Collins v. Beinecke — 67 N.Y.2d 479

Majority

p. 479

Frederick A. Collins, Individually and as a Member of and in the Right of the S & H Foundation, Inc., et al., Appellants, v William S. Beinecke et al., Individually and as Members and Directors of the S & H Foundation, Inc., et al., Respondents.

Argued May 1, 1986;

decided June 5, 1986

p. 480

POINTS OF COUNSEL

Harold R. Tyler, Jr., Robert P. LoBue and Stephen P. Younger for appellants.

I. The Supreme Court’s error in refusing to recognize the special nature and function of company foundations permeates and distorts its entire decision. (Trustees of Hamilton Coll, v Roberts, 223 NY 56 ; Simon v Etgen, 213 NY 589 ; Aetna Cas. & Sur. Co. v Jackowe, 96 AD2d 37 ; Sargent v Halsey, 75 Misc 2d 624 , 42 AD2d 375 ; Zeiser v Cohn, 207 NY 407 ; Evans Prods. Co. v Decker, 52 AD2d 991 ; McHugh v Paley, 63 Misc 2d 1092 ; Campbell v Brown, 268 App Div 324 , 294 NY 702 ; Santos v Chappell, 65 Misc 2d 559 ; Matter of Carter v Muscat, 21 AD2d 543 .) II. Defendants’ fiduciary duties are not defined solely by the permissive language of the foundation’s bylaws and certificate of incorporation. (Pepper v Litton, 308 US 295 ; Diamond v Oreamuno, 24 NY2d 494 ; Foley v D’Agostino, 21 AD2d 60 ; Matter of Vogel [Lewis], 25 AD2d 212 , 19 NY2d 589 ; Redmont Thinlite Corp. v Redmont, 475 F2d 85 ; Jacobus v Diamond Soda Water Mfg. Co., 94 App Div 366 ; Fender v Prescott, 64 NY2d 1077 ; Byrne v Barrett, 268 NY 199 ; Matter of James, 22 Misc 2d 1062 , 284 App Div 936 , 309 NY 659 ; Associate Alumni of Gen. Theol. Seminary v General Theol. Seminary, 163 NY 417 .) III. Continuation of the foundation’s activities and of its relationship to its sponsoring company was part of the goodwill that defendants were obligated to transfer to plaintiffs. (Mohawk Main

p. 481

tenance Co. v Kessler, 52 NY2d 276 ; Levitt Corp. v Levitt, 593 F2d 463 ; Balluffi v Montross, 199 Misc 220 .) IV. The foundation’s purpose and character as a charitable arm of the company should be preserved, and the Supreme Court erred in permitting defendants to divert the foundation from its clearly understood purpose. (Matter of Sousa v New York State Council Knights of Columbus Found., 10 NY2d 68 ; St. Joseph’s Hosp. v Bennett, 281 NY 115 ; Matter of Scott, 8 NY2d 419 ; Matter of Rieger, 60 AD2d 299 ; Matter of Jolson, 202 Misc 907 ; Elliott v Teachers Coll., 177 Misc 746 , 264 App Div 839 , 290 NY 747 ; Balluffi v Montross, 199 Misc 220 .)

Daniel A. Pollack for respondents.

