The Board Room: Why should boards pay for meritless lawsuits?
Yes, it’s true: There are oppressive boards that file “abusive” lawsuits against residents in order to collect a $150 late fee on common charges or when Sparky the family dog weighs 51 pounds and the house rules limit pets to 50 pounds.
But in my twenty years of experience, meritless lawsuits filed by residents against hard working volunteer board members who have the best interests of their community at heart are a far more common and troubling occurrence of co-op and condo life.
With costs to defend against a single lawsuit easily exceeding $50,000, meritless lawsuits are also an expensive fact of life, especially if the building’s insurance declines to provide a legal defense.
The way most bylaws and proprietary leases are written, boards can’t collect their legal costs when a frivolous claim against the building--and often the individual board members--is dismissed as meritless. They can only collect if the lawsuit arose from a breach of the by-laws or proprietary lease.
So, for example, suppose a coop shareholder sues the board for failing to provide heat and hot water to her apartment for the month of December. The board knew there was a major problem with the plumbing running to that apartment, but simply failed to do anything about it “because it was the holidays.” This seems like an appropriate situation for the shareholder to recover her legal fees.
Suppose on the other hand that a unit owner simply despises the people on the board and commences an action accusing the board members of all sorts of nefarious, self-dealing conduct.
While such a claim would likely be covered by the building’s directors and officers liability policy, those policies have deductibles, there is a likelihood of increased premiums on future policies due to the claim history, and there are also likely to be ancillary legal expenses even if there is insurance coverage. Under this scenario, nobody did anything wrong; however, the expenses incurred by the building as a result of the baseless litigation will not be recoverable due to the way the proprietary lease or by-laws are worded.
It doesn’t have to be this way.
I am currently counseling one condo board to amend its bylaws to provide that if a unit owner sues and loses, the unit owner has to pay the board’s legal fees. Not only would that relieve all the other residents of the building from having to foot the defense of a frivolous claim, but it would also discourage those claims from being filed in the first place.
The change would require a supermajority vote (usually at least two-thirds) of the common interest or outstanding shares depending on whether the building is a condominium or a co-op. It’s a big number but not insurmountable, especially if residents are already unhappy about the imposition of an assessment or a significant portion of their common charges being used to fund a baseless and/or vindictive claim against a Board.
And, to the extent there may be a concern on the part of owners about an abusive board commencing baseless litigation, the amendment could also require the board to cover a resident’s legal costs if the board loses a lawsuit.
Most proprietary leases and by-laws in older condominiums were drafted years ago and do not reflect the changes that the law has seen regarding the recovery of attorneys’ fees. The by-laws of newer condominiums are drafted by the sponsor’s attorneys who are often most concerned with protecting the sponsor. A building’s governing documents have a “useful life” just like a boiler. They need inspection and tuning from time to time to make sure they function when needed most. Once a lawsuit against the building has started, it may already be too late.
Robert Braverman, Esq., is the managing partner of Braverman & Associates, specializing in the representation of New York City co-op and condominium boards. Read more of his legal advice in The Board Room.
