Beta Theta Pi Memorandum 1/30/06

STATE OF NEW YORK
SUPREME COURT COUNTY OF MADISON
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JAMES C. SANFORD, WILLIAM C. BERRY, ESQ.,
PETER P.CLARK, et al., representing at least five
percent of the members of The Alumni Corporation
of the Beta Theta Chapter of Beta Theta Pi,
A New York Not-For-Profit Corporation, on behalf of
All Other Members Similarly Situated,
Index No. 05-1738
Plaintiffs,

-vs-

COLGATE UNIVERSITY,
a New York Not-For-Profit Corporation,

Defendant.
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MEMORANDUM OF LAW

PRELIMINARY STATEMENT

This Memorandum of Law is respectfully submitted on behalf of plaintiffs in opposition to defendant Colgate University’s pre-answer motion to dismiss. Plaintiffs can maintain the instant derivative suit because the Board did not properly evaluate plaintiffs’ demand for suit. The mechanism allegedly utilized by the Board constitutes a pretext or sham. Alternatively, due to Colgate University’s wrongful and coercive tactics, BTP Corp.’s Board of Directors was deprived of exercising any amount of discretion or free will to reasonably decide whether the sale of the Chapter House was in the best interest of the corporation. Therefore, the Board did not really make a “business judgment” and the rule should be inapplicable. Plaintiffs should be permitted discovery to determine the depth and scope of Colgate’s coercion over the Board in obtaining the Board’s recommendation to sell the Chapter House.

Furthermore, because the sale of the Chapter House was the product of duress and is procedurally unconscionable, the contract of sale should be rescinded.

ARGUMENT

POINT I
SEVEN MORE PLAINTIFFS HAVE JOINED THIS ACTION.

Plaintiffs have standing to bring this action. Since the time this action was filed, seven new plaintiffs have consented, approved and joined this action: Richard D. Stannard, Jay Chandrasekhar, Lawrence Fly Connell, Kevin W. Craig, Arthur L. Skaar, Jr., Fred Klein and Irving Reynold Ryerson. (See, Hulslander, Ex. A.) Therefore, there are 70 plaintiffs, a number which exceeds 5% of the number of members. Plaintiffs respectfully request leave to amend its complaint to include these new plaintiffs as parties.

POINT II
THE BOARD DID NOT PROPERLY EVALUATE PLAINTIFFS’ DEMAND TO FILE SUIT.

“Members of a domestic not-for-profit corporation are authorized by statute to bring actions to prevent or remedy a wrong to the corporation when the corporation fails or refuses to take appropriate action for its own benefit.” Jacobs v. Gladstone, 84 A.D.2d 651, 652, 444 N.Y.S.2d 309, 311 (3rd Dept. 1981) (holding dismissal of action was inappropriate when the board failed to take action regarding an executor’s conflict of interest and wasting of assets).

In Auerbach v. Bennett, 47 N.Y.2d 619, 633-34, 419 N.Y.S.2d 920, 928-29, 393 N.E.2d 994, 1001 (1979), the Court delineated two of the circumstances where a derivative action may be prosecuted after a board’s refusal of a demand: (1) where the directors had conflicting loyalties or stood in a dual relation which prevented an unprejudiced exercise of judgment; or (2) where the procedures followed by the directors to evaluate and refuse the plaintiff’s demand were restricted in scope or so pro forma or halfhearted as to constitute pretext or sham.
In the instant case, the Board, in refusing plaintiffs’ demand to bring an action against Colgate did nothing basically to evaluate the plaintiffs’ demand. On May 24, 2005, plaintiff Sanford demanded a revote of the sale due to the University’s April 15th partial retraction of its threat of expulsion; that the Board not proceed with the closing for the sale of the Chapter House; and that the Board bring legal action against Colgate to stop the implementation of the new residential plan that required the sale of the house to Colgate. (Colgate Ex. C.)

