Matter of Coward v Bright
Annotate this CaseDecided on May 3, 2006
Supreme Court, New York County
In the Matter of the Petition of Nicole J. Coward, Individually and as President of 409 Edgecombe Avenue Housing Development Fund Corporation, and 409 EDGECOMBE AVENUE HOUSING DEVELOPMENT FUND CORPORATION, Petitioners,
against
Anthony Bright, ROBERT BUNTING and MARCIA FINGAL, Respondents,
602847/05
Herman Cahn, J.
This action involves respondents' alleged election to the board of directors of 409 Edgecombe Avenue Housing Development Fund Corporation (Corporation). Petitioner Nicole J. Coward (Coward), and all of the respondents, are shareholders of the Corporation and residents of 409 Edgecombe Avenue, New York, New York (Building).
Petitioner asserts that for various reasons, defendants claimed election to the corporation's board was improper, while respondents assert that they were properly elected, and in fact, comprise the majority of the board.
Coward, individually and as president of the Corporation, seeks a judgment declaring the election void, and enjoining respondents from holding themselves out as directors or officers of the Corporation, and from conducting any business on behalf of [*2]the Corporation.
Respondents answered, and asserted five counterclaims. The counterclaims seek judgment requiring petitioners to turn over the corporate books and records and to prepare financial statements. The counterclaims also seek monetary damages, and an order enjoining petitioners from retaining non-party law firm, Schechter & Brucker, P.C.
Petitioner now moves, by order to show cause, for a preliminary injunction, enjoining respondents from holding themselves out as directors or officers of the Corporation, and from conducting any business or taking any action in the Corporation's name or on its behalf.
On March 9, 2006, the court issued a temporary restraining order, pending the decision of this motion, preventing respondents from conducting any business or taking any action in the Corporation's name or on its behalf, as directors or officers. The TRO also prevents respondents from calling or holding any shareholder meeting, and from spending any corporate monies.
Facts
A quorum, under the by-laws, consists of "shareholders who own a majority of all shares which are issued and outstanding ... ." By-Laws, Coward Aff., Ex. 2, art. VI (B), § 8. Under the by-laws, directors are elected by a majority vote of a quorum. Id., art. VIII (A), § 3 and art. VI (C), § 11 (a). Whereas, the removal of a director requires a majority of "Total Votes," as follows:
any Director may be removed with or without cause by a majority of Total Votes, and a successor may then be elected to fill the vacancy thus created. ... The term of any Director who becomes more than two months behind in payment of his or her maintenance charges shall be automatically terminated, and a replacement shall be duly elected.
Id., art. VIII (A), § 5. "Total Votes" are defined as a majority "of all of the issued and outstanding shares of the Corporation ... unless the question requires a different percentage of the Total Votes, in which case such express provision will govern and control." Id., art. VI (C), § 11 (a).
The by-laws provide that:
[a]ll shareholders in good standing in the Corporation ten (10) days before the date of any meeting are entitled to notice of the meeting and are eligible to vote at the meeting. No shareholder shall be eligible to vote or to be elected to the Board who is shown on the books or management accounts of the Corporation to be behind in two or more monthly payments due the Corporation under the Proprietary Lease.
[*3]Id., art. VI (C), § 9. Under the by-laws, each shareholder present at a shareholder meeting,
shall have the right to cast one vote per share on each question. In the event the shares allocated to one apartment are held by more than one person, such persons shall jointly or separately cast their allotted votes, with each person entitled to cast the fraction of the votes which represents his or here interest.
Id., art. VI (C), § 10. The by-laws state that "[t]he decision of the Board shall be conclusive on all questions of the meaning of [the] By-Laws ... ." Id., art. VII (2).
In December 2005 and January 2006, respondents allegedly prepared and distributed notices of meetings of the Corporation's shareholders. The purpose of each meeting, as set forth in each notice, was to recall Coward, Lois Gibbs (Gibbs) and Ella Johnson (Johnson), and replace them with three new directors. The petition avers that meetings were held, but that no action was taken at either meeting, because there was no quorum.
Thereafter, respondents allegedly prepared a notice and a "reminder notice" of a special meeting of shareholders, scheduled to take place on February 9, 2006 (Meeting). Petition, ¶ 33. The purpose of the Meeting, like the other meetings, was to recall Coward, Gibbs and Johnson, and elect new directors to fill the resulting vacancies.
