Andrew P. Brucker in Legal/Financial on October 22, 2021
One of the most common complaints in cooperatives is that the board takes control and never gives it up and that the board works for itself and not for the good of the shareholders. In the vast majority of cases, it's not true. Typically, board members work very hard, and shareholders continue to elect the same board members as there is no general discontent with how they are doing their job. But sometimes it is absolutely true that the board members are acting for themselves and have held on to power any way they can. This was the case in a small cooperative in New York City, and the resulting decision by the court in Siwana Green v. Al Cristancho is a good example of what shareholders can do when this happens.
The cooperative at 67-69 St. Nicholas Ave. was run by Siwana Green and family members (the “Green Group”) for at least 10 years. According to shareholders who brought the lawsuit in 2018, the Green Group kept control of the cooperative by failing to hold regular annual meetings (it also failed to have monthly board meetings). The cooperative had a bylaw provision that shareholders in arrears could not vote. The last annual meeting was in 2014, and by manipulating shareholder eligibility to vote, the Green Group retained its control.
In addition to these problems, the corporation was heavily in debt, owing over $1 million in property taxes and water and sewer charges, with an impending foreclosure on the building being pursued by the City of New York. This was especially troublesome since during the same period, it seemed that the cooperative earned over $1 million from unit sales and flip taxes. The shareholders claimed that the Green Group used those funds for its own personal gain.
At Last, an Election
The bylaws of the cooperative provided that a special meeting could be held if called by written notice to the shareholders and at least 10% of the shareholders agreed to attend. Enough shareholders got together and called for a special meeting to remove three members of the Green Group and elect replacement directors. Due to the fact that the current rent roll was inaccessible or nonexistent, a shareholder list was difficult to establish. The shareholders brought in Neighborhood Housing Services, a nonprofit established to assist and maintain affordable housing, which supervised the meeting and acted as the inspectors of election. In order to establish which shareholders were eligible to vote (that is, not in arrears), shareholders were asked to provide proof of maintenance payments to the cooperative for the past year.
Ten shareholders attended the meeting (in person and by proxy), and nine of the 10 were eligible to vote. Eight shareholders voted to remove the three directors of the Green Group from the board (one shareholder abstained), and three new shareholders were elected. The old board members refused to recognize the new board or turn over the books, records, checkbooks or any documentation.
The Green Group then brought an action against the three people elected to the board at the special meeting, requesting that the court put aside the election results and restrain them from exercising any of their rights as directors. The Green Group alleged that there were three defects in regard to the special meeting. It claimed that the notice was defective, since some shareholders were not eligible to vote; that some shareholders who voted were actually not eligible to vote; and that two of the three shareholders elected were not eligible to serve.
The court denied all claims by the Green Group without a hearing. It is clear that the court was impressed that Neighborhood Housing Services certified the legitimacy of the meeting and the election. In addition, the court took note that not a single person voted to keep the Green Group in power.
But perhaps more than anything, the court reviewed the cooperative’s dire financial position and the actions (or lack of action) by the Green Group. The court held that even if the Green Group could establish that the meeting was not in conformance with the corporation’s bylaws, the court would have denied the request of the Green Group to put aside its dismissal from the board “in the exercise of this court’s discretion and the interest of justice.” As noted by the court, a majority of the shareholders exercised their judgment and voted out the Green Group, and the court held “their will should not be freely disregarded.”
Often we hear that a court’s decision is based on a technicality and that form is as important as substance. In this decision, the court has made it clear that the will of the people will prevail, even if there may have been a technical mistake or two. Substance, in this case, was more important than form.
Andrew P. Brucker is a partner at the law firm Armstrong Teasdale. The statements and views in this article are his own and not necessarily those of the firm.
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