Sterling Laurel Realty, LLC v. Laurel Gardens

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-0696-14T4
STERLING LAUREL REALTY, LLC,
individually and derivatively
on behalf of LAUREL GARDENS
CO-OP, INC., and MICHAEL ROKOWSKY,
as a member of the Board of
Directors of Laurel Gardens
APPROVED FOR PUBLICATION
Co-Op, Inc. through appointment by
Sterling Laurel Realty, LLC, April 5, 2016
Plaintiffs-Appellants, APPELLATE DIVISION
v.
LAUREL GARDENS CO-OP, INC.,
DANIEL HUDSON, ROSEMARY
FARRELL, ROBERT STANZIONE
and CHRISTINE HOIE,
Defendants-Respondents.
———————————————————————————————————————-
Argued February 2, 2016 – Decided April 5, 2016
Before Judges Reisner, Hoffman and Leone.
On appeal from Superior Court of New Jersey,
Chancery Division, Monmouth County, Docket
No. C-120-13.
Steven Siegel argued the cause for
appellants (Sills Cummis & Gross, P.C.,
attorneys; Mr. Siegel, of counsel and on the
briefs; Anthony S. Bocchi, of counsel).
Martin N. Crevina argued the cause for
respondents as to Counts I, II and IV
(Buckalew Frizzell & Crevina, LLP,
attorneys; Mr. Crevina, on the brief).
Sandra Calvert Nathans argued the cause for
respondents as to Counts III, V and VI
(Schenck, Price, Smith & King, LLP,
attorneys; Ms. Nathans and James A. Kassis,
on the brief).
The opinion of the court was delivered by
HOFFMAN, J.A.D.
Plaintiffs Sterling Laurel Realty, Inc. (Sterling) and
Michael Rokowsky appeal from two Chancery Division orders
entered on September 19, 2014. The first order denied
plaintiffs' motion for partial summary judgment, and the second
order granted summary judgment in favor of defendants Laurel
Gardens Co-Op, Inc. (the Co-Op), Daniel Hudson, Rosemary
Farrell, Robert Stanzione, and Christine Hoie,1 dismissing
plaintiffs' complaint. The central issue in this case is
whether a majority of the Co-Op's Board could amend the bylaw
definition of a quorum (for purposes of shareholder meetings)
from a majority of the shareholders to twenty percent of the
shareholders. Because allowing the Board to change the quorum
definition by amending the bylaws would allow it to reduce the
rights of the shareholders without their involvement, we
conclude the bylaw amendment was invalid. We therefore affirm
in part, and reverse and remand in part.
1
Hudson, Farrell, Stanzione, and Hoie are shareholders in the
Co-Op and are also four of the seven members of its Board of
Directors (the Board).
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I.
We glean the following undisputed facts from the summary
judgment record. The Co-Op is a New Jersey corporation that
owns and operates a residential apartment complex in Eatontown.
Sterling was the Co-Op's sponsor regarding its conversion to the
cooperative form of ownership and continues to own approximately
twenty-five percent of the cooperative apartments, and thus
holds approximately twenty-five percent of the Co-Op's total
stock. As the Co-Op's sponsor, Sterling is entitled to appoint
two individuals to the Board, one of whom is Rokowsky.
Since its inception in 1986, the Co-Op has been controlled
by two governing documents: (1) the certificate of
incorporation, and (2) the bylaws. The one-page certificate of
incorporation simply sets forth the Co-Op's name, purpose,
address, and authorized number of shares. The twenty-one page
bylaws explain in detail the methods and procedures governing
the operation of the Co-Op.
Four bylaws have particular relevance to the case under
review. First, Article I, Section 4 (the shareholder-quorum
provision) establishes the requisite quorum for shareholder
meetings, requiring the presence, "either in person or by
proxy[, of] the holders of a majority of the shares of the
Cooperative, including unsold shares," in order "to permit the
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transaction of any business." Second, Article II, Section 5
(the Board-quorum provision) establishes the requisite quorum of
directors for Board meetings, requiring the presence of "a
majority of the number of directors" in order to hold a vote on
any measure requiring Board approval. Third, Article X, Section
2 authorizes the Board to amend the bylaws by a two-thirds vote.
