Can't We All Just Get Along?
War and Peace between Boards and Sponsors
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. In 2004 and again
this year, attorneys Walter Goldsmith, Esq., a partner with
Sonnenschein, Sherman & Deutsch LLP and Douglas P. Heller,
Esq., a partner in the firm of Friedman, Krauss & Zlotolow,
will conduct a workshop offering advice on how to turn around
adversarial situations between the board and sponsor, with
insights for understanding the sponsor’s point of
view and clues to improving communications.
The relationship between boards and holders of unsold shares
can been a bit strained, to say the least. While many board
members are inclined to think of the sponsor as someone
who is difficult to work with, many sponsors might think
of board members as unreasonable amateurs that nobody can
work with at all. According to attorneys Doug Heller and
Walter Goldsmith, however, both parties can do more to reduce
or eliminate the miscommunication that many times results
While the primary objective of many board members is to
create a quality environment that maximizes each shareholder's
individual investment, the sponsor’s objective is
to maximize its own profit. As Mr. Heller and Mr. Goldsmith
explain, these interests do not have to be mutually exclusive.
Both board members and holders of unsold shares must resist
any temptation to deviate from their fiduciary duties. Mr.
Heller says, "Your number one, two, three, and hundredth
priority is to act in the best interest of the building."
Says Mr. Goldsmith, "It's the toughest job you'll ever
There are a number of scenarios that can create ill will
between a board and its sponsor. Holders of unsold shares
do not need board approval for selling their units, nor
are they bound by the board's sublet restrictions. Also,
unlike other shareholders, they're generally exempt from
paying flip taxes and fees for subletting, alterations and
transfers. Many offering plans also grant the sponsor veto
power over the board's management decisions, and in some
cases disproportionate voting power. This can leave board
members feeling powerless to control the quality of life
of the shareholders.
The sponsor may hold on to free-market units in perpetuity;
boards complain that this results in transient, trouble-making
tenants. Sponsors, however, say they're holding onto these
market rent units to offset costs of maintaining the rent-regulated
Other conflicts arise over building maintenance. While
boards want to make improvements, sponsors may not want
to put money into the building that they cannot recover
because of fixed rents. Shareholders might feel the building
was in poor condition when it was converted, and thus consider
repairs to be the sponsor's responsibility. The suspicion
that a sponsor didn't disclose everything at the time of
the conversion and that he doesn't have the building's best
interests at heart can also cause significant rifts.
Conflicts are almost inevitable in mixed-use scenarios.
According to Mr. Heller, "The holder of unsold shares
has a whole different point of view in this situation."
Where the sponsor wants to maximize the rent for that ground-floor
supermarket, residents complain about smell and noise.
Another potential for conflict: building employees working
in sponsor units for extended periods of time. “If
the super or handyman is always painting the sponsors' apartments,”
notes Mr. Heller, “there's a problem.”
In one case, Mr. Heller says, a board decided to enact
a rule to prevent any director from profiting from the building,
such as brokering units, representing the building as attorney,
or acting as a contractor in the building. The impetus for
this rule was that the building treasurer (voted in by the
shareholders) was also the broker for the holder of unsold
The Role of
the Attorney General
As stated in article 23-A of the Business Law, known as
the Martin Act, anybody who makes or takes part in a public
offering of cooperatives is subject to the Attorney General's
jurisdiction with respect to the offering plan. Says Mr.
Heller, "That means, for example, that if the sponsor
has lied in his offering plan, buyers can complain to the
Attorney General's office. But, if he votes in a way you
don't like at a board meeting (assuming he's there legitimately),
you can't complain."
According to Mr. Heller, the AG's office carved out a specific
function for itself since the 1970’s: mediating co-op/sponsor
disputes in the hope of avoiding litigation. “This
has been extremely helpful; unfortunately, it has now been
suspended, hopefully temporarily.”
In response to bulk transfers of unsold shares, in 1982
the New York State Attorney General promulgated regulations
clarifying the distinction between a sponsor and a holder
of unsold shares. The sponsor is the original person who
submitted the offering plan. Subsequent investors are legitimate
holders of unsold shares, according to these regulations,
only if they've been designated as such by the original
sponsor. This protects the original intent of the offering
plan, legitimizing the new individual's entitlement to all
the benefits (and obligations) in the original offering
plan, such as the right to sell and/or sublease apartments
without board consent. If that designation cannot be proven,
the board can challenge the legitimacy of the holder of
unsold shares. (However, see page 5 for a 2005 Court decision
that disallows the distinctions in the AG's regulations.)
