Summary
In SantiEsteban v. Crowder, 957 N.Y.S.2d 639 (N.Y. Sup. Ct. 2010), shareholders in a cooperative corporation sued the actual or purported officers and directors who managed the co-op and paid themselves $220,000 in compensation for their services.
Summary of this case from Spizz v. Eluz (In re Ampal-Am. Isr. Corp.)Opinion
No. 102125/10.
2010-06-30
Rosemarie SANTIESTEBAN and Althea Aaron, on behalf of themselves and 94–102 Hamilton Place, H.D.F.C., Plaintiffs, v. William CROWDER, Equilla Crowder, Linda Crowder, Alfreda Barnes, and Ruby James, Defendants.
David Slarskey, Patterson Belknap Webb & Tyler LLP, for Plaintiffs. Ondine Slone, Miranda Sambursky Slone Sklarin Verveniotis LLP, for Defendants.
David Slarskey, Patterson Belknap Webb & Tyler LLP, for Plaintiffs. Ondine Slone, Miranda Sambursky Slone Sklarin Verveniotis LLP, for Defendants.
EILEEN A. RAKOWER, J.
Plaintiffs Rosemarie SantiEsteban and Althea Aarron are shareholders of 94–102 Hamilton Place H.D.F.C. (“Hamilton Place” or “the corporation”) They bring this action individually, and on behalf of the corporation to redress what they allege to be the “gross mismanagement” of the corporation by Defendants William Crowder, Equilla Crowder, Linda Crowder, Alfreda Barnes, and Ruby James.
Hamilton Place is the owner of 54 units of residential housing in a building located on Hamilton Place between West 141st Street and West 142nd Street (“the building”). The corporation was formed as a result of the Tenants Interim Leasing (“TIL”) program operated by the New York City Department of Housing Preservation and Development (“HPD”) in the 1980s. Under the TIL program, HPD authorized groups of tenants to rehabilitate their buildings with funds that would have otherwise been paid to the City as rent. When residents successfully brought their buildings into compliance with the building code, the City would transfer the building to a co-op corporation that was established with the support of a community-based non-profit organization. Then the co-op would sell its shares at reduced and restricted rates to the tenants of the building who were low-income individuals.
According to the complaint, Defendants William and Equilla Crowder (“Mr. and Mrs. Crowder”) purport to be President and Vice President, respectively, of Hamilton Place. Plaintiffs claim that, in their respective positions, Mr. and Mrs. Crowder have dominated the corporation through “personal and unchecked control of its finances and decision-making.” The complaint further alleges that Defendants Linda Crowder, Ruby James, and Alfreda Barnes all claimed to be members of the Board of Directors (“Board”), despite not having been properly elected to the Board. Linda Crowder and Ruby James are daughters of Mr. and Mrs. Crowder, and Alfreda Barnes is alleged to be a close friend and associate of the Crowder family. Plaintiffs further allege that Barnes does not live in the building, but rather rents out individual rooms in her unit in contravention of the corporation's governing documents.
Plaintiffs allege that, in violation of the corporation's governing documents, there had not been new Board elections since the mid–1980s until 2008. During this time, according to the complaint, Mr. and Mrs. Crowder “solidified control over Hamilton Place through the improper transfer, sales and leasing of units to family members and friends.” Plaintiffs claim that Mr. and Mrs. Crowder run the corporation with the support of about 15 relatives and friends of the family; some of these individuals are rightful shareholders, some claim to be shareholders but did not lawfully obtain their shares, and others simply reside in the building as tenants.
Plaintiffs further claim that the Defendants have used corporate monies to personally enrich themselves, as well as family members and friends through unlawful transfers of shares and through interested transactions. Specifically, Plaintiffs allege in their complaint that Defendants “have improperly and without authorization caused approximately $220,000 to be paid to themselves during the years 2007–2009.” In addition, Plaintiffs claim that Defendants have governed the corporation's affairs through intimidation and deceit, and have refused to respond to requests for maintenance and repairs, which has resulted in the building falling into a serious state of disrepair.
In September 2008, Board elections were held for the first time in over twenty years. Plaintiffs allege that the elections were marred both by intimidation, and by the participation of associates of the Crowders who were not valid shareholders. These elections resulted in the election of Defendants William, Equilla, and Linda Crowder to the Board, as well as their friend, Defendant Alfreda Barnes. Plaintiff Aaron, a shareholder not related to, or associated with the Crowders, was also elected to the Board. According to the complaint, however, the remaining Board members conducted business outside of Aaron's presence.
