Victor M. Metsch in Legal/Financial on August 16, 2018
This year, as in years past, the cycle of annual meetings at New York co-ops produced its share of hotly contested elections to boards of directors. And, as in years past, some of those disputed elections led to litigation. A new court ruling has underscored a fact of life that sometimes gets lost in the heat of the battles to gain control of co-op boards: cooperative housing corporations are, at bottom, democracies. The majority usually rules.
The new state Supreme Court ruling resulted from a contested election at a 19-unit co-op on the Upper West Side of Manhattan, where disgruntled shareholders succeeded in voting out the existing board. The ousted board members sued, seeking to have the election results overturned.
Their case was based on the events at two meetings. At a meeting on March 13, 2018, the ousted board members claimed that several shareholders were ineligible to vote either because they were more than two months in arrears on their maintenance payments, or their apartment was not their primary residence. At the annual meeting on April 17, the ousted board members claimed that the election was not in conformity with the bylaws because the notice of meeting was not issued by the president, by order of the board, or by 10 percent of the shareholders eligible to vote.
The ousted board sought to have the March 13th meeting declared void and the April 17th election declared a nullity. The new board moved to have the case dismissed.
The state Supreme Court’s deliberations were governed by the Business Corporation Law, which provides that when a shareholder is aggrieved by the conduct of an election, the court may either confirm the election or order a new vote. However – and this is crucial – even when there are improprieties, the vote may not be set aside unless the court determines that the result would have been different if there had been no improprieties.
The court found that the meeting held on March 13th did not comply with the by-laws; however, the court also said the non-compliance was moot because another vote was taken on April 17th. That meeting was monitored by the program coordinator for Neighborhood Housing Services of New York City, who vetted the shareholders’ eligibility to vote and determined the validity of proxies.
The court found that nine of the ten shareholders who attended the April 17 meeting, in person or by proxy, constituted a quorum and were eligible to vote. (One shareholder was ineligible due to being more than one month in arrears on maintenance charges.) Eight of the nine eligible shareholders voted in favor of removal of the old board and election of the new board.
“Here,” the court wrote, “it is clear that a majority of the shareholders exercised their judgment and voted [the old board] out and [new members] on to the board.” The ousted board’s claims, the court added, “largely amount to form over substance, insofar as they seek to hide behind bylaw provisions in an effort to retain their positions at the [co-op] in contravention to the will of the shareholders.”
As this case illustrates, a co-op’s managing agent and attorney should review the bylaws to ensure compliance before the annual meeting – especially when the election is contested and litigation is likely. And board members should remember that while bylaws are important, when arguments are “technical” and divorced from what seems fair and democratic, a court might bend over backward to achieve what it views as a just result.
Victor M. Metsch is of counsel at the law firm Smith, Gambrell & Russell.
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