Does our NYC co-op board need to tell shareholders that we’re getting sued?
- If your co-op board needs an assessment to pay for a suit, you should inform residents about the dispute
- Prospective co-op and condo buyers will learn about pending litigation through their attorney’s due diligence
New York City condo and co-op boards should inform their attorney, insurance firm, and managing agent about pending litigation as well.
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The board of our NYC co-op building was served with a lawsuit. I informed our insurance company, property manager, and attorney, but does our board need to tell shareholders as well?
There are a few circumstances where shareholders need to be informed about a lawsuit filed against board members, but there’s a limit to how much information your board may want to share.
Typically, a lawsuit would need to be noted in the annual financial statements of a condo or co-op, said Samantha Sheeber, managing partner at law firm Starr Associates. That disclosure could lead to questions from shareholders, so it might be wise to have your building’s attorney briefly explain that lawsuit during your annual meeting.
There’s an added benefit to addressing a pending lawsuit, even briefly. Court documents are accessible online, and there’s little to stop a shareholder—or enterprising journalist—from taking a look if it’s a juicy case. By making a statement, your attorney can put the kibosh on building gossip.
“When a litigation is filed it becomes public record,” said Andrew Freedland, a partner at law firm Herrick Feinstein. “Somebody is going to find out about it and that’s when I find there’s a rumor mill in co-ops and condos. People start chattering.”
Freedland said that he commonly tells shareholders and owners that there is litigation at the annual meeting, and adds that he can’t disclose much more than that during an ongoing case. That tends to shut down the rumor mill, he said.
Residents could also uncover pending litigation by looking through board minutes—and so can prospective buyers. A buyer’s attorney will likely be scouring through your building’s minutes to see if there are any lawsuits that could lead to an assessment down the line, and your property manager would need to disclose that information when asked on a buyer’s questionnaire, Sheeber added.
For more serious and money matters
Speaking of assessments, your board should absolutely inform shareholders if it plans to institute an assessment to pay for ongoing litigation, Sheeber said. Lawsuits that could result in an assessment, or threaten residents' ability to occupy their units, should be disclosed, she added.
For example, if your insurance company says it won’t cover the cost of litigation for whatever reason, “then the board is most definitely going to have to notify the unit owners that there is this action pending, it's being defended, and the costs may have to be borne by the unit owners,” Sheeber said.
“It will probably be in the best interest for the board to notify in that instance, because they don't want for it to be determined that they withheld information that was necessary,” she added.
Ultimately, your board should lean on your attorney to ensure that you’re meeting your obligations to your shareholders or owners, Sheeber said. (So you’ve done the right thing by telling your attorney about the lawsuit, and your property manager and insurance company as well.)
“The board has to determine, mostly with their counsel, what's in the best interest of the unit owners, and have I met my fiduciary obligations in terms of disclosures,” Sheeber said. “It is not black and white. You want to make sure you are adhering to your fiduciary duties.”
