The opinion of the court was delivered by: Carolyn E. Demarest, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the printed Official Reports.
In this proceeding for dissolution of a residential co-operative corporation pursuant to BCL § 1104-a, by motion noticed for June 25, 2008, petitioner moved for an order 1) granting her statutory interest from the date preceding the filing of her petition; 2) directing respondents to post a bond as security for their election pursuant to BCL § 1118 to buy petitioner's interest in the co-operative; and 3) declaring that the valuation of petitioner's interest would be based on 25% of the fair value of the entire building rather than 20% of the whole or limited to the fair value of her unit within the building. Respondents cross-moved for an order directing petitioner to place her apartment (in which she no longer resides) on the market for immediate sale at the highest price reasonably attainable so as to mitigate the costs to respondents.
On September 3, 2008, the court issued an order denying petitioner's request to order the posting of a bond, finding that the value of the real property as a whole was sufficient to secure petitioner's interest, and denying the petitioner's motion for a determination as to a discretionary award of interest pending a full hearing on the issues relating to valuation, and further denying respondents' cross-motion to order the immediate marketing for sale of petitioner's apartment as there is no authority for such an order at this point in the litigation. The determination of petitioner's proportional interest was reserved and the parties were referred to mediation. As mediation has not been successful in resolving this case, and trial is scheduled for February 23, 2009, the court will address the only remaining legal issue determinable at this time: the petitioner's proportionate interest in the assets of the corporation.*fn1
The respondent cooperative corporation ("Corporation") was formed in 1975 for the purpose of purchasing 162 Columbia Heights, a landmarked brownstone structure in Brooklyn, New York, and to operate the building as co-operative residential units. There are five units in the building occupied by petitioner and respondents DeLille, McGrath a/k/a Viveros,*fn3 Riccio and Esposito, each of whom owns 400 shares of the Corporation and occupies a unit pursuant to a proprietary lease appurtenant to those shares. Although petitioner disputes the legality of the transfer of shares and the lease for the garden unit to respondent Esposito, she has pled his status as a shareholder and lessee.
Related to this dissolution proceeding, which was commenced on May 25, 2007, is an action (Index No. 27566/05), brought by petitioner herein against the Corporation and shareholders DeLille and McGrath, for $221,000 in legal fees allegedly advanced by petitioner on behalf of the Corporation in the defense of a lawsuit brought by a former shareholder/tenant (Gudas Action) and for $550,000 advanced by petitioner as settlement funds in that case, which is not disputed. Defendants in the related action dispute their liability for the legal fees.
During the pendency of the Gudas litigation, petitioner served the Corporation as its president or vice president and treasurer and as a board member and was responsible for managing the litigation. However, following settlement of that action on May 10, 2004, a dispute arose among the shareholders regarding the disposition of the garden apartment and the 400 shares appurtenant thereto which the majority believed were owned by the Corporation and petitioner contended belonged to her. As a result of such disagreement, at a shareholders' meeting held June 14, 2005, petitioner resigned her position as president and as a member of the board of directors. It is petitioner's position that thereafter no validly elected board existed to perform the business of the Corporation because the subsequent meetings, at which an additional director was elected, were not properly noticed. Therefore, petitioner argues, the transfer of the 400 shares appurtenant to the garden apartment and the issuance of the proprietary lease for that apartment, which occurred on May 25, 2006, was void and she should be credited as having a 25% interest, as opposed to a 20% interest, in the fair value of the Corporation for purposes of valuation pursuant to the Corporation's election, under BCL § 1118, to purchase her interest.
It appears to be undisputed that the original by-law providing for "at least three and not more than seven" directors (Article III, § 1) has been superceded by amendment to provide for only two directors.*fn4 It is further not disputed that petitioner resigned as a director in June, 2005. Section 4 of Article III of the By-Laws supplied to the Court provides that "a majority" of the remaining directors may fill a vacancy created by resignation without notice to shareholders and without regard to the presence of a quorum until the next annual or special meeting of shareholders. Similar language appears in BCL § 705(a):
Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the board for any reason except the removal of directors without cause may be filled by vote of the board. If the number of the directors then in office is less than a quorum, such newly created directorships and vacancies may be filled by vote of a majority of the directors then in office . . . . (emphasis added)
This statutory provision, reflected in the By-Laws of the Corporation, has been uniformly interpreted to permit a vacancy created by resignation to be filled by "a majority" of the remaining board members. Matter of Jacobson v Moskowitz, 27 NY2d 67 ; Matter of Caplan v Lionel Corp., 20 AD2d 301, 304 [1st Dept 1964], aff'd, 14 NY2d 679; Avien, Inc. v Weiss, 50 Misc 2d 127, 132-133 [Sup Ct, Queens Cty 1966]; see also Matter of Gearing v Kelly, 15AD2d 219 [1st Dept 1961], aff'd, 11 NY2d 201 . The compelling reason for the statutory rule, incorporated into the By-Laws here, is that the Corporation would be paralyzed from acting in a situation in which emergency action regarding a substantive matter might be necessary were a quorum of the full authorized board be necessary to fill vacancies. By permitting a majority of the remaining directors to fill the vacancy, the quorum needed to act upon other matters can be achieved. See Matter of Jacobson, 27 NY2d at 71-72; Avien, Inc., 50 Misc 2d at 133.
Because, in this case, only two directors constitute the entire board, the remaining board member following petitioner's resignation, Keiko DeLille, would have been authorized to appoint a second director to fill the vacancy as she was the only director then in office. Although petitioner argues to the contrary on the theory that DeLille could not alone constitute a "majority," such analysis is not only illogical, since any decision taken by the only authorized director would necessarily be unanimous and thus exceed the required "majority," but would contradict the clear intent of both the statute and the Corporation's By-Laws to provide a mechanism to overcome the paralysis arising from the lack of sufficient directors to act on behalf of the Corporation. It is noted that petitioner deliberately resigned knowing that her absence would impede the functioning of the board. See Gearing, 15 AD2d at 221-22.
In any case, respondents contend that a shareholders meeting was convened on September 8, 2005, for the purpose of electing a new board of directors and that all shareholders were present, including petitioner, as represented by her attorney Joseph French who held her proxy. A vote was taken to place the garden apartment on the market for sale, to which all parties, except petitioner through Mr. French, agreed. The meeting was interrupted when a process ...