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REED v. KNOLLWOOD PARK CEMETERY

December 1, 1977

JEAN S. REED, Plaintiff,
v.
KNOLLWOOD PARK CEMETERY, INC., Defendant, and NEW YORK STATE CEMETERY BOARD, Defendant-Intervenor



The opinion of the court was delivered by: BARTELS

BARTELS, District Judge

 These are cross-motions for summary judgment on stipulated facts in an action to enforce payments due on certificates of indebtedness issued by Knollwood Park Cemetery, Inc. ("Knollwood") and presently held by the plaintiff, Jean S. Reed. Knollwood does not oppose the action; the real opposition is from the intervening defendant, New York State Cemetery Board ("Cemetery Board"), which has prohibited Knollwood from making the payments Reed seeks. Some background is necessary to place the legal issues raised in context.

 Facts

 On April 22, 1947, two promoters, Stannard and Glassir, entered into an agreement with The Evergreens, a cemetery in Queens, to purchase in installments five contiguous parcels of land for sums amounting to almost $800,000. Two days later, Stannard and Glassir offered to convey their purchase rights in the land to Knollwood Park Cemetery, of which they were two of the five directors. Knollwood accepted, agreeing not only to purchase Stannard's and Glassir's rights for $7 million face value in certificates of indebtedness, but also binding itself to satisfy Stannard's and Glassir's obligations on their contract to purchase the land from its original owner, The Evergreens. In effect, Knollwood agreed to purchase the land twice.

 The certificates of indebtedness issued have a face value of $1,000 apiece, are numbered from one to seven thousand, and are payable in numerical order, as explained on the face of the certificate. *fn1"

 In 1947, when Knollwood was incorporated, former § 87 of the Membership Corporations Law *fn2" required a cemetery corporation to apply at least one-half of the proceeds of lot sales to payment of the purchase price of real estate acquired by the corporation, but prohibited the corporation from agreeing with the seller of the real estate that the seller would receive more than one-half of such proceeds. The remainder of the lot proceeds was to be applied to the preservation, improvement and embellishment of the cemetery.

 In 1949, in response to an investigation by the New York State Attorney General into abuses by cemetery corporations, the Membership Corporations Law was significantly amended. *fn3" In particular, Not-for-Profit Corporation Law § 1401(y) (McKinney 1970) [hereinafter cited as "NPCL"] required for the first time every cemetery to set up a current maintenance fund and a permanent maintenance trust fund and to deposit 15% and 10%, respectively, of the gross proceeds of lot sales into these funds. In cases where a cemetery corporation had previously agreed with a seller of real estate to pay him a percentage not in excess of 50% of the proceeds of lot sales, the new law required that before determination of the seller's share there first be deducted from the proceeds the amount of the maintenance funds and expenses of lot sales. *fn4"

 Knollwood thereafter did not follow the formula prescribed in the amendments. Instead of first setting aside from gross proceeds the amount of the maintenance funds and the expenses of sales and then taking 50% of the remainder for the land purchase fund, Knollwood first set aside 50% of the gross for the land purchase fund and thereafter made deductions from the balance (the "unrestricted funds") for such maintenance funds and sales expenses. This practice, which Knollwood followed for many years, had the effect of significantly increasing the size of the land purchase fund and decreasing the size of the unrestricted funds.

 Adding to these defalcations, Knollwood immediately began in 1947 to make payments on the certificates of indebtedness, and by 1954 it had paid out $138,000, before the full amount due on the original Evergreens contract of April 24, 1947, had been paid or set aside for payment as required by the terms of the certificates. When the Cemetery Board became aware of this default it threatened legal action, but the matter was eventually settled between Knollwood and the Cemetery Board by an agreement which provided:

 
1. Until the full amount of monies owing to "The Evergreens" under the contract dated April 24, 1947 has been paid or set aside, no further monies will be paid in redemption of certificates beyond the $138,000 already paid out therefor; and
 
2. Knollwood will procure the consents by the owners of all outstanding certificates that the maximum amount payable for certificates, including the $138,000 already paid, shall be Two Million Four Hundred Fifty [sic] ($2,450,000) Dollars, and the certificates will be reduced accordingly. The said certificates shall be non-interest bearing.

 Knollwood accordingly suspended payments on the certificates until 1957, when the Evergreens contract was satisfied by monies taken from the cemetery's unrestricted funds rather than from the land purchase fund. However, there is no written evidence that the consents called for in paragraph two of the settlement agreement were obtained.

 Although Knollwood had been filing financial statements with the Cemetery Board on an annual basis, the Cemetery Board did not begin to take a close look at Knollwood's accounting practices until 1967, when Knollwood applied for a rate increase. The Board granted the increase, but it also ordered Knollwood to suspend payments on the certificates of indebtedness pending an investigation. The Board issued a final order on November 24, 1971 (affirmed without opinion by the Appellate Division on February 13, 1973) which directed Knollwood Park Cemetery:

 
(a) By proper bookkeeping entries to credit the land purchase fund with the 50% of the net proceeds from lot sales collections remaining after deduction of the expenses of sale and the statutory 10% and 15% of the gross proceeds for the Permanent Maintenance and Current Maintenance ...

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