Opinion ID: 1249875
Heading Depth: 1
Heading Rank: 3

Heading: By-Law Amendment

Text: In 1986, the Board of Directors amended the Association's by-laws, making it more difficult for the membership to amend the by-laws. Skane sought to have the original by-law reinstated and claimed the Board of Directors' amendment was adopted in bad faith, was unreasonable and oppressive, and disturbed vested contractual and property rights. Originally, Article XI of the by-laws read in pertinent part as follows: Section 1. Powers of Members. The By-Laws of this Association may be adopted, amended or repealed at a meeting duly called for said purpose by the vote of a majority of the voting power represented at said meeting, provided a quorum is present... . Section 2. Powers of Directors. Subject to the right of the members to adopt, amend or repeal these By-Laws, as provided in Section 1 of this ARTICLE XI, at any special or regular meeting, the Board of Directors may adopt, amend, or repeal any of these By-Laws other than a By-Law or amendment thereof changing the authorized number of directors. A quorum was defined as thirty percent of the members entitled to vote, so under the original by-law a majority of fifteen percent plus one member could conceivably amend the by-laws. In 1986, the Board of Directors, upon the advice of legal counsel, amended Article XI, Section 1 to read in pertinent part as follows: Section 1. Powers of Members. The By-laws of this Association may be adopted, amended, or repealed at a meeting duly called for said purpose by an affirmative vote of at least two-thirds (2/3) of the voting power of the entire membership of the Association. For purposes of this provision, the entire membership shall refer to all members of the Association authorized to vote, and shall not refer to a two-thirds (2/3) majority in person or by proxy at the meeting. The Board of Directors made the amendment because a small group called the Council of Concerned Members, of which Skane was a member, had proposed to amend the by-laws. At a June 25, 1989, Board of Directors' meeting, the Association's attorney explained the dangers which could result from a small minority being allowed to amend the by-laws. The attorney's comments were recorded in the Board of Directors' minutes as follows: The membership is not obligated to follow by-laws as much as the board members and chaos would prevail. He suggested that all of us retire if this ever occurs. When the firing starts the by-laws are the only protection for the Board. That's where we'll hide. If you have membership making by-laws it's a very, very [] dangerous situation. The few members that are making the changes will never take responsibility for 1640 members. Skane claims the Board of Directors breached its fiduciary duty by acting in bad faith when it amended the by-law. As support for his allegation of bad faith, Skane points to the comments made by the Association's attorney at the 1989 Board of Directors' meeting and also to the fact that the by-law amendment was a response to actions proposed by the Council of Concerned Members. In this case we can safely say that, as a matter of law, no material question of bad faith existed. The attorney's comments in 1989 explained why the original by-law should not be restored; his comments were not evidence of the 1986 Board of Directors' bad faith in amending the by-law. More importantly, the comments did not evidence any bad faith. The attorney was merely concerned that a minority of members could make changes without the majority's interests being protected. Skane's only other support for his claim of bad faith is that the Board of Directors' minutes described the meeting to change the by-laws as a special meeting to take action by the Board of Directors to change the By-Laws as recommended by our attorney due to ac[ti]on taken by the Council of Concerned [Members]. This statement demonstrated that the Board of Directors relied upon the advice of its attorney, not that it acted in bad faith. Skane also argues that the amendment requiring a two-thirds majority is oppressive and unreasonable. He views the by-law amendment as being oppressive because a meeting had never been held when two-thirds of the membership were in attendance, much less when two-thirds of the membership voted affirmatively on a matter. According to Skane, the amended by-law made it virtually impossible for the membership to amend the by-laws. Whether by-laws are reasonable or oppressive is normally a question of fact and, therefore, not appropriate for summary judgment. 18A AM.JUR 2D Corporations § 319 (1985). However, in this case the membership essentially ratified the amended by-law at the 1987 annual meeting when, by a vote of 723 to 250, they denied a motion to reinstate the original by-law. Since the membership itself voted to retain the amended version, no material question of fact existed regarding the reasonableness of the by-law amendment. Finally, Skane contends that by-laws are contractual in nature and that the original by-law created a vested contractual right which the Board of Directors had no authority to impair. He relies upon the distinction between by-laws which `are mere regulations governing the conduct of the internal affairs of the corporation,' and those `in the nature of a contract which are evidently designed to vest property rights inter se among all stockholders.' Black v. Glass, 438 So.2d 1359, 1371 (Ala. 1983) (quoting Bechtold v. Coleman Realty Co., 367 Pa. 208, 79 A.2d 661, 663 (1951)). Skane views the original by-law as being within the vested rights category because members relied upon the by-laws when they were purchasing property in the Association's subdivision. [4] We agree with Skane that by-laws are contractual in nature, yet we disagree with his analysis that the original by-law created a vested right which could not be impaired. See, e.g., Black, 438 So.2d 1359; and 8 WILLIAM MEADE FLETCHER, FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 4166 (perm. ed. 1982). To analyze this issue, we have limited statutory guidance. The only reference in Wyoming's nonprofit corporations statute regarding by-laws amendments says, The power to alter, amend or repeal the bylaws or adopt new bylaws shall be vested in the board of directors unless otherwise provided in the certificate of incorporation or the bylaws. Wyo. Stat. § 17-6-107 (1989). [5] The Association's by-laws clearly allowed the Board of Directors to amend the by-laws. Article XI, Section 2 provided the Board of Directors with authority to adopt, amend, or repeal any of these By-Laws other than a By-Law or amendment thereof changing the authorized number of directors. Thus, anyone joining the Association was on notice that the by-laws were subject to amendment by the Board of Directors. Apparently, under Skane's analysis, prospective purchasers relied upon the by-law which allowed members to amend the by-laws, yet they ignored the by-law giving the Board of Directors the right to make amendments. As one court has said: It is not one by-law or some by-laws of which the member must take notice, for he must take notice of all which affect his rights or interests. Where, as here, there is an express and clear reservation of the right to amend he is bound to take notice of the existence and effect of that reserved power. ... Associations and corporations have a right to change their by-laws when the welfare of the corporation or association requires it... . Orchard Ridge Country Club, Inc. v. Schrey, 470 N.E.2d 780, 782-83 (Ind. App. 1984) (quoting The Supreme Lodge, Knights of Pythias v. Knight, 117 Ind. 489, 20 N.E. 479, 483 (1889) (citation omitted)). Despite the Board of Director's broad authority to amend the by-laws, a by-law which creates a vested right cannot be amended so as to impair that right. Lambert v. Fishermen's Dock Cooperative, Inc., 61 N.J. 596, 297 A.2d 566, 568-69, 61 A.L.R.3d 967 (1972). See also 8 FLETCHER, supra, at §§ 4177 and 4188. However, Skane fails to sufficiently articulate why the original by-law created a vested contractual or property right. The fact that a prospective purchaser relied upon a particular by-law was not sufficient to create a vested right. If mere reliance upon a by-law creates a vested right, a member could arbitrarily create a vested right by claiming he relied upon a particular by-law at the time he made his purchase. This would make every by-law potentially immune from amendment, no matter how trivial the proposed change might be. Because Skane fails to explain why the original by-law was a vested right, and we can discern no reason for its being a vested right, we hold that any right the members had in the original by-law is not superior to the Board of Directors' authority to amend the by-laws. In summary, we hold that Skane's trespass action cannot lie because he lacked a possessory interest, nor can Skane recover for breach of a fiduciary duty when he did not suffer any actual damages. The Board of Directors' by-law amendment was not adopted in bad faith, was not unreasonable or oppressive, and did not disturb vested contractual or property rights. Affirmed.