Sterling Laurel Realty, LLC v. Laurel Gardens

134 A.3d 27, 444 N.J. Super. 470

• Court: New Jersey Superior Court Appellate Division
• Decided: April 5, 2016
• Docket: A-0696-14T4
• Status: Published

Opinion

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION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).

2 A-0696-14T4 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

3 A-0696-14T4 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

4 A-0696-14T4 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.

5 A-0696-14T4 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.

6 A-0696-14T4 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

7 A-0696-14T4 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

8 A-0696-14T4 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

9 A-0696-14T4 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

11 A-0696-14T4 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

12 A-0696-14T4 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.

13 A-0696-14T4