have insurance coverage to protect against any financial losses."


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