Silver St. Dev. Corp. II v Park Lake Hous. Dev. Fund Corp.

[*1] Silver St. Dev. Corp. II v Park Lake Hous. Dev. Fund Corp. 2004 NY Slip Op 51888(U) Decided on December 6, 2004 Supreme Court, Nassau County Warshawsky, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 6, 2004
Supreme Court, Nassau County

Silver Street Development Corporation II, Plaintiff,

against

Park Lake Housing Development Fund Corp., GERALD GARDNER WRIGHT, GERALD GARDNER WRIGHT, P.C., and GERALD GARDNER WRIGHT, P.C. AND ASSOCIATES, , Defendants.



010415/2004

Ira B. Warshawsky, J.

Before the court are four motions concerning plaintiff's contract of sale for the purchase of that certain real property situate at 395 South Franklin Avenue, Hempstead, New York, (the Premises), a 240 unit low income apartment complex owned by defendant Park Lake Housing Development Fund Corp., (Park Lake), and the issue of which of two Boards of Directors of Park Lake have authority to deal with plaintiff in order to effect the sale, and who will represent such Board in this action. The motions are as follows:

001) plaintiff's motion for a preliminary injunction enjoining defendants from selling or transferring or liening the Premises, and an order removing Gerald Gardner Wright, the escrow agent of the down payment on the contract of sale, and enjoining any removal of the escrowed funds;

002) a motion by The Scher Law Firm, LLP to be substituted as counsel for Park Lake in place of defendant Gerald Wright P.C. and Gerald Gardner Wright, P.C. and Associates (Gerald Wright P.C.) , and compelling the aforesaid law firm to turn over the file in this action;

004) a motion by The Scher Law Firm, LLP for a declaration that the Board of Trustees of the Park Lake Housing Development Fund Corp., which was appointed by the Board of Trustees of the Union Baptist Church on November 17, 2003 is the Board of Trustees authorized to act in behalf of Park Lake and that the former Board of Trustees was terminated on October 22, 2003 and no longer is authorized to act in behalf of Park Lake, and Gerald Gardner Wright P.C. no longer represents Park Lake, and for imposition of sanctions against Gerald Wright P.C.; and

005 ) a cross motion by Park Lake for an order determining that the Board of Trustees of the Park Lake Housing Development Fund Corp., appointed and in existence on September 30, 2003, when the Contract of Sale for the Premises was signed, was not effectively terminated on October 22, 2003 and is authorized to act in behalf of Park Lake, for a further determination that the acts of the Board of Directors of Park Lake approved by the Union Baptist Church are null and void, and for a declaration that the authority of the Union Baptist Church over Park Lake for the management of Park Lake violates Park Lake's Certificate of Incorporation and By-Laws, and sections 601 and 706 of the Not for Profit Corporation law and is void.

A motion brought by the Office of the Attorney General for the State of New York to intervene in this action was granted without opposition of the parties.

In 1970 The Union Baptist Church in Hempstead sponsored Park Lake as a not-for-profit organization to provide housing for low-income residents in and around the Village of Hempstead. Since then the Premises has existed to provide apartments to low-income persons with assistance from federal subsidies under the Section 8 housing program. Shinda Management is the managing agent.

Insofar as Park Lake is a not-for-profit corporation providing low-income housing with government subsidies it is subject to oversight and regulation by diverse agencies including the Federal Department of Housing and Urban Renewal, the State Commission of Housing and Community Renewal, and the Hempstead Housing Authority, as well as the State Attorney General. It cannot make any disposition of the Premises without gaining approval from the Supreme Court of the State of New York, after notice to the Attorney General, N-PCL §§ 510 & 511, nor can it amended its charter of Incorporation and By-Laws without approval by the Attorney General. [*2]

Internally Park Lake is governed by Directors who must be Members in the Corporation who, in turn, become members by being approved by the Board of Trustees of the Union Baptist Church. Withdrawal of approval is deemed a resignation of the member. The Certificate of Incorporation, Article XI. Pursuant to Article II, the Certificate of Incorporation of Park Lake cannot be amended without approval of the State Attorney General's Office and the Federal Housing Commission and the State Commission of Housing and Community Renewal.