Finally, Article X, Section 3 (the sponsor-protection provision)
protects Sterling's rights, stating that
any provision hereof may not be altered,
amended or repealed in such a manner as
would adversely affect the rights or
interests of the Sponsor under [the]
Offering Plan (or its successors and
assigns) in any shares and accompanying
proprietary leases that may have been
pledged with the Sponsor in connection with
financing the purchase of apartments in the
building.
On June 1, 2012, Hudson, as the Board President, sent a
notice to the Co-Op's shareholders informing them of a
shareholders meeting scheduled for June 18, 2012. Attached to
this notice was a proposed amendment to the Co-Op's bylaws (the
sublease amendment) that would require, "as a pre-condition for
any application to sublease a [Co-Op] Apartment, that the
Apartment Owner shall have acquired the Apartment for a minimum
of one (1) year before applying to sublease the Apartment." By
limiting the scope of permissible subleases, the amendment, if
enacted, would ultimately reduce the ratio of rental units to
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owner-occupied units within the Co-Op. Due to market
conditions, reducing this ratio would make it easier for
prospective buyers to obtain financing to purchase a share of
the Co-Op. The amendment contained a provision exempting
Sterling from the sublease restriction.
Plaintiffs expressed concerns about the sublease amendment
and the effect it would have on Sterling's rights as the Co-Op's
sponsor.2 On July 15, 2012, Rokowsky sent a letter to the other
Board members, claiming that the sublease amendment would
violate the sponsor-protection provision. The letter explained:
The proposed amendment will harm the
interests of [Sterling] in that we may
choose to sell our units to potential
purchaser(s) who are investor(s) . . . who
would want to sublease their units rather
than occupy the units themselves.
The proposed amendment which would restrict
them from doing so for one year, and would
cause such purchasers to shy away from
purchasing our units, thus adversely
affecting the pool of our potential
purchasers and making it reduce the value of
our units.
2
Rokowsky sent an email to the Board's administrative assistant
on June 6, 2012, requesting a complete list of all shareholders,
including addresses, so that plaintiffs could state their
concerns to the shareholders. Although the Board had not
provided plaintiffs with such a list at the time they filed
their complaint, plaintiffs thereafter received the list.
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Although defendants planned for a shareholder vote on the
sublease amendment at the June 18, 2012 shareholders meeting,
not enough shareholders were present at the meeting to establish
a quorum.3 Defendants scheduled another vote for July 19, 2012,
but again no quorum of shareholders was reached. Accordingly,
defendants scheduled a third shareholders meeting to take place
immediately after the Board's monthly meeting on August 9, 2012.
This time, in addition to the proposed sublease amendment,
defendants proposed an amendment to the shareholder-quorum
provision (the shareholder-quorum amendment). The shareholder-
quorum amendment would reduce the necessary quorum from "a
majority of the shares of the cooperative" to "twenty (20%)
percent of the shares of the cooperative." This amendment was
intended as a cost-saving measure, due to the time and cost
associated with rescheduling shareholders meetings that fail to
reach a quorum.
On August 7, 2012, Rokowsky sent another letter to the rest
of the Board, objecting to the shareholder-quorum amendment. In
addition to citing to several New Jersey statutes that he
claimed prohibited the amendment, Rokowsky argued that
only requiring a Twenty percent quorum does
not and [cannot] accurately reflect the
3
Neither Sterling nor its appointed Board members attended this
meeting, or any relevant meeting thereafter.
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interests of a majority of shareholders and
specifically that this would allow matters
to be voted on at regular or special
shareholder meetings without requiring the
presence, or input of a Holder of Unsold
Shares. Furthermore the proposed amendment
will harm the interests of Sterling, Holder
of Unsold Shares in that it will lower the
property values of units at [the Co-Op]
because potential purchasers will shy away
from purchasing units at [the Co-Op] due to
the fact that Shareholders meetings can go
forward with only a twenty percent
shareholder representation and change
gravely important matters at their whim.
