Understanding Co-op and Condo Bylaws

Emily Myers of Habitat Magazine discusses bylaw governance with Carl Finger, principal at the law firm Finger and Finger. Finger outlines how bylaws serve as a corporate operations roadmap and explains the risks of improper adherence, from minor scheduling issues to major legal challenges. He highlights the business judgment rule's protection of board decisions—when bylaws are followed—and shares insights from the Cohan v. Board of Directors case. Finger advises boards to stay familiar with bylaws, consult legal professionals on complex matters, and focus on updating house rules for daily governance.

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: 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 Carl Finger, a principal at the law firm, Finger and Finger. And today we are going to discuss the bylaws, their purpose and problems that can arise if they're not followed correctly. Carl, can you briefly explain the information a board might expect to find in the bylaws? 

Carl Finger: Sure. The bylaws are essentially the co-op or condominium board's roadmap to how they operate as a corporation, as opposed to your proprietary lease, which gives you more of your guidelines, how you act as a resident in the cooperative or your house rules, which gives your guidelines as to how you act as a unit owner in your condominium. So the business aspects of running a corporation, including how you have your annual meeting, how you have your board meeting sometimes how you do certain budgets, which officers you have-- president, vice president, secretary, treasurer-- what their roles are on a day-to-day, monthly and annual basis. 

Emily Myers: And so what are some of the common issues where boards tend to run into trouble when it comes to the bylaws? 

Carl Finger: The bylaws outline everything from qualifications for directors to time for annual meetings to how you serve your notices for annual meetings.

And those types of things are easy to find, but if not followed, can lead to problems. They even cover when you have an annual meeting. They often talk about inspectors and how you count the votes. And depending on the type of voting you have, certainly there are opportunities to run afoul of your bylaws, even as something that might seem simple, like counting votes can be more complicated.

Certainly if you have what's called cumulative voting. So there are basic fundamental operative things that you do as a board, that you have your managing agent do on your behalf, that if are not followed, can throw your election out of kilter even before it starts, if you're talking about an annual meeting election.

Emily Myers: And what is the risk then, for the board if they are not following the bylaws, as you mentioned, perhaps with cumulative voting or other aspects? 

Carl Finger: So the risks stretch from, you know, inconvenient: we didn't give the proper notice for the annual meeting, either in form or we didn't give the proper timeframe for the annual meeting, and now we have to reschedule.

That's kind of mere inconvenience, a little bit of expense possibly associated with redoing a notice for an annual meeting. But not too embarrassing, hopefully, and not too costly. On the other hand, if you get past your annual meeting and you find out that the proper notice wasn't done or you didn't properly conduct the vote or election, you may have an election that's susceptible to being set aside by the court and certainly can create problems if you're trying to operate the business on a day-to-day basis thereafter.

So there's all different kinds of problems that can arise , as I said, from the minimal to the quite concerning. 

Emily Myers: And are there any cautionary tales for our listeners about boards and their interaction with the bylaws you can share with us? 

Carl Finger: Sure. All different problems and decisions that the board makes can be susceptible to being overturned.

So you can have a situation where you have the adoption of a policy that you're implementing, and if you haven't properly adopted that according to the bylaws, you may be subject to having that policy reversed. We've seen cases where not only has a policy been reversed, but in the case of Cohan versus Board of directors of 700 Short Road Waters Edge, which is an appellate division, second department case, the court not only reversed the board's assessment of a certain fee, but actually, the appellate court awarded the shareholder legal fees in the case. And that can be substantial because that case, for instance, went up to the appellate division. So you can imagine that the legal fees were most likely fairly significant. That's the extreme because they not only lost the case, they lost on the policy, the board in that case they ended up paying a penalty.   

But it could be something less financially significant, but also significant. Redoing an election, redoing a vote, having a decision challenge d that you made on a certain issue. So as a board, you just wanna dot the i's and cross the t's with what's required in the bylaws.