Know the Law
Many board members don't realize that proxies exist only
for shareholder meetings, not board meetings, in the State
of New York. Says Mr. Heller, "If the sponsor doesn't
show up, he doesn't vote." The law says you can have
meetings via telephone, but "if the sponsor shows up
and says I represent the two absent board members, tell
him he doesn't," Mr. Heller explains. Only directors
present at a board meeting can vote, and they each have
one vote only.
Mr. Goldsmith explains that class action lawsuits arise
when groups of shareholders with a sufficient number of
similar problems/issues bring an action against a sponsor.
There are cases where courts have protected the rights of
minority shareholders who were trampled on by the majority.
This is particularly relevant in low-rise buildings, where
some units may be affected and others not, such as those
with fireplaces or balconies. The pressure is to resist
spending money on items that benefit some shareholders and
It's also important to understand the implications of the
Jennifer Realty case, where the sponsor sold very close
to the minimum amount of units and then sat on the remaining
80% of shares for many years, refusing to sell when inquiries
were made. Shareholders were left to wonder if they really
had a co-op under these circumstances and filed suit against
the sponsor for failure to create a “viable cooperative”.
While the Court of Appeals did not make a definitive decision
on what to do in such cases, in a landmark decision, the
court refused to dismiss the cause of action and referred
the case back to the lower court for trial. And, according
to Mr. Goldsmith, at least one appellate court cited Jennifer
in its own decision.
When dealing with your sponsor, say Mr. Heller and Mr. Goldsmith,
one cannot emphasize enough the importance of acting professionally.
Attempt to understand the other side's intentions so you
can take a reasonable approach. Many times, says Mr. Heller,
both sides "are totally missing each other and there
actually could be a meeting of the minds, but they have
no basis to understand one another and they don't communicate
well enough to ever get there." At that point, he says,
both sides have simply “made lawyers rich, because
you litigate for reasons that probably wouldn't be necessary
if both sides had taken a better view at the beginning."
When you approach the holder of unsold shares, present
a united front; don't show division."If you do,"
says Mr. Goldsmith, "he'll take it as a sign of weakness."
According to Mr. Heller, when the sponsor "asks you
for something and you say no as a reflex action because
you basically hate the guy, it starts the dynamic where
everybody is at war."
A good way to avoid litigation is to take a strong stance.
Hire a good team of professionals — accountant, managing
agent, good counsel — to sit at the table with you,
as necessary. Mr. Goldsmith says, "An ounce of prevention
is worth a pound of cure. Don’t be penny wise and
pound-foolish. Spend the extra money and hire a good managing
Mr. Goldsmith says he works with several cooperatives "where
20 years ago we all basically had our M-16s pointed at each
other. And now the holder of unsold shares and the board
are the best of buddies. Now why is that? They switched
the dynamic. Other than the fact there's been some board
turnover; they gradually got to the point where they started
to treat each other as professionals rather than personalizing
Be aware that a lot of sponsors and holders of unsold shares
might be inexperienced in dealing with boards. According
to Mr. Heller, "Everybody assumes the holder of unsold
shares is this big, bad guy with a ton of money who came
down just to mess up their lives. But a lot of these guys
basically borrowed a lot of their money, and are operating
by the skin of the teeth. And they might know a lot less
about co-ops than you!"
The bottom line, they say, is that somebody's got to be
the adult in these situations. Sometimes a board turns down
a request because they don't understand it. Don't neglect
to consult your professionals about this. The first person
to ask is your managing agent. If the agent tells you he
doesn’t have time, Mr. Heller cautions, "call
his boss. He will respond because the firm won't want to
Boards and sponsors that can keep their efforts focused
on their fiduciary duties have the best chance of keeping
the peace. Mr. Heller and Mr. Goldsmith say some kind of
“ritual”at the beginning of each board meeting
might be in order to keep everything in perspective. Says
Mr. Heller, "Have everybody swear they'll uphold what
is in the best interest of the building before the meeting
starts. If everybody did that, I think you'd have much more
With this, they hope you'll never cross the line from peace
into war. The outcome of any litigation is unpredictable."The
ultimate goal with litigation," Mr. Goldsmith says,
"is to avoid it."