The petition states that a quorum was not present at the Meeting. The petition also claims that the third notice was defective because it failed to identify who had called the Meeting, had not been given by the Corporation's secretary, and had not been given to Coward, Gibbs or Johnson, in accordance with the Corporation's by-laws. Coward claims that she was not present at the Meeting, and that proxies had not been filed with the Corporation's secretary.
The petition avers that an election was held at the Meeting, where certain shareholders voted in favor of recalling Coward, Gibbs and Johnson from their positions as directors, and electing respondents Bright, Bunting and Fingal as three new directors of the five-member board, for a one-year term, from July 1, 2006 through June 30, 2007. Petitioners aver that the election was null and void, but that respondents are, nevertheless, improperly attempting to act as officers and directors.
Discussion
Petitioners argue that they are entitled to a preliminary injunction, because a quorum was not present at the Meeting, and because respondents failed to comply with the notice provisions of the by-laws. In opposition, respondents argue that the petition should be dismissed because it does not comply with section 619 Business Corporation Law, that the election complied with the Corporation's by-laws, and that petitioners fail to [*4]satisfy the standard for a preliminary injunction.
Business Corporation Law § 619
BCL § 619 provides that, "[u]pon the petition of any shareholder aggrieved by an election ... , the supreme court ... 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."
Here, the petition is based upon BCL § 619. Petition, ¶ 1. The petition claims that Coward was aggrieved by virtue of the improper election, and by respondents' attempt to assume control over, and exclude Coward from the operations of, the Corporation. While the statute applies to Coward as a shareholder, the statute does not state that it operates to grant the Corporation a cause of action. However, respondents do not cross-move to dismiss the petition, but rather, request dismissal informally in their opposition brief. Petitioners have had no opportunity to respond to this argument. Therefore, the issue of dismissal is premature.
Moreover, at oral argument on the motion, held on March 30, 2006, respondents' counsel indicated that the Corporation itself owned five units in the Building. Tr., at 8-9. Therefore, it is unclear whether the Corporation itself is a shareholder entitled to bring this action under BCL § 619. For the foregoing reasons, respondents' request for dismissal, based upon BCL § 619, is denied.
Preliminary Injunction
In order to obtain a preliminary injunction, petitioners must demonstrate "a likelihood of success on the merits, irreparable injury in the absence of the sought relief, and a balance of the equities in [their] favor." Manhattan Real Estate Equities Group LLC v Pine Equity, NY, Inc., 16 AD3d 292, 292 (1st Dept 2005).
Likelihood of Success on the Merits
With respect to the requirement that petitioners show a likelihood of success on the merits, it is sufficient that petitioners make a prima facie showing of a right to relief. McLaughlin, Piven, Vogel, Inc. v W.J. Nolan & Co., Inc., 114 AD2d 165, 173 (2d Dept 1986).
The parties do not dispute that there are 123 units in the Building, and that 250 shares of stock are allocated to each unit. Therefore, there are 30,750 total shares issued and outstanding. Under the Corporation's by-laws, a majority vote of those shares (15,376 shares, or 62 units) is required for the removal of a director. By-Laws, art. VIII (A) (5) and art. VI (C), § 11 (b).
Coward submits an affidavit in support of petitioners' motion, claiming that respondents posted the election results of [*5]the Meeting in the lobby of the Building. According to Coward, this document stated that Coward and Gibbs each received 34 recall votes, i.e. the votes of 34 units, and that Johnson received 33 recall votes. Thus, the votes to recall Coward, Gibbs and Johnson were less than the majority of Total Votes (15,376 shares or 62 unit votes) required to recall them from their positions as directors. The most recall votes received was 34 votes, nearly half the required votes for recalling a director. Therefore, petitioners have made a prima facie showing that Coward, Gibbs and Johnson were not recalled by a majority of Total Votes.
In opposition, respondents submit the affidavit of Pat Wright (Wright), a shareholder and resident of the Building. Wright served as president of the board for two years, and as assistant secretary for one year, ending July 2005. According to Wright, for purposes of voting, each unit in the Building is entitled to one vote. Wright identifies 37 units that are owned and used by the Corporation, rental units, combined units for purposes of voting, owned by estates, in arrears, or otherwise in dispute with respect to voting rights.