According to Eric Will, after receiving the demand, the Board “conferred” with Ralph A. Jones, a Beta Board Member who is an attorney, but decided to sell the property anyway (Will Aff. 11-12.) Mr. Will does not tell us in which area of the law Mr. Jones practices. We do not know if Mr. Jones has any legal experience in contracts or business law or litigation. Certainly, Mr. Jones did not render a written legal opinion regarding the issues raised in the complaint, or Mr. Will would have generously provided it for the Court annexed to his affidavit.

The Board’s “conference” and “deliberation” is a sham. Sanford’s letter was sent by Federal Express on May 24, 2005. (Ex. C.) The demand was received at the Chapter House at some unknown time on May 25, 2005. (Will Aff. 10.) Unless Mr. Will was at the Chapter House on May 25th, which he does not state, it would have taken time for the demand letter to get to him for his review. Assuming the Board Members have jobs, it would have taken a bit of time to set up this alleged “conference” with the other Board Members and additional time so that they could review the complaint. (Will Aff. 11.) The complaint itself is quite lengthy. (Conan Ex. 1.) Various complex legal issues are raised in the complaint. Id. The closing occurred on May 26, 2005, the next day. (Conan Ex. 1, 27.) By virtue of the brief amount of time between the receipt of the letter and the closing, Mr. Jones could not have performed any significant legal research to fairly determine the merit of a potential suit or to explore any option other than sale. In fact, in an e-mail dated May 31, 2005, Mr. Jones admits the“[r]easons for proceeding [with the sale] ….include the lack of time to meet and discuss the proposed grounds, uncertainty as to what Colgate might do if we balked at this late date …Please understand the Beta Board is totally opposed to the sale but feels it has no other option if we want the see Beta continue at Colgate. (cf, Sanford I v. Colgate University, Decision, p.3) (PDT Corp. hired independent counsel soon after May 11, 2005 to render an opinion on the possibility of success of plaintiff Sanford’s proposed lawsuit. The Board did not reject Sanford’s proposal until May 27, 2005.)

Furthermore, there is no evidence that the Board ever obtained any outside legal advice regarding the sale itself or what measures could be taken to prevent it. Indeed, this utter inaction absolutely qualifies as “procedures followed by the directors to evaluate and refuse the plaintiff’s demand were restricted in scope or are so pro forma or halfhearted as to constitute pretext or sham,” thereby permitting the maintenance of this derivative action. Auerbach, 47 N.Y.2d at 631-34; 419 N.Y.S.2d at 927-929.

Moreover, plaintiffs have alleged several meritorious causes of action in favor of the corporation, some of which will be discussed infra. The Board of Directors refused to sue without evaluating the legal merit of plaintiffs’ complaint. In urging the members to vote to sell, the Board was essentially concerned with the student members only, who are not members of the corporation. (Will Ex. A.) Although the Board claims to have “negotiated” with Colgate for 18 months following Colgate’s announcement of the new residential plan in June 2003, Colgate Board of Trustee Chairperson John Golden wrote a letter on December 9, 2004 stating that Beta Theta Pi has already agreed to sell its Chapter House. (Conan, Ex. 1, 23.) The sale was pre-determined by the Board long before the vote.

Indeed, directors of a cooperative, which is analogous to a fraternity house, have a duty to act in the best interests of all shareholders. Ackerman, 189 A.D.2d at 666, 592 N.Y.S.2d at 365. Whether or not the business judgment rule protects the actions of the Board of Directors is in this matter a question of fact. Id. Because plaintiffs should be permitted to maintain this derivative action on behalf of BTP Corp. due to the Board’s absolute failure to evaluate plaintiffs’ demand to file suit, plaintiffs’ complaint should not be dismissed.

POINT III
ALTERNATIVELY, THE BUSINESS JUDGMENT RULE DOES NOT BAR THIS ACTION.

