Policy Bites: Why Cooperatives Should Adopt Ethics and Confidentiality Agreements for their Board of Directors.

Many of us already know that housing cooperatives are made up of the entire membership. By this token, cooperatives are inherently diverse. Since a cooperative’s Board of Directors typically consists of a group of members elected by the entire membership, its Directors are usually equally diverse and important as the entire membership that makes up the cooperative. There are several important characteristics, traits, and duties that each director holds as a position of trust and fiduciary to the corporations they serve. It is important for Cooperatives to understand these duties and the extent upon which they bestow obligations to each director. A good approach to doing this is for a cooperative to adopt certain ethics, conduct and confidentiality policies, and for their Directors to execute agreements avowing their fiduciary duties and obligations to the cooperative. These policies and agreements should strengthen the sense of loyalty and ethical conduct of the Directors, and add a sense of transparency. In addition, they may also insulate the Cooperative from potential liability from legal claims and challenges to official Board actions.

 

Directors are fiduciaries and owe certain duties and responsibilities to the Cooperative and membership

Typically guided by state law, a Director is considered to hold a fiduciary position of which that director owes several duties to the corporation of which they serve. For example, in Michigan (see M.C.L. § 450.2541) the Nonprofit Corporation Act sets forth three distinct duties that every director’s standard of conduct must conform to when serving on a nonprofit corporation, such as the makeup of many Cooperatives. This law states that Directors must act:

  • In good faith (the “duty of good faith”);
  • With the care an ordinarily prudent person in a like position would exercise under similar circumstances (the “duty of care”); and
  • In a manner he/she reasonably believes is in the best interests of the corporation (the “duty of loyalty”).

These duties (of good faith, of care, and of loyalty) apply to each individual director of the corporation. Each duty is unique and involves different standards and conduct. However, the overall theme of each duty is that the director is serving the best interests of the corporation.

 

Duty of Good Faith and Duty of Care

The duty of good faith stands for the principle that when deciding on behalf of the corporation, directors, and officers must act with a conscious regard for their fiduciary duties. Directors and officers must act to benefit the cooperative and do so without violating the law. This concept of “good faith” can also be understood by terms such as acts of honesty, having an honest intention, sincerity, and fair dealing.

States typically incorporate these duties into law. For instance, Michigan law provides that directors of nonprofit corporations must discharge their duties both in good faith and with the same degree of diligence, care, and skill in which that of an ordinarily prudent person in the same position would exercise under similar circumstances. (see M.C.L. § 450.2541(1)(a), (1)(b)). This statute, for example, creates a new standard for Directors’ conduct – i.e., the “ordinarily prudent person standard.” This standard does not mean that Directors should merely act as an “average” person. Nor does this standard mean to set a minimum requirement that actions of directors and officers be “mediocre.” Rather, the Ordinary Prudent Person Standard acknowledges that a director is not an expert, nor required or expected to have a specific set of technical or specialized expertise in an area in which the director is acting. Instead, this standard means that directors are expected to have and utilize “sound, practical judgment and common sense” and to reach informed decisions and conclusions when acting on behalf of the corporation.

Directors should exercise diligence in the performance of their duties. Exercising diligence is part of exercising due care. Examples of exercising diligence include reading and becoming familiar with the Cooperative’s governing documents including any updates or amendments, regularly attending meetings of the board and of the membership, seeking professional opinions from professional agents such as its accountants, lawyers, and property managers. Seeking and relying on information obtained from professional agents of the corporation (accountants, lawyers, etc.) establishes a record, and evidence, that a director acted diligently – i.e., relying on information and opinions of professionals will help show that the director(s) acted in both good faith and with a duty of care to the corporation.

 

Duty of Loyalty

The duty of loyalty speaks for itself. Directors must act in the best interest of the Cooperative. This duty requires Directors to discharge their duties with the sort of undivided devotion and commitment to the Cooperative. The interests of the Cooperative should come first. Directors may not place their individual interests, or the interests of any third parties (i.e., family members, relatives, friends, personal or business acquaintances, or other business entities with which that director has any form of pecuniary interest in) above the interest of the Cooperative. Why is this? Members of the Board are privy to important, sensitive and confidential information of the Cooperative and its membership. The duty of loyalty ensures that the directors will not use this information for personal gain or for the gain of others which the director may have an interested in.

