Randel Brown v. East Side Water System, Inc.

STATE OF LOUISIANA
COURT OF APPEAL, THIRD CIRCUIT

16-882

RANDEL BROWN
VERSUS

EAST SIDE WATER SYSTEM, INC.

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APPEAL FROM THE
THIRTEENTH JUDICIAL DISTRICT COURT
PARISH OF EVANGELINE, DOCKET NO. 75510-B
HONORABLE GARY J. ORTEGO, DISTRICT JUDGE

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SYLVIA R. COOKS
JUDGE

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Court composed of Ulysses Gene Thibodeaux, Chief Judge, Sylvia R. Cooks, and
Elizabeth A. Pickett, Judges. :

AFFIRMED IN PART, REVERSED IN PART, AND AMENDED.

Pickett, J., concurs in the result.

Jonathan C. Vidrine
P. O. Drawer 1019
Ville Platte, LA 70586
Telephone: (337) 363-2772
COUNSEL FOR:
Plaintiffs/Appellees — Randel Brown, et al.

Jacob B. Fusilier

Fusilier & Associates, LLC
P.O. Box 528

Ville Platte, LA 70586
Telephone: (337) 363-6661
COUNSEL FOR:

Defendant/Appellant — East Side Water System, Inc.

‘COOKS, Judge.

The defendant corporation appeals the judgment of the trial court in favor of
numerous members/shareholders of the corporation that “canceled and invalidated”
an action by its board of directors to increase the quorum required for elections
from ten percent to fifty percent. The trial court also set dates for new elections to
be held using the previous ten percent quorum.

FACTS AND PROCEDURAL HISTORY

The East Side Water System, Inc. (hereafter East Side), a non-profit
corporation located in Evangeline Parish, Louisiana, was established in 1969. The
articles of incorporation state in Article V that “[t]he corporate powers and
management of this corporation shall be vested in, and exercised by, a board of
directors of seven (7) members, to be elected annually. . .” The articles go on to
state that “[a]t all elections for directors, as well as at the other meetings, of the
members, each member shall be entitled to one vote, and a majority of all members
shall decide all elections or any question coming before any such meeting.”

In accordance with the provision that “a majority of all members shall
decide all elections,” it became practice that a quorum of fifty percent of the
membership was required for a valid election. Article V also provided that a
“majority of the directors shall constitute a quorum; and a quorum shall be
necessary to consider any questions that may come before any meeting of the
directors.” It was argued by the plaintiffs in this matter that the requirement of a
majority to constitute a quorum was limited to the board of directors and was not
required by the articles of incorporation for elections of the board of directors by
the general membership. This is not correct. Although Article V did not use the
word “quorum” when discussing the requirements for elections by the general
membership, its wording makes clear that “a majority of all members shall decide

all elections or any question coming before any such meeting.” Thus, in effect the

‘articles of incorporation required a majority of the members for a quorum for
elections or to transact business.

The trial court noted that “in the first years” of the corporation’s existence,
there were less than 100 members, and it was “reasonably easy” to attain a fifty
percent attendance of members to vote in the annual election of the board of
directors. However, this became more difficult as the size of the corporation
increased, and in 2004, the board of directors amended the bylaws of the
corporation to make a quorum for a valid election of the board of directors ten
percent of the membership of the corporation. The trial court noted the
justification for this move was that with the significant growth of the membership,
“a 10% quorum and voting requirement for a valid election was more feasible,
appropriate and in the best interest of the corporation and its membership.”

Over ten years later, at a March 11, 2015 board meeting, the board of
directors voted to raise the election quorum threshold from ten percent to fifty
percent of the membership. It justified this move by arguing it was simply
bringing the bylaws back into compliance with the articles of incorporation.
Shortly thereafter, on May 14, 2015, a single shareholder, Randel Brown, filed a
declaratory judgment suit seeking to overturn the board of directors’ decision to
raise the election quorum to fifty percent and seeking reinstatement of the ten
percent quorum. Plaintiff also requested the court order defendant to produce for
copying and inspection certain corporate documents and financial information and
further alleged there was a breach of fiduciary duties by the board of directors as to
certain financial and operational expenditures and expenses.

