Why Your Building's 1969 Bylaws Could Sink Your Board

Most co-op and condo boards are operating with bylaws that haven't been touched since the Nixon administration. Dean Roberts, senior partner at Norris McLaughlin, reveals how outdated bylaws create real legal vulnerabilities for boards, from impossible quorum requirements that can lead to an entire board being ousted, to missing provisions for dealing with disruptive directors. In this episode, Roberts explains why many buildings are particularly vulnerable right now, what warning signs boards miss, and the specific provisions that could prevent disaster. The takeaway? Small preventive steps today can save buildings from dramatic upheaval tomorrow. 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: Every co-op and condo board depends on its bylaws to function. But what happens when those rules are decades out of date? Outmoded quorum requirements, obsolete sponsor provisions, and antiquated language can tie boards’ hands and open the door to disputes.

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Emily Myers: I am Emily Myers with Habitat Magazine, and my guest today is Dean Roberts, senior partner at Norris McLaughlin. Dean, thanks so much for being here. 

Dean Roberts: Thank you, Emily. Pleasure to be here. 

Emily Myers: So you've seen firsthand how outdated bylaws can create real problems for boards. Can we start with an example of a building where perhaps quorum issues or stale bylaw language put the board in a difficult spot.

Dean Roberts: Yes. There are plenty of examples, but two, two leap to mind is we were retained by a very prestigious high-end co-op, and I asked to review their corporate documents. They come over, the bylaws are a Xerox of the offering plan from like 1969. The pages aren't straight. They, you know, are just outta whack, and they're numbered like page 1 18, 1 0 2 to one 18, which makes no sense, but what that tells you is nobody's touched these documents since the sponsor created them.

Emily Myers: Well, so can outdated bylaws sort of actually open a board up to legal challenges then from shareholders? 

Dean Roberts: Oh yeah. Yeah. This is the classic example of an ounce of prevention, pound of cure kind of problem. Most boards don't think about their bylaws much, even though they're the core of the corporate, you know, operating procedures.

They're the owner's manual for the co-op for a lot of purposes. But it's one of those things that you don't really deal with them until you usually have a crisis or an issue oftentimes evolving elections or how to deal with a renegade board member, or you go to the document and language you need, just simply isn't there.

Emily Myers: You were gonna talk about a second example. 

Dean Roberts: We represent a number of Mitchell Lamas, which most of them were created 1950, late fifties to mid 1970s. Oftentimes, their bylaws are untouched, but the one I loved was for 20 plus years, the co-op was operating with board of director terms for three years as a sort of standard.

It's either one year or three. Because of a typo, when they created this co-op in 1963, it said two years. They had never operated with anything but three years. So the bylaws were completely out of sync and as part of a complete upgrade of their bylaws, because this, the term limits came into play during COVID, when they missed a couple annual meetings in the board terms, and they suddenly realized they had an entire board up for election as opposed to the two or three they thought they had. 

Emily Myers: Okay. So could that invalidate, could that have perhaps invalidated, uh, the previous board, 

Dean Roberts: Well, in theory, it would create a legal challenge that you had directors operating beyond their legally mandated terms. There's a counter argument that says since they weren't replaced, you know, there was no harm.

But it's one of those things where theoretically, there are a lot of bad things that could happen, especially if you get into a situation where you're having a battle with a problematic shareholder. This is where bylaw issues often come into play is the board is wanting to do something and the issue with the bylaw creates a roadblock to that happening.

It becomes a weapon to be used against them. 

Emily Myers: Yeah. I mean, you mentioned a Mitchell Lama. Is this something that is, that is prevalent in, in Mitchell Lama and limited equity co-ops for any reason? 

Dean Roberts: No, no, it's not unique to them. I, I've found the bizarre things in missing things from Park Avenue to the Bronx to Queens.

It's, it's endemic with all co-ops because there's an, it's changing. For the longest time, nobody ever bothered to look a review bylaws. 

Emily Myers: There are obviously a raft of issues that can come up. Is quorum is getting, is a building able to get a quorum? Is that, is that a particular issue? 

