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COURT OF APPEALS DECISION DATED AND RELEASED SEPTEMBER 10, 1996 |
NOTICE |
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A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See § 808.10 and
Rule 809.62(1), Stats. |
This opinion is subject to
further editing. If published, the
official version will appear in the bound volume of the Official Reports. |
No. 95-3534
STATE
OF WISCONSIN IN COURT OF
APPEALS
DISTRICT III
MYRON J. BRUEGGEMAN,
JO ANNE BRUEGGEMAN,
GALE L. COLVIN, JR.,
ROBERT P. CRONIN,
CHRISTINA D. CRONIN,
ABRAHAM DELEEUWE,
JOHN FEITH, RICHARD J.
GALLA, ANNETTE F.
GALLA, RICHARD W.
HERZFELD, ELIZABETH L.
HERZFELD, ROBERT M.
MURPHY, CATHLEEN P.
ROSE, QUENTIN F. ROSE,
RICHARD SCHAFER,
RICHARD J. SCHELLER,
PENNY I. SCHELLER,
RICHARD L. STILES,
RICHARD W. STUEBER,
PENELOPE J. STUEBER,
JAMES P. ZIERK,
AND GAIL J. ZIERK,
INDIVIDUALLY, AND ON
BEHALF OF THE CLASS
CONSISTING OF ALL
OWNERS OF CONDOMINIUM
UNITS AT THE
LANDMARK RESORT
CONDOMINIUM WHO ARE
MEMBERS OF THE
LANDMARK RESORT CONDOMINIUM
OWNERS ASSOCIATION,
INC., A WISCONSIN
NONPROFIT CORPORATION,
AND ON BEHALF OF
THE LANDMARK RESORT
CONDOMINIUM OWNERS
ASSOCIATION, INC., A
WISCONSIN NONPROFIT
CORPORATION,
Plaintiffs-Respondents,
v.
KATHERINE M. COLVIN
AND HETTY DELEEUWE,
Plaintiffs,
LANDMARK RESORT RENTAL
ASSOCIATION
INCORPORATED, A
WISCONSIN CORPORATION,
RICHARD VEENSTRA,
PETER HAGAN, ROBERT
GEYER, WILLIAM
MARKWARDT AND THE
LANDMARK RESORT
CONDOMINIUM OWNERS
ASSOCIATION, INC., A
WISCONSIN
NONPROFIT CORPORATION,
Defendants-Appellants,
SAWYER HILL, LTD., A
WISCONSIN
CORPORATION, JEFFREY
RITTER AND
FRAN SHEFCHIK,
Defendants.
APPEAL from a judgment
of the circuit court for Door County:
RICHARD J. DIETZ, Judge. Affirmed.
Before Cane, P.J.,
LaRocque and Myse, JJ.
LaROCQUE, J. The Landmark Resort Rental Association,
Inc., a wholly owned subsidiary of The Landmark Resort Condominium Owners
Association, Inc., and other defendants, appeal a summary judgment that
enjoined the Rental Association's purchase of a restaurant.[1] The Owners Association board of directors
twice failed to obtain the necessary three-fourths vote of Owners Association
membership to allow the Rental Association to purchase the restaurant. They then acted, in their capacity as the
board of the Rental Association, to amend the Rental Association bylaws
authorizing the purchase by a simple majority of the Owners Association
membership.[2] We conclude that the trial court could
invoke equitable principles to prevent the board of directors from using a
wholly owned subsidiary as a means to avoid what was unambiguously prohibited
by the parent corporation's bylaws. We
therefore affirm the trial court's partial summary judgment.
The material facts are
undisputed. Sawyer Hill, Ltd., built
the Landmark Resort Condominium complex.
The complex consists primarily of one restaurant and 293 condominium
units. Sawyer Hill owned the restaurant
from the time it was built until the disputed sale to the Rental
Association.
The condominium unit
owners formed the Owners Association as a nonprofit corporation, pursuant to
the Wisconsin Non-Stock Corporation Law, ch. 181, Stats., for the purpose of governing the operation of the
condominium. Each unit owner is a
member of the Owners Association.
The Owners Association
began providing services to its members for the purpose of maintaining the
property. These services included
making rental reservations for the unit owners, as well as other routine
maintenance and administrative functions.
Several unit owners testified that they earned a profit renting their
units.
The Owners Association
board of directors became concerned about a potential securities law violation
resulting from the Association's assistance in providing the members with
rental profits. To avoid this potential
violation, and a challenge to its nonprofit stock status, the Owners Association
formed a wholly owned subsidiary, the Rental Association, to conduct its
for-profit activities. Unit owners then
contracted with the Rental Association to perform rental management
services. The same individuals serve on
the boards of both entities.
Sawyer Hill eventually
decided to sell the restaurant. In
order to preserve group rental facilities, the Owners Association formed a
restaurant committee to examine the need for the restaurant and the
restaurant's value.
The
restaurant committee decided it was in the best interests of the Owners
Association to have the Rental Association buy the restaurant. The Owners Association held two votes of its
membership on the issue. In each vote a
majority, but less than three-fourths of the voting members, favored purchasing
the restaurant.
