Fraternity Lawsuits against Colgate University
Free Association for Everyone but DKE
Stalinist Russia and the Nanny-state in Hamilton
Coercive Land Grab Portends End of Greek Life
Colgate Views Involved Parents as a Problem
Practical Advice for Fraternities In Free Speech Battles on Campus
Expectations for Fraternity and Sorority members
The Alumni Corporation
of the Beta Theta Chaper of
Beta Theta Pi vs Colgate University
STATE OF NEW YORK
SUPREME COURT COUNTY OF MADISON
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CHARLES H. SANFORD, III, JOHN R. WILLARD,
NORMAN J. PLATT, PETER O. HANSON, et al.,
representing at least five percent of the members of
New York Zeta of Phi Delta Theta Corporation,
A New York Not-For-Profit Corporation, on behalf of
All Other Members Similarly Situated,
Index No. 05-1514
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 motion to dismiss. Because the sale of the Chapter House was the product of economic duress and is procedurally unconscionable, the contract of sale should be rescinded. Furthermore, due to Colgate University’s oppressive and coercive tactics, PDT 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, there was no “business judgment” made to somehow shield Colgate from defending its actions.
ARGUMENT
POINT I
THE CONTRACT SHOULD BE RESCINDED DUE TO ECONOMIC DURESS.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)
This is a case in equity. The contract for sale was plainly 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 PDT Corp. Colgate wrongfully fashioned an impermeable
plan to take this property from PDT Corp. This taking should be rescinded
in its entirety based on the wrongful, coercive tactics employed by Colgate
to confiscate this property by economic duress.
“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).
Here, PDT Corp.’s decision to sell its house to Colgate was not
the product of free will. In implementing the New Residential Education
Plan, Colgate required that all Colgate students (with the exception of
approximately 250 senior students who are historically granted permission
to live off campus) must live in university-owned housing by the Fall
of 2005. In implementing the New Residential Education Plan, Colgate announced
its intention to purchase, and to subsequently operate, all fraternity
and sorority housing at Colgate.
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)
(Amended Complaint, 20.) PDT was forced to agree to sell its house or
the Zeta Chapter of Phi Delta Theta would not be “recognized”
by Colgate. 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)
(Amended Complaint, 22.) Therefore, if the house was not sold to Colgate, no Colgate student would be permitted to reside in the house. PDT would be unable to realize any revenue or to even exist if it failed to sell its property to Colgate. PDT would have been forced out of business, and the property would then constitute an economic waste.
This is significant because in connection with Colgate’s “Residential
Education Plan,” Colgate formally stated by letter dated June 22,
2004 that “any student who participates in an unrecognized fraternity
or sorority will be subject to disciplinary sanctions including, possibly,
suspension or expulsion.” (Amended Complaint, 21, quoting, David
Hale, Vice President of Colgate.) Indeed, the threat of suspension or
expulsion for membership in 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 PDT Corp. 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 PDT Corp. that its members could be suspended or expelled
if PDT Corp. refused to sell its house to Colgate is akin to “threatening
the immediate possession of needful goods” as in Austin Instrument.
Furthermore, PDT Corp.’s members certainly could not obtain the
“goods” [education] from another source absent transferring
to another university should PDT have refused to sell. Colgate’s
outrageous threat of action against the students if PDT refused to sell
deprived PDT of exercising its free will.
Colgate’s unilateral actions deprived PDT from exercising any free will with respect to the sale of its house. There was no real choice involved by the board. In fact, the Affidavit of Steven Zatta fails to even remotely address the duress under which PDT was forced to sell. Mr. Zatta’s affidavit utterly and intentionally ignores the clear reality of the sale. Indeed, as stated in the Affidavit of Norman J. Platt and through Zatta and the other Board members’ own admissions, PDT Corp. “had a gun to their heads.” As stated by Mr. Clayton- “a vote against the sale means death to the chapter.” Having a “gun to one’s head” is duress. Therefore, the contract should be rescinded.
