Kensington Terrace Apts., LLC v 160 Ocean Parkway Owners Corp.

[*1] Kensington Terrace Apts., LLC v 160 Ocean Parkway Owners Corp. 2009 NY Slip Op 50602(U) [23 Misc 3d 1105(A)] Decided on April 6, 2009 Supreme Court, Kings County Demarest, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 April 6, 2009
Supreme Court, Kings County

Kensington Terrace Apartments, LLC, Plaintiff,

against

160 Ocean Parkway Owners Corp., Dominick Diorio, Diane Stein, Judith Spina, Beverly Wasserman, Jeff Schein and Arlayne Berelson, Defendants.



23603/08



Attorney for Plaintiff:

Harry L. Klein, Esq.

26 Court Street

Brooklyn, NY 11242

Attorney for Defendant:

John W. Carroll, Esq.

Wolfson & Carroll

233 Broadway, Suite 2200

New York, NY 10279

Carolyn E. Demarest, J.

Pending before this court is an application for preliminary injunctive relief. The plaintiff Kensington Terrace Apartments, LLC moves, by order to show cause, for an order preliminarily enjoining and restraining the defendants 160 Ocean Parkway Owners Corp., Dominick Diorio, Diane Stein, Judith Spina, Beverly Wasserman, Jeff Schein and Arlayne Berelson individually, and/or collectively, from acting in the capacity as purported officers and directors of the Corporation, from otherwise taking action on behalf of or binding the Corporation and from interfering with Ben Hirsch or any other previously elected member of the Corporation's Board of Directors.

Factual Background

Plaintiff Kensington Terrace Apartments, LLC is the designated new Sponsor [*2](hereinafter, Sponsor) and owner of 7,090 unsold shares under an offering plan, dated June 28, 1983, to convert premises 160 Ocean Parkway, Brooklyn, New York to cooperative ownership. Defendant 160 Ocean Parkway Owners Corp. (hereinafter, the Corporation ) is a New York State Cooperative Housing Corporation which, together with Kensington, holds the leases for 25 of the 54 apartments. Ben Hirsch (B. Hirsch) is the Sponsor's manager. Pursuant to Article III of the By-Laws, the business of the Corporation is managed by a seven-member Board of Directors. Section 3 of Article III provides that "[u]pon the sale of a majority of the shares of the Corporation, or on the fifth anniversary of the conveyance of the building to the Corporation, whichever is sooner, Sponsor shall relinquish control of the Board of Directors." Since it appears both that more than a majority of the shares of the corporation has been sold and more than five years have elapsed since the conveyance of the building, plaintiff may no longer control the Board. Thus, it appears to be undisputed that the maximum number of directors that the plaintiff may designate for election is three.

In August 2007, the Sponsor's designees, B. Hirsch, Yakov Hirsch (Y. Hirsch) and Jack Rubin (Rubin), occupied three (3) of the seats on the seven member Board of Directors. The other Board members were Robert Randazzo and defendants Beverly Wasserman (Wasserman), Dominick Diorio (Diorio), and Diane Stein (Stein) (collectively, the individual defendants). On or about August 13, 2007, in an effort to wrest more control from plaintiff, the individual defendants caused a notice of special meeting to be distributed by the Corporation's secretary, defendant Stein, to shareholders announcing that new elections for all board seats would be held at a special meeting on August 27, 2007 (August Special Meeting). B. Hirsch avers that neither he, nor Y. Hirsh, nor Rubin, as the Sponsor's manager and designees, received such notice and that the results of the election at the August Special Meeting are therefore void. At the August Special Meeting, a new Board of Directors was elected consisting of defendants Diorio, Stein, Berelson, Wasserman, Jeff Schein (Schein) and non-parties Judith Spina (Spina) and Peter Davis (Davis). Immediately following the August Special Meeting, the newly elected Board of Directors met and adopted a resolution amending the Corporation's by-laws (Article III, Section 3) so as to bar non-shareholders from serving on the Board of Directors.