The duty of loyalty works to prevent situations involving conflicts of interest. Typical examples of transactions involving conflicts of interest are when a cooperative engages or contracts with a third party and where a Director has a relationship or pecuniary interest with that third party. These situations set the stage for classic examples of “conflicts of interest” or “identities of interest.” If such a transaction occurs where identity or conflict of interest is not first disclosed, and the interested director does not abstain from exercising influence over, the transaction may be subject to legal challenges or be set aside. In Michigan for example, the Nonprofit Corporations Act provides that:

  • A transaction in which a director or officer is determined to have an interest shall not be enjoined, set aside, or give rise to an award of damages or other sanctions because of the interest, in a proceeding by a shareholder, a member, or a director of a corporation that is organized on a directorship basis or by or in the right of the corporation, if the person interested in the transaction establishes any of the following:
    • The transaction was fair to the corporation at the time it was entered into.
    • The material facts of the transaction and the director’s or officer’s interest were disclosed or known to the board or an executive committee of the board and the board or executive committee authorized, approved, or ratified the transaction.
    • The material facts of the transaction and the director’s or officer’s interest were disclosed or known to the shareholders or members who are entitled to vote and they authorized, approved, or ratified the transaction.” (M.C.L. § 450.2545a).

Common instances involving violations of the duty of loyalty occur when the Cooperative, through the acts of its Board, transacts with a third party and a Director fails to disclose a conflict of interest or identity of interest with that third party. The duty of loyalty aims to avoid these situations, and if there is an interest, that the Director who may have an interest is precluded from exercising influence over the transaction. Therefore, disclosing identities or conflicts of interest are acts that fall in line with a director’s duty of loyalty to the cooperative. No matter the degree of connection between the director and third party, it is important that all such conflicts of interest and identities of interest be disclosed in writing, and that any interested director abstains from exercising any influence over the corporation’s actions as they relate to that transaction.

Best practices dictate that directors should be personally and financially disinterested from the third-party contractors, organizations or entities that may serve the corporation, to the greatest extent possible while serving the best interest of the cooperative. To protect the cooperative and its directors from liability and challenges, it is best for the Board of Directors and the Cooperative to adopt policies or rules that address situations where a conflict of interest or identity of interest arises. A sound policy will set out procedures and requirements for board members to disclose material facts, identities of interest or potential conflicts of interest in transactions. These procedures should also provide that the director abstains from exercising any action or influence over the transaction and will otherwise maintain confidentiality of information that the director possesses. A well-rounded policy should address three main areas: (i) awareness; (ii) disclosure; and (iii) disinterested review of the transaction.

 

Other Fiduciary Duties

In addition to the duty of care and duty of loyalty, directors and officers must also abide by the duty to maintain confidentiality of information of the cooperative. This is commonly referred to as the “duty of confidentiality.” As a general rule, unless the information has been released to the public or to the entire membership, directors should treat the information of the cooperative, and its members, as private and confidential. Violations of the duty of confidentiality may jeopardize opportunities and foster an environment of mistrust amongst the members, the board of directors, officers and residents of the community. Cooperatives should look to adopting certain policies regarding the confidentiality of certain information, and having directors and officers execute agreements acknowledging that the confidences of the cooperative will, and must remain confidential.

 

Incorporating Fiduciary Duties into Policies and Agreements

The duty of good faith, duty of care, duty of loyalty and duty of confidentiality exist to protect the cooperative and its well-being. A Cooperative does not run itself – it is run by a group of individuals. Cooperatives are comprised of its entire membership who elect its Board of Directors. The Directors serve as integral parts in the existence, conduct and continued sustainability of the cooperative. Incorporating policies that include the duty of good faith, duty care, and loyalty will not only best serve the community, but will also help protect the corporation and its individual directors and officers from certain liabilities.

Agreements that encompass and incorporate these duties are examples of best practices on how a cooperative can ensure that its Directors act with due care and in the best interest of the cooperative. Each Director should have an understanding of these duties, how they impact and dictate corporate action, and adopt practices and policies to address these matters. Having these duties encompassed in a written policy and agreement helps strengthen the cooperative, its Board of Directors, and membership.