Furthermore, 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. The instant case is utterly unique. What Colgate essentially did was tell an independent non-student not-for-profit corporation that it must 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 PDT Corp. did not sell, its property would be completely useless, rendering it an economic waste. Furthermore, if the Chapter House was not sold to Colgate, Colgate would de-recognize the fraternity. Moreover, if any student continued to participate with a de-recognized fraternity, he could be suspended or expelled.
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. Here,
Colgate has not attempted to overtly ban fraternities. Colgate’s
plan, which only affects fraternal living communities, is analogous to
a taking. Indeed, the affected students of Colgate are not members of
PDT Corp. The PDT Chapter House was owned by the Phi Delta Theta alumni.
These facts make the instant case far different from any case addressing
the right of a private university to control groups affiliated with it.
There is no case analogous to the one at bar. It is preposterous to assert
that a private entity can coerce another private entity into a sale of
real property based on the power it has over its tenants. The law is clear
that as a matter of equity a contract made under complete compulsion,
like this one, cannot be enforced.
POINT II
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 PDT 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.
Through this sale, Colgate gained PDT Corp.’s property and will eventually retrieve the proceeds it paid PDT Corp. for the property. The proceeds will be placed in a Foundation to provide scholarship money-money that goes right back to Colgate in the end.
PDT Corp. was utterly at the mercy of Colgate. If it chose not to sell,
Phi Delta Theta would not be recognized, no student would be permitted
to reside in the Chapter House, students could be suspended or expelled,
and PDT would be out of existence. PDT, due to its unequal position with
Colgate, had no bargaining power whatsoever. Due to the clear advantage
Colgate essentially usurped control over PDT Corp. and forced it to sell
its Chapter House. This usurpation of control was unconscionable. This
unconscionability is grounds for rescission.
POINT III
THE BUSINESS JUDGMENT RULE DOES NOT BAR THIS ACTION.
A Board of Directors acting under duress is the antithesis of the business judgment rule. 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. It did not exercise any judgment due to Colgate’s wrongful coercion threatening its very existence. 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 the 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 is that by Colgate making this rule, it put the unaffiliated private corporation out of business because the corporation cannot receive revenue to keep operating. This circumstance defines duress. Because the Board was thrust into a position of economic duress by Colgate through this unprecedented scheme, it had no choice but to sell. In this unique case, the business judgment rule should not bar this action, or even apply because of the duress inflicted and the total usurpation of Coltrol by Colgate. This is the very purpose of the Court’s ability to rescind a contract made under duress. The business judgment rule should not apply here because the Board is still under duress from Colgate. The Board wrongfully chose not to sue Colgate due to fear that Colgate would shut down the house if it did.
Indeed, the business judgment rule contemplates a choice between two or more courses of actions. The rule protects directors who have made that choice, but here, there was never any choice. The Board was at the mercy of Colgate throughout the entire process. In the instant case, the circumstances are more akin to the case where a demand to prosecute an action cannot be made due to futility. Although such a demand was made by plaintiffs in the instant case, due to duress, the board never had a choice to take any action other than sell. Indeed, prosecution of this action would have lead to the same end as if the Board made the decision to not sell the house in the first place: the chapter would cease to be recognized and the members would face expulsion if they chose to remain affiliated with the fraternity. The property would amount to an economic waste because no student would be permitted to reside within it if it were not sold. Therefore, the business judgment rule should not bar this action and Colgate’s motion should be denied. Indeed, at the very least, serious questions of fact exist thereby precluding entitlement to pre-discovery dismissal of the action.
POINT IV
BECAUSE THERE IS EVIDENCE THAT THE BOARD ACTED WRONGFULLY, PLAINTIFFS
SHOULD BE PERMITTED TO AMEND THEIR COMPLAINT.
“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).
Pre-discovery dismissal of pleadings in the name of the business judgment rule is inappropriate where it is suggested that the directors did not act in good faith. Ackerman v. 305 East 40th Owners Corp., 189 A.D.2d 665, 666, 592 N.Y.S.2d 365 (1st Dept. 1993); Schmidt v. Magnetic Head Corp., 101 A.D.2d 268, 282, 476 N.Y.S.2d 151, 159 (2nd Dept. 1984) (the complaint should not be summarily dismissed before pretrial discovery has been conducted on the ground that a committee of purportedly disinterested outside directors has decided that the corporate interests will not be promoted by a derivative action).