In August of 2009, Plaintiff SantiEsteban commenced a special proceeding pursuant to BCL § 624 and CPLR § 3102(c) seeking access to corporate records which she had alleged was improperly denied her by the Crowders ( SantiEsteban v. 94–102 Hamilton Place H.D.F.C., Index No. 111736/09) ( SantiEsteban I ). By order dated November 12, 2009, the court granted SantiEsteban's petition, and ordered that the corporation make the sought-after records of the corporation available for SantiEsteban's inspection ( id. at 8). In addition, the court directed Mr. and Mrs. Crowder to reimburse the corporation for any legal fees incurred by the corporation in defense of the petition, based on the court's finding that the record before it “[gave] the appearance that bad faith was the driving force behind the Board's denials” ( id.).
Plaintiffs commenced the instant action on February 18, 2010, bringing causes of action for (1) breach of fiduciary duty; (2) conversion; (3) interference with contractual relations; and (4) waste. That same day, Plaintiffs moved by order to show cause for a temporary restraining order (“TRO”) preventing the Defendants from expending corporate funds in defense of this action; paying themselves fees, salaries, or other remuneration from corporate funds; expending corporate funds without prior notice to Plaintiff and allowing for Plaintiff to seek judicial intervention if necessary; or conducting any further elections, shareholder meetings or votes without prior authorization from either Plaintiffs or the court. In addition, Plaintiffs moved for an order appointing a receiver to manage the affairs of the corporation.
The parties appeared and argued the order to show cause on the record. Mel B. Ginsburg appeared on behalf of the Defendants. Although Mr. Ginsburg previously acted as the attorney for the corporation and Board members, he agreed to represent the Defendants (sued herein individually) for purposes of the TRO on the condition that he would not be paid by the corporation for his appearance. In their moving papers, Plaintiffs submitted, inter alia, a copy of the corporate general ledger, which showed that Mr. and Mrs. Crowder and Alfreda Barnes consistently paid themselves monthly “management fees,” which typically exceeded $1,000. In addition, the general ledger indicates that Mr. Crowder was paid $600 every month in “salary.” The general ledger also reflects that periodic payments were made to Malik Crowder, Linda Crowder's son, for “computers.” These payments were usually in the amount of approximately $400.
At oral argument on the TRO, Mr. Ginsburg acknowledged that several of the Defendants were receiving salaries despite the corporate By–Laws explicitly prohibiting officers and directors from doing so; however, he argued that while they were “technically” prohibited from being compensated by the corporation, “that's the way they have done it” historically, and it would be more expensive to hire an outside management company.
Unpersuaded by this argument, the court granted Plaintiffs' motion, appointed Jamie Heiberger, Esq. as Temporary Receiver (“the Receiver”) to manage the building and the affairs of the corporation, and enjoined Defendants from, inter alia,
collecting rents, maintenance, licensing fees or other monies or charges of said Property and from interfering in any manner with the Property or its possession; and from transferring, removing or in any way disturbing any of the occupants or employees....
... transferring shares, funds, or other property of the Corporation without the prior written consent of the Temporary Receiver; ... [and]
... conducting any elections, shareholder meetings or votes without prior written authorization of the Temporary Receiver ...
The order also directed the Defendants to turn over and provide access to the records of the corporation to the Receiver.
Presently before the court are opposing motions from Plaintiffs and Defendants. Plaintiffs move for an order (1) consolidating SantiEsteban I with the present action pursuant to CPLR § 602; (2) granting partial summary judgment to Plaintiffs pursuant to CPLR § 3212; and (3) dismissing Defendants' counterclaims against Plaintiffs. Plaintiffs submit the following in support of their motion: an attorney's affirmation; a memorandum of law; the affirmation of the Receiver; the affidavit of Plaintiff SantiEsteban; and the affidavit of Luis Roldan (a shareholder). Plaintiffs argue that they are entitled to partial summary judgment based upon Defendants' admissions (via Mr. Ginsburg) at oral argument on February 18, 2010, and based on Defendants' failure to comply with prior orders from this court. Plaintiffs argue that Defendants have already admitted that several of the Defendants paid themselves salaries in contravention of the corporation's governing documents. They further claim that, due to Defendants' failure to turn over corporate records pursuant to court's orders, it has become impossible for the Receiver to ascertain who the valid shareholders and occupants of Hamilton Place are. As for Defendants' counterclaims, Plaintiffs state that both should be dismissed because Defendants lack standing to raise them on behalf of the corporation, and because they otherwise fail to state a claim.
