The following article is a guest post by C. Jaye Berger, Esq.
Shareholder and unit owner inspections of building documents can be a somewhat controversial subject. The right to inspect books, minutes or records is based on a combination of state statute, the bylaws for the building and related case law. In addition, there is the interpretation of these documents made by the co-op, the condo, the managing agent and the building’s legal counsel, which can mean the difference between being able to inspect documents or possibly having to go to court. Recent case law has broadened the boundaries. Here are a few things you should know.
- The right to examine is during usual business hours, after making a written demand. The request is usually sent to the managing agent or to the Board of Directors.
- The review must be “reasonably related to the person’s interest as a shareholder” acting in “good faith” and the inspection must be for a “proper purpose.” However, standards such as “good faith,” and for a “proper purpose” are subjective and open to interpretation. Therefore, when a shareholder sends the managing agent a list of documents he or she wants to review, if there is a contested election taking place or some other controversial event in the building, the response to the request may be to deny all or part of it. When or if that occurs, the matter can quickly escalate to a higher level and can sometimes end up in court.
- The right to inspect is also in the discretion of the Court. This presumes that the written request has elevated to a court case. Upon refusal to permit the requested inspection, the shareholder may make a demand for inspection, pursuant to statute, to the supreme court in the judicial district where the office of the corporation is located, for an order to show cause why an order should not be granted permitting inspection by the applicant.
- Orders to Show Cause are usually filed in a dramatic fashion, since they are served by process servers and give fairly short periods of time to respond before the initial hearing date. Usually there are a number of hearings in these kinds of cases, in which the Court and the parties try to work out a resolution.
- If the lawsuit results in a Court Order requiring the Co-op or Condominium to produce documents and the building fails to do so, for one reason or another, it can escalate into an Order to Show Cause for Contempt of Court for failure to comply and there will be further hearings pertaining to that.
- Recent case law has interpreted inspection rights more broadly than in the past. Now, even the fact that there is pending litigation between the shareholder and the building would not necessarily be viewed as a request “in bad faith” per se, although one has to wonder how the rules of discovery in litigation play into this.
- Another recent case expanded the rights to examine board records, such as monthly financial statements, board minutes, invoices and even legal documents, although the legal documents could be redacted to protect client/shareholder confidentiality.
- The standards of “good faith” and “a proper purpose,” will always leave an element of uncertainty with every request and leave the door open for the possibility of having a court decide.
- Before the matter blows up, the Co-op or Condo Board should try to come to terms with the shareholder or unit owner about trying to provide whatever they are looking to examine or if there is a compromise that can be reached. For example, it might involve not wanting to produce private information from other shareholders. The Building may redact (ie. white out) private information, such as social security numbers, and ask for a signed confidentiality agreement.
- Buildings dealing with such issues should seek advice from legal counsel familiar with such issues as soon as possible. In one matter I was involved with, the situation was helped by having the documents be made available in the Co-op’s business office in the building, with the managing agent present, instead of a Board member who had a history of confrontation with the shareholder.
Copyright © 2017. C. Jaye Berger, Esq., Law Offices C. Jaye Berger, is an attorney in Manhattan with offices at 110 E. 59th St., 22nd Fl., New York, New York 10022, (212) 753-2080. She focuses on the areas of real estate and construction law and litigation. Her clients include owners, developers, contractors, architects, engineers, interior designers, co-op buildings, condos, shareholders, unit owners and insurance companies.