Election Season

Contested elections. Sometimes you just can’t avoid them. In a matter with twists and turns worthy of a law school exam, the court had to decide which candidate was successful where the inspector of the election had failed to count a proxy that would have changed the winner.

The case is Richard Mishaan, Charles Koppelman, Geraldine Kunstadter, Arthur N. Abbey, and Wayne Nelson v. 1035 Fifth Avenue Corporation, Eugene Atkinson, Emil Rad, Alex Green, Robert Schmon, Joyce Menschel, and Michael DiGiacomo. The property at 1035 Fifth Avenue is a cooperative housing corporation with a board of nine directors. Each director serves a three-year staggered term. In 2014, five candidates ran for three seats.

The court reviewed the co-op’s bylaws: “All ballots and proxies shall be voted and counted at one and the same time.” An inspector of elections is required to “immediately” file an oath and a Certificate of the Results of a vote. The annual meeting of the board is to be held immediately following the annual meeting of shareholders “without notice.”

The After-Meeting Activities

The managing agent, Harry Smith of Gumley-Haft, collected and counted the ballots and proxies at the meeting and announced that Richard Mishaan, Joyce Menschel, and Charles Koppelman were elected. However, Smith did not sign the “required” Certificate of Results. The directors present (Mishaan, Koppelman, and another board member were not present) met after the meeting and elected officers. The next day, however, a shareholder asked that he be permitted to review the proxies. He discovered that his proxy, although sent on time, had not been counted, Smith forgot to forward the proxy to his colleague who was entering the information onto a spreadsheet that was used to tabulate the votes. When counsel for the co-op learned of this, he directed the agent to count the proxy and then sign the Certificate of Results.

Counting that proxy changed the election results so that Eugene Atkinson and not Mishaan was elected to the board. Three days after the election, Smith wrote a letter to shareholders informing them of the recount and explaining that he always recounts, or double-checks, the votes, especially when the numbers are close. The board discussed the issue with counsel and ultimately decided to increase the size of the board to eleven members (the board had the right to do this under the bylaws) and to appoint Mishaan and Michael DeGiacomo to the two new seats. As designed by the board, the seats were to be for a term of one year rather than three as provided in the bylaws. Mishaan declined the board’s proposal and sued.

The Action

Because this building is a cooperative, the court looked to the Business Corporation Law. The statute is unequivocal that no ballots, proxies, or any revocation of or changes to them shall be accepted after the close of the polls, and that the polls are closed at the end of the meeting. Next, the court looked to the co-op’s bylaws: ballots and proxies are to be voted at one and the same time; inspectors shall immediately file the results of any vote taken.

The court concluded that the inspector not immediately signing the Certificate of Results was irrelevant, and did not serve to keep the polls open. But Smith’s action – of opening the vote, recounting, and certifying a different result – was improper. It violated the plain language of the bylaws and went outside the scope of his authority as an inspector. Ultimately, the court concluded – relying on prior case law – that the first tally was not so “clouded with doubt or tainted with questionable circumstances that the standards of fair dealing require” that the count should be set aside or that the election of Mishaan was somehow inequitable. To the contrary, the court noted, the recount involved the violation of several bylaws. Board elections simply cannot be opened after announcement of the successful candidates because a missing proxy was discovered. What if the proxy were discovered a week after the election? Or a month?

Fiduciary Obligations

As is often the case, there was also something else going on here. It turns out that before the election, there were allegations that the board was dysfunctional. Vicious personal attacks were made by at least one candidate at a “Meet the Candidates” forum and there were claims that there was a “campaign of dirty politics” for board seats.

Based on the apparent vitriol, petitioners claimed that the individual respondents breached their fiduciary duty. To demonstrate a breach, petitioners would have to show the existence of a fiduciary relationship, misconduct by respondents, and damages directly caused by such misconduct. But the petitioners’ allegations here were general – they claimed that the respondents manipulated the election process by making Mishaan the subject of their hostility prior to the annual meeting and then by refusing to acknowledge him as a board member after the election.

These allegations didn’t rise to the level needed to claim a breach of fiduciary duty, however. It was the agent – not any board member – who failed to count the proxy. The board president was the only board member who had any involvement in the election. Any claim that “rigorous questioning” of Mishaan at the candidates’ night constituted a breach of fiduciary duty failed. Rigorous questioning is not enough and, in any event, there was no indication that any petitioner suffered monetary damage as a result of the alleged conduct.

The Takeaway

There is little question that most elections are uncontested. Even when contested, very few end in litigation. But for many people, an apartment is a very large asset and owners want to do what they believe is necessary to protect that asset. There can be huge disparity in how individuals believe their boards should act – how the building should be managed both financially and in terms of its physical plant. There can often be a situation where someone runs and he or she obtains one percent of the vote. But when it is clear there is going to be a closely contested election, boards and shareholders should try to come to some creative solution – if they can – to address one another’s issues. If that cannot be done – and sometimes the disagreements are too fundamental to come to agreement – the shareholders must be able to decide.

When an election is close, from a practical standpoint, it is often good practice to have more than one inspector of elections. Another practice may be to close the polls at the end of the meeting so that no additional votes can be issued, and to allow the inspectors to place all the ballots in an envelope, seal it, and have someone sign his or her name across the flap – that way, they can open and count the ballots the next day at the office of the inspectors (often two members of the managing agent). If done this way, inspectors can check and double-check their work.

There is one final point that, for some reason, was not addressed by the court. When an election is uncontested (and thus there is a successful candidate or slate by acclimation), proxies and ballots are not an issue. But when there is a contest, we want to remind people that a proxy is just that – a proxy. It is not a ballot and, indeed, New York does not use absentee ballots in these types of elections, even if the one giving the proxy identifies whom the proxy-holder must vote for. When a person or board is a proxy-holder, a ballot must be completed and submitted with the proxy. Without that procedure, no matter how duplicative it seems to be, the vote by proxy alone should not be counted. n

Attorneys
For Petitioners: Kasowitz, Benson, Torres & Friedman
For Respondents:
Cantor, Epstein & Mazzola