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Willens v. 2720 Wisconsin Avenue Cooperative Association

March 11, 2004

LILIANE WILLENS & STEVEN NIEDERMAN, APPELLANTS,
v.
2720 WISCONSIN AVENUE COOPERATIVE ASSOCIATION, INC., ET AL., APPELLEES.



Appeal from the Superior Court of the District of Columbia (CA-2329-99) (Hon. Susan R. Winfield, Trial Judge)

Before Terry, Farrell and Glickman, Associate Judges.

The opinion of the court was delivered by: Glickman, Associate Judge

Argued October 11, 2001

This dispute between a cooperative and two of its members, appellants Liliane Willens and Steven Niederman, was triggered by a decision of the cooperative's board of directors to forgive certain debts owed to the cooperative by other members. Willens and Niederman sued the cooperative and its directors for breach of contract and breach of fiduciary duty in connection with that decision. The trial court granted summary judgment to the defendants on each of appellants' claims. We reverse.

I.

The appellees in this case, defendants below, are 2720 Wisconsin Avenue Cooperative Association, Inc. (hereinafter referred to as the "Cooperative"), and six of its members who served without compensation on its Board of Directors.*fn1 Established under the Cooperative Association Act, D.C. Code § 29-901 et seq. (2001), the Cooperative is a non-profit housing corporation that owns and operates a forty-eight unit apartment building in the District of Columbia at 2720 Wisconsin Avenue, N.W. The Bylaws of the Cooperative provide that to each unit in the building there corresponds one membership interest in the Cooperative, as evidenced by a Mutual Ownership Contract.*fn2 The Bylaws specify the percentage of the total value of the Cooperative that each apartment unit represents, and each member of the Cooperative - i.e., the holder of each membership interest - is deemed "to own . . . that [same] percentage of the Cooperative's overall equity." The Bylaws further state that the percentages are determinative of the members' "property rights . . . in the equity of the Cooperative" and in any distributions of corporate reserves.*fn3 Thus, members of the Cooperative do not own the apartment units themselves; rather, the members own shares in the corporation represented by their units. At the time of the events at issue here, appellant Willens owned a 6.43381% share of the Cooperative as represented by three units. Appellant Niederman owned a 2.27565% share represented by one unit.

The Cooperative was established and incorporated in 1974 by its developer, who had acquired the building at 2720 Wisconsin Avenue subject to three mortgages totaling $675,000. The developer in turn transferred the building to the Cooperative in exchange for a fourth, "wrap-around" or "blanket" mortgage, which encompassed the payment obligations under the first three mortgages plus an additional $270,000 for the developer, and a promissory note from the Cooperative in the total amount of $945,000. This so-called "Wrap Note" accrued interest at 8% per annum and was amortized over thirty years with a final payment due in 2004.

The Wrap Note was a debt of the Cooperative. The Mutual Ownership Contracts apportioned this corporate debt among the Cooperative's members. When a member purchased his or her unit and corresponding interest in the Cooperative, the Mutual Ownership Contract required the member to execute a promissory note in favor of the Cooperative for the balance due on the unit's proportionate share of the Wrap Note debt (unless the member chose to pay the full amount in a lump sum at settlement). Like the Wrap Note, the individual promissory notes bore interest at 8% per annum and fully matured in 2004. Payments on the notes were due monthly, but prepayment was permitted without penalty. *fn4

Appellants Willens and Niederman were two of only four members of the Cooperative who exercised their right to prepay their shares of the Wrap Note obligation. (The other two are not parties to this litigation.) After having purchased two apartment units and signed standard 8% promissory notes to the Cooperative for each, Willens elected to pay off both her notes in 1993, eleven years before the notes otherwise would have matured. That same year Niederman likewise paid off the promissory note he had signed for his unit. Four years later, in August 1997, Willens paid the full purchase price at settlement for a third unit, which obviated the need for her to sign any promissory note in that transaction. The parties have treated this as equivalent to a prepayment for purposes of the present litigation.

Meanwhile, in the mid-1990's, the Cooperative entered into negotiations to retire its corporate obligations under the Wrap Note. By this time, the developer reportedly was bankrupt and the Wrap Note was in the hands of a bankruptcy trustee. The Cooperative claimed in the negotiations that it was entitled to numerous set-offs on account of judgments it had obtained against the developer, payments it had been compelled to make on behalf of the developer to the holders of the mortgages underlying the Wrap Note, and various other losses it had incurred through the fault of the developer. As some of these set-off claims raised complex accounting issues or were otherwise unresolved, the actual net amount that the Cooperative owed on the Wrap Note was in dispute. Ultimately, though, on December 31, 1996, the Cooperative and the bankruptcy trustee reached a compromise under which the Cooperative paid $285,000 in cash and assumed the developer's liability of $32,000 on an underlying note, and the Wrap Note was cancelled. To make its payment, the Cooperative drew in part on note payments by its members that it had previously set aside for the developer and in part on its reserves. Based on a straight amortization schedule, the principal balance of the Wrap Note as of the end of 1996 was $499,000, but given the uncertainty over the true value of the Cooperative's set-offs, none of the parties to this appeal is able to state whether the Cooperative saved money or overpaid by retiring the Wrap Note on the terms that it did. In connection with the summary judgment motions in the trial court, however, the parties stipulated that the Cooperative "paid in full its obligation under the Wrap Note," and "may have even overpaid its obligations, having not received the benefit of all of the set-offs" to which it was entitled. Nevertheless, in view of the unsettled state of affairs, appellants agree that the settlement was in the Cooperative's best interest.

