Personal Liability While Serving On Your Board

Serving on your board means making decisions that impact your entire community — without getting paid. But are you personally protected when things go wrong? Geoffrey Mazel, partner at Hankin & Mazel, provides an overview the multiple layers of legal protection available to volunteer board members while highlighting exactly when these shields disappear, potentially leaving you exposed. Most importantly, you'll learn when to consult legal counsel before making decisions that could trigger personal liability. Habitat’s Emily Myers conducts the interview.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Emily Myers: [00:00:00] Welcome to Legal Talk, a conversation about the governance issues facing New York's co-op and condo boards. I'm Emily Myers with Habitat, the magazine for New York City's co-op and condo board directors, and I'm joined by Geoffrey Mazel, partner at the law firm, Hankin and Mazel. Board directors are volunteers and it's important they don't face lawsuits at every turn, but they also need to act within the law.

Geoffrey, can you explain the principle way in which board members are protected in their roles? 

Geoffrey Mazel: Okay. Thank you, Emily. Thank you for having me. This is obviously a threshold topic for board members. They are volunteers. They don't get paid. They wanna know that they're protected from liability.

The last thing anybody needs in their life is more liability in today's world. Fortunately there's numerous levels of protection for board members, both in the New York State statute in case law, and also in [00:01:00] the bylaws of the co-op corporations. So they are generally held harmless, and indemnified for both legal fees and any loss that would occur in their ordinary course as board members of the corporation.

Emily Myers: And is this a protection under the business corporation law? 

Geoffrey Mazel: The business corporation law many years ago-- in fact I remember when it was passed-- does have indemnification language for co-op board members and hold harmless language. So statutorily, a co-op board member is held harmless from any loss that may occur from any of their actions.

Of course, the one exception, and I'll be probably speaking to a lot, is not negligence acts , but intentional acts or wrongful acts or acts without authority may not be protected. 

Emily Myers: So before we get into that, you've also got the business judgment rule, which provides protection as long as a board member acts within their authority in good faith [00:02:00] and follow proper procedures.

Geoffrey Mazel: There is a long list of case law regarding the business judgment rule. It is a ubiquitous term when you go into a boardroom. Everybody knows about the business judgment rule. However, it doesn't mean you can do whatever you want. I hear board members well, we have the business judgment rule.

I said yes, but it does, has have certain limitations. It does protect board members, and it is a major legal doctrine that allows board members to function. Otherwise, you're looking over your shoulder every decision you make. However, once again, if there's an intentional act, an illegal act, or an act without authority, they may not be protected.

Emily Myers: So can you give then some examples of where a board might not be protected? 

Geoffrey Mazel: Let's say they enter into a contract with a no bid contract where they never had a board meeting. So maybe only one board member was involved. One board member signed the contract and then just to layer it a little worse, that board member [00:03:00] benefited from that contract. That board or at least that person who signed that contract may not be protected under the business judgment rule.

Let's say something goes wrong with the contract, there's a breach of contract, what have you, or the decision in and of itself. There's numerous examples. The one I see a lot lately is regarding human rights. If a board member blatantly discriminates against a protected class, there may not be a protection under those circumstances. And certainly if there's a conflict of interest, which I guess falls into my first example there may not be protection there. 

Emily Myers: Yes. A no bid contract might indicate some preferential treatment. So whenever there's preferential treatment, you're also talking about discrimination.

This becomes an area where there is liability. 

Geoffrey Mazel: Yeah. And also if they act outside their authority and again, boards, they wanna pass rules all the time. And [00:04:00] that they wanna stop people from doing certain things that they might not have the authority to do. You can't move in with a partner or you can't move in with a family member.

That flies in the face of your proprietary lease. So that sort of act would not be protected and. And again, you open yourself up to liability in situations where you act outside of the scope of your authority. 

Emily Myers: So what are then the potential consequences of not following those procedures even if perhaps no actual wrongdoing has occurred?

Geoffrey Mazel: The biggest problem obviously would be liability money. You could be out money. Very often co-ops and condos have directors and officers liability policies, which the duty of the insurance company to defend the board members is broader than their duty to indemnify.

So you probably, in most circumstances, depending on how crazy and how egregious, will have a defense from the insurance company, but they [00:05:00] may not indemnify you. In other words, the contract of insurance may not cover you. In addition, in the case of discrimination, when there's a finding of what they call punitive damages, that's not covered by insurance.