Dean Roberts: That is, that is one of the biggest issues right now, especially in the Michel Llamas because there have been changes to the law that make, you can't use electronic voting and there's a lot of difficulty.

You have do a lot of procedural stuff to get the votes in. So as a consequence, you have a hard time getting a quorum, and that creates a cascade of problems. And then you have, you know, directors that are not elected, they're running past their terms, and eventually you end up with an entire board. And it's with, with a recent client of mine, they couldn't get quorum for two years and then the entire board was up for election and was replaced in its entirety by a renegade unhappy group.

That was the classic dog that catches a bus. Once they, once they were successful, they completely split and began infighting with each other. So it was, you know, yes. But that, that, that's the biggest problem right now, it's quorum because most of the old bylaws have 50%, you know, majority, 50.1% have quorum.

The CPLR, the Business corporation law has a minimum. You go to one third. And it just, with the, you know, with a variety of issues, it's become harder and harder to get quorum. So one of the first things we do when we review bylaws is to see what the quorum requirements are. And do they have trouble getting quorum?

'cause some, some co-ops don't, but many do. But the thing I've, the two things I find most prevalent in unreviewed or unimproved bylaws are just technically out of date language, like sponsor language, like, you know, this high-end co-op I, I represent had a ton of sponsor language and there hadn't been a sponsor unit in the building since the 1980s.

So you had giant provisions of a sublet and fees and all these things for a sponsor that just were clutter, you know, likewhat's the term, sludge, things that slow down the process. 

Emily Myers: Yeah, so the risk there, there isn't so much a risk, it's just that the, that the bylaws become sort of cumbersome.

You're reading through irrelevant. 

Dean Roberts: It's an efficiency issue in that with, with this muddled language you're creating, just drag on using them and the possibility that they'll be interpreted in one way or another. But that's more prevalent to the other issue, which is language that is just outright out of date.

Emily Myers: what are you seeing there? 

Dean Roberts: The husband and his wife is the classic, or just he, you know, this, I don't wanna use the term woke because it has such a political overtone, but frankly just out of date language about, you know, gender, et cetera, thing, you know, terms, especially legal terms. For my regulated co-ops, a lot of times they talk about being regulated by agencies that no longer exist.

There's just, and even in the private co-ops, there's reference to legal terms that are out grossly outdated or not relevant anymore. Conversely, there are a ton of language and terms that aren't in the documents at all. 

Emily Myers: And what, what kind of language that should be there. 

Dean Roberts: The indemnification language usually needs to be improved, but the thing that we run into the most is any kind of disciplinary action toward renegade board members? Almost all the old bylaws have the simple kind of reference to the business corporation law that the shareholders can remove a director with or without. Cause that's a very heavy tool to use it. It's very difficult. It requires a special shareholder meeting.

50% of all shareholders have to vote to remove the director. That's a pretty high burden. So what do you do with a board member who is constantly disclosing board business, who's disrupted in meetings, who you know? Look, I've physically had to step in between board members. You know, I take chairs out of people's hands 'cause they, you know, people's emotions get very high sometimes.

And the bylaws are usually absolutely silent on these terms. You know, there's censure, private and public. There's suspension, you know, there's removal, you know, more and more co-ops are going to a provision that allows super majority of directors to remove another director, and that's, that's the change we see most often is, is some kind of disciplinary structure for directors.

There's also just a lot of general cleanup of like, you know, another big part of it is flip taxes and fees. You know, a lot of the bylaws don't specifically say the board has the power to levy fees, fines, and penalties. And I've had cases where a shareholder has been penalized for an illegal alteration or something, and they will say, we can't do it because of the bylaws, and it's an issue.

Emily Myers: Okay. Gosh. So updating the bylaws, dealing with board member discipline, with the quorum issues. Just returning to quorums, you know, are there strategies perhaps, aside from changing the bylaws that can get enough shareholders for a quorum? 

Dean Roberts: Well, the, the joke is you can always tell a well run co co-op because they can't get quorum usually.

