This post concerns an atypical form of business organization — the condominium — in the context of disputes over access to books and records. Access to books and records is a subject that has garnered increased judicial attention in recent years as more New York litigants and their counsel discover the utility of commencing summary proceedings to enforce statutory and common-law inspection rights of shareholders in traditional corporations and of members of LLCs.
What I find most interesting is the seemingly expansive approach the courts have taken in upholding inspection rights regardless of business form based on common law rather than statute, as reflected in two cases decided last month involving condominiums.
Unincorporated Condo vs. Incorporated Co-op
The most recent government census data tallies over 300,000 co-op apartment units in New York City and over 100,000 condominium units. The approximate 3:1 ratio is destined to shrink, however, as the number of new and converted condominium buildings coming onto the market in recent years has far exceeded new and converted co-op buildings, among other reasons, due to the strong preference for condominium ownership by foreign buyers and less onerous restrictions on re-sale.
Co-ops are organized as traditional corporations in which owners hold shares along with proprietary leases, hence they can give rise to the same types of dissension and legal squabbles among co-owners as in any incorporated business that I write about on this blog, including judicial dissolution proceedings brought by oppressed minority shareholders (read here and here), contests over board control and by-laws (read here and here), and shareholder derivative claims (read here). Co-op shareholders, like shareholders in any other business corporation, also possess statutory rights to inspect the corporation’s books and records under Section 624 of the Business Corporation Law.
Condominiums are different. They are not business corporations. In New York, they are organized as unincorporated associations governed by the Condominium Act codified in Article 9-B of the Real Property Law. There are no shares or shareholders as in a co-op. Rather, each unit owner holds fee simple title to their apartment or commercial unit and an undivided interest in the building’s common elements (the land, lobby, basement, corridors, elevators, etc.). Given this structure, we don’t see any of the “classic” business divorce scenarios that usually occupy this blog, involving condominium ownership.
There is a resemblance nonetheless to corporate structure by virtue of the statute’s requirement that the operation of the property be governed by by-laws providing for the election of a board of managers and officers. Like any corporate democracy with elected managers, in a condominium inevitably there will be disputes pitting a non-controlling unit owner or faction against controlling board members and officers over finance, budget, improvements, repairs, operations, business dealings with outside vendors, and other potential flashpoints inherent to common ownership of realty.
Not surprisingly, one of those other flashpoints is access to the condominium’s books and records under the board’s control. Section 339-w of the Condominium Act requires the board to keep records of receipts and expenditures, which “shall be available for examination by the unit owners”. It has no other provision granting inspection rights for other types of information.
Condominium Books and Records Cases
A&A Properties. One of the earliest (if not the first) reported books-and-records court decisions involving a condominium centered on gaining access to lists of unit holders for purposes of soliciting voting support in opposition to a proposed by-law amendment. A 1998 trial court decision in A&A Properties NY Ltd. v Soundings Condominium broke new ground by granting the unit holder’s application to inspect the list. The court was not persuaded by the board’s argument based on the omission in the Condominium Act of any right of access — in contrast to the express statutory right possessed by co-op shareholders under Business Corporation Law § 624 to inspect the shareholder list — instead reasoning that “there is no valid reason why the Board should not furnish a unit owner this information and avoid the owner having to incur the time and expense of obtaining the list from the public records [of recorded deeds].”
Pomerance. Fast forward to 2013, when the Appellate Division, First Department, in Pomerance v McGrath, likewise upheld a condominium owner’s right to inspect the list of unit holders in connection with a board election. The appellate panel’s ruling cited but went beyond the above-mentioned 1998 decision by firmly cementing in common law the right of access to the list, writing that “the rationale that existed for a shareholder to examine a corporation’s books and records at common law applies equally to a unit owner vis-à-vis a condominium” and that, consistent with the Condominium Act’s legislative intent “to encourage home ownership in the condominium form,” giving condominium owners “the same rights as cooperative shareholder-tenants will encourage condominium ownership.”
Pomerance Redux. Three years later, the Pomerance case again came before the First Department on appeal, this time addressing the dissident unit owner’s demand, for the purpose of investigating alleged board mismanagement, to inspect a wider array of books and records including all past, present, and future monthly financial reports, building invoices, redacted legal invoices, and board meeting minutes. In its decision last month (read here), the appellate court granted summary judgment in favor of the dissident. “Consistent with our holding on the earlier appeal,” the court wrote, “we hold that plaintiff has a right, whether statutory or under the common law, to examine monthly financial reports, building invoices, minutes of board meetings, and appropriately redacted legal invoices, so long as she seeks to do so in good faith and for a valid purpose.” The court also held that, while the board was not obligated to create and deliver records to the unit holder, the unit holder “has a well established right to make paper copies while examining” as well as “to create electronic copies” subject to entering into a confidentiality agreement.
GDLC. About two weeks after the second Pomerance opinion, a Manhattan trial court judge decided GDLC, LLC v Toren Condominium, 2016 NY Slip Op 32105(U) [Sup Ct NY County Oct. 21, 2016], in which it granted a petition to inspect financial statements, budget documents, and, more controversially, an engineering report and an agreement “secretly” settling a lawsuit brought by the condominium against the condominium’s sponsor asserting claims for defective design and construction of the building. The petitioners included the owner of a commercial unit and its principal serving as a member of the condominium’s board. The petition (read here) took a double-barreled approach, arguing rights of access based, first, on the unit owner’s common-law right to inspect for a valid purpose and, second, on the board member’s “absolute and unqualified right” of access to fulfill his fiduciary duties regardless of purpose. The court rejected the board’s argument that its decision to maintain confidentiality of the settlement agreement is impervious to judicial review under the business judgment rule, and it agreed with petitioners that, “[i]n order to fulfill a board member’s fiduciary obligations, board members need unfettered access to the books and records of the condominium.” Citing the Pomerance decision, it also agreed that the commercial unit holder established a valid purpose for its common-law right of inspection.
By the way, in none of the above decisions is there any mention of by-law provisions regulating unit-holder access to books and records. I imagine in the wake of these decisions more and more condominium organizers and boards will adopt such by-laws.
As I mentioned at the outset, the recent condominium decisions fit within what seems to be a larger pattern of books-and-records decisions involving corporations and LLCs upholding inspection rights, e.g., last month’s Pokoik decision granting shareholder access to records of the corporation’s wholly-owned subsidiary; the S&H Nadlan decision earlier this year upholding LLC member inspection rights; and the McGraw-Hill and Novikov decisions in 2014 relaxing the proper-purpose requirement for investigating suspected mismanagement.