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Rainbow Mountain, Inc. v. Begeman

Court of Chancery of Delaware

March 23, 2017

RAINBOW MOUNTAIN, INC., a Delaware corporation, Plaintiff,
v.
TERRY BEGEMAN, Defendant.

          Submitted: December 23, 2016

          Brian T.N. Jordan, JORDAN LAW, LLC, Wilmington, Delaware; Attorney for Plaintiff Rainbow Mountain, Inc.

          Terry Begeman, Montebello, Virginia; Pro se Defendant.

          MEMORANDUM OPINION

          MONTGOMERY-REEVES, Vice Chancellor.

         This action arises from a dispute among the members of Rainbow Mountain, Inc., a Delaware nonstock corporation, ("Rainbow Mountain"). Plaintiff Rainbow Mountain seeks a declaratory judgment that Defendant Terry Begeman was effectively removed as a director, officer, and member of the corporation and as a result has no right to occupy land owned by Rainbow Mountain. Terry, [1] as Counterclaim Plaintiff, seeks a declaratory judgment that he remains a member, director, and officer of Rainbow Mountain and is entitled to continue to occupy Rainbow Mountain's land. Both parties in this case have moved for summary judgment and have stipulated to a decision on the paper record. I hold that Terry was not properly removed as a director in 2008 or as a member in 2009, but Terry was effectively removed as Secretary of Rainbow Mountain in 2009. As a member of Rainbow Mountain, Terry is entitled to continue to live on Rainbow Mountain's real property under the Rainbow Mountain bylaws.

         I. BACKGROUND

         The facts in this opinion derive from the documents that the parties have submitted with their pleadings and briefs in this case. Both parties have moved for summary judgment and have stipulated to a decision on the paper record.[2]

         A. Parties

         Rainbow Mountain owns approximately 97 acres of land in Virginia. Sheridan and Barbara formed Rainbow Mountain, and they and their natural children were the original members of the corporation.

         Terry is one of Sheridan and Barbara's six children. He currently lives in a cabin on the land owned by Rainbow Mountain. Before the events that gave rise to this litigation, Terry was a director, a member, a Senior Vice-President, and the Secretary of Rainbow Mountain.

         Mark Begeman, Laurie Larimar, Cindy Dallwig, Jeffrey Begeman, and Todd Begeman are Terry's five siblings. Susan Begeman, Roger Dallwig, and Bonnie Begeman are Terry's siblings-in-law. Jason Begeman, Melanie Ketchum, and Justin Begeman are Terry's niece and nephews. Eric Ketchum is Melanie's husband.

         B. Facts

         1. The Rainbow Mountain bylaws

         Both parties have submitted a set of bylaws of Rainbow Mountain that was originally adopted on February 10, 2003 (the "2003 Bylaws").[3] Plaintiff and Defendant also have submitted another version of the bylaws that first appears in the record in a 2005 Rainbow Mountain resolution (the "2005 Bylaws").[4]

         On January 21, 2003, Thomas W. Aldous of the law firm Skeen & Zobrist sent Terry a letter attaching the 2003 Bylaws for him to send to the members of Rainbow Mountain.[5] By February 10, 2003, six of the ten individuals thought to be members of Rainbow Mountain on that date[6] had signed a written consent of members adopting the 2003 Bylaws.[7]

         On July 29, 2004, Judge J. Michael Gamble of the Twenty-Fourth Judicial Circuit of Virginia published an opinion in a case arising out of Sheridan's attempt to transfer Rainbow Mountain's real property to himself (the "Virginia Litigation").[8] Judge Gamble held that Rainbow Mountain had no written bylaws and rather had bylaws only by custom, acquiescence, and course of conduct. Judge Gamble found that the members acquiesced in a procedure under which Barbara made all decisions for the corporation and appointed directors, officers, and members. Further, Judge Gamble held that the members of Rainbow Mountain were Sheridan, Barbara, and their six children.[9] Barbara passed away before the Virginia Litigation began, [10] and Sheridan died during it.[11] Thus, when Judge Gamble's opinion was issued, the surviving members of Rainbow Mountain were Mark, Laurie, Cindy, Jeffrey, Todd, and Terry.

