Opinion
27182/09.
Decided February 11, 2010.
Smith, Buss Jacobs, LLP, Yonkers, New York, for Petitioners.
llen M. Turek, Esq., C/o Turek Roth Mester LLP, New York, New York, for the Apartment Corporation respondent.
Abrams Garfinkel, Esq., C/o Margolis Bergson, LLP, New York, New York, for the other respondents.
Petitioners are alleged to be aggrieved shareholders, some of whom were candidates for election in 2009 to the board of directors of the Kings Village Corp., a cooperative apartment corporation. Respondents are the Cooperative apartment corporation and four of the "held over" members of the board of directors of the apartment corporation who were elected at the 2008 annual meeting of shareholders. Petitioners seek, by way of an Article 78 Petition [which is in reality a declaratory judgment action or a special proceeding pursuant to Business Corporation Law § 619 (powers of Supreme Court respecting elections)], with regards to the actions by Respondent cooperative apartment corporation concerning it's 2009 annual shareholders meeting for the election of directors, an order that 1) the quorum requirement is 25% of the apartment corporation's shareholders; 2) a quorum was present for the annual meeting of shareholders noticed and held on the 9th of July, 2009; 3) declaring that the ballots cast and the proxies delivered for the election of directors of Respondent apartment corporation at the July 9th, 2009 annual meeting of shareholders are valid and should be counted; 4) declaring that Respondent apartment corporation should not have adjourned the July 9, 2009 annual meeting of shareholders due to a purported lack of quorum; 5) declaring that the Respondent apartment corporation may not change the number of director positions subject to election at the 2009 annual shareholders meeting after the initial annual meeting was commenced and adjourned for lack of a quorum; 6) declaring the Respondent apartment corporation may not change the quorum requirements for the 2009 annual meeting of shareholders after the annual meeting commenced but was adjourned, or after the meeting was commenced but improperly adjourned because a quorum was obtained; 7) enjoining and directing Respondent apartment corporation and its counsel to preserve and produce the ballots, attendance sheets, registration log, proxies, notices and other election material pertaining to the July 9, 2009 annual meeting of shareholders upon the return date of this special proceeding; 8) declaring that Petitioners are entitled to rely on the doctrine of spoliation of evidence with regard to any ballots, proxies, attendance sheets, voter registration logs, and other election material not preserved by Respondent apartment corporation and their counsel; 9) appointing an independent inspector of elections to count the ballots and proxies delivered at the July 9, 2009 annual shareholders meeting, and if appropriate, declaring the winners of said election or taking [sic] such other relief as may be just and necessary to complete the election of five (5) individuals to the Board of Directors of Respondent apartment corporation; and 10) granting such other and further relief as this Court may deem just and proper under the circumstances.
Respondent cooperative apartment corporation is not a not-for-profit corporation. Goldin v. Engineers Country Club, 2008 NY Slip Op 6695, Matter of Purpura v Richmond County Country Club, 114 AD2d 460.
Section 619 states: "Upon the petition of any shareholder aggrieved by an election, and upon notice to the persons declared elected thereat, the corporation and such other persons as the court may direct, the supreme court at a special term held within the judicial district where the office of the corporation is located shall forthwith hear the proofs and allegations of the parties, and confirm the election, order a new election, or take such other action as justice may require".
Pursuant to CPLR 103, the court has jurisdiction to determine this matter even though it is not technically the proper subject of an Article 78 proceeding. The Court finds this matter to be the proper subject of a summary proceeding under BCL § 619. In Re Schmidt, 97 AD2d 244 (2nd Dept. 1983). Respondents, the apartment corporation and some of the members of the board of directors in office prior to the aforesaid 2009 annual meeting, claim they properly terminated the meeting before the balloting was completed, as there was no quorum present, and thus they should be permitted to notice another rescheduled 2009 meeting of shareholders.
Section 103 (c) states, in pertinent part "If a court has obtained jurisdiction over the parties, a civil judicial proceeding shall not be dismissed solely because it is not brought in the proper form, but the court shall make whatever order is required for its proper prosecution. If the court finds it appropriate in the interests of justice, it may convert a motion into a special proceeding, or vice-versa, upon such terms as may be just, including the payment of fees and costs."
