Unequal Treatment

May three members of a co-op board adopt bylaws that have the effect of precluding one or two individuals from eligibility for board service? The answer was a clear "no" in Feld v. 710 Park Avenue Corp., a case decided earlier this year.

Plaintiff Jan Feld moved for a preliminary injunction precluding the defendant 710 Park Avenue Corporation and its board of directors from (1) implementing and enforcing, at any meeting of the co-op's shareholders, certain amendments to the co-op's bylaws that were adopted by the co-op's board of directors on May 22, 2002, and (2) holding an election for directors at any annual meeting of the co-op's shareholders that was convened prior to the conclusion of the action.

On June 3, 2002, this court signed plaintiff's order to show cause containing a temporary restraining order for the same relief. Consequently, although the annual meeting of the co-op's shareholders was held, as scheduled, on June 4, 2002, no election was conducted at that meeting, and, under Article III, Section 2, of the co-op's bylaws, the board of directors remained in office. The temporary restraining order was continued pending a decision of the court.

The co-op was a cooperative housing corporation, which owned the land and building located at 710 Park Avenue in Manhattan. It is home to roughly 80 shareholders and their families. Feld, who was a tenant-shareholder of the co-op, was a member of the board from June 1993 until June 2000, and he was the president from 1994, or 1995, until March 2000, when the other members of the board removed him as president.

As the June 4, 2002 date for the annual meeting of shareholders approached, Feld let it be known that he was planning to run (again) for the position of director. Feld announced his intention in a May 15, 2002 letter to shareholders, in which he accused the board of directors of incompetence and self-dealing. One week later, on May 22, 2002, less than two weeks before the June 4, 2002 annual meeting, and just prior to the Memorial Day weekend, the board proposed amendments to the bylaws that provided that

(1) any business upon which shareholders were to take action, including nominations for election as a director, must be submitted in writing, with certain required information, to the co-op's managing agent not less than 15 days before the shareholders' meeting;

(2) no one may be an officer or director of the co-op unless he or she has been a shareholder in the co-op, or the spouse of such a shareholder, for at least one year, and holds a baccalaureate degree from a recognized college or university in the United States, or the equivalent degree from an educational institution outside the United States; and

(3) no one who has begun an action against the co-op or against one or more members of the board of directors who would be entitled to indemnification from the co-op, and who has not prevailed in that action or settled it, may be a director or an officer of the co-op.

In analyzing the merits of the case, the court said that it was axiomatic that a party seeking a preliminary injunction must show (1) the likelihood of success on the merits; (2) irreparable injury absent granting the preliminary Injunction; and (3) a balance of the equities.

The co-op contended that Feld could not prevail on the merits because the decisions of a cooperative corporation's board of directors are shielded from judicial scrutiny by the business judgment rule pursuant to Matter of Levandusky v. One Fifth Ave. Apt. Corp., and because, in any event, the challenged amendments were reasonable. However, the court said that the business judgment rule was inapplicable where a plaintiff submits evidence that the board had engaged in self-dealing, or has otherwise breached its fiduciary duty to the cooperative corporation, and that the plaintiff has been injured thereby.

The court noted that an invidious unequal treatment of shareholders by a board constituted a violation of the board's fiduciary duty, and suffices to overcome the shield offered by the business judgment rule, even in the absence of self-interested action on the part of the board.

Feld claimed that the current board had engaged in self-dealing, and contended that the amendments were specifically designed and adopted to bar him from running for the position of director. John B. Wade III, the current president of the co-op, acknowledged that the provision barring certain persons who had litigated against the co-op from holding the position of director or officer of the co-op was developed as a result of a lawsuit that Feld brought against two directors and a law firm that the co-op had retained, and which he abandoned after his motion for pre-action discovery was denied by the court.

Wade did not contend that this provision would exclude any other current shareholder in the co-op from holding office as a director or officer. Relying on 40 W. 67th St. v. Pullman, the co-op argued that if, as that case held, a shareholder may be evicted from his apartment in part because he has brought vexatious litigation against his cooperative corporation, then surely a shareholder who has brought an allegedly frivolous action against the co-op can be barred from running for a position as director.

In that case, however, the court had stressed that the decision to evict Pullman had been made not only upon a resolution by the board, but also upon the vote of about three-fourths of the shareholders. Here, by decisive contrast, the board's litigation-related amendment withdrew from the shareholders their right to vote for whom they wish to sit on the board. To be sure, under Article XII of the co-op's bylaws, this amendment, like all amendments adopted by the board, could be rejected by a two-thirds vote of shareholders.