         On July 7, 2005, [12] Laurie, Jeffrey, Todd, and Terry signed and delivered a written consent in lieu of an annual meeting of members, (1) recognizing the six members as determined by the July 29, 2004, Virginia court order, (2) electing as directors Jeffrey, Susan, Jason, Melanie, Todd, Bonnie, Justin, Laurie, and Terry, and (3) adopting a set of bylaws.[13] The July 7, 2005 written consent of members stated, in part, as follows:

[T]he Bylaws for the regulation of the affairs of the Corporation, a copy of which is attached hereto as Exhibit F and incorporated herein by reference, are hereby approved and adopted and ordered to be filed in the minute book of the Corporation to be effective immediately, and all previous bylaws are hereby superceded [sic], effective immediately.[14]

         The record does not indicate which version of the bylaws was attached as "Exhibit F" to the July 7, 2005 written consent. Terry stated at oral argument that the 2003 Bylaws have been the operative bylaws since they were ratified in the July 7, 2005 written consent of members.[15] Rainbow Mountain appears to agree because it cites to and includes as an exhibit to its opening summary judgment brief the 2003 Bylaws.[16] Rainbow Mountain does not offer any proof or argue that the 2005 Bylaws were ratified in the July 7, 2005 written consent or were adopted at any time thereafter. Instead, Rainbow Mountain argues that "there is no material difference on the Articles in question between the 2003 and 2005 bylaws."[17] Absent any evidence or argument in the record to rebut Terry's assertion that the 2003 Bylaws remain the operative bylaws, I find that the 2003 Bylaws were ratified in the July 7, 2005 written consent of members and have been the operative Rainbow Mountain bylaws since July 7, 2005.

         Under the 2003 Bylaws, Rainbow Mountain has three classes of members, each with different conditions of membership. The conditions of membership for Regular Members (also referred to as "Class A" members) are as follows:

Any individual who is a descendant of both Sheridan Begeman and Barbara Begeman and who is age 35 or older is eligible to be a Regular Member. Any individual who is legally and lawfully wedded to a descendant of both Sheridan Begeman and Barbara Begeman, who is not legally separated from such descendant, and who is age 35 or older is eligible to be a Regular Member. Any Associate Member who is 18 years of age or older and whose primary residence has been on the property of the Corporation for a period of six months immediately prior thereto is eligible to be a Regular Member.[18]

         The 2003 Bylaws further provide that "[a]ny individual eligible to be a Regular Member shall automatically become a Member of Class A upon delivery of a signed written notice to the Secretary of the Corporation . . . ."[19] The conditions of membership for Associate Members (also referred to as "Class B" members) are as follows:

Any individual who is a descendant of Sheridan Begeman and Barbara Begeman is eligible to be an Associate Member. Any individual who is legally and lawfully wedded to a descendant of both Sheridan Begeman and Barbara Begeman and who is not legally separated from such descendant is eligible to be an Associate Member.[20]

         The bylaws further provide that "[a]ny individual eligible to be an Associate Member shall automatically become a Member of Class B upon delivery of a signed written notice to the Secretary of the Corporation . . . ."[21] Finally, "[a]ny individual is eligible to be an Honorary Member"[22] (also referred to as a "Class C" member). In order to become an Honorary Member, an individual must:

submit a written and signed application, on a form approved by the Board of Directors, to the Secretary of the Corporation. Such application shall be signed by two Members of any Class in good standing who support such individual's election as an Honorary Member. Each application shall be considered by the Board of Directors at its next regular or special meeting and shall be approved or disapproved by 75% or more of the Board of Directors that attend such meeting so long as a quorum is present.[23]

         Regular Members of Rainbow Mountain are entitled to "participate in and to vote at all meetings of Members."[24] Further, among other rights, they are entitled to "live on the grounds of Rainbow Mountain Incorporated with their spouse and children . . . ."[25] Associate Members "shall have the same privileges as Regular Members, but shall not have the right to vote on matters presented for a vote at meetings of Members."[26] Honorary Members do not have voting rights or the right to live on the Rainbow Mountain property by default. But "[t]he Board of Directors may grant to any one or all of the Honorary Members such other duties and privileges, including voting privileges, as 75% or more of the Full Board of Directors may determine."[27] The record does not show whether anyone ever submitted a written notice to the Secretary of Rainbow Mountain as the bylaws require in order to become a member.

         Under paragraph 4 of article II of the 2003 Bylaws, Regular Members and Associate Members also have the right to request in writing from the board of directors an unassignable, irrevocable lifetime license to occupy no more than five acres of Rainbow Mountain land.[28] Under the terms of such a license, a member would be entitled to exclude others from the designated portion of Rainbow Mountain's land and make improvements on the land. The record does not indicate that any Rainbow Mountain members ever followed the article II, paragraph 4 procedure to obtain such a license, and Terry argues that while licenses were never formally granted under the bylaws, they were informally granted.[29] Regardless, certain Rainbow Mountain members did occupy parts of the Rainbow Mountain land.[30]

         The 2003 Bylaws provide for the removal of members as follows:

Membership in the Corporation, and all rights and licenses incident thereto, may be terminated for cause. The Board of Directors shall hold a hearing and the Member shall be given no less than 5 days written notice of such hearing. The Board of Directors shall prescribe rules and procedures for the hearing consistent herewith. The Member shall have the opportunity to be heard at such meeting. The Member may be expelled only by a vote of expulsion by 2/3 or more of the Full Board of Directors.[31]

         The 2003 Bylaws also provide that directors may be removed with or without cause by a majority of the members.