Prior to Petitioners' filing this special proceeding, the apartment corporation noticed its annual shareholders' meeting for February 19, 2009, which was terminated due to the absence of a quorum. This is not disputed. However, the number of shareholders that was necessary for a quorum on that date is in dispute. Nonetheless, under either side's analysis, the number of shareholders present at the February 19th meeting was apparently insufficient. Petitioners claim the quorum requirement is 25% of the shares entitled to vote, as set forth in the Corporation's By-laws. Respondents claim that on February 19, 2009, the quorum requirement was 51% of the shares entitled to vote, pursuant to an amendment to the By-laws enacted by the Board of Directors on March 27, 2007 (Exhibit H to the papers in Opposition). Thereafter, the Coop noticed a rescheduled meeting for July 9, 2009, which was also terminated for the absence of a quorum, which, at that time, the attorney for the apartment corporation believed to be 51% of the shares entitled to vote. The Board of Directors then held a board meeting on October 13, 2009 (Exhibit M to the papers in Opposition) at which they voted to amend the By-laws and change the quorum requirement from 51% (what they were lead to believe it was) to 40% of the shareholders entitled to vote. The apartment corporation then (on October 14, 2009) noticed another rescheduled annual shareholders' meeting for October 29, 2009, which meeting was enjoined on October 28, 2009, by the stay provisions in the Order to Show Cause filed with this special proceeding. The return date was thereafter adjourned twice, on consent, for all parties to complete the papers they wanted to submit to the Court. The Court directed, at oral argument on January 20, 2010, that the stay was to remain in effect pending the determination of this matter by the Court. The stay provides:
It is ORDERED, pending the hearing of this special proceeding, that a "reconvened" annual meeting of shareholders of Respondent Kings Village Corp., currently scheduled for October 29, 2009, be stayed, that the status quo be maintained, that the number of directors subject to election not be changed, that the quorum requirements for the 2009 annual shareholder's meeting not be changed and that Respondent Kings Village Corp., its officers, directors, agents, attorneys, employees, and anyone else acting pursuant to its direction or at its request, are enjoined and restrained from engaging in any activities, or entering into any agreements or obligations, other than those undertaken in the ordinary course of business.
For the reasons set forth herein, it is determined that all of the apartment corporation's attempts to hold a 2009 annual meeting of shareholders were invalid, and thus no such annual meeting was ever held, or can be held, and a new Notice of Annual Shareholders Meeting, for 2010, to be held on Tuesday, May 4, 2010, must be sent out to or served personally on the shareholders entitled to vote thereat, not less than 10 nor more than 50 days prior to the meeting date, in accordance with the By-laws of the apartment corporation, and a new annual meeting of shareholders must be held on that date, in compliance with the Court's decision and order herein. The new board of directors elected at that meeting shall serve for a period of one year, until the 2011 annual shareholders meeting is held. Until said annual shareholders meeting is held, and a new board of directors of Kings Village Corp. is elected, it is hereby Ordered that the stay provisions contained in the Order to Show Cause remain in full force and effect, such that the apartment corporation and its current (and held-over) board of directors may only operate on a day to day basis, conducting the "ordinary course of business" of running a cooperative apartment corporation, and they may not enter into any contracts, agreements or obligations that would bind the new board of directors for a period of more than three (3) months, including the renegotiation of the mortgage on the property, and they may not commence any repairs or improvements projected to cost more than $10,000.00 unless there is an emergency that requires an immediate repair.
FINDINGS OF FACT
The apartment corporation herein is entitled "Kings Village Corp." The corporation was organized pursuant to the Business Corporation Law, and the Certificate of Incorporation was filed with the Department of State on December 18, 1984 (Exhibit D to the papers in Opposition). The coop comprises 775 apartments and 2 professional apartments, with amenities such as parking lots, a health club and laundry rooms, located in five buildings in Brooklyn, New York. The complex was converted to cooperative ownership in the 1980's, pursuant to a non-eviction offering plan filed with the New York State Department of Law. The Sponsor of the offering, an entity called Flatbush Associates, apparently went bankrupt in the 1990's, and turned its interest in the premises over to the Apartment Corporation, which interest at that point consisted of the shares for 377 apartments and 23 promissory notes for loans given to shareholders for the purchase of apartments, together with the stock certificates and proprietary leases held as collateral for the loans. Sometime thereafter, a sum of cash was distributed to the coop from the bankruptcy estate. The apartment corporation formed a wholly owned subsidiary corporation, entitled KV Holding Corp., and either immediately or soon thereafter transferred the shares and promissory notes to it. This information is from the 1999 audited financial statement for the coop contained in Exhibit E to the papers in Opposition.
Sometime afterwards, an investor group named Kivi LLC purchased the aforementioned shares allocated to the 377 apartments directly from KV Holding Corp. In 2000, there was a 16th amendment filed to the Offering Plan, dated March 1, 2000, which states that Kivi LLC owned the shares allocated to 364 apartments and that the board of directors at that point consisted of four tenant-shareholders and three designees of the Holder of Unsold Shares. (Exhibit E).