As to the amendment that required a college degree as a condition of eligibility, Wade averred that he did not know at the time that the amendment was adopted by the board, that Feld lacked such a degree, and that Feld's lack of a degree was not discussed during the board's deliberations over the amendment.

However, on April 16, 2002, counsel for the co-op deposed Feld as a non-party witness in connection with an action that the co-op had begun against a number of contractors that had done work for it. Counsel elicited the information that Feld was born in Poland, arrived in New York in 1965, and was a citizen of the United States. When counsel then asked when Feld had become a citizen, Feld's counsel objected, saying, "I think you are really far afield."

The deposition continued as follows:

Plaintiff's counsel: It's going to be one question and I'm done.

A. I have no problem with that particular one. Five years later.

Q. Around 1971?

A. '70 or '71.

Q. Do you have a college degree?

A. No.

Q. Did you attend college?

A. For just less than six months in Poland before I left right after graduation [from high school].

Q. Other than a driver's license, do you hold any licenses?

A. No.

Q. You don't have a broker's license?

A. No.

Q. Do you have any certifications of any kind?

A. No, nothing that I could think of, no.

Q. Did you ever attend any graduate school, post college school of any kind?

A. I have not pursued any additional education after my high school and [a] few months of college in Poland, none whatsoever.

Feld contended, without dispute, that Nancy Volin, a then (and current) member of the board, and one of the named defendants in the previous action begun by Feld, was present at this deposition. In any event, the transcript of this deposition was obviously available to the board, and Wade's statement, that he was "reasonably certain that none of the other directors, [excepting Ms. Volin], was aware" that Feld did not have a college degree, was, in the court's view speculative. Neither Volin, nor any other member of the board other than Wade, had submitted an affidavit.

Wade contended that "[w]hile some may argue that a college degree is not necessarily indicative of intellect, other than subjecting people to intelligence tests, it was the best criterion that the board could come up with. However, in a case upon which the co-op relied heavily, the Delaware Supreme Court upheld an amendment that established the qualifications required of one of three categories of directors, as "[i]ndividuals who have had substantial experience in line (as distinct from staff) positions in the management of substantial business enterprises or substantial private institutions ..."

The court said that the difference between this requirement for practical experience (which would distinguish the few from the many) and the co-op's somewhat anomalous requirement for a college degree (a qualification that is probably shared by the vast majority of the co-op's shareholders but that excludes Feld) suggested that, after discovery, Feld would likely be able to prove that the latter requirement was squarely targeted to thwart his announced candidacy.

This conclusion was buttressed by the fact that, as the court noted above, the co-op issued the amendments one week after Feld announced his intention to run for a directorship, and less than two weeks before the annual meeting at which his candidacy would have been voted upon. In sum, the court held that Feld had shown that he was likely to succeed on the merits.

The court also concluded that the disqualification of Feld constituted an irreparable injury and cited numerous cases to support this conclusion. Finally, at least with regard to the first branch of plaintiff's motion, the court found that the balance of equities clearly tipped in Feld's favor.

Without injunctive relief, the board would be free to call a special meeting of shareholders, under Article II, Section 2 of the bylaws. At such a meeting, the election that was set for June 4, 2002 would be held, Feld would be barred from running, and his supporters, if any, would be disenfranchised. However, if an injunction were granted as to the first branch of Feld's motion, a special meeting, could be called, an election could be held; and the shareholders could vote into office such directors as they wished. The court said that the co-op could not credibly argue that it would be harmed by such a result even though the current board viewed the plaintiff as a scoundrel and a liar.

Accordingly, it was ordered that an undertaking be fixed in the sum of $5,000 on the condition that Feld, if it were finally determined that he was not entitled to an injunction, would pay the co-op all damages and costs which may be sustained by reason of the injunction.

It was further ordered that the co-op and its board of directors be enjoined during the pendency of the action or further order of the court from implementing or enforcing the amendments to defendant's bylaws relating to litigation and qualifications adopted by the board of directors on May 22, 2002 with regard to any annual meeting of the co-op's shareholders.

Comment: This foiled attempt to bar Feld from board service for being at odds with the current board must be viewed as outrageous. The case illustrates the difficulties a co-op or condo board faces when it seeks to bar a dissident from service, especially where cumulative voting is provided in the entity's bylaws.