Dennis v Buffalo Fine Arts Academy

[*1] Dennis v Buffalo Fine Arts Academy 2007 NY Slip Op 50520(U) [15 Misc 3d 1106(A)] Decided on March 21, 2007 Supreme Court, Erie County Devlin, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 March 21, 2007
Supreme Court, Erie County

Carl E. Dennis individually and as a Representative of Certain Members of the Buffalo Fine Arts Academy, MARTIN POPS as a member of the Academy, MAX WICKERT as a member of the Academy, KATKA HAMMOND as a member of the Academy, HAROLD L. COHEN as a member of the Academy, Petitioners

against

THE Buffalo Fine Arts Academy, and CHARLES BANTA, as President of the Buffalo Fine Arts Academy, and LOUIS GRACHOS as Executive Director of the Buffalo Fine Arts Academy, and THE BOARD OF DIRECTORS of the Buffalo Fine Arts Academy, and SOTHEBY'S, INC., , Respondents.



2007-2220



Richard E. Stanton, Esq.

Knoer, Crawford & Bender, LLP

Attorney for Petitioner

68 Niagara Street

Buffalo, NY 14202 Richard A. Moore, Esq.

Magavern, Magavern &

Grimm, LLP

Attorney for Respondents Buffalo Fine Arts Academy, Louis Grachos, Board of Directors

1100 Rand Building

Buffalo, NY 14203

Terrence M. Connors, Esq.

Connors & Vilardo, LLP

Attorney for Respondent

Sotheby's, Inc.

1020 Liberty Building

420 Main Street

Buffalo, NY 14202

Diane Y. Devlin, J.

Petitioners Carl E. Dennis, Martin Pops, Max Wickert, Katka Hammond, and Harold L. Cohen bring this action for preliminary and permanent injunctive relief pursuant to the Not-for-Profit Corporation Law (N-PCL). They allege that the Respondents have and will violate provisions of the N-PCL through the auction of more than 200 pieces of artwork by Respondent Sotheby's, Inc. between March 20, 2007 and June 7, 2007. Respondents Buffalo Fine Arts Academy (Academy), Board of Directors of the Buffalo Fine Arts Academy (Board), Charles Banta, and Louis Grachos, move to dismiss the petition because the Board's actions were lawful under the business judgment rule. Respondent Sotheby's, Inc. joins in respondents' cross-motion to dismiss and contends that the petitioners have failed to meet the requirements for imposition of a preliminary injunction.

The material facts of this case are predominantly undisputed. The Board voted unanimously on November 6, 2006 for the deaccession [FN1] of more than 200 pieces of sculpture and art. The Board believed that deaccession of these works was necessary to promote the Academy's focus on maintaining a world-renowned modern and contemporary art museum at the Albright-Knox Art Gallery. Their decision was predicated by other meetings of the Board, including those held on August 23, 2006 and October 19, 2006, at which the Board discussed the merits of deaccession and the overall strategy of the Academy. Ex-Officio Directors were not [*2]notified of the August and October meetings due to an apparent administrative error (see Spaulding Aff.). There is a dispute over whether Ex-Officio Directors were given notice of the November meeting. After certain members of the Academy were notified of the Board's decision to sell the artwork, they attempted to obtain a list of the pieces to be auctioned and requested that Board President Charles Banta call a special meeting of the members to discuss and issue a non-binding vote on the deaccession. Over 600 members petitioned the board for a meeting, and a meeting was held on March 12, 2007. On a motion recommending that the Academy withdraw 145 objects scheduled for auction, members voted 3-1 approving the deaccession (see Moore 2nd Aff. ¶ 3). The Board held another meeting of Directors on March 13, 2007, at which they confirmed their decision to move forward with the sale.

Petitioners have four main claims which they believe require this court to issue a preliminary injunction. First, they contend that the failure to notify Ex-Officio Directors of the various meetings of the Board is a violation of the By-Laws and N-PCL § 711. Article III Section 10 of the By-laws requires that notice be given to all Directors at least two days before a meeting (see Verified Petition Ex. 5). Second, petitioners contend that the Board has altered the corporation's purpose without amending its certificate of incorporation in violation of Article 8 of the N-PCL. Specifically, petitioners argue that the deaccession violates the stated purpose of maintaining a collection of painting, sculpture and other works of art and encouraging the advancement of education and cultivation of art. Additionally, petitioners argue that the deaccession violates the Academy's Collection Management Policy and is outside its 2001 Strategic Plan. Third, petitioners contend that the deaccession constitutes a misappropriation and waste of corporate assets under N-PCL § 720. They believe that the deaccession of certain pieces violates the intent of donor George A. Foreman and the will of donor Arthur B. Michael. Finally, as a result of the waste of corporate assets and the alteration of the corporation's stated purposes, the petitioners urge this court to pursue its "visitation" rights under N-PCL § 114. Under this section, a court may appoint a representative to investigate the records of a corporation to protect corporate assets from misuse by officers or directors.