_____________________________________________________________________________________

Matthew T. Nicols is an attorney at the Law Office of Pentiuk, Couvreur & Kobiljak, P.C. Located just south of Detroit, Mr. Nicols represents numerous cooperatives throughout the State of Michigan. He provides legal advice and assistance to cooperatives in resolving conflicts amongst the Board of Directors, and has even litigated disputes involving directors’ wrongful and harmful conduct to the cooperative. If your Board needs assistance or is struggling to adopt certain policies and practices pertaining to the Board of Directors, please give Pentiuk, Couvreur & Kobiljak, P.C. a call at (734)281-7100.

Representing Your Housing Cooperative on the Board of Directors

Shaping Your Public Image

One of the most important tenets of any corporation is its public image and its members’ perception of how the individual responsible for managing a corporation acts outside of the board room.

The perception goes beyond financial reports, spreadsheets, annual meetings and regular board business. Perception is also shaped by how Directors conduct themselves publicly even when they are not intentionally acting on behalf of their corporation. Even though your authority to act as a board member ceases when the meeting ends, your conduct as a representative of your corporation continues 24/7. The impact of board member misconduct in public is significant and has a long-lasting impact on a corporation’s image.

Harvard Business Review conducted a survey of CEO misbehavior through review of news media between 2000 and 2015. The incidents were categorized as follows:

  • 34% involved reports of a CEO lying to the board or shareholders over personal matters, such as a drunk driving offense, undisclosed criminal record, falsification of credentials, or other behavior.
  • 21% involved a sexual affair or relations with a subordinate, contractor, or consultant.
  • 16% involved CEOs making use of corporate funds in a manner that is questionable but not strictly illegal.
  • 16% involved CEOs engaging in objectionable personal behavior or using abusive language.
  • 13% involved CEOs making public statements that are offensive to customers or social groups[1]

As a board member for a housing cooperative, or any non-profit corporation, you are held to a reasonably prudent person standard when it comes to exercising your authority as a board member. You understand that you have to manage the affairs of your corporation lawfully and that your authority comes either from your entity’s bylaws, a board resolution or when acting during a duly called board meeting. You know you have a duty of loyalty, a duty of care and a duty of obedience.

 

Your Personal Brand is Part of Your Organization’s Brand

As board members, our responsibility to project a positive image extends outward from our role as a director. It is who you are and how you conduct yourself in public that will forever paint a picture for others. Whether that picture is a beautiful landscape or a terrifying rendition of Dante’s Seven Levels of Hell, you are in control of the image the public perceives.

When you attend functions through or on behalf of your cooperative, “image” is an inherent duty as a fiduciary. Your duty of care and obedience extends to your behavior in public, and as a board member in the year 2019, we all know that the age of social media and smartphones makes it increasingly easier for embarrassing moments to be captured and shared. It can also be a powerful tool to share an accurate and positive account of your community, so be mindful of how you are representing your business and your community for the world to see.

If you have a penchant for partying, you are going to be labeled. If you have a penchant for losing your temper and lashing out, you are going to be labeled. If you have a penchant for public drunkenness, you will be labeled. When others see behavior that is unacceptable under current social norms, your cooperative will be labeled as well. Long gone are the days where “what happens in Vegas stays in Vegas.” Before it has a chance to stay in Vegas, it’s posted on Facebook, Instagram, Tiktok and Twitter with your new labels listed in hashtags. No one wants to be labeled or associated with #drunkanddisorderly or #letsgostreaking.

 

Where to Start: Code of Conduct

Having a code of conduct for your board is critical. A good code of conduct reduces potential risks associated with fraud, conflicts of interest and other ethical lapses by defining unacceptable conduct.

Be sure to draft a Code of Conduct that clearly identities a board member’s ethical duties to not only the organizational management of your cooperative, but the face of your cooperative. Above all else, enforce the Code inscrutably. A Code has no value if it is never enforced or if it is enforced long after the bad behavior is witnessed.

A great code of conduct is actually and regularly enforced. Cooperatives and corporations that issue Codes simply to fulfill legal requirements or in response to member concerns without regularly enforcing that Code are missing a huge opportunity to cultivate trust within their own organization and to demand the highest of standards from its leaders. Robert Noyce, “Mayor” of Silicon Valley once said “If ethics are poor at the top, that behavior is copied down through the organization.”