Upon learning of, and dissatisfied with, the results of the August Special Meeting, the Sponsor, by notice dated November 12, 2007, called another special meeting of shareholders to be held on November 28, 2007. At that meeting, a new Board of Directors was elected consisting of the Sponsor's slate of three (3) candidates (B. Hirsch, Y. Hirsch and Rubin) and David Edrich, who is also a holder of unsold shares by inheritance, Diorio, Spina and Stein. However, two of the Sponsor's designees (Y. Hirsch and Rubin) that had been elected were subsequently disqualified based upon the recent by-laws amendment barring non-shareholders from sitting on the board of directors, and the conclusion that the Sponsor was only entitled to seat one person on the Board as its representative.

On August 13, 2008, at a meeting attended by the individual defendants but at which both Edrich and B. Hirsch were absent, the Board of Directors adopted a resolution that, whereas the Sponsor and Edrich, as holders of unsold shares, are entitled to nominate at most three (3) directors to the Board, in order to avoid threatened litigation, the Board would accept Spina's resignation and elect Sponsor's designee, Y. Hirsch, a non-shareholder, to fill her vacancy. The minutes of the August 13, 2008 meeting reflect discussion of the refinancing of the Corporation's [*3]mortgage. It is this proposal, supported by an offer from Sovereign Bank to loan up to $1,500,000, that has alarmed plaintiff and prompted the submission of the Order to Show Cause.

Sponsor has brought this action for declaratory and injunctive relief, alleging that the individual defendants Stein, Spina, Diorio, Wasserman, Schein and Berelson have unlawfully usurped control of the Corporation's Board of Directors by discounting Sponsor's votes and its candidates for the Board, and by overturning an otherwise valid election. The complaint seeks, inter alia, annulment of the amendment to the corporate By-Laws, damages and a declaration of plaintiffs' voting rights. By order to show cause dated August 19, 2008, the Sponsor moved for a temporary restraining order (TRO) and a preliminary injunction enjoining and restraining the individual defendants "from acting in the capacity as purported officers and directors of the Corporation, and from otherwise taking action on behalf of or binding the Corporation and from interfering with Ben Hirsch or any other previously elected member of the Corporation's Board of Directors." This court issued a limited TRO pending hearing restraining the individual defendants from binding the Corporation to any long-term commitment, including the re-negotiation of the mortgage on 160 Ocean Parkway. This court shall now consider the Sponsor's application for injunctive relief.

Discussion

It is well settled that in order to be entitled to a preliminary injunction, plaintiff must clearly demonstrate: (1) a likelihood of ultimate success on the merits; (2) irreparable injury absent the granting of the preliminary injunction; and (3) a balancing of the equities in their favor (see CPLR 6301; Aetna Ins. Co. v Capasso, 75 NY2d 860 [1990]; Preston v Fabrication Enterprises, 68 NY2d 397 [1986]; W. T. Grant Company v Srogi, 52 NY2d 496 [1981]; Khan v State Univ. of New York Health Science Ctr. at Brooklyn, 271 AD2d 656 [2000]; IVI Environmental, Inc. v McGovern, 269 AD2d 497 [2000]; Miller v Price, 267 AD2d 363 [1999]). Preliminary injunctive relief is a drastic remedy which is to be used sparingly (see Brenner v Hart Systems, Inc., 114 AD2d 363 [1985]; McLaughlin, Piven, Vogel, Inc. v W.J. Nolan & Company, Inc., 114 AD2d 165 [1985]), and the plaintiff has the burden of establishing a clear right to this equitable remedy (see J.S. Anand Corp. v Ariel Enterprises, 148 AD2d 496 [1989]; Nalitt v City of New York, 138 AD2d 580, 581[1988]).