The disagreements were over what came next. After retiring the Wrap Note, the Cooperative's Board of Directors undertook to determine the consequences of the settlement for the members of the Cooperative, who had signed promissory notes for amounts that had been tied to the original Wrap Note debt. There were essentially two groups of members to consider: those many who were still paying off their promissory notes and those few who had prepaid their notes (or who, equivalently, had paid the purchase price for their memberships in full without providing a note). *fn5 On the one hand, the Cooperative was still holding the individual promissory notes of the large majority of its members, including all but one (appellant Willens) of its Board of Directors. These notes covered 42 out of the 48 units in the apartment building. The monthly payments on these notes were scheduled to continue for another eight years, until 2004. On the other hand, there were the four members previously mentioned, holding a total of six apartment units, who had paid their obligations to the Cooperative in full prior to the settlement with the bankruptcy trustee. After extensive consultations with outside counsel, the Board of Directors decided (over director Willens's objection) to treat the two groups of members differently.

In accordance with its counsel's recommendation, the Board decided to terminate the note payment obligations of the majority of members who had not paid in full their proportionate share of the Wrap Note and whose promissory notes were still outstanding. The Board made this decision on the premise, as expressed by its counsel, that since the amount of each promissory note was fixed originally by reference to the amount of the Wrap Note, "upon the reduction of the blanket mortgage balance as a result of the Settlement the amount of blanket mortgage allocated to each such unit was reduced."*fn6 In order to replenish the corporate reserves that had been depleted to retire the Wrap Note, however, the Board imposed a special monthly assessment on the members in the majority group through April 1998 in the same amounts as their monthly note payments had been. The net effect of this decision was to forgive the last six-and-a-half years' worth of note payments, due from May 1998 to December 2004, that these members of the Cooperative otherwise would have owed.

There were no debts to forgive, however, in the case of the members in the minority group who had prepaid their promissory notes before the Wrap Note was retired. The Board of Directors deliberated at length over whether the Cooperative should pay a rebate to those members on the theory that they had overpaid. The Board's outside counsel initially advised in September 1997 that there was "no 'correct' way to assess this situation." On the one hand, he acknowledged, it could be argued that the members who had prepaid their full portion of the corporate obligation had the same right as every other member to share in the "discount"*fn7 the corporation had negotiated. But on the other hand, it could be argued that members who paid "not to share in the burdens of the mortgage . . . should not share in the benefits."*fn8 The Board's counsel thought that "each theory has its merits." Ultimately, however, he advised the Board that "legally, there is no support for making any adjustment" that would involve disbursing corporate funds to the members who had prepaid their share of the Wrap Note:

The owners who paid off their notes had their notes canceled and their obligation to the Cooperative under those notes terminated. There existed no agreements between those owners and the Cooperative to make an adjustment on the payoff transaction in the event that the amount that the Cooperative subsequently paid the Developer was more, or less, than the proportionate amount paid by these prepaying owners.

In counsel's opinion, moreover, the Cooperative's various set-offs against its obligation to the developer did not pass through to the Cooperative's members: "The obligation of the unit owner was to pay his or her promissory notes reflecting his or her share of the blanket mortgage and there were no set-offs allowed." The Board's counsel also advised that there did not appear to be "any equitable basis" either for making an adjustment on behalf of the pre-paying members of the Cooperative. By pre-paying when they did, counsel explained, these members limited their exposure to possible additional charges attributable to the Wrap Mortgage in the future; conversely, each prepayment actually "placed the Cooperative at a disadvantage" because the Cooperative "lost the difference" between the 8% interest it still had to pay under the Wrap Note and the lower money market rate of return it earned on the prepaid funds.

In the end, consistent with the views of its counsel,*fn9 the Board of Directors voted not to use funds belonging to the Cooperative to pay a reimbursement to the members who had prepaid their promissory notes. Director Willens cast the only dissenting vote. Simultaneously, the Board excused the pre-payers from the temporary special assessments it imposed on other members of the Cooperative to replenish corporate reserves that had been depleted to retire the Wrap Note. This was appropriate, its counsel advised, because that ...


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