When you have quorum, it's because people have pitchforks, they're ready to, you know, burn down the castle. I think that there's a two, there's a lot of different strategies. The one, one of the best ones is being prepared and giving a lot of advanced notice. And one of the advantages of, you know, zoom and other types of electronic attendants is that it's easier to get quorum because people can attend the meeting while they're feeding the kids dinner.

You know, as opposed to a physical meeting where it was just oftentimes hard to get everybody in the room and you relied on proxies, you can do, you know, a pre-game for the meeting of like making sure the proxies are out, soliciting them proxies. Another simple solution is door prices.

Surprisingly enough, they are efficient. You know, you give somebody a 50, you know, a $200 rent credit, you know, the lucky winner at the meeting. You know, you'd be amazed how many people will show up for a hundred dollars. 

Emily Myers: That's a good idea. Yeah. And there is such a thing as attendance proxies as well.

Is that something that is widely known about and used? 

Dean Roberts: Yeah, that's a greatly underutilized, we, we use it a lot. Because it's a tool, I don't, I don't advocate for it because I think shareholders have an obligation like we all do. You, you should be voting, you should attend, especially to the place you live.

But you know, if you're an absentee owner or you know, you're just really busy and you haven't, you don't care who the candidates are for the board. An attendance proxy is a proxy that you don't vote. It simply says, I'm here for quorum purposes. Where that's extremely handy is when your four shareholders short of quorum.

It's very, it's a nice reserve to have so you can get over the quorum requirement. 

Emily Myers: Okay. So it's a nice to have in, in a sort of, not quite a last resort situation, but it's, it's not something that you would widely advocate because you, you basically want involvement. 

Dean Roberts: Exactly. I mean, preferably to vote, but for shareholders who don't care, don't wanna vote, it's easy to, you know, frankly, meet them at the elevator and say, please sign the form.

And I've had annual meetings where we've gone out in the hallway. Ask people to sign proxies so that we can get the last 10 people we need for quorum. 

Emily Myers: Gosh. Okay. So what's the first step then, for a board, um, if they suspect their bylaws are outdated or, or causing governance problems? 

Dean Roberts: Well, as always, you know, a nice starting point is to speak with counsel, see what problem, you know, usually we have a ongoing relationship with our clients. We speak to them regularly. So if problems arise, we oftentimes bring these issues to the boards and say, Hey, you know, you might consider this for your bylaws, so speak to your counsel, speak to your managing agent, and you know, start that process. And that process can be driven by the attorney giving you the review and doing the memo.

Or you can have, what many co-ops do is a bylaws committee because. It is the governance tool. You want board input and direction, and you want shareholder input and direction, and these committees are a very efficient tool for getting that done, especially if you are doing substantial review. If your, if your bylaws haven't been edited in 25 years and you're amending, we just did one where there we did a combination, amend the bylaws, amend the proprietary lease to clarify a whole ton of problems.

Driven by a very litigious and frankly not sane shareholder who does nothing but litigate and torture the co-op. So a lot of these provisions, and there were 14 amendments to the bylaws and I think 15 amendments to the proprietary lease. So you had almost like, literally you had, you had to cast 30 votes, you know, one check off these boxes.

With that kind of substantial review, it's very good to have the full board and or a committee involved to get it done. If you're just doing, you know, cleaning up the language, editing out the sponsors, putting in some other, you know, less dramatic things, that's council and the board's job. But the one thing I'll point out is most bylaws require a shareholder vote to do substantial amendments or some of them, a good number of bylaws require a shareholder vote for any bylaw change. And that means you either have a special meeting or what we've found, you know, to get back to your quo in question. It's also not a bad thing to, if you're going to be doing bylaw amendments, to roll them into your annual meeting notice because it gives people a reason to come to the meeting and drives attendance. 

Emily Myers: Okay. That's a good spot to leave it. Dean, thanks so much for chatting with me today, 

Dean Roberts: Emily. Always a pleasure. 

Emily Myers: Dean Roberts, partner at Norris McLaughlin. Thank you for tuning into Habitat's coverage on issues affecting co-op and condo boards.