In support of its application, Sponsor argues that the August 27, 2007 Special Meeting, at which a new Board of Directors was elected and an amendment to the Corporation's by-laws was adopted, was improper because, as a shareholder of record, plaintiff was not served with notice of said meeting as required by Article II, Section 2 of the Corporation's by-laws.[FN1] B. Hirsch, [*4]Sponsor's manager, has submitted an affidavit stating that he did not attend the meeting because he never received notice of it. Additionally, he claims that the Sponsor's two other designees, Y. Hirsch and Rubin, also never received notice of the meeting. Sponsor further argues that the subsequently-adopted by-laws amendment requiring all directors to be shareholders was improperly adopted because the proposed amendment was never mentioned in the notice of the meeting, nor were all of the Corporation's directors present at said meeting as required by Article XII, Section 1 of the Corporation's by-laws.[FN2] Sponsor further argues that the final sentence of Article XII, Section 1, bars the amendment which restricts the rights of the holders of unsold shares. Specifically, that sentence states: "Notwithstanding this provision the rights of the holders of Unsold Shares shall not be abridged as provided for in the Offering Plan." Paragraph O of the Offering Plan states:

The By-Laws may be amended or repealed by vote of shareholders owning at least two-thirds of the then outstanding shares or by two-thirds of the members of the Board of Directors, except that the Directors may not amend, repeal or alter certain By-Law provisions, and so long as there are any Unsold Shares outstanding the By -Laws may not be altered or repealed without the unanimous consent of all shareholders. (emphasis added).

Thus, it is clear that the amendment adopted by the Board of Directors following the August Special Meeting of shareholders, the substance of which was not contained in a notice of such meeting, or in the notice of the shareholders' meeting which was not attended by Sponsor, was in contravention of the plaintiff's rights as a holder of unsold shares. Such amendment is therefore void.

In opposition, defendants have submitted the sworn affidavit of Diane Stein, Secretary of the Corporation's Board of Directors. In her affidavit, Stein avers that the Sponsor, as well as all other shareholders of record, were in fact served with notice of the August 2007 special shareholders meeting. In support of this contention, Stein has provided the court with copies of a certificate of mailing and affidavit of mailing as evidence that the notice pertaining to the special shareholder meeting was mailed to the Sponsor at its post office box address on August 13, 2007.

As to Y. Hirsch and Rubin, who were directors at that time, Stein concedes that they did not receive notice of the special shareholders meeting, but correctly claims that they were not entitled to such notice because they were not shareholders. Pursuant to Article II, Section 2, only [*5]shareholders of record are entitled to notice of a special meeting of the shareholders.

Therefore, contrary to B. Hirsch's assertions, Stein contends that the August Special Meeting was properly noticed and called in compliance with the applicable by-laws requirements, and that the Sponsor was mailed the requisite notice.

Next, defendants assert that the Amendment of the Corporation's by-laws, requiring that all directors be shareholders, was properly adopted by the newly elected Board of Directors. In this regard, defendants contend that, at the August Special Meeting, a new Board of Directors was elected consisting of Diordio, Stein, Berelson, Wasserman, Spina, Schein and Davis. Stein claims that B. Hirsch was not one of the board members originally elected at the shareholders' meeting but that, immediately following the election, the newly-elected directors convened for a directors' meeting. It was during that directors' meeting that the new Board passed the resolution purportedly amending the Corporation's by-laws . After the amendment was unanimously adopted, Stein claims that director Davis, a non-shareholder, resigned from the Board, and that the remaining Board members nominated and elected B. Hirsch to fill the vacancy on the Board. In support of this contention, Stein has attached a copy of the meeting minutes. It is defendants' contention that, because B. Hirsch was elected to the Board only after the by-laws were amended, his attendance at the directors' meeting during which the amendment was adopted was not required. Defendants argue, therefore, that the by-laws were properly amended by the then-existing Board in compliance with By-Laws, Article III, Section 6.[FN3] As previously determined, however, the amendment must be voided because its substance was not contained in the notice provided to shareholders, which include plaintiff, and the by-law was not unanimously approved by the shareholders, in derogation of plaintiff's rights as the holder of unsold shares.