 

Personal Relationships in Leadership

Board members who have a close relationship may be tempted to turn a blind eye to their fellow board member’s unethical behavior or public conduct, but they owe it to their housing cooperative and their community to address the issue. The inability to check each other for the good of the cooperative will create a poor image of yourselves, your board, and ultimately your cooperative by association.

 

Accountability is Everything

It’s critical that we check both ourselves and our fellow board members, no matter how close we are.

If someone has had one too many cocktails or starts acting confrontational, pull them aside and ask them if they would like to go for a walk; offer them a refreshing glass of water and remind them that they are projecting the wrong image for your cooperative.

Remind them of the negative impact this behavior could have on the cooperative including legal liability. If one of your fellow board members decides to go streaking, kindly remind them that there are laws against public nudity.

At the end of the day, you are the face of your cooperative and you are the face of your corporation! It’s up to you to cultivate your brand and image to make it a face your community deserves and can be proud of.

 

[1] Harvard Business Review. (2019). We Studied 38 Incidents of CEO Bad Behavior and Measured Their Consequences. [online] Available at: https://hbr.org/2016/06/we-studied-38-incidents-of-ceo-bad-behavior-and-measured-their-consequences [Accessed 4 Nov. 2019].

________________________________________________________________________________________

Why You Should Include Your Attorney in the RFP Process

We look at relationships between the Cooperative and the management agent similar to the context of marriage. We all hope things will last forever, but if the percentages are anything like actual marriages these days, the odds are things won’t always work out. In those instances, the cooperative lawyer needs to get you back in the dating scene to find a comparable mate who will oversee the many operations for the property. Some boards might think they don’t need a matchmaker because the costs of the lawyer may be unnecessary. Well, we see first hand how complicated and inefficient the process can be when not shepherded by the corporate attorney. Here are a few examples of how we make the process easy on you:
 
 

A. Streamlines the process making it orderly and time-efficient:

The Coop attorney will first work with the board to see what timeline we are working with to complete the interview process, to assure there is adequate time to contact candidates, submit their Request For Proposal (RFP’s), be interviewed, select a candidate, negotiate the terms of the management contract and still allow for some transition time prior to the outgoing Management agent’s term expiring. If you only have 60 days to find a new Management agent, time is of the essence and a streamlined process is essential.
 
 

B. Recommendations on Candidates:

 
The coop attorney will assist in providing some recommendations on possible qualified candidates. Just opening up the phone book for property managers doesn’t guarantee they know boo about cooperatives. In a recent RFP process where our office had not been initially consulted about the process, 3/4 of the candidates the client had scheduled for interviews had NO current cooperative clients or cooperative experience. They even contacted candidates for phone interviews without RFP’s being submitted, among other problems. These unforced errors cost time, which you don’t have.
 

C. Assist with the RFP:

 
The coop attorney will assist you in what types of questions to ask and not to ask. Many of the questions we have seen from clients who have done their own RFP’s maybe so tangential or specific that it may be better suited for the interview itself. Also, we will assure references are provided. Board Members should contact these to gain insight and to how the candidate is seen by their own clients.
 

D. Keeping you anonymous:

 
We feel It is also preferable that your identity stays anonymous as long as possible. Word travels quickly in this day and age, and some management companies will attempt direct contact with you once they know you are looking. The coop attorney keeps your identity unknown as long as possible to prevent this from happening. If it does become known to the management candidates who you are, we will assure they keep us as the sole contact to avoid direct communications with you which keeps the process level and even-handed for all candidates. Keeping things quiet with the members is also important to avoid any information about the process leaking to the candidates. We have seen major problems when too many chefs are in the kitchen.
 

E. The Interview Process:

 
The Coop attorney will assist in coordinating interviews with the candidates, routinely participates in the interviews and can help create a template of questions to ask based on your specific needs. The Coop attorney also has insight as to why a particular mgt agent may be a good fit or why they may not. Obviously, our role is not favor any candidate, but we sure will know who specializes in cooperatives, who goes to MAHC or NAHC for training, who might or might not have the capacity to take more clients, who might have issues being approved by HUD or the lender, etc. Use our insight to better guide your process.
 

