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Brown v. East Side Water System, Inc.

Court of Appeals of Louisiana, Third Circuit

July 12, 2017

RANDEL BROWN
v.
EAST SIDE WATER SYSTEM, INC.

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

          Pickett, J., concurs in the result. Jonathan C. Vidrine COUNSEL FOR: Plaintiffs/Appellees-Randel Brown, et al.

          Jacob B. Fusilier Fusilier & Associates, LLC COUNSEL FOR: Defendant/Appellant - East Side Water System, Inc.

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

          Pickett, J., concurs in the result.

          SYLVIA R. 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 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 ...

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