Exceptions were filed and granted by the trial court because (1) the plaintiff
did not have enough shareholders to meet the statutory requirements for a
shareholder suit; and (2) an action for declaratory judgment was not the proper
procedural device in this matter. The plaintiff amended his suit, adding sufficient

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‘shareholders and changing the procedural device from an action seeking
declaratory judgment to a writ of mandamus.

Trial on the merits was then held on June 17, 2016. The trial court denied
East Side’s Exception of No Cause of Action alleging the writ of mandamus filed
by Plaintiffs was not the appropriate procedural device for the relief sought. The
trial court noted that Louisiana is a fact pleading state, and the petition sufficiently
informed East Side of the nature of the cause of action asserted and alleged facts
sufficient to allow East Side to prepare a defense. Several directors and
shareholders were called to testify at the hearing. At the close of trial, the matter
was taken under advisement by the trial court. A judgment was signed on July 15,
2016 (following the trial court’s written reasons for judgment rendered on June 30,
2016). The judgment dismissed Plaintiffs’ claims stemming from an alleged
breach of fiduciary duty as to certain financial and operational expenditures by the
board of directors. The trial court granted Plaintiffs’ request for access to review
and copy certain corporate information and documentation. Lastly, the trial court
declared the action by the board on March 11, 2015 to increase the election
quorum from ten percent to fifty percent be “canceled and invalidated.” The court
also ordered the “previous 10% quorum and voting membership for a valid
election be and is hereby re-instituted immediately herein.” The trial court then set
a date for a “replacement” election for September 6, 2016 and for staggered
elections thereafter.

East Side has appealed the portion of the judgment pertaining to the quorum
requirement for elections, assigning the following assignments of error:

1. The Trial Court committed manifest error when it held that the

corporation’s board of directors breached their fiduciary duty to

the company by voting to return the quorum threshold to required
50% from 10% of the membership.

2. The Trial Court committed manifest error when it allowed cause of
action to continue despite the fact that it was procedurally incorrect
vehicle for the plaintiffs relief sought.

ANALYSIS
In its second assignment of error, East Side argues the Plaintiff used a
procedurally incorrect vehicle for the relief sought and granted by the trial court. It
maintains the relief sought should have been urged by a writ of quo warranto, not
by a writ of mandamus, and the trial court “committed manifest error when it
denied the Defendant’s Exception of Use Improper/No Cause of Action.” The trial
court specifically addressed this argument at the hearing below, and concluded as

follows:

... the Court finds that the factual pleading of the petition and the
supplemental petition is enough to uh. . . to put before the Court those
issues that it’s put before the Court whether it’s called a Writ of
Mandamus, whether it’s called a Summary Judgment act or whatever

it is, therefore, the Court finds that it is ready to go.

As the trial court noted, Louisiana is a fact pleading state under the
Louisiana Code of Civil Procedure. Springer v. Nannie O’Neal Apts., 13-570
(La.App. 3 Cir. 11/13/13), 125 So.3d 606. Louisiana Code of Civil Procedure
Article 854 provides that “[n]o technical forms of pleading are required.” A
plaintiff's petition is sufficient as long as it fairly informs the defendant of the
general nature of the cause of action and alleges facts sufficient to allow the
defendant to prepare a defense. Washington v. Flenniken Constr. Co., 188 So.2d
486 (La.App. 3 Cir.1966). Accordingly, we find no merit in East Side’s contention
that the trial court erred in denying its exception of no cause of action.

In its first assignment of error, East Side argued the Board’s March 11, 2015

action to amend the bylaws to increase the election quorum from ten percent to

fifty percent was a breach of its fiduciary duty and the trial court manifestly erred

‘in finding otherwise. Although we agree the trial court did not err in invalidating
the Board’s March 11, 2015 action, we do so for different reasons.