The By-Laws of Park Lake also provide that membership in Park Lake is limited to persons who have the approval of the Union Baptist Church, Article II, sections 1 & 2; membership may be terminated by vote of two-thirds of the members of Park Lake entitled to vote or, as stated above, by withdrawal of approval by the Union Baptist Church which results in an automatic resignation of membership. Article II, sections 3 & 4. A director of Park Lake may be removed by a vote of the majority of members of Park Lake entitled to vote at a meeting noticed for such action. Article IV, section 5.

Plaintiff commenced this action to gain, inter alia, an order of specific performance, and to enjoin the sale of the Premises to any other entity after having become impatient with Park Lake's failure - or unwillingness or inability - to provide documents, specifically audited 2003 financial statements, necessary to gain HUD approval of its purchase of the Premises. Having initially set the date of closing for March 30, 2004, and having remained willing and able to conclude the purchase, and begin renovating the 240 apartments for the benefit of the tenants, and having made a $300,000 deposit into Mr. Wright's escrow account and made available necessary interim operating funds, plaintiff perceived the project to be at a standstill.

The Contract of Sale was executed on September 30, 2003 by the Reverend Clinton C. Boone of the Union Baptist Church and President of the Park Lane Board, and an agent for the plaintiff. The Contract provided for a net of $4,500,000 to Park Lake with the purchaser to assume all liens, obligations and debts of the seller and to pay attorney fees which was later set at $200,000. Gerald Gardner Wright P.C., represented Park Lake in the negotiations with Silver Street and became the escrow agent. However, on October 22, 2003, the Union Baptist Church withdrew its support for the Park Lake Board. The record compiled heretofore shows negotiations between the parties before the Contract of Sale was signed and it would be inappropriate to opine in what respect the Union Baptist Church was dissatisfied with the decision of the Park Lane Board to execute a Contract of Sale with Silver Street Development Corporation. Nor is it necessary to engage in such inquiry to make a determination of the issues now before the court.

The Union Baptist Church replaced four of five members of Park Lake who were duly installed to become the governing Board. In the mean time, on November 4, 2003, Mr. Wright on behalf of the initial Board to whom he was counsel and also a member, moved to file a Restatement of Certificate of Incorporation for Park Lake which, inter alia, changed the corporation from a Type B corporation to a Type D Corporation and amended the procedure for election of officers of Park Lane to eliminate Union Baptist Church control, thus seeking to avoid the result of the Union Baptist Church's withdrawal of approval of the first Board.

On June 9, 2004, the Attorney General's Office contacted Mr. Wright and his clients and stated that such a modification of the Certification of Incorporation was of no import absent approval of such Offices, which was not, under the circumstances, immediately forth coming. [*3]N-PCL §§ 510 & 511. Such approval has not to date been granted with the result that the Board of the Union Baptist Church continues to control the appointment of the Directors of Park Lake. Insofar as the Church revoked approval of the Directors sitting on October 22, 2003, those individuals are divested of all authority to act as a representative of Park Lake, and Gerald Wright P.C., no longer is counsel representing Park Lake.

The foregoing recitation of events occurring between October and November of 2003 are consistent with the requirements of the Certificate of Incorporation and By-Laws of Park Lake for installing a Board of Directors to make management decisions about the housing complex. However, the "Old Board" states that section 706 of the Not for Profit Law prevents the Directors of the Union Baptist Church from forcing the resignation of a director of Park Lake by withdrawing their approval of membership. It may be observed that that is a curious proposition since by assuming it the "Old Board" also vitiates the very process by which it came into existence.

The argument in fact has two components. The lead off is NPCL § 706 which places authority for removal of any director with the members or the directors of the corporation on whose Board such director serves, or, if the corporation's Certificate of Incorporation permits, the members alone may remove a director by vote, even without cause. Removal of directors is, then, according to the statute an internecine affair, although the attorney general may also initiate proceedings. NPCL § 706 (d).

The secondary theory that follows the first is that the Union Baptist Church control "stifles" the directors of Park Lake from fulfilling their fiduciary duty to freely, independently and unreservedly act in the best interests of Park Lake since they must be mindful to please the Directors of the Union Baptist Church.

