10221-VCMR
Del. Ch.Mar 23, 2017Background
- Rainbow Mountain, Inc. is a Delaware nonstock corporation owning ~97 acres in Virginia; original members were Sheridan and Barbara Begeman and their six children, including Terry.
- The parties dispute which set of bylaws is operative: a 2003 version (2003 Bylaws) and a 2005 version (2005 Bylaws); the court found the 2003 Bylaws were ratified by written consent on July 7, 2005 and are operative.
- The 2003 Bylaws: (i) define three member classes; (ii) permit termination of membership only "for Cause" (with a detailed definition and procedures including notice, hearing, and 2/3 board vote); (iii) allow directors to be removed by a majority vote of Regular Members at a members’ meeting; and (iv) provide that only the board may remove officers.
- In Sept. 2005 the board purported to remove Mark and Cindy as members without following the 2003 Bylaws’ “for Cause” procedure; no evidence shows they received notice or a hearing.
- Between Nov. 2008 and Apr. 2009 members voted to remove Terry as a director, elected Eric to the board, and the board later voted to expel Terry as a member and appoint Laurie as Secretary; Terry lives on the property and asserts he remains a member, director, and officer.
- Procedural posture: cross-motions for summary judgment on a stipulated paper record; court decides as matter of law who remains a member, director, and officer and whether Terry has the right to occupy the land.
Issues
| Issue | Plaintiff's Argument (Rainbow Mountain) | Defendant's Argument (Begeman) | Held |
|---|---|---|---|
| Which bylaws are operative? | 2005 Bylaws or no material difference; rely on actions citing 2005 provisions | 2003 Bylaws were adopted and remain operative | 2003 Bylaws are operative |
| Were Mark and Cindy validly removed as members in Sept. 2005? | Removal was valid per board action reflected in written consent | Removal violated 2003 Bylaws (no Cause, no notice/hearing) and is invalid | Not valid — removal without Cause and without required notice/hearing was ineffective |
| Was Terry properly removed as a director (Nov. 2008)? | Members voted to remove Terry at Nov. 15, 2008 meeting | Vote was effective | Not effective — members’ meeting lacked a quorum under the 2003 Bylaws |
| Was Terry validly removed as a member/officer in Apr.–May 2009; is he entitled to occupy property? | Board vote (Apr. 29, 2009) terminated Terry’s membership and officer roles; thus no right to occupy | Member vote appointing Eric was ineffective (no vacancy, no quorum); board vote to expel lacked 2/3 and was invalid; Terry remains member and Senior VP and has right to live on property; only Secretary position was replaced | Terry was not properly removed as a member or Senior VP; he was properly replaced as Secretary; as a Regular Member he retains the bylaw right to live on the property |
Key Cases Cited
- Bank of N.Y. Mellon v. Realogy Corp., 979 A.2d 1113 (Del. Ch. 2008) (principles of contract interpretation apply to bylaws)
- Strougo v. Hollander, 111 A.3d 590 (Del. Ch. 2015) (corporate charters and bylaws are contractual and interpreted accordingly)
- Waggoner v. Laster, 581 A.2d 1127 (Del. 1990) (describes equitable estoppel and its limits against void corporate acts)
- Michelson v. Duncan, 407 A.2d 211 (Del. 1979) (distinction between void and voidable corporate acts)
- Klaassen v. Allegro Dev. Corp., 106 A.3d 1035 (Del. 2014) (discusses when failure to follow bylaw notice requirements renders board action void vs. voidable)