Subsequently, another entity (if not more than one, as all of the offering plan amendments were not provided) named RKR LLC purchased the still unsold shares, and then all of their interest was transferred to an entity named Kings Village Associates LLC, (referred to in the documents as, alternatively, "KVA"). Somewhere in the chain of ownership of these unsold shares, it seems Citibank may have foreclosed on the loans on them and sold the shares to an investor entity, but it is not clear which one. It does not seem that KVA purchased the unsold shares from Citibank, as the apartment corporation entered into a direct agreement with KVA.
As what is known as a "white knight" in coop conversion parlance, KVA swept in to aid the ailing coop in 2004, and entered into a contract with the apartment corporation granting them special rights, as a Holder of Unsold Shares that assumed the Sponsor's obligations under the offering plan. These rights vary from the rights the original Sponsor had, as were disclosed in the initial offering plan. For example, as relevant herein, the offering plan and the By-laws gave the original Sponsor the right to designate one member of the seven member board of directors for so long as the Sponsor still owned 25% of the unsold shares, and thereafter, the Sponsor had no right to designate a board member, but just the right to vote its shares. The contract gives KVA the right to designate a member of the board of directors as long as it owns the shares allocated to 25 or more apartments, and the right to designate two members of the board if it owns 100 or more apartments. This is a significant difference, as 25% of the shares would be approximately 190 apartments. KVA filed an amendment to the Offering Plan disclosing its status as the new successor to the Sponsor and as Holder of Unsold Shares, and disclosing its additional rights, as are set forth in the contract with the apartment corporation. The contract is located in Exhibit P and the Offering Plan amendment, Amendment 21, dated April 16, 2004, is in Exhibit Q of the Opposition papers. The Amendment states that KVA took title to the shares in March of 2004 from an entity described as "RKR LLC", and that the shares, at the time of the closing, were allocated to 246 apartments. Because the board of directors of the apartment corporation was not "sponsor controlled" on February 4, 2004, when the contract was executed with KVA, it is enforceable with regards to the rights of KVA to designate a member or members of the board of directors. The contract could be set aside if the board was dominated by the Sponsor, or if there was some form of undue influence, neither of which are alleged. At the present time, KVA owns 18,976 shares allocated to 54 apartments. They are thus entitled to designate one member of the board of directors, and to vote their shares for the election of the remaining board members. The validity of provisions granting holders of unsold shares the right to designate board members has been litigated and they have been enforced. Tower Assoc. v. Blvd. Towers Condo, 295 AD2d 525 (2nd Dept. 2002). However, contracts that state that the Sponsor or holder of unsold shares will not vote their shares for the board members it does not designate have been found to be unenforceable, and the courts have said that to hold otherwise would deprive the Sponsor or a Holder of Unsold Shares of the right to vote all of its shares. Rego Park Gardens Associates, supra; Board of Directors of Exec. House Owners Inc V. E. H. Assoc. LP, 248 AD2d 530 (2nd Dept 1998). It is noted that KVA is not a petitioning aggrieved shareholder in this proceeding.
Pursuant to General Business Law § 352 et seq. and 13 NYCRR § 20 et seq.
Sinnreich Affidavit annexed to the papers in Opposition.
While the contract states that KVA will refrain from voting their shares for more than two tenant-shareholder members of the board, it has been held that Holders of Unsold Shares are entitled to vote their shares for all of the board members they do not designate, as long as the initial control period had ended, the board members they vote for are not on the Sponsor's payroll and do not receive other remuneration from the sponsor. See Rego Park Gardens Associates v. Rego Park Gardens Owners Inc., 174 AD2d 337 (1st Dept. 1991) app den 78 NY2d 859; Mishkin v. The 155 Condominium, 2 Misc 3d 1001A (Sup. Ct. NY Co. 2004) and the cases cited therein.
There is another investor in this development, and this investor is a petitioning aggrieved shareholder. The history of this investor's involvement in the apartment corporation is considerably less transparent than that of KVA. According to the papers submitted, another "white knight" came along in 2001, and this investor (referred to as "DGR", "D.GR LLC", the "Gross Entities" and various other names, as will be explained below) purchased some 30 to 35 vacant apartments owned by the apartment corporation, which are described as being vacant and not habitable, and agreed to bring them up to code at their own expense, and to sell them. This of course benefitted the apartment corporation, as there would be fewer vacancies, a more sound building, and a greater number of shareholders to share the day to day expenses of the development.