However, viewing the matter more broadly than just one section of the Not for Profit Corporation Law, the integrity of the process is validated by section 601 of the NPCL, to the extent that the NPCL is involved. It is in a sense not pertinent as the Union Baptist Church governs more than it manages.

Management of Park Lake is vested in its Board of Directors according to the Certificate of Incorporation and its By-Laws. That much is obvious. The Certificate of Incorporation states that directors must be members and members must be approved by the Union Baptist Church; the Board of Directors was never set up to be a wholly autonomous unit. But the issue is not who manages Park Lake, but how one becomes a manager so as to manage. Section 601 of the Not for Profit Law provides:

A [not for profit] corporation shall have one or more classes of members, or in the case of a Type B corporation, may have no members, in which case any such provision for classes of members or for no members shall be set forth in the certificate of incorporation or the by-laws. ... If the corporation has members, membership may be effected by ...such method ... as is prescribed by the certificate of incorporation or the by -laws. ...Except as otherwise provided in this chapter or the certificate of incorporation or the by-laws, membership shall be terminated by resignation ....

Park Lake's Certificate of Incorporation provides that membership is effected by the [*4]imprimatur of the Union Baptist Church and ceases with its withdrawal, deemed a resignation. The interaction between the Union Baptist Church and Park Lane is consistent with the governing provision of the Not for Profit Corporation Law for installing or terminating members and directors since it relies upon the Certificate of Incorporation and the By-Laws of Park Lake. There is no law of which the parties have made the court aware that prohibits the oversight of the Union Baptist Church.

The practical effect upon which the "Old Board" dwells to invalidate the process is a director's conflict of interest in serving "at the whim" of the Union Baptist Church. The argument is confounding. No where in the record now before the Court is there reason to believe or even suspect that the Directors of the Union Baptist Church are not committed to furthering the stated goals of Park Lake to provide low income housing to those in need in the environs of Hempstead, or that they are exempt from being held accountable if they act in self interest.

The Court perceives no reason not to recognize the ultimate control the Union Baptist Church has over the composition of the Board of Directors of Park Lake. See Keogh v Connolly, 235 AD2d 241 (1st Dept 1997) (by-law provision giving a church the right to endorse or withdraw endorsement of directors of a not-for-profit corporation held valid). Finally, it may be said that the disposition by sale of the only asset of Park Lake, valued by plaintiff at 4.5 million dollars, is a matter of some importance deserving of consideration more thorough than that given management of ordinary affairs.

On the basis of the foregoing, the motions are determined as follows, and it is

ORDERED that the Board of Trustees of the Park Lake Housing Development Fund Corp appointed by the Board of Trustees of the Union Baptist Church by letter dated November 17, 2003, is the valid Board of Trustees in full control and having the full authority to act in behalf of Park Lake Housing Development Fund Corporation and that Gerald Gardner Wright P.C., and Associates is no longer counsel engaged to represent Park Lake Housing Development Fund Corporation; and it is further

ORDERED that the Scher Law Firm LLP is substituted as counsel of record for Park Lake Housing Development Fund Corporation in place of Gerald Gardner Wright P.C. and Associates, and a hearing shall be held before Court Attorney/Referee Frank Schellace, on a date to be fixed by mutual consent, to fix outgoing counsel's retaining lien, if the parties are not able to come to a mutual agreement. Upon payment of all disbursements the file shall be released to incoming counsel.

Plaintiff's application for a preliminary injunction is denied in so far as there can be no sale of the Premises absent approval of this Court.

All other requests for relief not expressly granted are denied including but not limited to the application to invalidate all actions taken by the Board of Directors who resigned as of October 22, 2004.

A Preliminary Conference (see NYCRR 202.12) shall be held on January 25, 2005, at 9:30 A.M., before the undersigned in the Supreme Court of Nassau County.

Counsel for all parties are reminded that this matter has been assigned to the Commercial Division of the Supreme Court of Nassau County and the parties are directed to follow the Rules of this Division. [*5] The foregoing constitutes the decision and order of the court.

Dated: December 6, 2004

J.S.C.