Alpha Phi Alpha Senior Citizens Center, Inc. v. Zeta Zeta Lambda Co., Inc., Index No. 710037/2014, 9/21/16 (Ritholtz, J.)

Summary Judgment; Amendment of Certificate of Incorporation; Not for Profit Corporation Law §§ 706, § 802; Standing

 By Julie Lavoie | Staff Writer

Plaintiff is a New York non-for-profit corporation that was founded and sponsored by an alumni chapter of the Alpha Phi Alpha Fraternity (“Sponsor”). Plaintiff and Sponsor agreed to pool resources to acquire a better facility for Plaintiff. As part of the agreement, Plaintiff pledged to contribute money to the purchase of a building and become a tenant. In turn, Sponsor promised to collect rent from Plaintiff, pay expenses, and give the net income to Plaintiff in the form of capital contributions. To implement the agreement, Sponsor created Defendant. Importantly, Defendant’s bylaws provided: (1) for the creation of a Board of Directors (“the Board”) at last three-fourths of which was to be comprised of members of the Sponsor; and (2) that there shall be no members. Additionally, Defendant’s Certificate of Incorporation (“CoI”) supplied the names of the initial members of the Board and stated that its corporate purpose was to hold property, collect income therefrom, and provide the net income to Plaintiff.

However, after Plaintiff moved in, the Board failed to pay any net income. In 2011 and 2012, Plaintiff confronted the Board and demanded payment, the Board refused to pay, and then, unilaterally amended its bylaws to remove the requirement that three-fourths of the Board be members of Sponsor (“the Amendment”). Subsequently, Sponsor served the Board with a notice of termination, which was later rejected by the Board.

In 2016, Plaintiff and Sponsor commenced suit against Defendant alleging: (1) entitlement to damages because Defendant violated a governance agreement with Sponsor by wrongfully amending its bylaws, which effectively extinguished Sponsor’s right to govern Defendant in furtherance of its corporate purpose; (2) the amended bylaws were null and void; and the Court should appoint particular individuals as directors.

Plaintiff moved for summary judgment on the basis of the alleged governance agreement. In response, Defendants filed a cross motion for summary judgment on the grounds that: (1) New York’s Not-for Profit Corporation Law (“N-PCL”) § 802 allowed the Board to amend the CoI because there were no members to vote on the Amendment, allowing a vote by the majority of the Board to pass the Amendment; (2) any breach of an obligation to turn over net income to Plaintiff was barred by the statute of limitations; and (3) neither Plaintiff nor Sponsor had standing.

The Court denied both motions. The Court first found that there was no statutory basis for Sponsor’s attempted removal of the Board. Under N-PCL § 706, directors can only be removed by a vote of members or directors. Here, Sponsor was neither. Therefore, Sponsor lacked standing. Second, the Court found the Amendment did not violate the CoI. Only bylaw amendments that violate the CoI are null and void. Here, the CoI merely designated the initial directors and was otherwise silent about the Board. Third, the Court held that under Stolow v. Greg Manning Auctions Inc., Plaintiff and Sponsor lacked standing to bring suit against Defendant for violation of its bylaws. Stolow stands for the proposition that, “a third-party, who is not a member of the…corporation nor a party to the bylaws, lacks standing to bring suit against an organization for violation of its bylaws.” Here, Plaintiff and Sponsor were neither members of Defendant nor a party to the bylaws, thus they lack standing.

Finally, the Court denied Defendant’s motion because it failed to establish its prima facie entitlement to summary judgment for the following reasons. First, the Court held that Defendant failed to consider the possibility that it entered a governance agreement with Sponsor. By virtue of contract law, a governance agreement may limit a party’s freedom to amend the CoI. Second, the Court held that the statute of limitations did not run. For a breach of contract, the statute of limitations begins to run at the time of the breach. Here, the cause of action accrued in in 2011 or 2012 when Defendant refused to pay Plaintiff net income. Therefore, six years had not passed yet and Plaintiff’s claim was not barred. The Court noted that additional discovery should be conducted on the issue of whether Defendants were agents of the sponsor and whether liability could be asserted against them.

Alpha Phi Alpha Senior Citizens Center, Inc. v. Zeta Zeta Lambda Co., Inc., Index No. 710037/2014, 9/21/16 (Ritholtz, J.).

 

 

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