 The other thing is really that the co-ops and condominium boards are entitled to a very beneficial treatment of their decision making process under what's called the Business Judgment Rule. And I'm sure there's even a separate discussion about that. But the Business Judgment Rule under Pullman and under Levandusky the board makes a decision, indicates that , if challenged in court, a judge, and a court should essentially defer to the decision making process of the co-op or the condominium board. As long as you've hewed to your bylaws. So the time when you lose the benefit of the Business Judgment Rule is if you haven't followed your bylaws and your proprietary lease carefully. So you really, really wanna, as a board, you really wanna be entitled to the benefit of the Business Judgment Rule. That is a tremendously strong legal rule that really provides a significant amount of protection to almost everything a board decides: budgets policies, house rules, and even to the point of terminating as per the Pullman decision, terminating proprietary leases based on shareholder conduct. So it's very significant benefit that can be lost if the bylaws are not followed. 

Emily Myers: So perhaps you've answered this question, but how can boards then protect themselves from legal challenges related to bylaw adherence, even if perhaps this violation is taking place inadvertently.

Carl Finger: So the first thing as a board in general is to be familiar with the bylaws. That doesn't mean that the board is expected to know all of the ins and outs, but you should have a functional knowledge of the subject matters that the bylaws cover. That's a place you start when you're dealing with annual meetings, board meetings, board roles. The second part of that though, is when you do get into a detailed and important decision, is to make sure that you are consulting your professionals. So, you know, have an attorney that is not just generally familiar with bylaws, but knows cooperative and or condominium law, and is able to address specific issues.

And then the third part of that obviously is in the implementation. So the board, you may have some choices from your attorney as to ways to handle things. And I think following a process where the board discusses, comes to a conclusion and chooses a path that's within the legal framework is important.

So as long as you are familiar and go to the right place to get the information that you need to make a proper decision. Because most boards, when complicated issues come up you don't wanna necessarily just rely on your own reading of it. If you have an attorney that's familiar with the cases that interpret the bylaws. Because the language in the bylaws may be subject to different interpretations.

Emily Myers: So make sure that you know what the right interpretation is, or at least the most likely interpretation by a court. 

 Co-ops worry sometimes about their bylaws being outdated. When should a board consider revising their bylaws? 

Carl Finger: It's always good to keep your eye on bylaws and the house rules. Generally speaking, your bylaws probably don't need a lot of updating. They are written in a way that covers the general operations. They are often consistent with the bylaws of other cooperatives.

And in the case of condominiums, other condominiums. And you don't in general wanna get too far afield of the basic language because often if it's similar, that means if you end up in court, you're going to be looking at a similar provision and similar cases dealing with similar provisions. 

On the other hand, certainly if issues arise, you should be comfortable that there are ways to amend the bylaws. In a co-op, most of the amending can be done by the board, but there are certain things that cannot be done by the board. So you wanna make sure that if the board is going to process an amendment and vote on amendment, it's not one of the prohibited items or areas. 

Other than that, you pretty much have flexibility to make changes if you need to. Generally the bigger bang for the buck is gonna be spending time on house rules, which govern how people live every day, and that's gonna be where you're probably gonna see your most likely area.

But again, if you have a problem with something that happens in your bylaws, if you wanna change something in terms of annual meetings, elections, board roles, qualifications for the board it's certainly an area where there's always, I think some discussion. You can do that. And as I said, most things can be done by the board without going to the shareholders.

Emily Myers: Great. Carl, is there anything else you wanna add? I think we've covered everything, but did we miss anything?

Carl Finger: I don't think so. Just as I said, be familiar and don't be afraid to ask questions from your professionals that know. It's better to ask first. This is not one of the situations where it's ask forgiveness later.

It's the opposite. Get it right the first time. 

Emily Myers: Carl, thank you so much, Carl Finger, principle at the law firm, Finger and Finger.