The President of the apartment corporation (Edward Johnson) entered into a rather lengthy contract (called a "Bulk Sale Agreement") dated May, 2001, (Exhibit S to the papers in Opposition) between the apartment corporation as Seller and "Daniel Gross, his nominees, successors and/or assigns" as Purchaser. The contract is signed by Daniel Gross as Purchaser. The relevant provisions of the contract state that the purchase price for the 35 units will be $200 in cash, the sum of $100,000 to be held by the apartment corporation as security for the Purchaser's obligations and then to be applied to maintenance, and an agreement that the Purchaser will comply with the enumerated post-closing obligations. These included leveling the floor of the ground floor apartments included in the transaction, repairing the sewer lines that connect the applicable apartments with the main sewer line, and renovating the apartments so they could be sold, all to be done legally, with licensed contractors, permits, insurance, etc. In addition, the apartment corporation agreed to waive maintenance for 24 months unless any apartment was sold to someone for occupancy sooner than that.
The board designation provision in this contract, which is now part of the dispute (paragraph 46.02) states "Notwithstanding anything to the contrary contained herein or elsewhere contained, the Purchaser, or its permitted assignees, individually or in the aggregate with other holders of unsold shares, shall not appoint and/or vote their shares in any way other than to have the holders of unsold shares, in the aggregate, hold no more than one less than a majority of seats on the Board of Directors of the Cooperative Corporation". The Court notes here that this provision does not specify how many board members the Purchaser expected to appoint. Additionally, the Purchaser was not entitled to be designated a holder of unsold shares, as they did not assume the sponsor's obligations. It seems that for some time, the KVA shareholders designated two members, the "Gross Entities" designated one, and the shareholders elected four, for a total of seven board members. At some point, the KVA shareholders were determined to be entitled to only one board member, and the "Gross Entities" were determined to be entitled to one board member, with five (5) elected by the shareholders, until the board meeting held in October of 2009 determined that the "Gross Entities" were not entitled to designate any board member, as is discussed further below.
As they owned more than 100 apartments, pursuant to their contract with the apartment corporation.
Presumably when they owned fewer than 100 apartments.
According to the Affirmation of Chaim Gross (annexed to the Petition), title to most of these 30 to 35 units was conveyed from the apartment corporation to D.GR LLC, as assignee of Daniel Gross, about a month after the contract was signed (June or July of 2001). Some units could not be conveyed, and the apartment corporation substituted others, and, in an amendment to the contract, the apartment corporation represents that they will provide the rest of the agreed upon units as soon as they obtain title from pending foreclosures, or something to that effect (Exhibit S to the papers in Opposition). It is thus unclear how many apartments were actually transferred to D.GR LLC.
Mr. Gross claims that all of the obligations of the Purchaser in the contract were complied with, and that their compliance was not called into question until September of 2009, when accusations and arguments commenced about the management of the coop and Mr. Turek, the attorney for the coop, wrote a letter to the representative for the "Gross Entities", calling their compliance into question. He states, [and is corroborated by Juan Sinnreich, the President of American Heritage Management Co., the managing agent of the coop since 2006, in his affirmation annexed to the papers in opposition], that the "Gross Entities" own 18 apartments at the present time.
The affirmation of Mr. Chaim Gross proceeds to explain that, sometime in April of 2004, the apartment corporation was notified by D.GR LLC that they intended to donate their remaining apartments to charities. The three charities are named Petitioners in this special proceeding, Gross Foundation, Inc., Friends of Arachim Inc., and Kolell (or Kollel) Emes V'Emunah (or Enunah) Viznitz, Inc. Mr. Chaim Gross states in his affirmation that he is the President of the first, Vice President of the second, and "agent" of the third, which he says is a rabbinical college in Rockland County. Mr. Turek claims this latter entity does not seem to exist.
Mr. Gross states (paragraph 12 of his affirmation) that an agreement was negotiated in 2004 with the apartment corporation whereby, in return for the right to designate one board member, the charities were to waive their right to elect any of the other board members in the annual elections of the shareholders. Mr. Gross claims the Board of Directors met in May of 2004, and agreed to this, however, the minutes of the meeting of the board (Exhibit R to the papers in Opposition) states instead that "DGR will have a seat on the board until their apartments total 10 units or lower". The board vote, thus, makes no mention of the requested transfer to the "charities" as Mr. Gross refers to them.