The business judgment rule is a shield for directors of a corporation to avoid liability for wrongful decisions. To invoke the protections of the business judgment rule, it is, therefore, essential, that some form of business judgment necessarily was made. Under the unique circumstances presented in this case, the Board of Directors was unable to make any business judgment as contemplated by the rule. The Board had no discretion to do anything but sell the house to Colgate. In the case at bar, a powerful university orchestrated a plan to “take” private property from an unaffiliated private corporation - private property that can only be used to house students. It took this property by threatening the corporation that if it did not sell the property to the University, the University would create a rule that no student could reside in the house. Further, that if a student continued to reside in the house, the student would be expelled.

Colgate can make rules delineating circumstances under which a student can be suspended or expelled. That is not the issue here. The issue here is that Colgate made a rule that would essentially put an unaffiliated private corporation out of business because the corporation could not receive revenue to keep operating under Colgate’s new rule. This circumstance defines duress and unconscionability. In this unique case, the business judgment rule should not bar this action, or even apply because of the duress inflicted by Colgate. The very purpose of the Court’s ability to rescind a contract made under duress to prevent circumstances like those presented in this case.

In Sanford I, Justice O’Brien opined that this circumstance is no different than a hostile takeover. With all due respect, plaintiffs believe it is very different. Hostile takeovers generally involve only money and stock. Hostile takeovers generally do not involve a student’s right to attend a university and freely associate or face expulsion. Therefore, the business judgment rule should not bar this action and Colgate’s motion should be denied.

Finally, the facts of this case differ from those of Sanford I. In Sanford I, as the Court noted in its decision, PDT Corp. obtained an outside legal opinion regarding the likelihood of success for a suit against Colgate such as the one currently before this Court. Here, no steps were taken to seriously evaluate plaintiffs’ demand to institute legal action against Colgate. Colgate should have to answer for its extreme and outrageous conduct of formulating an insidious plan to take private property.

POINT IV
THE CONTRACT SHOULD BE RESCINDED DUE TO ECONOMIC DURESS.

Fair dealing is one of the cornerstones of our legal system. Judge Pound writing for the Cardozo Court has opined:
“Courts of equity refuse to enforce harsh and unfair bargains. If moral coercion produces a contract; if it is executed under practical compulsion; if one party acts unfairly and the other yields to the pressure of circumstances—equity will refuse specific performance even though in law the contract would be enforced.”

Scheinberg v. Scheinberg, 249 N.Y. 277, 281-282, 164 N.E. 98, 99 (1928)

“It is well settled that duress and undue influence are grounds for rescission of a contract where the complaining party is compelled to agree to the contract by means of a wrongful threat which precluded the exercise of free will.” Baratta v. Kozlowski, 94 A.D.2d 454, 458, 464 N.Y.S.2d 803, 806 (2nd Dept. 1983); Austin Instrument, Inc. v. Loral Corp., 29 N.Y.2d 124,130, 324 N.Y.S.2d 22, 25, 272 N.E.2d 533, 535 (1971) (“a contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it my means of a wrongful threat precluding the exercise of free will”). “The existence of economic duress or business compulsion is demonstrated by proof that ‘immediate possession of needful goods is threatened or…by proof that one party to a contract has threatened to breach the agreement by withholding goods unless the other party agrees to some further demand” [internal citations omitted] Austin Instrument, Inc., supra, at 130, 25. To constitute duress, it must appear “that the threatened party could not obtain the goods from another source and that the ordinary action for breach of contract would not be adequate.” Id. at 131, 26, 130. In other words, “the existence of economic duress is demonstrated by proof that one party to a contract has threatened to breach the agreement by withholding performance unless the other agrees to some further demand.” 805 Third Ave, Co., v. M.W. Realty Assoc., 58 NY2d 447, 451, 461 NYS2d 778, 780, 448 NE2d 445, 447 (1983).
By letter dated June 1, 2004, the Colgate Board of Trustees Chairperson, John Golden, announced:
Because our New Residential Education Plan requires that all students live in university-owned housing by the fall of 2005 (with the exception of approximately 250 senior students who are historically granted permission to live off campus), only those Greek-letter organizations that choose to sell to the university will continue to be recognized by the university and house undergraduate members in their traditional chapter houses. (Emphasis added)