So in, in that particular situation, a board member who, makes a blatantly discriminatory action, again may have personal consequences.

Emily Myers: So are there any cautionary tales that you can provide or perhaps examples of best practice in this area? 

Geoffrey Mazel: Yes. So let's go to conflicts because conflicts could give rise to liability and it could give rise to lack of protections under both the business judgment rule and also business corporation law. One example you see a lot is a board member who's a broker in a building, and I've seen it where a board member might be the president of the board also.

So the chief cook and bottle washer. And they're making decisions on files where they stand to benefit. [00:06:00] So obviously they would have to disclose that conflict. And in my opinion, just speaking to conflicts of interest, there are permissible conflicts. And generally speaking, if the conflict is disclosed and the conflicted board member does not participate in the deliberations and voting and recuses themselves on the issue, you should be okay. But as far as I'm concerned, best practices is no conflict. Other best practices is this is where your legal counsel, this is where we shine, this is where we help you. This is the preventive medicine.

This is where we avoid terminal illness later. And I get calls all the time. What do we do? What do we do? We're being threatened. We might have a conflict. And this is where I coach them. I get it a lot, of course, on applicants. There's always a twist, there's always a human rights twist that may be happening.

And I find when I'm asked the question before the [00:07:00] decision is made that is something that, that prevents problems later. 

Emily Myers: So this is when a purchaser is requesting approval of an application. 

Geoffrey Mazel: I mean that, that is one of the most fertile grounds for lawsuits or claims against board of directors, generally would be in the human rights field. And people know now, people go online and you get a web you get a link and you file a complaint. It's easy as could be. 

There's no cost. And once a claim is filed, the cat's out of the bag and it's work. You have to defend yourself and you have to call your carrier, and it's usually a deductible, so it could be five, $10,000 and you may be named individually, so before you reject somebody so quickly, certainly it's always worth A, consulting with counsel. And B, and here's an issue I see a lot is make sure the entire boards has voted on that particular issue. In other words, very often there's a resale committee or an admissions committee [00:08:00] who makes the decisions and the board rubber stamps it. Well in, in the situation of a refusal, it is always my opinion that should go before the whole board, full minutes and a full vote. You can document the how, when, and why of that rejection, even though, again, another ubiquitous saying is we don't have to give a reason, but you know what?

Once you get into litigation, you have to give a reason for a refusal, and all your emails become discoverable. All your documents become discoverable and of course your minutes become discoverable. 

Emily Myers: So as a board member, you have to know why you are rejecting an applicant who wants to buy into a co-op, even though you don't need to disclose it to that applicant at the point of purchase.

Geoffrey Mazel: Correct. You don't have to disclose it, but when the issues come to light, there has to be a bonafide reason. Usually it's financial, but, otherwise, there could be presumptions that you discriminated depending on the fact pattern and, look. These days, I can't say [00:09:00] that I've ever seen blatant, full-blown discrimination, whatever it might be, name calling and this and that. But it's always something much more subtle. And it could be based on numbers of applicants that are rejected, that are of a certain class. It could be a number of things.

So one thing I always recommend to my boards, and this is for everything we're discussing, every decision they make, is, make sure it's done In the course of a board meeting, a duly constituted board meeting. There's minutes and a vote of the board is taken. 

Emily Myers: Do you suggest boards have an ethics policy or some kind of guidelines that they can refer to?

Obviously counsel is gonna be important but I don't know whether these kind of issues arise more frequently with perhaps the veteran board directors or perhaps it's the newcomers. 

Geoffrey Mazel: It depends on the personality. Sometimes the newcomers come on guns are blazing and they think they know everything and wanna re rewrite everything and start from scratch.

Other times it's experienced people. The board, certainly with human rights claims, I know the Human Rights [00:10:00] Commission does look at your policy, so there should be a policy there. As far as ethics policy, I think it's good practice. I do have some sort of standard types of policies.

I recommend some boards adopt them, some don't. But certainly it's all based on your course of action, and the board needs to follow proper protocol, proper corporate procedures, and of course, act within their authority. Act in good faith. Act without conflict and then you're protected under these doctrines that we discussed.

Emily Myers: Great. Geoffrey, some great information there. Thank you so much. 

Geoffrey Mazel: Thank you. 

Emily Myers: Geoffrey Mazel, partner at the law firm Hankin and Mazel.