In any event, the issue of the validity of the August Special Meeting, at which a new Board of Directors was elected and the Corporation's by-laws were amended, has been rendered moot by the subsequent November 28, 2007 special meeting of the shareholders during which another new Board was elected. Moreover, the recent resolution, unanimously adopted by the Board of Directors at its regular board meeting on August 13, 2008, appears to have rendered moot the Sponsor's challenge to the August 27, 2007 by-laws amendment requiring that all directors be shareholders since, pursuant to the terms of that resolution, the Board elected Y. Hirsch, a non-shareholder, to fill a vacancy on the Board, and acknowledged that the Sponsor, as a holder of unsold shares, is entitled to nominate and/or control up to three (3) directors.

Thus, the only issue that remains to be determined is whether the November 28, 2007 election, in which Sponsor's three (3) nominees, B. Hirsch, Y. Hirsch and J. Rubin, were elected to the Board in addition to Edrich, a holder of unsold shares, violates provisions restricting the Sponsor's control of the Board. Although Edrich was not nominated by Sponsor, because he is a holder of unsold shares, defendants contend his membership on the Board raises to four, and thus a controlling majority, the representation of unsold shares. Sponsor contends that it can have as [*6]many as three (3) designees sit as members on the Board of Directors and still cast its votes for any other director candidate of its choice, as long as he or she is not in any way affiliated with the Sponsor. It is the Sponsor's contention that the Corporation's By-Laws (Article III, Section 3) only prohibit it alone from controlling the board. Specifically, Article III, Section 3, which pertains to the election of Directors, states:

Upon the sale of a majority of the shares of the Corporation, or the fifth anniversary of the conveyance of the building of the Corporation, whichever is sooner, Sponsor shall relinquish control of the Board of Directors. It shall not be necessary for a director of this Corporation to be a shareholder.

Defendants contend that the combination of unsold shares represented by Sponsor and Edrich together would be tantamount to impermissible Sponsor control of the Board, in violation of the Attorney General Regulations (13 NYCRR 18.3[v][5][i]). It is defendants' contention that, pursuant to the regulation of the Attorney General, the Sponsor may not, in conjunction with any other holder of unsold shares, exercise voting control over the Board and that, as a result of the November 2007 election, Sponsor would be in control of the Board through a four-person majority comprised of its slate of three (3) designees, B. Hirsch, Y. Hirsch and J. Rubin, in addition to Edrich, a holder of unsold shares who would not have been elected to the Board without Sponsor's votes. Defendants argue that the Attorney General's regulations (13 NYCRR 18.3[v][5][i]) expressly prohibit a class, which consists of Sponsor, its designees, and other holders of unsold shares, from collectively controlling the Board.

In reply, Sponsor maintains that it and Edrich are unaffiliated with each other and, therefore, the regulations do not bar Sponsor and Edrich, or any other unaffiliated shareholder or holder of unsold shares, from combining their votes to elect a board of directors candidate of their choice. This court agrees and finds that Sponsor has sufficiently established a likelihood of success of the merits on this issue.

The Attorney General regulation at issue, 13 NYCRR 18.3(v)(5)(i), provides, in pertinent part, that if the plan for conversion to cooperative ownership is presented as, or amended to, a noneviction plan, the sponsor and other holders of unsold shares are "not to exercise voting control of the Board of Directors for more than five years from closing, or whenever the unsold shares constitute less than 50% of the shares, whichever is sooner" (13 NYCRR 18.3[v][5] [i]). "The purpose of the regulation is to provide that the offering plan contains assurances by the sponsor that it will, inter alia, ultimately relinquish voting control over the board of directors." (Board of Directors of Executive House Owners, Inc. v E.H. Associates, L.P., 248 AD2d 530, 532 [1998]). This rule has, in fact, been incorporated into Article III, Section 3 of the By-Laws of the Corporation.