We note, initially, that the record before us includes the articles of
incorporation and a copy of the bylaws when they were amended in 2004,
changing the quorum requirement from 50% to 10%. We have no copy of any
previous bylaws, and are unclear as to how they read prior to “amendment’ by the
board of directors in 2004. Following the amendment in 2004, the bylaws at
Article VII, Section 4 specifically read as follows:

At any meeting of the members of the corporation, ten percent
(10%) of the members of the corporation shall constitute a quorum for
the transaction of business. The voting powers of the members of this
corporation shall be equal, each member shall have one vote only and
no voting by proxy shall be allowed.

Apparently, this amended bylaw was followed as the procedure for general
elections for ten years, until at a March 11, 2015 board meeting, the board of
directors voted to raise the election quorum threshold from ten percent to fifty
percent of the membership and amended the bylaws to so reflect.

The trial court ruled this 2015 action by the board was invalid, specifically
finding East Side failed to provide “a valid or even reasonable reason or
explanation in their testimony as to any benefit whatsoever that would result or
occur pursuant to their action.” The trial court went on to state the following in
regards to the evidence presented at trial:

The evidence presented at the hearing, along with the corporate
records indicates in every election recently held (2013-2015), which
includes the election/re-election of all the current board of directors,
shows that it has been very close to failing and struggled to reach to
reached [sic] the required 10% membership voting quorum necessary
for a valid election (the 2014 election had the most voting members
with almost 200 members voting — 1,100 members @ 10% = 110
voters required), and further shows that these last several annual
elections would have also failed to attain this newly amended 50%
membership voting (1,100 members @ 50% = 550 voters for valid

election); thereby raising the real issue and possibility of the
membership/shareholders of this corporation ever being able to

achieve a “valid election” as to the election and/or re-election of the
corporation’s board of directors in all future elections.

Additionally, and most interesting to this court and this issue, is
the evidence and testimony at the hearing shows that, pursuant [to]
East Side’s articles of incorporation and by-laws, that if the next and
future election(s) fail to secure the new mandatory 50% of the voting
membership and therefore being invalid, then the current board of
directors are authorized to appoint to the board of directors their
choice to serve as board of director members until the next valid
election. Therefore, the court finds, whether intentionally or
unintentionally, this new mandatory 50% of the voting membership
does thereby create the great possibility and probability of allowing
the current board of directors to be appointed and/or re-appointed
following each invalid election, thereby maintaining and allowing the
present directors to continue to serve basically at the current board of
director’s own pleasure, and thus creating at least the appearance of
improprieties; and therefore said action and vote [is] definitely not in
the best interest of the corporation and its membership as required by
Louisiana law.

Supporting this finding of the trial court was the testimony of John Vidrine, a
member of East Side’s Board of Directors and the secretary-treasurer, who testified
as follows concerning his opposition to the board’s attempt to change the quorum

requirements:

... First of all fifty percent I felt was not ... was not doable. We’ve

never had fifty percent of the membership vote. Not only that, for

over ten years it had been running at ten percent so I felt that the only

reason that we wanted to change was to make sure our mem. . . our

Board members could not be replaced I felt was unfair.

John Todd Deville, who was a Board of Director’s member for thirteen years
and the President of the Board for six years, testified at the time of trial there were
approximately 1,050 members of the corporation. Mr. Deville stated in his
testimony he could not remember any election during his time where 500 members
showed up to vote. This further buttressed the Plaintiffs’ point that a fifty percent
quorum was not feasible to hold valid elections.

East Side’s primary argument to overturn the trial court’s judgment is that

the trial court committed manifest error in finding the board of directors breached

its fiduciary duty because it contends all the board did was amend the bylaws back
into compliance with the articles of incorporation. East Side notes that if the
bylaws of a corporation are in conflict with the articles of incorporation, the
articles of incorporation take precedence.