I. The bylaws govern this controversy and defendants are admittedly in compliance with the bylaws. (Matter of Haebler v New York Produce Exch., 149 NY 414 ; Procopio v Fisher, 83 AD2d 757 ; Associated Gen. Contrs. v Lapardo Bros. Excavating Contrs., 43 Misc 2d 825 ; Fairchild v Tillotson, 118 Misc 639 ; Leon v Chrysler Motors Corp., 358 F Supp 877 , 474 F2d 1340 .) II. This court should not interfere in the internal affairs of the foundation. (Matter of Grace v Grace Inst., 19 NY2d 307 ; Matter of Gilheany v Civil Serv. Employees Assn., 59 AD2d 834 ; New York State Soccer Football Assn. v United States Soccer Football Assn., 18 Misc 2d 112 ; McKane v Adams, 123 NY 609 ; Simons v Berry, 210 App Div 90 ; People ex rel. Sluiter v Holstein-Friesian Assn., 41 Hun 439 .) III. Appellants’ arguments are meritless. (Meech v Allen, 17 NY 300 ; Matter of Halls v Van Buren, 46 Misc 2d 703 , 24 AD2d 693 ; Brause v Goldman, 10 AD2d 328 , 9 NY2d 620 ; Trimmer v Van Bomel, 107 Misc 2d 201 ; Claude Neon Lights v Federal Elec. Co., 135 Misc 113 , 227 App Div 696 ; Mizrahi v Cohen, 1 Misc 2d 174 ; Bayview Gen. Hosp. v Associated Hosp. Serv., 45 Misc 2d 218 ; Seif v City of Long Beach, 286 NY 382 ; Matter of Wells v Board of Assessors, 67 Misc 2d 804 ; People v Sansanese, 17 NY2d 302 .)

OPINION OF THE COURT

This is an action for declaratory judgment and injunctive relief seeking a judicial determination of questions concerning the control and management of defendant S & H Foundation, Inc. Plaintiffs represent the interests of Baldwin-United Corporation which now indirectly owns all the stock of the former Sperry & Hutchinson Company, Inc. The individual defendants are former officers and stockholders of Sperry & Hutch

p. 482

inson Company, Inc. and are members and directors of the foundation. Plaintiffs seek to remove them and install representatives of Baldwin-United Corporation in their place.

The S & H Foundation was formed in 1962 as a type-B not-for-profit corporation and has, since its creation, received its sole financial support from the Sperry & Hutchinson Company, a company well known for its S & H green stamps. The foundation is and always has been a separate legal entity with its own bylaws and certificate of incorporation. Throughout the years, however, a substantial portion of the foundation’s grants benefited company employees directly or indirectly and many of its charitable programs were continuations of programs established and conducted by the company prior to 1962. Neither the certificate of incorporation nor the bylaws of the S & H Foundation contain any qualifications for membership or holding office. From its inception in 1962, however, a practice developed that only officers, directors or agents of the company served as members and directors of the foundation.

In 1981 Baldwin-United Corporation purchased all of the outstanding stock of the company, including all of the stock of the Beinecke defendants. Although the Beineckes’ connection with the company terminated with this stock sale, they have refused to resign as members of the foundation or to second the nomination for membership of three individuals associated with Baldwin-United. Accordingly, plaintiffs instituted this action seeking to compel them to do so, claiming that this is a "company” foundation and that individual defendants therefore have a fiduciary duty not to act contrary to the established practices and purposes of Sperry & Hutchinson Company, Inc. but that they are in fact doing so by blocking the personnel changes proposed by Baldwin-United.

As plaintiffs point out, the creation of company foundations is a recognized business practice. Such foundations provide a company with an opportunity to integrate and institutionalize its long-range charitable giving to further corporate goals and objects, and permit the company to create goodwill while doing so. Moreover, there are definite tax advantages to a company in using a foundation because it may use its gifts to smooth out its earnings picture by making large gifts in profitable years and smaller gifts in lean years (see generally, Hirschfield, Corporate-Community Foundations: The Tie That’s Binding, 25 Foundation News, No. 6 [Nov./Dec. 1984]; Weithorn, Tax Techniques for Foundations and Other Exempt

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Organizations § 12.02 [1]). Except for special tax treatment, however, the law does not accord any special status to company foundations, as plaintiffs concede.

The S & H Foundation exhibits many of the indicia common to "company” foundations: it bears the name of the company that created it; its charitable programs, involving as they frequently do the company’s employees and clientele, publicize the company’s generosity and contribute to the company’s goodwill; its organization and administration are intimately intertwined with that of the company; and the company is the sole source of its funds.