Defendants oppose Plaintiffs' motion and cross-move for summary judgment pursuant to CPLR § 3212. In support of their cross-motion, Defendants submit the following: an attorney's affirmation; affidavits from each of the individual Defendants; and two affidavits from two shareholders indicating their satisfaction with the Crowders' management of the building. Defendants argue that, at the outset, Ruby James and Linda Crowder should be dismissed. They state that James is not a member of the Board, and that Linda Crowder, elected to the Board in 2008, has never received any compensation from the corporation. Defendants also claim that Mr. and Mrs. Crowder and Alfreda Barnes were in fact authorized to earn salaries by the co-op's Offering Plan. They further provide affidavits from over 80% of the present shareholder population attesting to their approval of the Crowder's management of the building and their receiving compensation therefor, and expressing their opposition to the prosecution of the present action by Plaintiffs. Defendants also assert that no shares were improperly transferred by Defendants, and that all of the court's orders have been complied with.
Plaintiffs submit a memorandum of law in further support of their motion and in opposition to Defendants' cross-motion, and Defendants submit a reply affirmation in further support of their cross-motion.
The proponent of a motion for summary judgment must make a prima facie showing of entitlement to judgment as a matter of law. That party must produce sufficient evidence in admissible form to eliminate any material issue of fact from the case. Where the proponent makes such a showing, the burden shifts to the party opposing the motion to demonstrate by admissible evidence that a factual issue remains requiring the trier of fact to determine the issue. The affirmation of counsel alone is not sufficient to satisfy this requirement. (Zuckerman v. City of New York, 49 N.Y.2d 557 [1980] ). In addition, bald, conclusory allegations, even if believable, are not enough. (Ehrlich v. American Moninger Greenhouse Mfg. Corp., 26 N.Y.2d 255 [1970] ). (Edison Stone Corp. v. 42nd Street Development Corp., 145 A.D.2d 249, 251–252 [1st Dept.1989] ).
With respect to Plaintiffs' claim for breach of fiduciary duty, it is well settled that officers and directors of a cooperative owe a duty of loyalty to the cooperative, and must act for the benefit of all shareholders and residents therein ( see Levandusky v. One Fifth Ave. Apartment Corp., 75 N.Y.2d 500, 538 [1990] ). Such a duty naturally prohibits them from using their positions for their own personal benefit ( see American Int'l Group, Inc. v. Greenberg, 2008 N.Y. Slip Op 28536, *5–6 [Sup.Ct. N.Y. Co.2008] ).
Conversion is established
when one who owns and has a right to possession of personal property proves that the property is in the unauthorized possession of another who has acted to exclude the rights of the owner. Where the property is money, it must be specifically identifiable and be subject to an obligation to be returned or to be otherwise treated in a particular manner.
(Republic of Haiti v. Duvalier, 211 A.D.2d 379, 384 [1st Dept.1995] ) (citations omitted).
As for Plaintiffs' third cause of action,
Tortious interference with contract requires the existence of a valid contract between the plaintiff and a third party, defendant's knowledge of that contract, defendant's intentional procurement of the third-party's breach of the contract without justification, actual breach of the contract, and damages resulting therefrom.
(Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 424 [1996] ).
A cause of action for corporate waste exists where an officer or director of a corporation diverts corporate assets for improper or unnecessary purposes ( see Aronoff v. Albanese, 85 A.D.2d 3, 5 [2nd Dept.1982] ).
Here, the court finds that Plaintiffs are entitled to summary judgment on their first, second, and fourth causes of action with respect to Mr. and Mrs. Crowder and Alfreda Barnes's receiving salaries from the corporation. Paragraph IX of the Certificate of Incorporation provides,
All income and earnings of the Corporation shall be used exclusively for corporate purposes, and no part of the net income or net earnings of the Corporation shall inure to the benefit or profit of any private individual, firm, corporation or association.