F. Management contract negotiations:

 
Once a candidate has been selected, the attorney will work out the terms of the management contract to assure essential terms are mandatory, such as indemnification clauses and to assure there are not “add on” costs that were not a part of the original bid. We will also assure there is an easy out clause without cumbersome termination provisions. Any candidate that insists that you can’t terminate the contract with or without cause upon 60 days notice is a deal-breaker. We will assure you will have the freedom to terminate if that need ever happens.
 
The RFP process can be challenging. You are back on the dating scene and not a lot of time to find a new mate. Use your cooperative attorney to make the process less daunting than it would be if you try it alone. You and your members will thank you for it.

“But I’m allergic to your emotional support dog!”  What’s a Cooperative Board to Do?

I Have A Right to My Assistance Animal.

It has been years since HUD announced rules defining assistance animals and imposing upon housing providers the duty to accommodate members who request assistance animals in order to overcome their disability.  The typical approach is that either the Board or a special committee chosen by the Board reviews and evaluates a member’s request for an assistance animal, sometimes identified as an emotional support animal.  They review the application along with an accompanying note from the member’s physician stating that an assistance animal is required and requesting the cooperative to accommodate that request.  Most often this means that a cooperative with a “no pets” policy must make exceptions.  

 

I Have A Right to Peace and Quiet.

Naturally this upsets other members who have specifically want to live in a cooperative because it is a nice place to live and because it does not allow pets. No barking dogs.  No smelly cats.  Just peace and quiet.   Sometimes a Board thinks that once the assistance animal is in place that the objections will die down. This is often, however, not the case. Conflicts most often begin to arise when the owner of an assistance animal takes the animal for a walk, or brings the animal into common areas, or walks the animal out into the parking lot.  Sometimes the animal is leashed and other times it is not. 

Invariably other members are present, and questions and complaints begin to flow back to the Board. “Hey, I thought this was a no pet co-op.”  “No, I have a right to the animal.” “You can’t have a dog here. I’m going to tell management and get you evicted.” “Your dog was about to jump up on me, I’m going to sue.”  “Well I’m going to call my lawyer then.”  By the time it gets to the Board things are already well out of hand. These are the sort of complaints you can expect to receive as a Board member, and you’ll have to deal with them.  But how? Can we get rid of the animal? What do we do? What does the law say?

 

The Board Is Asked to Take Sides.

The worst thing a Board can do is get caught up in all the emotion of this member against that member and that member’s assistance animal, usually a dog.  To deal with basic problems concerning animal etiquette, barking, odor, damage, and failure to pick up dog waste, Boards are free to adopt reasonable rules and regulations governing assistance animals, just as they would if they permitted pets and had rules and regulations governing patents. If your cooperative doesn’t have such rules and regulations, you’re really missing an opportunity to keep the complaints down as well as provide your members notice of what’s expected.   While a Board cannot impose a financial assessment against a member with an assistance animal, it can otherwise regulate the conduct of the animal, especially to avoid conflict with neighbors, especially those who complain about animal misconduct.

 

Did I mention my Allergy?

At some point Boards will be told that one neighbor who is a member of the cooperative and resides in unit 305 for example, has an allergy and that he or she is allergic to the assistance animal residing in unit 306. It’s time to sit up and take notice. You have a problem brewing. It is certainly true that many members are likely to have various allergies including allergies to dog and cat dander and hair being the most common.  In the United States, as many as three in 10 people with allergies have allergic reactions to cats and dogs.  Statistically, they are living in your cooperative.  Don’t just ignore it.

 

The Conflict Escalates.

As these things go, it will probably happen at some point that the member in unit 305 likes to take a walk about the same time the member in unit 306 likes to walk his or her assistance animal. Unfortunately, they meet at the stairwell or the elevator or at a common area at the same time on their way outside. “I have a right to get in the elevator first.” “No, you don’t’.” “Well, should I avoid you or are you supposed to avoid me?” “I don’t know, but I’m as much a member here as you.” “Well, keep your dog away from me, I have an allergy.”  If the Board does nothing at some point somebody will end up calling the police. The local television station will show up. The cooperative will see a Board member’s face on the 6 o’clock news.  Is that how your cooperative wants to be known in the community?

