Condominium and Cooperatives Should Review Scope of Their By Laws Governing Indemnifications
Condominium and cooperative board members volunteer their time to serve their neighbors. They are not paid for their service, but they have the right to expect that serving should not cost them money, especially when they act in good faith and perform their duties to the best of their abilities. For this reason, the By-Laws of most condominiums and cooperatives include a section providing that the condominium or cooperative will indemnify its board members and officers from legal fees and expenses incurred in defending litigation brought against them for their actions on behalf of the condominium or cooperative, absent a court finding that they acted wrongfully or in bad faith.
The New York Business Corporations Law also includes provisions governing indemnification of directors and officers. These provisions apply to cooperatives, which are organized as corporations, but they do not directly apply to unincorporated condominiums, which are governed by the Condominium Act provisions of the Real Property Law. In many cases, where the Condominium Act does not address a specific governance issue, many courts have applied corresponding provisions of the Business Corporation Law by analogy. However, there is nothing in the Condominium Act that specifically authorizes this practice, and a recent appellate court decision calls it into question.
In Board of Managers of 28 Cliff Street Condominium v. Maguire, 2020 N.Y. App. Div. LEXIS 7062, 2020 N.Y. Slip Op. 6844 (1st Dep’t Nov. 19, 2020), an action was brought against the President of a Condominium Board of Managers. The court dismissed some of the claims against the Board President while others remained pending. The Board President brought a motion to require the Condominium to indemnify her for the legal fees she incurred in defending against the claims that had been dismissed. A lower court held that the Business Corporation Law’s provisions on indemnification would be applied by analogy and directed a hearing on whether the Board President had acted in good faith and was entitled to indemnification.
The appellate court reversed this ruling and held that the Board President was not entitled to indemnification. Because the building was an unincorporated condominium and not a cooperative, “the BCL does not directly control the parties’ legal fees dispute.” In addition, the By-Laws of the Condominium provide for indemnification of directors and officers in certain limited situations, and the court would not expand the scope of the permitted indemnification beyond those provided in the By-Laws. The By-Laws gave the Condominium authority to indemnify directors and officers in litigations involving contractual liability, but not tort claims. The dismissed claims in this action were for breach of fiduciary duty and misappropriation, which are tort rather than contract claims. Accordingly, the court ruled, the Board President, “alone, is responsible for her legal fees.”
In view of this decision, condominiums and their counsel should carefully review their By-Laws to ensure that their By-Laws provide for a broad scope of indemnification for their board members and officers, and review whether there are any other provisions that should also be updated. Although this decision addresses condominiums, cooperatives could benefit from such a review as well. Finally, condominiums and cooperatives should also periodically review their insurance coverage program to make certain that their directors and officers are protected from personal liability to the maximum extent possible.