In order for petitioners to be entitled to a preliminary injunction, they must show that they will suffer irreparable injury in the absence of an injunction, that the balance of the equities falls in their favor, and that there is a likelihood that they will be successful on the merits (see Aetna Ins. Co. v Capasso, 75 NY2d 860 [1990]; see also CPLR 6301). Although petitioners may have produced enough evidence that they will suffer irreparable injury by the sale, they have not shown that it is likely [*3]that they would succeed on the merits or that the balance of the equities falls in their favor.

The petitioners claim that the selling of irreplaceable objects beyond the jurisdiction of the court will irreparably harm their interests because there is no adequate remedy at law, other than an injunction, which can keep the artwork in the Academy's possession so that petitioners and members of the community may view it (see Stanton Aff. ¶ 15). An injury will be deemed irreparable if it cannot be compensated by traditional legal remedies such as a monetary award (see Poling Transp. Corp. v A & P Tanker Corp., 84 AD2d 796 [1981]). The proposed objects for auction are unique and a traditional legal remedy does not seem appropriate to adequately compensate the petitioners. However, respondents point out that similar pieces of art from the same historic period will be retained by the Academy for public benefit and education (see Grachos Aff. ¶ 16). In that sense, petitioners would not be irreparably harmed by the proposed deaccession.

Regardless of the fact that petitioners could sustain irreparable injury from the sale, they have not fulfilled their burden under the other two elements for a preliminary injunction.

It is clear that for a party to be entitled to the drastic remedy of a preliminary injunction, its pleadings must provide more than what is needed in a traditional cause of action. It is somewhat unclear exactly what a party seeking relief must produce to sustain its burden of showing a likelihood of success on the merits. Must a party demonstrate a strong probability of ultimate success and a clear right to the relief sought or simply a prima facie showing of a right to relief without showing a certainty of ultimate success (compare Rick J. Jarvis Assoc. v Stotler, 216 AD2d 649 [1995] with Tucker v Toia, 54 AD2d 322 [1976])? Petitioners must at least show a reasonable probability of success on the merits, and in the present case they have failed to do so. Each of the petitioners' claims fails to meet the likelihood of success standard.

The petitioners are correct that Ex-Officio Directors were required to be given notice of the meetings and the failure of the Board to give notice to those Directors of the August and October meetings were a violation of the By-laws. However, this violation was harmless. First, under Article III, Section 2 of the By-laws, Ex-Officio Directors are not entitled to vote (see Verified Petition Ex. 5). Their presence at meetings, including the November 6, 2006 meeting [FN2], would have [*4]had no impact on the results of the vote. Furthermore, all Ex-Officio Directors were given notice of the March 13, 2006 meeting, in which the Board confirmed its November vote without an objection. It is clear that the Board did not attempt to wilfully conceal their actions from Ex-Officio Directors, and respondents gave a valid excuse for the administrative error (see Spaulding Aff. ¶ 6, 7). If the Board had wanted to restrict Ex-Officio Directors' access to the deaccession meetings, they could have, under Article III Section 14 of the By-laws, by obtaining the written consent of all the voting directors in lieu of a meeting (see Verified Petition Ex. 5). The petitioners are not likely to succeed on this claim.

The petitioners' second claim is also unlikely to succeed on the merits. This claim is that the proposed deaccession is an act which so deviates from the Academy's purpose in its certificate of incorporation that it requires a majority vote of its members under N-PCL § 802 to amend its certificate. In its most recent restatement of its certificate of incorporation, the Academy states that its purpose is "to promote and cultivate the fine arts and for that purpose to establish and maintain a permanent art gallery... to the end encouraging and advancing the education and cultivation of art in all of its branches" (see Verified Petition Ex. 3). It is obvious that the Academy's purpose is broad in scope. The petitioners seem to confuse the corporation's purpose in its certificate of incorporation, a document filed with the Department of State, with its mission and its management policies, which are internal documents adopted and implemented by the Board. The Board of Directors is free to change and amend its mission, its Collection Management Policy, and its 2001 Strategic Plan, without amending its certificate of incorporation, so long as they do not pursue endeavors outside the stated purpose of the corporation. The petitioners' reliance upon Alco Gravure and Manhattan Eye, Ear & Throat is misplaced. In those cases, non-profit corporations proposed to sell all or substantially all of their assets in violation of corporate purposes (see Alco Gravure, Inc. v Knapp Found., 64 NY2d 458 [1985]; Matter of Manhattan Eye, Ear & Throat Hosp. v Spitzer, 186 Misc 2d 126 [Sup Ct, NY County 1999]). These cases are readily distinguishable from the present case. The proposed deaccession accounts for a very small portion of the Academy's assets, and the sale in no way constitutes a departure, or an ultra vires act, in violation of its corporate purposes. The deaccession is incomparable to the drastic corporate changes requiring a vote by members under Section 8 of the N-PCL. The Board has the authority under the N-PCL to manage the corporation as it sees fit, and the petitioners claim that the [*5]proposed deaccession is a violation of corporate purposes is unlikely to succeed on the merits.