 

The Board Must Act—The Third Way.

What’s a Board to do?  These are deep legal waters.  You have to stay afloat.  Too often the Board acts irrationally and attempts to evict the member with the assistance animal.  But the law would not be on the Board’s side in such case.  What is required is that the member with the allergy must also establish to the Board that he or she has an allergy by production of a medical note or certification to that effect stating that the member should not be around dogs or cats or the particular source of the allergy. If the allergic member produces such a note, then the Board must attempt to accommodate both members. It may have to offer to move one member to the other side of the cooperative or to a unit away from the other member. It may have to adopt specific policies about who gets on the elevator first and the presence of animals in common areas.  Creative solutions rather than mechanical application of some policy you found on the Internet is required.  Rash and harsh remedies are to be avoided. 

 

You’re in the Deep End Now.

This is where experienced legal counsel will come in very handy to assist the Board and help it avoid making the wrong decision for which it will end up paying more in the long.  Some Boards with limited funds are not inclined to contact legal counsel until, well . . . . until it’s too late and they have already been sued.  It will probably cost more to rectify that situation than had the Board consulted an attorney early in the process.  Of course, an ounce of prevention is worth a pound of cure. The best approach is to adopt well thought out policies in connection with assistance animals to begin with, which also addresses interaction with those who suffer from allergies.  In this way, all the members know the rules and regulations. They know what is expected and what is not permitted.  Good policies are the key to a good cooperative.  Good Boards should not neglect them.  

______________________________________________________________________________________


Attorney Kerry L Morgan has extensive experience in matters related to federal discrimination law and has worked zealously with cooperatives to resolve disputes. If your Board needs help or is struggling to keep its head above water, give him a call at 734-281-7100.  He previously served as an Attorney-Advisor with the United States Commission on Civil Rights in Washington, D.C. and knows what he is talking about.

Insurance and Indemnity Provisions in Cooperative Management Agreements: Not Your Typical Boilerplate Language

The Management Agreement between a cooperative and a management agent outlines the contractual obligations and expectations between the cooperative and the management agent. These contractual obligations define the duties and responsibilities of the management agent for the management and operation of the cooperative. It also provides for the duties and responsibilities of the cooperative corporation, as effectuated through its Board of Directors Equally as important to the management duties and operational provisions in the Management Agreement, so too are the insurance and indemnification provisions.

 

Get your Cooperative Attorney Involved:

Often times, the insurance and indemnification language are categorized as boilerplate industry language, meaning standard and generic. However, that is not always the case. The insurance requirements of the parties and the indemnification provisions are extremely important, and should always be reviewed by the cooperative attorney prior to any effectuation of a Management Agreement. Additionally it is also quite necessary for the cooperative’s attorney review the cooperative’s insurance policies and limits to be sure that the insurance policies and limits are in line with what is being proposed in the Management Agreement. Such review is vital, as sometimes the indemnification portion of the Management Agreement will require the cooperative to indemnify the management agent, but the cooperative may not have the proper insurance in place, or there are gaps within the current policy. This will only lead the cooperative to look into its own pockets to satisfy such indemnification provision, should the occasion of claim arise.

 

Insurance:

Within the insurance provision of a Management Agreement one will find the required insurance coverage limits and policies that the cooperative is required to obtain and maintain throughout the life of the Management Agreement. A properly written Management Agreement will also provide for the respective insurance policies and limits that the management agent is to maintain. Such policies include; commercial general liability in amounts satisfactory to the cooperative, statutory workers compensation coverage, and fidelity bond / crime coverage. It is vital that the cooperative be named as an additional insured on the management agent’s general liability insurance to provide even more adequate coverage for protection. The cooperative should also be named on the management agent’s commercial general liability policy. While it is very important to have contractual indemnification, not having the insurance to pay for such indemnification puts the party agreeing to provide such indemnification in financial restraints as it will be subjected to pay for such loss out of its own pocket should coverage be inadequate.

 

Indemnification:

The indemnification language in and of itself can be filled with legalese and nuances. Sometimes the indemnification language can be difficult to interpret, but the verbiage is extremely important. However, when your cooperative attorney dissects such indemnification language and breaks it down for you, it can be quite simple.