(Complaint, 20.)
By Letter dated June 22, 2004, Colgate’s Financial Vice President, David Hale, announced:
We have also made clear to [the Colgate Alumni InterFraternity/Sorority Council Property Committee] that Colgate University will only recognize fraternities and sororities that are residential organizations beginning in the fall of 2005. Organizations that choose to retain ownership will no longer be residential and accordingly will not be recognized by Colgate after June 2005. In this regard, we are aware that there are ideas of houses functioning as eating clubs or even continuing as underground, unrecognized fraternities. Everyone should understand the [University] will not permit this and will adopt a policy that any student who participates in an unrecognized fraternity or sorority will be subject to disciplinary sanctions including, possibly, suspension and expulsion [emphasis added].

(Complaint, 21.)
By a memorandum dated September 8, 2004, Adam Weinberg, Dean of the College, announced:
Any Greek-letter organization that opts not to sell its house to the university will not become a member of the Broad Street community and will consequently forfeit university recognition as of July 1, 2005. Beginning in the fall 2005 semester such organizations will not be allowed to house or enroll Colgate students as members, and will cease all operations. (Emphasis added)

(Complaint, 22.)
In sum, if Beta Theta chose to retain ownership of its property, not only would its student brothers be suspended or expelled if they attempted to reside in the house, no Colgate student would be permitted to reside in the house. Beta Theta would be unable to realize any revenue from the property or to even exist if it failed to sell its property to Colgate. Beta Theta would have been forced out of business. In fact, Mr. Will’s letter to the Beta Theta membership recommending the sale of the property confirms that Beta Theta was placed under duress by Colgate’s actions. “Admittedly, both choices are grim. Either sell the property at 88 Broad Street we have held for 125 years, along with the house we built and maintained for over 80 years; or not sell and end the undergraduate operation of Beta Theta at Colgate.” (Will Ex. A.)

Indeed, the threat of suspension or expulsion for members of an organization is “wrongful.” The threat of expulsion without just cause, based only upon membership in an organization, is the breach of the implied contract between the student and university and is prohibited. See generally, Tedeschi v. Wagner College, 49 N.Y.2d 652, 660 (1980) (when suspending or expelling a student, a university must act with good faith and its action must not be arbitrary or irrational); Nieswand v. Cornell University, 692 F.Supp. 1464, 1471 (N.D.N.Y. 1988); citing Vought v. Treachers College, Columbia Univ., 127 A.D.2d 654, 511 N.Y.S.2d 880 (2nd Dept. 1987); New York v. Fenton, 68 A.D.2d 951, 414 N.Y.S.2d 58 (3rd Dept. 1979); Carr v. St. John’s Univ., New York, 17 A.D.2d 632, 231 N.Y.S.2d 410 (2d Dept.), aff’d 12 N.Y.2d 802, 235 N.Y.S.2d 834, 187 N.E.2d 18 (1962) (an implied contract exists between a student and the university through publications by university).

There can be no doubt that Beta Theta was under economic duress when it agreed to sell the house. Although Austin Instrument involves economic duress in the sale of “goods,” a clear analogy can be drawn to the facts of the instant case. Here, a student’s ability to remain a student at Colgate and receive an education is a “good.” Threatening Beta Theta that its members could be suspended or expelled if Beta Theta refused to sell its house to Colgate is akin to “threatening the immediate possession of needful goods” as in Austin Instrument. Furthermore, Beta Theta’s members certainly could not obtain the “goods” [education] from another source absent transferring to another university should Beta Theta have refused to sell. Colgate’s outrageous threat of action against the students if Beta Theta refused to sell deprived Beta Theta of exercising its free will. Colgate claims that it had “legal precedent” for its actions. Plaintiffs disagree. Indeed, there is precedent for overtly banning fraternities, sororities or other organizations in a private university setting for misconduct. See generally, Phelps v. Colby College, 595 A.2d 403 (Sup. Jud. Ct. Me 1991); Mu Chapter of Delta Kappa Epsilon v. Colgate University, 176 A.D.2d 11 (3rd Dept. 1992). The Supreme Court of New Hampshire has held “judicial interference in internal affairs of associations is strictly limited and will not be undertaken in the absence of a showing of injustice or illegal action and resulting damage to the complaining member.” Brzica v. Trustees of Dartmouth College, 147 N.H. 443, 456, 791 A.2d 990, 1000 (2002).