On June 23, 2004, a contract was entered into between the apartment corporation (signed by Larry Watson, President) and DGR LLC, Friends of Arachim, Gross Foundation, and Kolell Emes V'Emunah Viznitz Inc. Mr. Gross claims this contract embodies their agreement, and it states "It is agreed that any and all of the shares of stock owned by DGR LLC are being transferred to Kolell (emphasis added) which transfer the coop provides its consent. . . . Shareholders shall not have their right to vote any of their shares at an annual meeting of shareholders but instead shall have the right to appoint one director as long as the shareholders are the holder of more than 10 apartments in the aggregate. In the event that shareholders hold less than 10 apartments, they shall have the right to vote its shares for any person who is otherwise qualified as a director under the cooperatives' by-laws."
Mr. Larry Watson, in his affidavit in opposition, says he was president of the board of directors of the apartment corporation from 2002 to 2009, and he has "no recollection of signing the [DGR 2004] Agreement. However, I recall attending the board meeting held on May 12, 2004, in which the board discussed the possibility of allowing DGR LLC . . . to have the right to designate a seat on the board so long as DGR owned a certain number of apartments. I recall that we discussed entering into a contract by which DGR — and DGR only — would have this right to designate, but I do not recall actually seeing and/or signing such a contract."
CONCLUSIONS OF LAW
At the outset, it must be noted that the actions of the Board of Directors of Kings Village Corp. which are challenged are not actions whose review is limited to an analysis of whether the actions violated the business judgment rule, as Respondents argue. Annual shareholder elections must be in compliance with the corporation's By-laws and applicable law. ( See Forest Hills Gardens Corp. v Evan , 12 AD3d 563 , 786 NYS2d 70). The cases involving the business judgment rule conclude that the coop board's determination must be sustained if it was authorized, and was taken in good faith and in furtherance of the legitimate interests of the homeowners association ( see Matter of Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530, 553 NE2d 1317, 554 NYS2d 807; LoRusso v Brookside Homeowner's Assn. , 17 AD3d 323 , 324-325, 793 NYS2d 96; Gillman v Pebble Cove Home Owners Assn., 154 AD2d 508, 509, 546 NYS2d 134; Schoninger v Yardarm Beach Homeowners' Assn., 134 AD2d 1, 10, 523 NYS2d 523). In the aforementioned cases, the court found that the determination at issue satisfied these standards, and thus the respective petitions were properly dismissed. But if a corporation's election was not conducted in accordance with the coop's By-Laws and applicable New York Laws, the courts are authorized to correct the problems with the election. Kensington Terrace Apts v. 160 Ocean Parkway Owners Corp. 23 Misc 3d 1105A (Sup Ct Kings Co 2009).
It is also noted that Respondents raised several issues at oral argument, to which Petitioners' counsel responded "you didn't make a cross-motion". Pursuant to BCL § 619, the Supreme Court is not limited to merely confirming a challenged corporate election or ordering a new one, but may "take such other action as justice may require," and therefore, with respect to a disputed election, the court may decide all necessary issues, including the question of stock ownership". Unbekant v Bohl Tours Travel Agency, Inc., 21 AD2d 317, 250 NYS2d 397 (1964, 3rd Dept), app dismd 14 NY2d 959, 253 NYS2d 996, 202 NE2d 377. Thus, The "judicial review" of corporate elections has been broadened by this section (BCL § 619) to empower the court to hear the proofs and allegations of the parties as to all issues relevant to the validity of such elections. Crass v Budd Publications, Inc., 28 AD2d 1100, 284 NYS2d 156 (1st Dept 1967).
The initial inquiry is whether the "Gross Entities" are entitled to designate one of the seven members of the board of directors. The answer is an unequivocal "no". The explanation is simple, even though the facts could not be more convoluted. First, the "Gross Entitles", with 18 units, own fewer than 3 percent of the shares of the apartment corporation, and it would be totally inequitable for them to maintain that level of control of the board of directors nine years after purchasing their units. Second, the "agreement" dated June 23, 2004, which the President of the coop does not remember signing, but which must be accorded the presumption of regularity and considered valid for purposes of this special proceeding, was issued without any valid consideration for the agreement, and the court cannot enforce it. The 2001 agreement, which gave the Purchaser thereunder, or his assigns, the right to aggregate with other holders of unsold shares in designating board members, so long as they, in the aggregate, designated less than a majority of the board members, was enforceable as between the parties to that contract. The Purchaser expended considerable sums to make the apartments legal, and was then entitled to sell or rent them. However, the 2001 agreement was between the apartment corporation and an investor, and the investor was not entitled to the status of a Holder of Unsold Shares, which would have required him to assume the Sponsor's obligations, which he did not do. In fact, KVA did assume the Sponsor's obligations, as is described in their offering plan amendments. None of the "Gross Entities" has filed any amendments to the offering plan. Once D.GR LLC took title as assignee of Mr. Daniel Gross, pursuant to the May, 2001 contract performance of the contract was complete. This is analogous to the conveyance of a deed which terminates the contract of sale. Thus, subsequent transferees of the shares are not entitled to special status, whether they become shareholders by purchase or by charitable gift. A purchase agreement for the sale of coop stock with special rights accorded to the buyer for good and valid consideration, as was the case with the contract between the Coop and Daniel Gross, or his assignee pursuant to an assignment of the contract, does not "run with the land", as Mr. Chaim Gross would like to believe, and apply to subsequent owners of the shares of stock.
