A recent case has called attention to the issue of whether officers and directors or managers of a condominium are entitled to be indemnified by the condominium in the event that they are sued because of their conduct. A condominium manager was sued because she allegedly misappropriated insurance funds to pay for improvements in her commercial unit, rather than repairs to the common elements. The case was dismissed for technical reasons, and the manager claimed she was entitled to be indemnified for her legal expenses in defending the suit. She claimed that several sections of the Business Corporation Law (“BCL”) entitled her to indemnification.

The Appellate Division held that the BCL does not apply to condominiums, because as a general rule condominiums are unincorporated associations. The relevant statute to be applied was the Real Property Law (“RPL”), which does not provide for indemnity to managers, but instead provides that the by-laws may provide for indemnity. In this case, the by-laws only provided for indemnity for contract claims, not tort claims, so there was no indemnity.

We recommend that every board of an unincorporated condominium take the time now to check their by-laws to be sure that the indemnity clause provides for appropriate reimbursement. If not, one alternative is to amend the by-laws to broaden the coverage. However, in many condominiums amending the by-laws is difficult, because the amendment requires a two-thirds vote by the unit owners, and there may be a high proportion of investors or out-of-state owners who have little interest in participating.

If amending the by-laws is not practical, another alternative is for the board to incorporate, a procedure that is specifically authorized by the RPL. There is generally no requirement that incorporation is authorized by a super-majority of unit owners. One result of incorporation is that the broad indemnification provisions of the BCL would then apply.

This case is part of a trend to more carefully apply technicalities to suits involving condominiums. In one recent case, the court held that the condominium’s president was properly named as a defendant in her official capacity, even though there was no basis for a claim against her personally because an officer is a proper, if not necessary, party to a suit against an unincorporated association. How that will affect her credit rating is not known. In another case, the court dismissed a suit where the plaintiff was “The xxx Condominium,” because the condominium was not an entity that could, per se, bring a suit, and the suit should have been brought by an officer. How this will affect the many cases where the named party, whether plaintiff or defendant, is “The Board of Managers of the xxx Condominium” is also not yet known, although the RPL does state that actions may be brought by “the board of managers”.

Please do not hesitate to contact us if you have any questions concerning these technical matters, or if you would like our opinion concerning the contents of your by-laws.