The five Board members present at the August 9, 2012
meeting unanimously approved both the shareholder-quorum and
sublease amendments to the bylaws.
On July 29, 2013, plaintiffs filed a six-count verified
complaint against the Co-Op and the Board members who approved
the amendments. In addition to asserting claims of shareholder
oppression, breach of contract, and tortious interference,
plaintiffs sought two forms of injunctive relief: a declaratory
judgment pronouncing the amendments null and void, and an order
enjoining the Co-Op from enforcing the amendments. At the close
of discovery, the parties filed cross-motions for summary
judgment.
After hearing oral argument, the motion judge concluded
that neither amendment violated the sponsor-protection
provision, and that the Board had the authority to amend the
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shareholder-quorum provision. Accordingly, the judge denied
plaintiffs' motion, granted defendants' cross-motion, and
dismissed plaintiffs' complaint with prejudice.
Plaintiffs filed this appeal on October 3, 2014, initially
challenging the validity of both the shareholder-quorum and
sublease amendments; however, at oral argument, plaintiffs
advised that they had abandoned their challenge to the sublease
amendment, thus limiting their arguments on appeal to the
validity of the shareholder-quorum amendment.
II.
When reviewing an order granting summary judgment, we
"employ the same standard [of review] that governs the trial
court." Henry v. N.J. Dep't of Human Servs., 204 N.J. 320, 330
(2010) (quoting Busciglio v. DellaFave, 366 N.J. Super. 135, 139
(App. Div. 2004)). Summary judgment is appropriate "if the
pleadings, depositions, answers to interrogatories and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact
challenged and that the moving party is entitled to a judgment
or order as a matter of law." R. 4:46-2(c).
In support of their challenge to the validity of the
shareholder-quorum amendment, plaintiffs argue that the New
Jersey Business Corporation Act (the Act), N.J.S.A. 14A:1-1 to
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17-18, precludes the Board from unilaterally reducing the Co-
Op's shareholder-quorum requirement. Defendants counter by
arguing that N.J.S.A. 14A:2-9 authorizes the Board to amend a
bylaw provision to lower the quorum requirement. We agree with
plaintiffs.
When interpreting a statute, we give the relevant language
its ordinary meaning and construe it "in a common-sense manner."
State ex rel. K.O., 217 N.J. 83, 91 (2014); see also N.J.S.A.
1:1-1 (stating that the words of a statute are customarily
construed according to their generally-accepted meaning). We do
not add terms which may have been intentionally omitted by the
Legislature, nor do we speculate or otherwise engage in an
interpretation which would avoid its plain meaning. DiProspero
v. Penn, 183 N.J. 477, 492 (2005). Where plain language "leads
to a clear and unambiguous result, then the interpretive process
should end, without resort to extrinsic sources." State v.
D.A., 191 N.J. 158, 164 (2007) (citation omitted).
Here, the applicable statutory language leads us to a clear
and unambiguous result. N.J.S.A. 14A:5-9 states, in pertinent
part: "Unless otherwise provided in the certificate of
incorporation or this act, the holders of shares entitled to
cast a majority of the votes at a meeting shall constitute a
quorum at such meeting." We interpret this plain language to
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mean that, in order to hold a vote amongst the Co-Op's
shareholders, a majority of all shares in the Co-Op must be
represented at the meeting. We further conclude, based on the
plain language of the statute, that a valid modification of the
Act's majority quorum requirement in this case could occur only
by amending the Co-Op's certificate of incorporation.4
A straightforward application of this interpretation
reveals that defendants' attempt to alter the shareholder-quorum
requirement using the bylaws was improper. The Co-Op's
certificate of incorporation does not address the quorum
required to conduct business at shareholders meetings. Thus,
the Act's majority quorum requirement clearly controls.