Wright claims that these 37 units have not been counted toward a quorum for many years. Wright argues that, therefore, of the 123 units, only 86 units were eligible to vote, and 44 units constituted a quorum. At the Meeting, Wright allegedly calculated the quorum, served as the election inspector, and kept a record of the people present.
Wright claims that there were 48 units present at the Meeting, and that 36 units voted. Even assuming, for the moment, that each unit was entitled to one vote, and that Wright properly excluded the above-referenced 37 units from those eligible to vote, respondents' purported 36 votes fall short of the 44 votes needed in order to recall any of the directors.
Respondents' argument is based on the position that there was a quorum at the Meeting, because there were more than 44 units present, and because a majority of those 44 units (presumably 23 units) voted in favor of recalling the incumbent directors. However, respondents are confusing by-law provisions article VI (C), § 11 (a) and (b). The by-laws make clear that it is not a majority of the quorum that is required to recall a director, but rather, a majority of Total Votes, which is defined as "a vote of all the issued and outstanding shares of the Corporation ... ." By-Laws, art. VI (C), § 11 (b). In other words, under respondents' one vote per unit calculation, respondents would have needed 44 unit votes to recall a director, not a majority of those present at the Meeting. The by-laws also make clear that successor directors cannot be elected to fill the vacancies of recalled directors until after the recall of those directors. By-Laws, art. VIII (A) (5). [*6]
Moreover, Wright claims to have served as the election inspector, and to have kept a record of the people who were present at the Meeting. However, Wright fails to submit any such records in support of respondents' claims. For the foregoing reasons, respondents' argument fails to rebut petitioners' prima facie showing of a likelihood of success on the merits.
Petitioners also argue that respondents failed to comply with the notice provisions of the by-laws with respect to the Meeting. Because petitioners have shown a likelihood of success on their claim that the election was void for lack of a majority of Total Votes, the court need not address the issue of whether the election was void for failure to comply with notice provisions.
Irreparable Injury
Petitioners' submit the affidavit of their attorney, Thomas Juneau, Esq. (Juneau). Juneau states that he spoke with the Corporation's managing agent, who advised that respondents sought to open a new bank account, to transfer all of the Corporation's funds to the new account, and to instruct the Corporation's shareholders to deliver maintenance payments to the account. This would prevent the Corporation from having access to funds to pay for its day-to-day obligations.
In addition, petitioners claim that, without control over the board, they will be unable to finalize and distribute the Corporation's financial statements to shareholders, and to consider contracts for certain work required in order to be in compliance with Local Law 11.
These claims show that petitioners and indeed all the residents of the building would suffer irreparable harm in the absence of the preliminary injunction. Respondents do not respond to these claims.
Balancing of the Equities
Petitioners have shown that, without the preliminary injunction, the Corporation would be subject to diversion of corporate funds, inability to distribute financial statements and a delay in consideration of work on the Building. Whereas, respondents fail to show how they would be harmed by maintaining the status quo until the next annual meeting of shareholders, scheduled to take place in July 2006, or until a new election is held. Therefore, a balancing of the equities tips in favor of petitioners.
The court notes respondents' argument that Gibbs "appears" to have been "in arrears for two months without being removed." Williams Aff., ¶ 4. The by-laws provide that "[t]he term of any Director who becomes more than two months behind in payment of his or her maintenance charges shall be automatically terminated, and a replacement shall be duly elected." Id., art. VIII (A), § 5. Petitioners submit a "Collection Status" report for the [*7]Corporation, which shows residents in arrears for the period ending January 31, 2006. However, this report does not date back two months from the date of the Meeting, and, based upon the papers before the court, the court is unable to determine whether Gibbs was in arrears for more than two months.
In any event, even if Gibbs were in arrears, this fact would not validate respondents' recall election. Nor would it tip the equities in favor of respondents with respect to petitioners' motion for a preliminary injunction.
Accordingly, it is
ORDERED that petitioners' motion for a preliminary injunction is granted, and it is further
ORDERED that respondents are enjoined from holding themselves out as directors or officers of 409 Edgecombe Avenue Housing Development Fund Corporation, and from taking any corporate action in connection therewith, pending the outcome of this litigation, or until such time as they are duly elected pursuant to the by-laws of the corporation.
Dated: May 3, 2006
ENTER:
______/s/____________
J.S.C.
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