CRISIS MANAGEMENT:
COPING WITH THE UNEXPECTED

Each year CNYC presents a day-long Housing Conference featuring dozens of workshops and seminars that cover virtually every aspect of managing and operating housing cooperatives and condominiums. At the 2006 Conference, attorneys Theresa Racht and Steven S. Anderson, along with Castle Village board president Gerald Fingerhut, conducted a workshop filled with good advice on crisis management.

At some point, every coop or condo board must cope with an unexpected event, whether a fire or a flood or a lawsuit or a major structural problem. When this happens, affected Boards can find themselves in the center of a whirlwind with their resources strained; forced to create, develop and execute a multi-tiered strategy to manage the crisis.

An informed Board will have a competent team of professionals by their side to help guide them through the long and arduous process of dealing with a major dilemma. Communication is key.

Rude Awakenings
When your building experiences a catastrophe, however minor, “don’t ignore the problem,” says attorney Steven S. Anderson. Gather your professionals around you at once and, he says, your general counsel is usually the person to get this ball rolling. “The chain of command needs to be set up right away. Know who is going to be talking to whom.” And, he cautions, “If you don’t do your jobs right as board members, you won’t be board members very long.”
Mr. Anderson relates the story of a building that suffered an underground garage collapse. There was a failure to rebuild and, he says, “entrenched management and the Board who didn’t communicate with shareholders and satisfy everyone that the right things were being done were thrown out of office in about a year or so.”

Attorney Theresa Racht recalls returning home after a holiday weekend to find a message regarding one of the buildings she represents. “It was the managing agent saying ‘We’ve had a catastrophic fire; who do we need to notify besides the insurance company?’”

Fortunately, no one had been injured but an entire line of apartments was destroyed. The fire had started in a gas dryer in the basement at one o’clock in the morning. The building then spent two years fighting with insurance companies to get money. Meanwhile, they had an entire line of shareholders who were no longer paying maintenance. “This happens,” she says. “There’s a whole list of calls you have to make immediately.”

Act Quickly
When a crisis occurs, first thing’s first: Call your super and your managing agent immediately. Next: Call your attorney. “It doesn’t matter what time of day or night it is,” says Ms. Racht. “Believe me your attorney will want to hear it. And if he doesn’t, well then you probably shouldn’t have him as your attorney.”

Phone calls to your insurance broker and mortgage lender can wait until the next business day, Ms. Racht says, but you have to have a board meeting within a day or two. “You’re going to want your attorney and managing agent there because you need to brainstorm.”

Ms. Racht recalls another phone call; this one came at 4:30 on a sunny afternoon in May 2005. The managing agent said, “Turn on the news. Castle Village’s retaining wall is on the West Side Highway; who do we need to notify?” Ms. Racht remembers, “It had happened 20 minutes earlier and I was already being called.”

The Board met immediately with their professionals and decided the next steps. “I had Castle Village bring in litigation counsel very early on because I don’t litigate,” says Ms. Racht. “Even if you do have general counsel that litigates,” she cautions, “a lot of these issues are outside their expertise” so you might need additional help. Your key professionals should be able to guide you.

The next order of business is to “get a notice out to the shareholders right away telling them what happened,” says Ms. Racht. But at the same time, she cautions, “you have to be careful what you say.”

Choose Your Words Wisely
Anything you do or say is going to be reviewed by the accountants and by the insurance carrier (who, of course, just can’t wait to pay claims). Many times a building crisis won’t be played out in the public eye as was the case with Castle Village but even lesser situations can turn into crises pretty quickly. According to Mr. Anderson, “So much of what’s important is communicating with shareholders and knowing who should say what to whom.”

“There is a legal framework that you have to deal with,” he continues. “And anything you say becomes part of the record.” Know that there is actually a minimal amount of documentation to which shareholders are entitled. However, as Racht says, politically it might be better for the Board to share information. Castle Village, for example, made the insurance policy available for shareholder review.

Board minutes should be available for review, but only at the managing agent’s office. Do not hand out copies. “You must control who is seeing it and know who is,” cautions Ms. Racht. “You don’t know what use it’s being put to.” And that brings us to the issue of high-profile situations during which the press is camped on your doorstep.