The Board's authority to manage as it sees fit is supported by the N-PCL and the business judgment rule. The business judgment rule applies to both profit and non-profit corporations, and states that those actions taken by a board of directors in good faith in the exercise of honest judgment and within legitimate corporate purposes cannot be overturned by a court (see Consumers Union of U.S., Inc. v State of New York, 5 NY3d 327 [2005], citing Auerbach v Bennett, 47 NY2d 619 [1979]). Without a showing of bad faith in the form of self-dealing, fraud, or unconscionability, a court's review of the directors' decision will be limited (see Schoninger v Yardam Beach Homeowners' Assn., 134 AD2d 1 [1987]).

The petitioners' third claim is that the Board engaged in misappropriation and waste of corporate assets by violating the intent of donors George A. Foreman and Arthur B. Michael. Mr. Foreman donated the Shiva as Brahma to the Academy and Mr. Michael donated by bequest several Chinese sculptures, all of which are up for auction through the proposed deaccession (see Verified Petition ¶ 33-44).

The Board is empowered under N-PCL 202 and 513 to sell property which was donated or bequeathed to the corporation. This power is limited by an individual's right to specifically restrict the alienability of an item which he or she donates. Both Mr. Foreman and Mr. Michael's donations do not restrict the Board's right to sell these items. First, there is no evidence produced by petitioners that Mr. Foreman himself (i.e., not his family), specifically limited the purpose for which the Shiva was given. Second, the will of Mr. Michael contains no express provision limiting the rights of the Academy to sell his donations. This court agrees with a determination by the Attorney General's office, that the will needed to contain an explicit perpetual limit on the right to sell the item in order for the Board to have violated the donor's intent (see Moore 1st Aff. Ex. A).

The petitioners' third claim is unlikely to succeed, because the Board did not act in bad faith in deciding to sell the items and they did not violate the donors' intent. The Board did not misappropriate or waste the items donated to them. The Board reasonably and honestly exercised their judgment to determine that deaccession was necessary for the continued existence and notoriety of the Albright-Knox. Thus, their decision is unreviewable by this court under the business judgment rule (see Consumers Union; Schondiger).

The final effort of petitioners to challenge the proposed deaccession shows no likelihood of success on the merits. The petitioners believe that under N-PCL § 114, the court should appoint a representative to "visit" the corporate records to prevent waste of corporate assets or a violation of corporate purposes. The Board's decision [*6]neither wastes corporate assets nor violates any corporate purpose. Furthermore, the plain language and overall thrust of Section 114 is to prevent directors from pursuing illicit activities such as fraud and self-dealing, and not for challenging the types of action that petitioners complain of here.

The third and final requirement for imposition of a preliminary injunction further moves this court to find for the respondents. A court must balance the equities to determine if a preliminary injunction is a just and fair result. Other than petitioners' arguments that certain pieces of artwork will be forever lost from the Academy's collection, petitioners offer no other discussion of the reasons that the balance of the equities should fall in their favor. On the other hand, respondents, particularly respondent Sotheby's, have come forward with evidence that the company has expended nearly $200,000 solely from the marketing of the auction (see Buckley Aff. Ex. K). Petitioners do not contest that delay of the auction will cost respondents estimates in the millions of dollars. Furthermore, injunctive relief is subject to the defense of laches (see Leising v Town of Clarence, 144 AD2d 969 [1988]). Although petitioners were not given a full list of the items to be sold until mid-February, petitioners knew of the Board's decision on deaccession, and they waited four months to bring this action. Additionally, after obtaining a full list of the items to be sold, petitioners waited almost three full weeks to bring the Order to Show Cause. The delay is another important element which tips the balance of the equities in respondents' favor.

In sum, petitioners are not entitled to a preliminary injunction because they have not shown a likelihood of success on the merits or that the balance of equities falls in their favor. Due to the fact that petitioners will not be successful on the merits and all that they seek is injunctive relief, the respondents' cross-motion to dismiss the petition is granted in its entirety.

SO ORDERED.

Hon. Diane Y. Devlin

Justice of the Supreme Court

DATED:March 21, 2007

Buffalo, New York Footnotes

Footnote 1:Deaccession is a term used commonly in the museum industry and it means to sell pieces of artwork or other property. It is used by art museums to generate revenue to acquire other pieces (see Banta Aff. ¶ 25).

Footnote 2:The dispute over whether Ex-Officio Directors were notified of the November 6, 2006 meeting remains unsettled. The fact that respondents produced an RSVP list does not prove that these directors were given notice, and this assertion is controverted by Demone Smith's affidavit. Ultimately, even if no notice was given, it was a harmless error.