The testimony establishes the articles of incorporation have never been
amended since adopted, except once to allow for members to vote by proxy.
Passage and amendment of the bylaws cannot serve to amend the articles of
incorporation. Louisiana Revised Statutes 12:237, sets forth the methods by which
a corporation can amend its articles of incorporation:

A. A corporation may amend its articles in compliance with
any method stipulated in its articles.

B. If the articles do not stipulate a method of amendment, or do
not stipulate in detail the procedure for amendment thereof, an
amendment altering the articles may be adopted by two-thirds in
interest of the voting members present, at any annual or special
meeting of members the notice of which set forth the proposed
amendment or a summary of the changes to be made thereby. For
purposes of this Subsection, a majority of the members shall
constitute a quorum and a quorum must be present at the meeting at
which the amendment to the articles is to be considered. The notice of
such meeting must be transmitted to the members not less than thirty
days prior to the meeting.

The court in Lain v. Credit Bureau of Baton Rouge, Inc., 93-1166, p. 5 (La.App. 1
Cir. 4/8/94), 637 So.2d 1080, 1085, writ denied, 94-2010 (La.11/4/94), 644 So.2d
1049, discussed La.R.S. 12:237, explaining as follows:
As Louisiana Revised Statute 12:237 states, the articles must provide
the method or detailed procedure for amendment. As the statute
plainly provides, the method or detailed procedure must be set forth in
the articles and not, as defendant contends, in the by-laws or by more
general provisions of the Louisiana Non-Profit Corporation Law.
A review of East Side’s articles of incorporation reveal there is no procedure set
forth in the articles delineating the required method for amending the articles of

incorporation. In the absence of such procedure, La.R.S. 12:237(B) provides the

method to be used to amend the articles of incorporation. A review of that statute

‘indicates amendment of the articles requires, after proper notice is sent to the
members, a quorum of a majority of the members and a two-thirds vote to amend
the articles by the members in attendance. The Board’s 2004 unilateral decision to
amend the bylaws to set forth a quorum of ten percent in order to hold valid
elections and transact business was contrary to the procedure set forth in La.R.S.
12:237(B). Thus, the 2004 Board vote to amend the bylaws did not serve to amend
the articles of incorporation. Moreover, this bylaw amendment conflicted with the
articles of incorporation.

We share the trial court’s concern that the Board’s 2015 amendment of the
bylaws to the 50% quorum creates a “great possibility and probability of allowing
the current board of directors to be appointed and/or re-appointed following each
invalid election, thereby maintaining and allowing the present directors to continue
to serve basically at the current board of director’s own pleasure.”

As set forth, the articles of incorporation have provided from the inception
of the corporation that “[a]t all elections for directors, as well as at the other
meetings, of the members, each member shall be entitled to one vote, and a
majority of all members shall decide all elections or any question coming before
any such meeting.” This clearly establishes a required quorum of 50 percent of all
members for a valid election of the board members to take place.

Louisiana Revised Statutes 12:1-206(B), plainly sets forth the bylaws of a
corporation “may contain any provision for managing the business and regulating
the affairs of the corporation that is consistent with law or the articles of
incorporation.” (Emphasis added.) Thus, “if there is any inconsistency between
the bylaws and the articles, the articles control.” Wells v. Fandal, 13-620 (La.App.
5 Cir. 2/12/14), 136 So.3d 83, 88.

We are mindful that the fifty percent quorum requirement is an onerous
burden, but the law in this instance provides the procedure that is required to

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change the quorum requirement when it is impractical or impossible to secure the
required attendance of the members. In the absence of a more specific provision in
the articles of incorporation addressing the subject, La.R.S. 12:231(3), in pertinent

part, provides as follows:

A members’ meeting properly called on due notice, if notice is
required, may be organized for the transaction of business whenever a
quorum is present. Unless otherwise provided in this Chapter or in the
articles or by-laws, the following rules shall apply:

(3) If a meeting cannot be organized for lack of a
quorum, those present may, except as otherwise provided
in this Chapter, adjourn the meeting to the time and place
which they determine. Notice of the second meeting shall
again be attempted pursuant to R.S. 12:230. However, in
the case of any meeting called for the election of
directors, those who attend the second of such adjourned
meetings, although less than a quorum as fixed in
Paragraph (1) of this Section, or in the articles or by-
laws, shall nevertheless constitute a quorum for the
purpose of electing directors. In the case of a second such
meeting called after the lack of a quorum for a purpose
other than or in addition to the election of directors,
including amendment of the articles of incorporation or
dissolution of the corporation, any number of members
present shall constitute a quorum, notwithstanding any
other provision of law to the contrary.