Here, there is injustice and an illegal action by Colgate. What Colgate essentially did was force an independent non-student not-for-profit corporation to relinquish its property or be forced out of business. Indeed, under Colgate’s New Vision Plan, no Colgate student was permitted to live on property owned by anyone else but Colgate. The Chapter House is zoned only for fraternal living. Essentially, if Beta Theta did not sell, its property would be completely useless, rendering it an economic waste.

This is not a case about a private university’s right to formulate rules and regulations to control conduct. This is an unprecedented case where a private university, through coercion and oppression, forced the sale of private property, owned by persons who were not students. Colgate’s plan, which only affects fraternal living communities, is analogous to a taking. Indeed, the affected students of Colgate are not members of Beta Theta. The Beta Theta Chapter House was owned by the Beta Theta alumni.

In the instant case, the contract for sale was the product of coercion and was executed under practical compulsion. The threat of extinction and expulsion of members typifies practical compulsion. It is clear that Colgate University, through its plan to own all fraternity houses located in Hamilton, New York, unfairly and coercively acquired the Chapter House from Beta Theta. Colgate wrongfully fashioned an impermeable plan to take this property from Beta Theta using unlawful threats against its students. This taking should be rescinded in its entirety based on the wrongful tactics employed by Colgate to confiscate this property.
The law is clear that as a matter of equity a contract made under complete compulsion, like this one, cannot be enforced.

POINT V
COLGATE’S ACTIONS WERE UNCONSCIONABLE.

The procedural elements of unconscionability are identified by resort to evidence of the contract formation process. Industralease Automated & Scientific Equip. Corp. v. R.M.E. Enterpriss, 58 A.D.2d 482, 489, 396 N.Y.S.2d 427, 431 (2nd Dept. 1977); Friedman v. Becque, 64 A.D.2d 70, 85, 407 N.Y.S.2d 999, 1008 (2nd Dept. 1978). “High pressure sales tactics, misrepresentation and unequal bargaining position have been recognized as procedurally unconscionable.” Id.

In the instant case, it is clear that Colgate and Beta Theta did not have equal bargaining power. Although the parties attempted to negotiate alternatives to sale, Colgate unilaterally refused any alternative without providing a legitimate reason for its decision. In fact, the purported reason for the sale: to eliminate a “pattern of conduct” by the fraternities - was clearly pretext. In information published by the University during 2001 through 2003, crimes and incidents in dormitories outnumbered those in fraternity houses 1778 to 10.

Beta Theta was clearly at the mercy of Colgate. If it chose not to sell, Beta Theta would not be recognized, no student would be permitted to reside in the Chapter House, students could be suspended or expelled, and Beta Theta would be out of existence. Beta Theta, due to its unequal position with Colgate, had no bargaining power whatsoever. Due to the clear advantage Colgate essentially usurped control over Beta Theta and forced it to sell its Chapter House. This usurpation of control was unconscionable. This unconscionability is grounds for rescission.

CONCLUSION

Based upon the foregoing, plaintiffs respectfully request an order denying Colgate University’s motion to dismiss in its entirety. Alternatively, plaintiffs respectfully request an order permitting plaintiffs to amend their complaint to more particularly assert the Board’s failure to evaluate plaintiffs’ demand to institute action and for such other and further relief as the Court deems just and proper.
Respectfully submitted,

SMITH, SOVIK,KENDRICK & SUGNET, P.C.

By: ______________________________
Kevin E. Hulslander
Attorneys for Plaintiffs
250 South Clinton Street, Suite 600
Syracuse, New York 13202
(315) 474-2911

Students & Alumni for Colgate, Inc.
2707 E. Willamette Lane, Greenwood Village, CO 80121
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