However, the foundation’s certificate of incorporation and bylaws and the annual gift instruments from the company contain no specific limitations requiring the foundation to expend its resources as the company directs or limiting membership in the foundation to persons affiliated with the company. Nor did the sale documents contain any provisions to ensure Baldwin-U nited’s future control over the foundation.

Plaintiffs assert, however, that due to the past practices and relations between the corporations and the substantial assets that the company has contributed to the foundation, which now total over six million dollars, equity must intervene to remove the individual defendants and thus prevent them from diverting these funds to their own purposes. We agree with plaintiffs that the sale of a business imposes a duty upon the seller not to impair the goodwill of that business (Mohawk Maintenance Co. v Kessler, 52 NY2d 276 , 286), and that defendants may not act in a manner that is inimical to the charitable purposes of the foundation (cf. Not-For-Profit Corporation Law § 513 [b]). The customs and practices of the past are not enough, however, to impose a fiduciary duty on them to resign or to install plaintiffs’ representatives in their places (see, Matter of Rye Psychiatric Hosp. Center, 66 NY2d 333 ). Absent evidence that defendants have misused the foundation’s assets or a showing that their acts are " 'unfair, oppressive or manifestly detrimental to the [foundation’s] interests’ ” (Matter of Sousa v New York State Council Knights of Columbus Found., 10 NY2d 68 , 75), we find no basis for the invocation of equitable power to annul defendants’ acts and interfere in the legal relationship that the parties have structured for themselves.

Accordingly, the order of the Appellate Division should be affirmed, with costs.

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Chief Judge Wachtler and Judges Meyer, Simons, Kaye, Alexander, Titone and Hancock, Jr., concur in Per Curiam opinion.

Order affirmed, with costs.