This statute allows the members, if unable to gain a quorum in the first called
meeting, to establish a date and time for a second meeting pursuant to La.R.S.
12:230 (which requires written notice of the second meeting to be given at least ten

days and not more than sixty days prior to said meeting).’ At that second meeting,

"La.R.S. 12:230 provides:

Unless otherwise provided in the articles or by-laws, and except as otherwise provided in this Chapter, the
authorized person or persons calling a members' meeting shall cause written notice of the time, place and purpose of
the meeting to be given to all members entitled to vote at such meeting, at least ten days and not more than sixty
days prior to the day fixed for the meeting. Notice of the annual meeting need not state the purpose thereof, except
as otherwise provided in this Chapter if a specified action is to be taken at the meeting. If such written notice is
placed in the United States mail, postage prepaid, and addressed to a member at his last known address, notice shall
be deemed to have been given him. Notice of any meeting may be waived in writing by any member at any time;
the written waiver need not specify the purpose of or the business to be transacted at the meeting; and such notice
shall be deemed to have been given to, or waived by, all members present or represented at any such meeting except
any member who, at the beginning of the meeting, objects to the transaction of any business because the meeting is
not lawfully called or convened. Notice need not be given to any member with whom communication is made

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‘those who attend that second meeting, even if less that the required 50% quorum as
set forth in the articles of incorporation, “shall nevertheless constitute a quorum for
the purpose of electing directors.” This statute provides a reasonable, legally
permissible remedy for the membership to avoid potentially onerous quorum rules
for the election of directors.

DECREE

We therefore must reverse that portion of the trial court’s judgment fixing
the quorum at ten percent. We further declare the board members action on March
11, 2015 changing the quorum requirement from ten percent to fifty percent was
contrary to and exceeded the authority granted the Board by the articles of
incorporation. The articles of incorporation grant only the members of the
corporation the authority to elect the board of directors and to change the vote
requirement for accomplishing this end.

We affirm the portion of the trial court’s judgment essentially recognizing
that the articles of incorporation provides for voting by proxy by the members of »
the corporation. We amend the trial court’s judgment to provide the current board
of directors shall give proper notice in accordance with La.R.S. 12:230 to the
members of the corporation that the staggered election which was originally
scheduled for the first Monday of April, 2016, namely for the board of directors
members, Todd Deville, Steve Vidrine and John Vidrine, will be held on the first
Tuesday of September, 2017, being September 5, 2017. We further order that the
staggered election of the next two directors, those positions from the 2014 election,
shall be held on the regular annual election date of the 1* Monday of April 2018
and continuing each year in the staggered terms. This court further orders that

these staggered elections shall be held in accordance with the articles of

unlawful by any law of the United States of America, or by any rule, regulation, proclamation or executive order
issued under any such law; any action or meeting taken or held without notice to any such member shall have the
same force and effect as if notice had been given to him as otherwise required.

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*

‘incorporation or in accordance with La.R.S. 12:230 and 12:231 in the event a
quorum is not present at the first meeting.’

AFFIRMED IN PART, REVERSED IN PART, AND AMENDED.

* The use of La.R.S 12:230 and 12:231 to avoid the onerous fifty percent quorum requirement currently found in the
articles of incorporation does not prevent the members of the corporation at the first meeting (with prior notice) or at
| any validly held subsequent meeting from amending the quorum requirement to provide a more feasible percentage.

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