In interpreting 13 NYCRR 18.3(v)(5)(i), the First and Second Departments have both narrowly construed the phrase "voting control" to mean the power to nominate or designate a majority of board members, or to cause members to be elected that are on the sponsor's payroll or otherwise receive remuneration from the sponsor. In Rego Park Gardens Assoc. v Rego Park Gardens Owners, Inc. (174 AD2d 337 [1991], app den 78 NY2d 859 [1991]), the sponsor retained the right to designate three of the five directors while it owned 50% or more of the shares of the cooperative corporation, two directors while it owned between 25 and 50%, and one [*7]director while it owned less than 25%. As here, the sponsor was precluded from exercising voting control over the board once it owned less than 50% of the shares. The First Department ruled that the latter restriction did not prevent the sponsor from voting its shares to fill vacancies on the board, other than those which it had a right to fill by designation. In so holding, the court stated, "[t]he mere fact that new directors may be elected with the votes of the sponsor cannot, without more, be equated with exercising voting control as a matter of law." (id. at 339).

In Park Briar Assocs. v Park Briar Owners Inc. (182 AD2d 685, 686 [1992]), a Second Department case, the sponsor sought to set aside an election of the board where it had been prohibited from voting for more than three of the seven directors. The Second Department agreed with the holding in Rego Park, stating that "the cooperative corporation cannot prevent the [sponsor] from voting for any director unless it is shown that the director in question is on the [sponsor's] own slate or receives a salary or other remuneration from it." (id. at 686; see Rego Park Gardens Assocs., 174 AD2d at 339). In so holding, the court quoted comments from the Attorney General, stating that:

" The position of the Department of Law with regard to what constitutes board control by the [sponsor] involves not disenfranchisement of the [sponsor] but rather its inability to designate related parties to fill a majority of the board member seats. Therefore, although the [sponsor] may vote its shares, it may not nominate or designate more than three of the seven board members if it is no longer in control.'" (emphasis in original)

(id. at 687; see also Executive House Owners, Inc., 248 AD2d 530 [Second Department reaffirmed that a sponsor, as holder of unsold shares, can vote for all board nominees not just for one less than a majority of the total number of directors on the board]).

In light of the foregoing caselaw, it is clear that the "voting control" prohibition set forth in the Attorney General regulations merely prevents the designation, by a sponsor or holder of unsold shares, of candidates under its own control so as to create a majority of the Board. Unless a restriction on the sponsor's voting rights is specifically contained within the by-laws, offering plan or certificate of incorporation, a sponsor can vote for unrelated board candidates without limitation. Defendants fail to point to any provision in the by-laws, offering plan or the certificate of incorporation which specifically prohibits the sponsor from casting all of its votes, or otherwise limits the Sponsor's right to vote its shares for non-sponsor candidates to the Board. Rather, the by-laws merely state, in Article III, Section 3, that the sponsor must "relinquish control of the Board of Directors" after the fifth anniversary of the conveyance of the building to the corporation.[FN4] The offering plan contains a similar provision (Offering Plan, at 47).

There is no evidence that Edrich is affiliated with the Sponsor or that he otherwise receives a salary or any type of remuneration from Sponsor. Contrary to defendants' contention that Edrich is within Sponsor's control, the proxy sheet for the meeting of August 27, 2007, [*8]annexed to defendants' opposition, indicates that Edrich's proxy was given to defendants. The mere fact that the Sponsor voted for Edrich, an unrelated/unaffiliated holder of unsold shares, "cannot, without more, be equated with exercising voting control as a matter of law" (Rego Park Gardens Assoc., 174 AD2d at 339; see Park Briar Assocs., 182 AD2d at 686). In light of the foregoing, the Sponsor's three (3) board member nominees (B. Hirsch, Y. Hirsch and J. Rubin), as well as Edrich, who were all originally elected at the November Special Meeting, are all simultaneously permitted to serve on the Board. Accordingly, plaintiff has established the probability that it will prevail on the merits.