His affirmation fails to state whether he recognizes the signature thereon as his.
This entity is referred to as both DGR LLC and D.GR LLC.
Additionally, the minutes of the board meeting of May 12, 2004 make it clear that the board voted to approve a modified right to designate a board member to DGR only. One can surmise that there was some confusion as to DGR's rights in 2004 once KVA entered into a contract with the apartment corporation which gave KVA new rights as a holder of unsold shares. As DGR claims they no longer own any of the shares, it is quite clear that their right to designate a board member expired when they transferred their shares to the charities referred to as the "Gross Entities".
Finally, the "Gross Entities" could not have made more of a confusion of their interests in an application to assert their rights. The purported June 23, 2004 agreement states that all of the shares were to be transferred from DGR to Kolell Emes V'Emunah Viznitz, Inc., but it does not seem that this is in fact what happened. Even if all of the shares are held by Kolell, the June 23, 2004 agreement was not approved by the board of directors of the apartment corporation and is thus unenforceable.
There are three entities listed on the petition, Gross Foundation, Inc., Friends of Arachim, Inc., and Kolell Emes V'Emunah Viznitz, Inc., but nowhere in the papers (and they are numerous) does it say whether these three entities own the 18 apartments jointly, with all three corporation's names on each stock certificate, or whether each owns 6 units, or something else. There is, in fact, no evidence in the papers that any of these three entities owns any of the shares, that there was a transfer from D.GR LLC to one or more of them, or even that title to the apartments in fact was placed, by way of the issuance of stock certificates in 2001, in the name of D.GR LLC. We only have conclusory statements from Chaim Gross. Mr. Turek's letter of September 14, 2009 (Exhibit C to the petition) inquires whether Kolell exists, as he could not find any evidence that it is a valid corporation. Bizarrely, Exhibit F to the petition is a letter from Mr. Spira on behalf of the "Gross Entities" to the management company asking for a list of shareholders. It would have been of some assistance to the Court in determining this matter if the Petitioning entities had included in their papers evidence of their incorporation, their acquisition of shares in the apartment corporation, and copies of the stock certificates for the 18 units involved. Without this, the standing of the "Gross Entities" in this proceeding is only based on the assumption that if they didn't own the stock, they would have no reason to bring this proceeding. But stranger things have happened. Thus, their standing in this matter is based on mere speculation. The remaining Petitioners were, as stated above, candidates for election to the board.
The next inquiry is whether the 2009 annual shareholders meeting was properly noticed. The notice dated January 15, 2009 scheduled the meeting for Thursday, February 19, 2009. However, the Court notes that, despite the absence of a dispute over this initial notice, the Notice was not in accord with the By-laws of the apartment corporation. The By-laws require the annual shareholders meeting to be held on the second Tuesday in May. In addition, the Notice of Annual Shareholder Meeting incorrectly states that five of the seven members of the board of directors are to be elected at the meeting, and two were to be designated by the "Holders of Unsold Shares". Apparently, for some time prior to the 2009 meeting, KVA was permitted to designate first two, then one board member, and "the Gross Entities" was permitted to designate one. This recently became an issue of dispute, as the apartment corporation, subsequent to the cancellation of the February and July meetings on the grounds of the alleged absence of a quorum, noticed a reconvened meeting for October 29, 2009, which is silent as to the number of board members to be elected. Then, by Notice in the form of a two-page single-spaced Memorandum, which was distributed to all of the shareholders (which is located at Exhibit L to the papers in Opposition), and which is dated October 23, 2009, the attorney for the apartment corporation, Alan Turek, says "At a meeting of the Board of Directors held October 22, 2009, the Board voted 4 to 2 to deny Friends of Arachim Inc., Gross Foundation Inc. And Kolell Emes V' Emunah Viznitz Inc. (collectively, "Gross Entities") individually and collectively, the right to designate a seat on the Board. . . . The Gross Entities, however, may submit his [David Spira's] name as a candidate and seek to have him elected by the shareholders, like anyone else." It appears to be this action which most of all caused the filing of the Petition before the Court.