Furthermore, Article X, Section 1 of the corporate By–Laws specifically provides that no officer or director shall receive compensation for services provided to the corporation in that capacity, or in any other capacity, “unless a resolution authorizing such remuneration is unanimously adopted by the Board before the services are undertaken” (emphasis added). Further still, Article X, Section 4 prohibits transactions in which a director or officer is interested, absent prior authorization from the Board (excluding any interested directors) after full disclosure of the interest, or by a shareholder vote after full disclosure.
Defendants point to page 31, E–4 of the co-op's Offering Plan, which provides that the co-op “has the option of hiring a professional managing agent or a non-profit community management group, both of which will charge managing fees, or continuing to manage the building itself.” However, this is in no way inconsistent with the provisions By–Laws cited above, and, absent prior authorization, payments to Mr. and Mrs. Crowder and Alfreda Barnes were improper. Nor is this fatal defect remedied by the affidavits of shareholders who attest to their having been aware of their taking salaries and having had no objections thereto.
While the court grants summary judgment against Mr. and Mrs. Crowder and Alfreda Barnes with respect to their taking salaries from the corporation, the court notes that it remains incumbent upon the Plaintiffs to prove the actual damages caused to the corporation, if any, sustained by the improper payments at the time of trial.
As for Plaintiffs' allegations of unlawful transfers of shares, the record presently before the court does not allow the court to conclude, as a matter of law, that any or all of the Defendants engaged in the improper transfer of cooperative shares, or that no such improprieties occurred. Accordingly, additional discovery is required ( see CPLR § 3212(f)). Furthermore, the record is insufficient to conclusively determine that Defendants have willfully failed to comply with this court's orders, such that the extreme sanction of striking their answer is warranted ( see Dauria v. City of New York, 127 A.D.2d 416[1st Dept.1987] ).
The court also finds that Plaintiffs' are entitled to dismissal of Defendants' counterclaims. Both counterclaims (alleging waste of corporate resources by commencing this action; and alleging that Plaintiff SantiEsteban conducted illegal work in her apartment) are claims belonging to the corporation, and not to the Defendants individually ( see General Motors Acceptance Corp. v. Kalkstein, 101 A.D.2d 102, 106 [1st Dept.1984] ).
With respect to Defendants' motion to dismiss Linda Crowder and Ruby James, their dismissal from the action is denied at this juncture as premature. Plaintiffs' complaint states cognizable causes of action against these individual defendants, and the record indicates that little or no discovery has taken place at this time. The contradictory allegations contained in Ms. Crowder and Ms. James's affidavits on the one hand, and Plaintiffs' verified complaint on the other, amount to an issue of material fact which cannot be resolved on a motion for summary judgment.
In addition, the court finds that Defendants are not entitled to dismissal of Plaintiffs' third cause of action. Plaintiffs have a contract with the corporation which provides for access to corporate records. Plaintiffs set forth a cognizable claim that Defendants interfered with Plaintiffs' contractual right.
Finally, the court declines to consolidate SantiEsteban I with the instant action, as the corporation was a named respondent in the prior proceeding, whereas here, Plaintiff SantiEsteban is bringing an action as an individual shareholder and on behalf of the corporation. In addition, although the two matters share some common factual issues (inasmuch as the improper denial of access to corporate records underlying SantiEsteban I is cited herein as an example of Defendants' alleged domination of the corporation), SantiEsteban I and the present action involved entirely distinct questions of law ( seeCPLR § 602(a)). Moreover, the prior proceeding has already been resolved; to the extent that Plaintiffs allege that Defendants have failed to comply with the court's November 12, 2009 order in SantiEsteban I, Plaintiff SantiEsteban remains at liberty to seek appropriate relief under that caption.
Wherefore, it is hereby
ORDERED that Plaintiffs' motion for summary judgment is granted to the extent that Defendants William Crowder, Equilla Crowder, and Alfreda Barnes are found liable to plaintiff on the first, second, and fourth causes of action with respect to their improper taking of salaries, and the issue of the amount of a judgment to be entered thereon shall be determined at the trial herein; and it is further
ORDERED that Plaintiffs' motion for summary judgment is granted to the extent that Defendants' counterclaims are dismissed; and it is further
ORDERED that Plaintiffs' motion for summary judgment is denied in all other respects; and it is further
ORDERED that Plaintiffs' motion for consolidation is denied; and it is further
ORDERED that Defendants' motion for summary judgment is denied in all respects.
This constitutes the decision and order of the court. All other relief requested is denied.