Liability lessons

Convincing busy Manhattanites to serve on their co-op or condominium boards has always been somewhat of a hard sell.

Indeed, acting as a board member has long been a time-consuming (and often hassle-filled) job. But now, residents have more reason than ever to avoid seeking election to their boards: getting socked with a personal liability lawsuit.

Co-op and condo board members have always been open to legal action, but a slew of recently well-publicized lawsuits — most notably a high-profile suit at the famed Dakota on the Upper West Side — that singled out individual board members as defendants have made the risks more visible, sources told The Real Deal.

“We live in a litigious society,” said Terry Oved, an attorney with the law firm of Oved & Oved. “The realistic implications [of serving on a board] are that, whether or not you’re really liable, someone can sue you and you could have to face this.”

Alphonse Fletcher, Jr.

In the Dakota case, resident and former board member Alphonse Fletcher, Jr., sued the building’s co-op board in 2011 along with a number of the board’s individual members, accusing them of racial discrimination after his application to buy a second unit in the building was rejected.

Fletcher, an African-American hedge fund manager, said the board used racial slurs when referring to him. He is seeking $15 million in damages, a percentage of which co-op board members would be responsible for paying if they were found liable.

While the suit against the full board was not all that surprising, what really rankled the co-op world was a decision by an appellate court in July 2012 to allow Fletcher to continue his case against the individual board members — especially since a 2006 decision by the same court had limited when board members could be held personally liable.

But Fletcher suffered a setback in December, when two law firms representing him withdrew as his counsel, with one saying he had failed to pay his bills and the other citing “irreconcilable differences,” according to news reports.

Still, since Fletcher filed his suit, others have taken a page from his playbook and targeted individual board members in their own buildings, including at 210 East 36th Street, 88 Greenwich Street and 1107 Fifth Avenue.

“It seems like there’s a lot of real estate litigation these days,” said attorney Robert Pariser of the law firm of Wilson Elser. “When you’re filling out a refinance application for a mortgage, they ask you if you’ve ever been involved in a lawsuit. You have to explain why. Even though you might not be ultimately responsible for something, people don’t want to be sued.”

Marc Fitapelli, the attorney representing the plaintiff suing 210 East 36th Street, agreed, noting that lawsuits are disruptive to board members’ lives.

“They have to sit through depositions,” he said. “It’s unpleasant to be dragged through a lawsuit.

“These people are left holding the bag. It’s scary,” Fitapelli added.

The law on liability

Courts have long recognized the rights of co-op unit owners to decide for themselves who they want living in their buildings.

And while it’s illegal for boards to discriminate on certain grounds — such as race, ethnicity, age, gender, religion or familial status — they do not need to tell prospective buyers why they were rejected. However, their reasons often go beyond questionable financials.

For example, in May, the board of 907 Fifth Avenue reportedly rejected an application by Sheikh Hamad bin Jassim bin Jabr al-Thani, the prime minister of Qatar, because they didn’t like his entourage hanging out in the halls.

And, of course, celebrities such as Mariah Carey and Calvin Klein have also been rejected for fear they’d draw too much publicity — or too many paparazzi — to buildings that would rather be low-key.

In the rare circumstances where discrimination is proven, individual board members can be forced to cough up punitive damages. Directors’ and officers’ insurance will not protect individual board members in those instances, sources say.

The co-op board members at 210 East 36th Street are now dealing  with the consequences of rejecting a litigious buyer.

Eight board members and the board itself are currently being sued by an African buyer named Goldwyn Thandrayen. Thandrayen, who is seeking a yet-to-be-determined amount in damages, is charging that the board rejected his application to buy a unit based on his nationality.

Broker Aileen Grossmann

In court documents, the plaintiff alleges that one of the board members, Aileen Grossmann, a broker at Town Residential, wrote in e-mails that Thandrayen had the necessary funds to make the purchase and that she referred to his native Mauritius as a “tiny little unknown country” in an August e-mail to a fellow board member.

“I would not consider any foreign [bank] accounts in a co-op sale package,” she said in the e-mail, according to the plaintiff’s allegation in court documents, “especially when there is virtually no money in U.S. dollars and their entire portfolio is in some tiny little       unknown country. It’s not like it’s in British pounds or Euro [sic] either.”

Grossmann declined to comment on the suit, while Jack Cohen, an attorney for the co-op board, was not immediately available for comment.

Fitapelli, Thandrayen’s attorney, also declined to comment on the case.

But Pariser, who is not involved in the suit and spoke in broader terms, said it’s generally acceptable to reject a prospective buyer if the existence of their funds can’t be easily verified. “That could be because the funds aren’t easily assessable because they aren’t in the U.S.,” he said.

While Fair Housing laws are largely cut and dry on the topic of discrimination, it’s often difficult for board members who aren’t well versed in the ins-and-outs of the law to determine when they can and can’t be sued. And plaintiffs regularly sue individual board members without merit, attorneys said.

In a recently filed lawsuit against the condo board members at 88 Greenwich Street, individuals will likely not be held liable, attorneys told TRD.

The suit, filed in November, was brought by the residents of the Hurricane Sandy–affected building, which was deemed uninhabitable by the city for over a month after the storm.

The residents filed a $35 million suit against the condo board and property manager, as well as five individual board members, alleging that building management took unsatisfactory precautions against flooding. The board members will likely not be held accountable on an individual basis, Fitapelli said, since they appear to have been acting inside the scope of their official duties.

Meanwhile, in another ongoing case, individual board members at 1107 Fifth Avenue are in the crosshairs. In that suit, the estate of one of the building’s former unit owners, Monique Uzielli, is accusing 1107’s board president, Maureen Klinsky, of sabotaging its potential $27.5 million penthouse sale. Five other board members are also named in the suit.

The suit, which was filed in October, alleges that Klinsky denied a prospective buyer after her own (lower) offer was rejected by the estate. The estate claims the board made approval contingent on the buyer agreeing to make the apartment’s private wraparound terrace and roof accessible to residents of the entire building.

An attorney for the plaintiff was not immediately available for comment. Neither Klinsky nor an attorney for the board immediately responded to requests for comment.

Pariser said it’s often hard to prove liability in cases where individual board members are named. “It’s really hard to sue a board member,” he said. “You can sue anybody, but nine times out of 10, individual board members are going to be dismissed.”

Playing it safe

It’s relatively easy for co-op boards to err on the side of caution when it comes to avoiding personal liability, said Roberta Axelrod, a Time Equities executive who serves on 10 co-op boards as part of her job.

Axelrod said she recommends that board members have financial criteria and policies that they apply consistently so if there’s a challenge they can present it as evidence.

“When boards get into trouble, [it’s often because] it becomes more subjective and therefore harder to prove their logic,” she said.

Neil Garfinkel, an attorney and the Real Estate Board of New York’s counsel, advises all boards to educate members on Fair Housing laws.

“Co-op boards need to be educated and understand that they have to follow these laws,” he said. “While they have the right to reject, they absolutely cannot reject based on a protected category.”

Oved recommends having an agreed-upon reason for rejection amongst the board.

“Even though you don’t have to state a reason for rejecting someone, it’s very important that you have a valid reason,” he said. “There should be notes and that reasoning should be put into a file [in case there is future litigation.]”