Article I § 1 (Exhibit A to Respondent's Opposition).
Petitioners claim it was improper to change the number of designated board members after the meeting was noticed, particularly because the notice of the reconvened meeting states that proxies previously given would still be valid if not superceded, and that any change should have been declared to be applicable to future annual meetings, not to the 2009 annual meeting. They are correct in this claim. However, the Court does not agree that the solution should be, as Petitioners contend, that the board members who probably would have been elected at the July 9, 2009 meeting should now be deemed elected and seated.
The Court finds that the original Notice was erroneous, as the "Gross Entities" was not entitled to designate a board member, and because the meeting was not supposed to be noticed for February, and because the cooperative corporation misunderstood what number of shareholders constituted a quorum, and thus, because the 2009 annual meeting of shareholders was never completed, and an election was never properly held, and it is now 2010, the apartment corporation must serve notice, in accordance with the By-laws, for the 2010 annual meeting of shareholders. The hands of time only turn in one direction.
The third inquiry is whether the February 19, 2009 meeting was properly canceled because of failure of a quorum to attend. Because insufficient information is provided with regards to how many shares were represented, the Court cannot answer this question. However, the Court can state, with certainty, that the quorum requirement on February 19, 2009 was one-third of the shares entitled to vote. This is because the By-laws provide for an impermissibly low quorum requirement of 25%, so it must be read to mean one-third of the shares entitled to vote, as required by statute. Business Corporation Law Section 608 states that "the holders of a majority of the shares entitled to vote thereat shall constitute a quorum at a meeting of shareholders", but that "the certificate of incorporation or by-laws may provide for any lesser quorum not less than one-third of the votes of shares entitled to vote, and the certificate of incorporation may, under section 616 (greater requirement as to quorum and vote of shareholders), provide for a greater quorum [emphasis added]. Section 608 (b). Section 608 (d) states "The shareholders present may adjourn the meeting despite the absence of a quorum."
Respondents erroneously argue that the quorum requirement had been increased to 51% at a board meeting held on March 27, 2007, which was prior to the February 19, 2009 meeting. This conclusion is incorrect for several reasons. As stated above, any quorum requirement greater than a majority of shares must be pursuant to an amendment to the Certificate of Incorporation, and not just an amendment to the By-laws. The board of directors, if they had validly amended the By-laws, (which they did not, as will be explained below), could only increase the quorum requirement to a majority, which is one share more than half the shares entitled to vote. It must be understood that 51% and "a majority" are only the same if there are only 100 shares in a corporation. In this apartment corporation, there are 251,171 shares, and thus a 51% quorum requirement is 128,097 shares, whereas a majority of one share more than half is 125,586. The difference of 2,511 shares might represent 8 to 10 apartment owners, depending on the number of shares allocated to the particular apartments. There is no allegation that the Certificate of Incorporation was amended in March of 2007, or at any time, to require 51% of the shareholders entitled to vote to be present in person or by proxy in order to have a quorum. The vote to amend the By-laws to require 51% of the shares entitled to vote to be present in person or by proxy in order for a quorum of shareholders to exist was therefore void.
Even if the Business Corporation Law did not prohibit a By-laws amendment from creating a super-majority quorum requirement without an amendment to the Certificate of Incorporation, the meeting of the board that ostensibly increased the quorum requirement was not conducted in accordance with the provisions of the By-laws for an amendment to the By-laws, and is thus invalid for that reason as well. Article X of the By-laws for this apartment corporation entitled "Amendments" states that, with the exception of certain types of amendments not relevant herein, the By-laws may be amended by either the shareholders or the board of directors, and if by the board of directors, that two-thirds of the directors, not two-thirds of the directors present, may amend the By-laws, provided that the substance of the amendment was contained in the notice of the meeting, or, if not noticed, if all members of the board of directors are present at the meeting. According to the minutes of the March 27, 2007 meeting (Exhibit C to the Order to Show Cause), five of the seven board members were present at the meeting on March 27, 2007, and the vote for the amendment was not unanimous. A valid amendment to the By-laws required 5 votes. Several items are described in the minutes as having been approved "unanimously", and this vote is not described as unanimous, leading one to the inevitable conclusion that the vote on the quorum issue was not unanimous. Further, there was no evidence provided that the intended vote on this amendment to the By-laws was properly noticed to the two other board members who did not attend. Therefore, because the intent to vote on this By-laws amendment was not properly noticed, and because, even if it was properly noticed, five members of the board did not approve it, the amendment was not validly approved. So even if the substance of it was not impermissible for the reasons stated above, the vote was insufficient to amend the By-laws. The Respondent's argument that the meeting of March 27, 2007 was "ratified" by the adoption of the minutes at the next monthly meeting of the board in April, 2007, is, for the reasons stated above, erroneous. The action was ultra vires and unauthorized by the By-laws and the New York State Business Corporation Law, and could not be "ratified" by approval of the minutes. Therefore, the amendment to the By-laws voted on at the March 27, 2007 meeting is void. Kesington Terrace Apts LLC v. 160 Ocean Parkway Owners Corp., 3 Misc 3d 1105A (Sup Ct Kings Co 2009).