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. Furthermore, the business judgment rule does not foreclose courts of law from inquiry into the disinterested independence of members of the board. 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).
In Auerbach, 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. 47 N.Y.2d at 633-34, 419 N.Y.S.2d at 928-29,
Furthermore, “where it is not charged that the present board of directors in any way participated in the alleged wrongful acts, a stockholder, in order to maintain a suit on behalf of a corporation, must allege facts from which may reasonably inferred: (1) the existence of a cause of action in favor of the corporation; (2) the refusal of the board of directors to sue…; (3) that the refusal is due (a) to fraud, bad faith or misconduct on the part of the board amounting to breach of trust; or (b) to inexcusable neglect on the part of the board, or indifference to the welfare of the corporation; or (c) that the board in refusing to sue was subjected to improper control or was otherwise not in a position to exercise fair, honest and independent judgment.” J.C.F. Holding Corp., v. General Gas & Elec. Corp.,181 Misc. 283, 287, 46 NYS2d 605, 609 (N.Y. Cty. S.Ct. 1944), aff’d 267 SD 863, 47 NYS2d 303 (1st Dept. 1944).
Here, plaintiffs can establish that some of the board members had conflicting loyalties and they were subjected to improper control or was otherwise not in a position to exercise fair, honest and independent judgment. In his affidavit, Steven Zatta claims the Board diligently negotiated with Colgate for eighteen months but fails to address why, by November 2003, Mr. Clayton, a Board Member, had already given his blessing to Colgate regarding its “New Vision” and the sale of PDT Corp.’s house.
Furthermore, it was discovered that Colgate materially misrepresented the purpose of the sale. Prior to the April 16th meeting, Colgate disseminated information to the Colgate Community nationwide stating that the reason for the fraternity buyout was a “pattern of conduct” on fraternity row that made ownership by Colgate essential. This pattern of conduct involved crime and the use of drugs and alcohol. Prior to the April vote, some of the Brothers reviewed information published by Colgate which stated that between 2001 and 2003, 1778 crimes and/or incidents occurred in dormitories and only 10 occurred in fraternity houses. After learning that the “pattern of conduct” was concocted by Colgate as justification for the taking of the property, Brother Platt approached the Board and asked to rescind the vote and revote considering Colgate’s flagrant misrepresentation as to the purpose for the sale. The Board refused to consider Colgate’s material misrepresentation and refused to permit a re-vote.
Moreover, Mr. Zatta fails to mention that on April 15, 2005, Dean Weinberg
partially retracted his threats of suspension and/or expulsion yet he
did not inform the members of this material change in position and he
would not permit a re-vote. Indeed, on April 15, 2005, The Colgate Maroon-News
published Dean Weinberg’s Letter to the Editor that partially retracted
the most egregious of Colgate’s previous threats; to-wit, Dean Weinberg
wrote, “Members of unrecognized fraternities and sororities will
not be stopped from associating and gathering. Members of those organizations
will continue to be recognized as brothers and sisters and will be treated
the same way as every other student.” Yet Zatta and the Board did
not inform the Brothers of this material change in position.
It was wrongful for Zatta and the board to fail to inform the membership
of Colgate’s material change in position and permit the vote to
go forward. It was wrongful for the board to conduct the vote as planned
without permitting the members to consider the facts. It was incumbent
on the board to inform the members accordingly.
All of these facts constitute evidence that the Board, throughout this process, was subjected to improper control or was otherwise not in a position to exercise fair, honest and independent judgment. Furthermore, all of these circumstances constitute evidence that the Board, individuals who are all graduates of Colgate, may not “possess a disinterested independence and stand in a dual relation that prevents an unprejudicial exercise of judgment.” Auerbach, 47 N.Y.2d at 631, 419 N.Y.S.2d 920, 393 N.E.2d 994.
Therefore, because there is evidence that the Board had conflicting loyalties, did not properly evaluate alternatives to suit prior to the vote, and did not properly evaluate plaintiffs demand to sue due to continuing economic duress by Colgate, plaintiffs should be permitted to amend their complaint accordingly.
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 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