Bar the press from confidential board meetings, says Racht. And know that anything given to shareholders can suddenly become a headline. Do not keep general counsel out of the loop even if special litigation counsel is brought in. Your general counsel knows co-op law inside and out. For instance, Ms. Racht explains, “Insurance counsel might not know how the managing agent’s relationship with the building works.”

Also, special litigation counsel might not recognize what’s in the best interest of your building politically. According to Gerald Fingerhut, president of Fairview Consulting Ltd., and then treasurer of Castle Village, “The first thing our litigation counsel said when we hired him was ‘Keep your mouth shut.’” Unfortunately, the board members couldn’t share their side of the story and, as Mr. Fingerhut explains, a high-profile article “ripped us apart because it only presented one side of the story. And it certainly wasn’t ours.”
Mr. Fingerhut continues, “We went to our litigation counsel and said, ‘we have to tell our side of the story.” Fortunately litigation counsel chose to participate and was able to offer advice on how to best frame the responses given to the press.

When creating a communications strategy, according to Ms. Racht, “What you need to decide is who’s going to be the public face of the corporation.” If no one on the board is comfortable in the role, you can ask a shareholder or hire a public relations firm. The board needs to be mindful of the fact that the same story has to be told to everyone. According to Ms. Racht, “Whatever you tell the press; whatever you’re putting into writing to your shareholders; whatever you’re telling the lender has to be consistent.”

Even if you communicate fairly regularly with your shareholders with newsletters, this time it is critical to keep the unit owners apprised of the situation. If you have a website, post daily notices. Also consider distributing notes to each unit owner and place signs in the elevator. The bottom line: Keep the lines of communication open.

Expect the Unexpected
According to Ms. Racht, “What you’re going to want to do, besides hiding under the bed or resigning from the Board, is to make very sure that you are not being imprudent about spending money.” Your building’s crisis is going to cost money, and lots of it. “First of all,” she explains, “no retainer agreement that you have with an attorney, accountant or engineer is ever going to include emergency-management services. If it does, you’re paying for something that you may never have to use.”

Also know that nothing happens quickly and be prepared for the fact that many previous plans are going to fall by the wayside, such as planned policy changes. Says Ms. Racht, “Think of yourselves as doctors. You’re in triage.”
Resources will be strained so board member and shareholder skills should be pooled. “You might have people with political influence or architects and engineers,” says Ms. Racht. “It might be in your best interest to include shareholders with these types of expertise to be on committees to help you oversee the situation and volunteer their time.” Mr. Fingerhut spent over 1000 hours this past year on the Castle Village matter. (He is now the co-op’s board president.)

Also know that, unfortunately, the reality is that you should not expect an insurance settlement. According to Ms. Racht, “Assume you’re going to have to sue.” Realize, though, that litigation can take many years. You’re going to have to rebuild, repair, or reconstruct before you see a penny from any kind of insurance or litigation claims.

Mr. Anderson relates the story of a building that suffered a fire. The board hired a public adjuster and while they received emergency money right away, the remaining amount got co-paid to their lender. Ms. Racht explains, “Your mortgage has provisions in it that says if you have a loss, the lender has certain rights to oversee what you’re doing.” Lenders’ waivers of lien allow them say, “We’re not paying until we see that the work is done to our satisfaction.” How, then, would you pay for reconstruction? You’ll have to borrow money or, as is every board member’s horror, assess your shareholders.

“You have to give the bad news and you should not delay,” says Ms. Racht. “If it’s going to be an $11 million assessment that has to be paid over a year, get that news out there. Get your bullet-proof vests on when you do it, but get that news out there… The longer you delay, the harder it’ll be for shareholders to accept the news.”

According to Mr. Anderson, “Shareholders want to hear that the Board is a set of rational people; that they’ve hired the right professionals and that they’re on top of the situation. And then they can handle the bad news. They just want a sense of confidence.”

As Ms. Racht explains in the case of Castle Village, “Gerry’s story is that he had a board who came together quickly and made decisions quickly, as tough as they were… Don’t sit there and equivocate.”

To state the obvious: You have a problem that’s going to take a lot of energy and commitment. According to Mr. Anderson, “Your duty is to your shareholders first and foremost. It’s kind of obvious and it’s consistent with what you should be doing as far as communicating.” Says Ms. Racht, “You really can weather these things but it takes an enormous amount of effort.”