Defendants emphasize that, at all relevant times, the Board
had the authority to amend the bylaws. Notwithstanding this
position's factual accuracy, the Board's general ability to
amend the Co-Op's bylaws lacks relevance here. N.J.S.A. 14A:5-9
makes clear that an amendment to a corporation's bylaws is
4
Although we need not address legislative history when
confronted with unambiguous statutory language, we briefly note
that the Act's legislative history supports our interpretation
in this case. The commissioners' comments indicate that the
Act's requirement — that an entity must indicate a deviation
from the Act's default majority quorum provision in its
certificate of incorporation — is "a change from [repealed] R.S.
14:10-9, which permits [a deviation from the default majority
quorum provision] to be set forth in the bylaws." N.J.S.A.
14A:5-9 (Comm'rs' cmt 1968).
10 A-0696-14T4
insufficient to supplant the default majority quorum requirement
set forth in the Act; only an amendment to the certificate of
incorporation — which can only be approved by a vote of the
shareholders, see N.J.S.A. 14A:9-2(4) — could legally alter the
Co-Op's shareholder-quorum requirement.
Defendants also contend that they were, for all practical
purposes, left with no choice but to reduce the shareholder-
quorum requirement, by way of a Board-approved amendment to the
bylaws. They argue that plaintiffs, due to their substantial
percentage of shares owned, were preventing the shareholders
from conducting any meaningful business by boycotting the
shareholder meetings.
We find this argument equally unpersuasive. Despite
defendants' arguments to the contrary, they had two methods
available to them for addressing plaintiffs' perceived
obstructive behavior. N.J.S.A. 14A:5-2 permits shareholders to
initiate General Equity litigation to obtain a court-ordered
shareholders meeting. At such a meeting, the majority quorum
requirement would have been waived by operation of law, because
"the shareholders present in person or by proxy and having
voting powers shall constitute a quorum for the transaction of
the business designated in such order." Ibid. Alternatively,
defendants could have convinced a majority of the shareholders
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to attend the annual shareholders meeting and vote to amend the
certificate of incorporation to reduce the quorum requirement.
However, as defendants did not use either of these methods
to hold a shareholders meeting, we conclude that the Act's
default majority quorum provision controls, and defendants'
unauthorized amendment to the shareholder-quorum provision
violated the Act's clear and unambiguous terms. See also In re
Brophy, 13 N.J. Misc. 462 (Sup. Ct. 1935) (establishing that, if
a statute requires an authorization or limitation to be set
forth in the certificate of incorporation, an action setting it
forth in the bylaws will be insufficient); Jones v. Wallace, 628
P.2d 388, 391 (Or. 1981) (invalidating, pursuant to the Oregon
Business Corporation Act, O.R.S. 57.165, a bylaw amendment
altering the corporation's shareholder-quorum requirement when
no such amendment was made to the entity's articles of
incorporation).
Allowing the Board to change the shareholder-quorum
requirement through a bylaw amendment would effectively reduce
the rights of shareholders without their consent or
participation. We find such a result to run contrary to the
Legislature's intent in adopting the Act. See Vergopia v.
Shaker, 191 N.J. 217, 235–36 (2007) (holding that a board of
directors cannot create bylaws that will substantially interfere
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with the statutory rights given to shareholders). Therefore, we
reverse the motion judge's determination with regard to count
one.
We further conclude that the claims seeking disclosure of
the shareholder list are moot, as the list has been provided.
Additionally, the claims seeking damages were properly dismissed
as unsupported by proof of damages. Plaintiffs' arguments to
the contrary lack sufficient merit to warrant discussion in a
written opinion. R. 2:11-3(e)(1)(E). Therefore, we affirm the
motion judge's dismissal of counts two through six of
plaintiffs' verified complaint, and reverse the dismissal of
count one. We remand to the Chancery Division for the limited
purpose of entering an order invalidating the Co-Op's bylaw
amendment to Article I, Section 4, adopted by the Board on
August 9, 2012.
Affirmed in part, reversed and remanded in part.
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