for rejected coop buyer: screwed? yes; recourse? not so much

Manhattan real estate is not a benevolent universe
I referred a week ago (Jan 20, adventures in nephrology / about that kidney donation….) to a long phone conversation with a long-time Manhattan Loft Guy reader as something "for another post". Here’s that post. The reader (lets call the reader DL/SF) tells a mournful story about romance, dreams, schemes, dejection, rejection and the loss of faith in a benevolent universe. Of course the story involves bad behavior by a coop board, abetting a conflict of interest by one coop director.

It has been a while since I have beaten up on coop boards (the link history is below) but apparently it has not been because coop boards have universally cleaned up their acts. At least, not this (unnamed by me) coop board. The story told by DL/SF is so classic that it had already been featured in the New York Times in 2005, and that story was so close to my heart (and involved a sale I had been peripherally involved in) that it really bothers me. DL/SF knew about the NY Times piece, and included a link in the email that led to our conversation. First, that back story….

The NY Times piece from April 24, 2005 detailed a dirty little secret in Manhattan real estate: that coop boards and directors sometimes abuse their power for personal reasons. That article was refreshing because it may be the only public complaint by a coop shareholder about board misconduct that named names (and addresses). Not only did the shareholder go on record, but her agent was identified and the agent’s firm’s head offered some scathing quotes. That article had a terrific lead:
 

As related there (and denied by the coop director named), the shareholder trying to sell an apartment for $695,000 had a cash offer from a couple with "seven-figure income and ample liquid assets" but the couple was eventually rejected by the board without having been interviewed. At the end of the day, the seller felt forced to sell to a buyer affiliated with a board member who had expressed firm (and peculiar) interest in buying the apartment. (Actually, at the end of the day, we’re all dead; which is what happened to that buyer, but that had nothing to do with this transaction I am sure. But I digress….)

As it happened, the agent representing the seller in the deal in the NY Times then sat two desks from me at my old firm, and it is my former boss who was quoted so stingingly to close that article. (Her money quotes literally close the article, but the whole thing is a good read.) When that agent was on vacation while this apartment was for sale, I showed it a few times. Needless to say, I was very familiar at the time with what went on there. So I was especially intrigued when reader DL/SF linked to that article and described the situation as follows:

Reader DL/SF wanted to vent, but also to do something (going public was one option). But reader DL/SF (correctly) realized that there was nothing to be done that would (a) change the board decision or (b) punish the board and the particular director. Reader DL/SF was just an applicant, to whom the coop board owed nothing. The person with the real beef in DL/SF’s situation was the selling shareholder but, as in the case in the Times, the eventual buyer agreed to match the price agreed upon so the seller was "damaged" only by the delay (if that deal is consummated). Meanwhile, any selling-shareholder-who-has-not-sold-yet may reasonably be concerned with how their next application to sell will be treated if they make a stink. Tough choices, all around, for all those screwed here.

These shareholders conceivably had a legal claim against the board for any dollar consequences flowing from the delay, but the cost-benefit analysis in starting a lawsuit was pretty weak. Te rejected buyers had no legal claim at all. But this is wrong, although effectively invisible to the only people who might care and (if they cared) could do something: the other shareholders.

why a conflict of interest policy would not have helped
Taking what DL/SF relates as true, the full board must have understood that they rejected highly qualified potential shareholders in order to give a board member the opportunity to buy that apartment. What is particularly irritating about this instance is that the board knew what it was doing. This board rejected a supremely well-qualified buyer couple in favor of a board member who (after completing this purchase) would put another apartment on the market. The board may or may not get an application from buyers for that (to be sold) apartment that will be as well qualified as DL/SF, but they are willing to run that risk. And to screw a shareholder whom they think they will unscrew when they approve the sale to the board member. But the existing shareholder is stuck with an apartment they no longer want longer than they would have been if DL/SF had been approved, and is subject to market risk (will the board member renegotiate a lower price if market conditions change?) and event risk (what if the board member decides not buy-and-sell? or dies?).

This would probably have played out exactly as it did even if the board had a conflict of interest policy (one that required disclosure and recusal by an ‘interested’ board member). As told by DL/SF, the board knew of the interest of their fellow board member (as in the Times case, where the board member said that she recused herself, making it obvious she had an interest). Few coop boards have conflict of interest policies that do more than require disclosure, and then, usually only within the board — not to shareholders generally. Some boards have no conflict policies at all.

would shareholders care?
Shareholders in a coop have a legitimate interest in knowing if their board includes people who place personal interest ahead of fiduciary obligations, but there is rarely a mechanism for them to find out, and probably even more rarely an interest on their part in finding out. (Many shareholders are relieved that there are even enough people who want to be on a board in the first place.) They should be (a) interested, (b) informed, and (c) willing to throw the bums out when this happens.

DL/SF is not holding his/her breath. Neither is Manhattan Loft Guy. Many thanks to DL/SF for this from-the-trenches story. Good luck with that whole benevolent universe thing.

For my greatest hits on coop boards, see:

June 19, 2009: power of a coop board to reject a deal as "too low"?? (featuring this great MLG sub-heading: coop boards protect value like Canute protected beaches) 
Nov 21, 2008: picking on coop boards but in need of editing (NY Post) (about a crappy NY Post article and coop boards tightening standards in a changed market)
March 16, 2008: coop boards behaving badly / 32 Gramercy Park South edition (about a coop board lawsuit over a shareholder’s holiday decorations)
May 29, 2007: advantages to the much-maligned coop ownership, vs. condos (about one advantage of coops compered to condos — the ability of aboard to deal with misbehaving owners)
Feb 9, 2007: coop boards behaving badly / can you imagine? (about ways in which some coop boards do bad things, sometimes)

© Sandy Mattingly 2010