Initially, when the
Owners Association board had formed the Rental Association, it did not
expressly deal with the purchase of real estate in either the articles of
incorporation or the bylaws. However,
after the Owners Association membership rejected the purchase, they amended the
Rental Association bylaws to require that for any purchase of property in
excess of $500,000, which includes the restaurant, the Rental Association
directors must obtain approval from a simple majority of votes cast by members
of the Owners Association.[3]
The Rental Association
directors proceeded with the purchase of the restaurant without another formal
vote. They reached an agreement with
Sawyer Hill for a purchase price of $1,100,000. According to the stipulated facts, the Rental Association
financed the purchase with a $750,000 down payment and seller financing of
$400,000.[4]
Certain members of the
Owners Association brought this action to declare the Rental Association's contract
to purchase the restaurant from Sawyer Hill null and void, to enjoin the Rental
Association and the Owners Association from purchasing any property without
obtaining a three-fourths vote of the members of the Owners Association, and
for damages associated therewith. The
plaintiffs moved for summary judgment on the grounds that the directors of the
Owners Association breached their fiduciary duties to the members of the Owners
Association by using the Rental Association to purchase the restaurant. The defendants responded by filing a
cross-motion for summary judgment, arguing that the actions taken by the
directors to purchase the restaurant were within their powers under the bylaws
of the Rental Association. The trial
court granted the plaintiffs' motion for partial summary judgment.
We review summary
judgment de novo. Park Bancorp.
v. Sletteland, 182 Wis.2d 131, 140, 513 N.W.2d 609, 613 (Ct. App.
1994). When reviewing a summary
judgment, we apply the standard set forth in § 802.08(2), Stats., in the same manner as the
circuit court. Kreinz v. NDII
Secs. Corp., 138 Wis.2d 204, 209, 406 N.W.2d 164, 166 (Ct. App.
1987). The methodology has been
described in many cases, including Grams v. Boss, 97 Wis.2d 332,
338, 294 N.W.2d 473, 476-77 (1980), and need not be repeated here.
The plaintiffs argue
that the Owners Association directors breached their fiduciary duty by
purchasing the property through the subsidiary and thereby defeating the
purpose of the three-fourths voting requirement. See note 2. The
purpose of the three-fourths voting requirement is to involve the members in
major decisions regarding management of the assets of the Owners Association.
The defendants argue
that nothing in the Owners Association bylaws prevented the creation of a
subsidiary with the power to purchase real estate, citing O'Leary v.
Board of Directors, 89 Wis.2d 156, 167, 278 N.W.2d 217, 221 (Ct. App.
1979). O'Leary notes,
however, the mere fact that acts performed by a board of directors are intra
vires ("within the power") does not necessarily mean they cannot be
set aside upon action of the membership.
Id. at 167, 278 N.W.2d at 221. O'Leary recognized the right of members to invoke
equity jurisdiction where the board of directors used their power to deprive members
of their basic participating right, the right to vote. Id. at 169, 278 N.W.2d at
221-22.
Plaintiffs also cite Aiple
v. Twin City Barge & Towing Co., 143 N.W.2d 374 (Minn. 1966). In Aiple, the directors of a
parent corporation were enjoined from using a subsidiary to avoid a statutorily
required shareholder voting requirement.
A majority of the shareholders, but not the statutorily required
two-thirds, wanted to increase the capital of a corporation. Id. at 376. The majority shareholders, through the
directors, created a wholly owned subsidiary, transferred part of its business
to the subsidiary, and used the stock of the new subsidiary for the purpose of
acquiring new capital. Id. Although it noted that the directors' plan
might be a good business idea, the Aiple court enjoined the
directors from executing the plan because it interfered with the legal rights
of the minority stockholders who opposed the plan. Id. at 379.
While the directors in Aiple
created a subsidiary for the purpose of avoiding the voting requirement and the
directors here did not, the distinction is not significant in light of the
circumstances. The board's sole purpose
in amending the Rental Association bylaws was to avoid the voting rights of the
members of the Owners Association. This
is a breach of the directors' fiduciary duty.
By the Court.—Judgment
affirmed.
Not recommended for
publication in the official reports.
[1] By order dated April 3, 1996, we granted leave to appeal because the matters raised met the standards for an interlocutory appeal under § 808.03(2), Stats. However, we limited the issues on appeal to the grant of partial summary judgment.
[2]
The Owners Association bylaws provide in part:
3.2 Power and
Duties of the Board of Directors.
The affairs of the Association shall be governed by the Board of
Directors. All powers and duties as
shall be necessary for the administration of the affairs of the Association
shall be exercised by the Board of Directors.
Such powers and duties shall be exercised in accordance with the
provisions of the Declaration, the Articles of Incorporation and these
By-laws.
....
5.5 Borrowing Money and Acquiring and Conveying Property. The Association, by a three-fourths (3/4ths) vote of the unit owners, may borrow money and purchase or convey property, and direct any two (2) officers of the corporation to execute such documents in connection therewith as is deemed necessary or appropriate by counsel for the Association.