Sponsor has also established that there is the threat of irreparable harm absent the granting of a preliminary injunction here (see Walker & Zanger v Zanger, 245 AD2d 144 [1997]). Sponsor has presented evidence demonstrating that the defendants intendtorefinance the Corporation's current mortgage, which has a principal balance of $750,000.00, with a 1.5 million loan, in addition to a $1 million line of credit. In support of this contention, Sponsor has submitted a copy of a commitment letter, dated May 15, 2008, from Sovereign Bank. Sponsor maintains that since the Corporation is financially sound and in need of no major capital projects, there is no justification for encumbering the Corporation with such massive debt at this time. As plaintiff holds over 46% of the shares of the Corporation and will be responsible for that proportion of expenses incurred, substantial irreparable harm could reasonably result to the Sponsor if the individual defendants are permitted to bind the Corporation to such large long-term financial commitments as a mortgage refinance loan without plaintiff's proportional participation on the Board.

Although defendants submit that the commitment of Sovereign Bank is placed at risk by further delay, unless defendants withdraw their resistance to the Board as constituted pursuant to the election of November 28, 2007, the Court finds that, in light of plaintiff's potential financial exposure, the balance of the equities are in the Sponsor's favor (see Park Briar Assoc.,182 AD2d at 686; Props For Today v Kaplan, 163 AD2d 177 [1990]).

In balancing the equities, the Court is mindful that the purpose of the preliminary injunction is to preserve the status quo during the pendency of the litigation (see Burmax Co., Inc. v B & S Industries, Inc., 135 AD2d 599, 600 [1987]).

Conclusion

Sponsor's application for a preliminary injunction is granted and the individual defendants and their officers, nominees, agents, servants, employees, attorneys, successors, assigns, affiliates or other entities under their control are hereby enjoined and restrained from binding the Corporation to any long-term commitment, including the re-negotiation of the mortgage on 160 Ocean Parkway, pending further order of this Court or election of a new Board in conformity with this decision. Defendants Wasserman, Schein and Berelson are also enjoined from acting as members of the Board of Directors pending a new election held in conformity with this decision. The granting of this injunctive relief is conditioned upon the posting of good and sufficient undertakings in amounts to be fixed by the Court, pursuant to CPLR 6312(b), after a hearing which shall be held for that purpose at 360 Adams Street, Brooklyn, New York, in Room 756 at 2:30 P.M. on May 18, 2009, unless the parties stipulate to an amount. The matter is adjourned to that date in any case.

The foregoing constitutes the order and decision of the court. [*9]

E N T E R ,

J. S. C. Footnotes

Footnote 1:Article II, Section 2, entitled "Special Meetings," provides as follows:

"Special meetings of shareholders . . . may be called at any time by the president or secretary or by a majority of the Board of Directors. . . . The secretary shall cause a notice of such special meeting stating the time, place and object thereof and the officer or other person or persons by whom the meeting is called, to be delivered personally or mailed as provided in Section 1 of this Article to each shareholder of record of the Corporation entitled to vote at such meeting not less than ten nor more than forty days before such meeting."

Footnote 2: Article XII, Section 1, entitled "Amendments," provides as follows:

"These By-Laws may be amended, enlarged or diminished either (a) at any shareholdings' meeting by vote of shareholders owning two-thirds of the amount of the outstanding shares, represented in person or by proxy, provided that the proposed amendment or the substance thereof shall have been inserted in the notice of the meeting or that all of the shareholders be present in person or by proxy, or (b) at any meeting of the Board of Directors by a majority vote, provided that the proposed amendment or the substance thereof shall have been inserted in the notice of meeting or that all of the Directors are present in person . . . ." (Emphasis supplied).

Footnote 3:Article III, Section 6, provides, in pertinent part, as follows:

Any meeting of the Board at which all the members shall be present, or of which notice shall be duly waived by all absentees, either before or after the holding of such meeting, shall be valid for all purposes provided a quorum be present.

Footnote 4:Although in Matter of Madison v Striggles, 228 AD2d 170 [1st Dept 1996], the Court found that the relevant language did not "prohibit the sponsor from combining her votes with those of other resident shareholders, who are not holders of unsold shares, to elect three or more members of the five member Board . . .", thus suggesting support for defendants' argument that, as a group, the holders of unsold shares may not control a majority of the seats, the language of the offering plan at issue was specific in creating this limitation, unlike the By-Laws here.