Cases cited

Trustees of Hamilton College v. Roberts 223 NY 56 N.Y. 1918-02-26 p. 480
Simon v. Etgen 213 NY 589 N.Y. 1915-01-19 p. 480
Aetna Casualty & Surety Co. v. Jackowe 96 AD2d 37 N.Y. App. Div. 1983-10-31 p. 480
Sargent v. Halsey 75 Misc 2d 624 N.Y. Sup. Ct. 1973-03-30 p. 480
Sargent v. Halsey 42 AD2d 375 N.Y. App. Div. 1973-10-23 p. 480
Zeiser v. Cohn 207 NY 407 N.Y. 1913-02-25 p. 480
Evans Products Co. v. Decker 52 AD2d 991 N.Y. App. Div. 1976-05-20 p. 480
McHugh v. Paley 63 Misc 2d 1092 N.Y. Sup. Ct. 1970-09-16 p. 480
Campbell v. Brown 294 NY 702 N.Y. 1945-03-08 p. 480
Santos v. Chappell 65 Misc 2d 559 N.Y. Sup. Ct. 1971-02-03 p. 480
Carter v. Muscat 21 AD2d 543 N.Y. App. Div. 1964-07-09 p. 480
Pepper v. Litton 308 US 295 SCOTUS 1939-12-04 p. 480
Diamond v. Oreamuno 24 NY2d 494 N.Y. 1969-05-15 p. 480
Foley v. D'Agostino 21 AD2d 60 N.Y. App. Div. 1964-03-17 p. 480
In re the Arbitration between Vogel & Lewis 25 AD2d 212 N.Y. App. Div. 1966-03-29 p. 480
In re the Arbitration between Vogel & Lewis 19 NY2d 589 N.Y. 1967-01-05 p. 480
Jacobus v. Diamond Soda Water Manufacturing Co. 94 App Div 366 N.Y. App. Div. 1904-05-20 p. 480
Fender v. Prescott 64 NY2d 1077 N.Y. 1985-04-25 p. 480
Byrne v. Barrett 268 NY 199 N.Y. 1935-07-11 p. 480
In re the Estate of James 22 Misc 2d 1062 N.Y. Sur. Ct. 1953-04-16 p. 480
In re the Construction of the Will of James 309 NY 659 N.Y. 1955-07-08 p. 480
Associate Alumni of General Theological Seminary of Protestant Episcopal Church v. General Theological Seminary of Protestant Episcopal Church 163 NY 417 N.Y. 1900-06-12 p. 480
Mohawk Maintenance Co. v. Kessler 52 NY2d 276 N.Y. 1981-02-19 at 286 p. 481, p. 483
Balluffi v. Montross 199 Misc 220 N.Y. Sup. Ct. 1950-12-27 p. 481
Sousa v. New York State Council Knights of Columbus Foundation 10 NY2d 68 N.Y. 1961-06-01 at 75 p. 481, p. 483
St. Joseph's Hospital v. Bennett 281 NY 115 N.Y. 1939-07-11 p. 481
In re the Accounting of United States Trust Co. 8 NY2d 419 N.Y. 1960-12-01 p. 481
In re the Estate of Rieger 60 AD2d 299 N.Y. App. Div. 1977-12-29 p. 481
In re the Construction of the Will of Jolson 202 Misc 907 N.Y. Sur. Ct. 1952-05-16 p. 481
Elliott v. Teachers College 177 Misc 746 N.Y. Sup. Ct. 1941-12-15 p. 481
Elliott v. Teachers College 290 NY 747 N.Y. 1943-04-22 p. 481
Haebler v. New York Produce Exchange 149 NY 414 N.Y. 1896-05-26 p. 481
Procopio v. Fisher 83 AD2d 757 N.Y. App. Div. 1981-07-09 p. 481
Associated General Contractors of America, New York State Chapter, Inc. v. Lapardo Bros. Excavating Contractors, Inc. 43 Misc 2d 825 N.Y. Sup. Ct. 1964-08-20 p. 481
Fairchild v. Tillotson 118 Misc 639 N.Y. Sup. Ct. p. 481
Grace v. Grace Institute 19 NY2d 307 N.Y. 1967-04-06 p. 481
New York State Soccer Football Ass'n v. United States Soccer Football Ass'n 18 Misc 2d 112 N.Y. Sup. Ct. 1958-11-25 p. 481
McKane v. Adams 123 NY 609 N.Y. 1890-12-02 p. 481
Meech v. Allen 17 NY 300 N.Y. p. 481
Halls v. Van Buren 46 Misc 2d 703 N.Y. Sup. Ct. 1965-04-20 p. 481
Halls v. Van Buren 24 AD2d 693 N.Y. App. Div. 1965-07-13 p. 481
Brause v. Goldman 10 AD2d 328 N.Y. App. Div. 1960-04-21 p. 481
Brause v. Goldman 9 NY2d 620 N.Y. 1961-01-05 p. 481
Trimmer v. Van Bomel 107 Misc 2d 201 N.Y. Sup. Ct. 1980-11-04 p. 481
Claude Neon Lights, Inc. v. Federal Electric Co. 135 Misc 113 N.Y. Sup. Ct. 1929-09-30 at 227 p. 481
Mizrahi v. Cohen 1 Misc 2d 174 N.Y. Sup. Ct. 1955-06-30 p. 481
Bayview General Hospital v. Associated Hospital Service 45 Misc 2d 218 N.Y. Sup. Ct. 1964-12-08 p. 481
Seif v. City of Long Beach 286 NY 382 N.Y. 1941-07-29 p. 481
Wells v. Board of Assessors 67 Misc 2d 804 N.Y. Sup. Ct. 1971-11-11 p. 481
People v. Sansanese 17 NY2d 302 N.Y. 1966-05-05 p. 481
Rye Psychiatric Hospital Center, Inc. v. Schoenholtz 66 NY2d 333 N.Y. 1985-11-19 p. 483

Statutes and regulations cited

Not-for-Profit Corporation Law p. 483