With regard to the meeting held on July 9, 2009, the notice of the meeting was similarly incorrect in stating that five members of the board were to be voted on and two designated. There was a valid quorum, however, as the quorum requirement on that date was one-third of the shares entitled to vote, present in person or by proxy. It is acknowledged by both sides that some 49% of the shares were present in person or by proxy. The ballots and the proxies, however, were defective, as they provided for the designation of David Spira as the board member designated by the "Gross Entities" (Exhibit B to the Petitioner's Affirmation in Further Support).
Subsequent to the July 9, 2009 aborted meeting, the "held-over" board of directors held a meeting on October 13, 2009, and validly enacted a provision changing the quorum requirement to 40% of the shares entitled to vote. At the time, there was one vacancy on the board, all six other board members were present, and five voted in favor of the amendment. The fact that they provided that the change was "effective immediately", or that they thought they were reducing the requirement from 51% so there would be a quorum at the rescheduled meeting, is of no moment. Since the 2009 meeting is declared by the Court to be a nullity, the fact that the shareholders were not notified of the amendment sufficiently in advance of the October 29th meeting does not need to be remedied. However, the notice of the 2010 annual meeting of shareholders must inform the shareholders of the new quorum requirement. Business Corporation Law § 602(e) requires the board to notify shareholders of any bylaws amendments which affect an election, prior to the election.
Mr. Turek, attorney for the apartment corporation, argues that the Petitioner's failure to object to the termination of the July 9, 2009 meeting at the meeting itself constitutes a waiver of their right to bring this special proceeding. This conclusion is incorrect. Counsel for the coop erroneously proclaimed that the meeting was being adjourned for lack of a quorum, with the acquiescence of the board then in power. Were the insurgent candidates supposed to start a riot at the meeting? They prudently brought the matter to court. The situation is not analogous to decisions that say that once you attend the meeting, vote, and do not object to an illegal procedure at the meeting, you have waived your right to complain later. Mr. Turek announced that no business could be conducted due to the lack of a quorum. It is just not the same thing as failing to object to a procedure at a meeting that has a quorum and conducts business and then complaining later.
See In Re Election of Directors 189 Misc 316 (Sup Ct Queens Co 1947) where the Court found it appropriate to adjourn a meeting that became turbulent.
It must be said that it has not been established that the board of directors acted in bad faith. They acted, at all times discussed herein, on advice of counsel. Unfortunately, some of the advice was inaccurate.
In conclusion, the 2010 annual meeting of shareholders must be noticed, within the window of 10 to 50 days as provided in the By-laws, it must be held on the first Tuesday in May, and the notice must advise the shareholders of this legal proceeding, of the Court's decision, of the new quorum requirement enacted on October 13, 2009 of 40% of the shares entitled to vote, that there will be 7 board members on the board of directors, that KVA has the right to designate one member of the board until they own the shares allocated to fewer than 25 apartments, so six board members will be elected, and that all shareholders, including KVA and the "Gross Entities", are permitted to vote their shares for their choice of the nominees for the six board positions.
It is hereby ORDERED that a temporary injunction in conformance with this decision and order is granted, and the stay contained in the Order to Show Cause is extended, and the apartment corporation Kings Village Corp., and their officers, nominees, agents, servants, employees, attorneys, successors, assigns, affiliates or other entities under their control are hereby enjoined and restrained from engaging in any activities other than those undertaken in the ordinary course of business of the Coop, and from binding the apartment corporation to any long-term commitment (longer than three months), including the renegotiation of the mortgage on the property, and from binding the apartment corporation to any expenses for repairs or improvements (not an emergency) unless the cost of same is less than $10,000, until there has been an election of a new Board of Directors in conformity with this Decision and Order. This shall constitute the Decision and Order of the Court. Copies of this decision have been mailed by the Court to the attorneys for both parties.