In cooperative Management Agreement’s, it is typical and expected to find mutual indemnification language between the cooperative and the management agent. The cooperative agrees to indemnify the management agent for when the management agent is sued by a third party for the cooperative’s potential or alleged wrongdoings and the management agent agrees to indemnify the cooperative for when the cooperative is sued by a third party for the management agent’s potential or alleged wrongdoings. Of course, taking this one step further, there must be exceptions that are carved out for the protection of the cooperative as it pertains to the cooperative’s indemnification of the management agent. The cooperative should in no way agree to indemnify its management agent for the management agent’s breach of the Management Agreement, for violation of any law, or for the management agent’s gross negligence or willful misconduct.

 

Problem Areas with Indemnification Provisions:

Sometimes we have seen indemnification provisions that provide for the management agent’s indemnification of the cooperative, but only for the management’s agents gross negligence or willful misconduct. Sometimes there are even monetary caps on such indemnification. Such language should always be reviewed by the cooperative attorney, as such language is not customary in cooperative Management Agreement’s. The reason that such language is not customary is that the management agent is only agreeing to step into the cooperative shoes when the cooperative is sued by a third party for the management agent’s acts of gross negligence or willful misconduct.

The problem here is that and the threshold for the management agent to step in and defend the Cooperative must arise due to gross negligence or willful misconduct, which is a very high standard to meet. With such language as this, ordinary negligence is not included. Such language places an unreasonable risk on the Cooperative. Having such strong language to the detriment of the Cooperative again undermines one of the most salient purposes of the Management Agreement. Of note, management agents may also carry errors and omissions insurance coverage relative to ordinary negligence.  Again, the cooperative’s attorney should look to all policies for coverage to protect the cooperative.

 

Remember the Purpose of the Management Agreement:

The insurance and indemnification language also ought not to be so one sided. It should be fair and commercially reasonable. Often times, the essence of the Management Agreement can be lost during tough negotiations, especially with respect to the insurance and indemnification provisions. The goal of such negotiations is not to see who is the last party standing. The goal of the Management Agreement is to lay the foundational relationship between the parties as well as outline the management agent’s duties and responsibilities for the operation and management of the Cooperative. The relationship between the cooperative and its management agent is vital as such relationship has to work in order for the cooperative to operationally flourish.

 

Shifting of the Risk:

Just as the Management Agreement’s managerial and operational terms must fit the needs to the Cooperative, so do the insurance and indemnification provisions. A cooperative should not scramble at the last hour with its cooperative attorney and its insurance professionals to bind new coverage just to fit the needs of a Management Agreement’s insurance and indemnification language. The Management Agreement must be tailored to the cooperative’s needs, and not to the management agent, but fair and reasonable. A cooperative should not have to conduct a shifting of the risk analysis while negotiating a Management Agreement.

The cooperative’s board must remember, especially when it comes to the unnecessary shifting of risk in a management agreement that all director’s and officer’s policies, and the exclusions provided therein, are not one size fits all. Each policy is different as well are its exclusions. Worst case scenario here is that the board members could make an insurance decision for which they believe they are covered, but after closer review of such director’s and officer’s policy, it turns out that the board members are not covered for such an insurance decision.

 

The Takeaway:

In sum, the insurance and indemnification provisions are equally as important as the rest of the provisions of the Management Agreement. The negotiations of such provisions ought to not become a risk shifting exercise as it is customary and commercially reasonable for mutual indemnification.  Remember, it is absolutely vital that your cooperative attorney review the proposed Management Agreement, as well as the cooperative’s insurance policies, to be sure that the cooperative is fully protected with minimal exposure.

 

______________________________________________________________________________________


I am Alyssa Gunsorek and I am an associate attorney at Pentiuk, Couvreur & Kobiljak, P.C. Part of our practice is to help our clients negotiate contracts with outside vendors. We analyze contracts and provide a risk assessment evaluation to help protect our clients from unfavorable contractual language. I have also written and co-written various articles and publications for the Midwest Association of Housing Cooperatives’ MAHC Messenger and for the Housing Cooperative Quarterly, the flagship publication of the National Association of Housing Cooperatives. I also write articles for Pentiuk, Couvreur & Kobiljak’s own Cooperative Law Journal.