Any or all of the directors may be removed with or without cause, at any time, by the majority vote of the Regular Members at a special meeting called for that purpose. Such removal may be accomplished with or without cause, but the director involved shall be given an opportunity to be present and to be heard at the meeting at which his or her removal is considered.[32]

         The 2003 Bylaws define "Cause" as follows:

The term "Cause" shall mean a Member's or director's (i) continued participation in activity in material conflict with the Corporation's interests but only after written notice to the Member or director from the Corporation and the Member's or director's failure to discontinue participation in activity in material conflict with the Corporation's interests within 30 days after receipt of said notice; (ii) conviction of a felony; (iii) fraud, misrepresentation, embezzlement or similar acts of dishonesty; (iv) habitual drunkenness; (v) habitual use of prescription medication beyond that which is prescribed by Member's or director's physician or Member's or director's use of an illegal drug; (vi) intentional or willful misconduct that may subject the Corporation to criminal or civil liabilities; or (vii) willful violation of or substantial failure to comply with the Certificate of Incorporation, bylaws, or the duly promulgated rules and regulations of the Corporation respecting Membership rights and duties but only after written notice to the Member or director from the Corporation and the Member's or director's failure to correct said violation or failure within 30 days after receipt of said notice.[33]

         In the case of a vacancy on the Rainbow Mountain board, the 2003 Bylaws provide as follows:

Any vacancy occurring in the Board of Directors shall be filled by a majority of all of the remaining directors- though less than a quorum-or by a sole remaining director. A director appointed to fill a vacancy shall serve for the unexpired term of his or her predecessor in office. Notwithstanding the foregoing, the Members who are entitled to elect a director, who has vacated his or her position, may elect a successor to fill such vacancy for the unexpired term and such election shall take precedence over the appointment of a director by the Board of Directors. A reduction in the authorized number of directors shall not remove any director from office prior to the expiration of his or her term of office.[34]

         The 2003 Bylaws provide that the board of directors may appoint officers for Rainbow Mountain as follows:

The officers . . . shall be a president, a secretary, and a treasurer. The Board of Directors may also choose one or more vice presidents (any one or more of whom may be designated executive vice president or senior vice president), one or more assistant secretaries and assistant treasurers, as well as other officers and agents, with such titles, duties, and powers as the Board of Directors may from time to time determine.[35]

         The 2003 Bylaws provide that only the board of directors may remove officers as follows:

Each officer of the Corporation shall hold office until his or her successor is chosen and qualified or until he or she dies, resigns or is removed. Any officer may be removed at any time by the affirmative vote of a majority of the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the officer so removed. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors for the unexpired portion of the term. Only the Board of Directors may remove an officer from his or her office.[36]

         Finally, the 2003 Bylaws also establish a quorum for member meetings. The bylaws state that "[m]embers holding more than 50% of the votes that may be cast at any meeting shall constitute a quorum at a meeting of Members."[37]

         2. Removal of Mark and Cindy as members

         On September 21, 2005, the directors of Rainbow Mountain that were elected in the July 7, 2005 written consent signed a unanimous written consent terminating Mark and Cindy's memberships[38] in Rainbow Mountain without cause.[39] The written consent purported to remove Mark and Cindy as members without cause through the following resolutions:

[A] motion is hereby brought before the Full Board of Directors to provoke [sic] Article IX(2) of the Corporation's Bylaws in order to terminate the membership(s) of the following individuals:
Mark Begeman
Cindy Dallwig
. . . Mark Begeman and Cindy Begeman [sic] have 30 days from [the date the written consent is delivered to the corporation's secretary] . . . to permanently vacate the premises and all corporate property and to remove all their personal belongings thereof [sic].[40]

         A footnote in the September 21, 2005 written consent of directors quotes the bylaws of Rainbow Mountain as stating "[m]embership in the Corporation, and all rights and licenses incident thereto, may be terminated by the Board of Directors at any time without cause."[41] There is no evidence in the record, however, of an amendment to the bylaws to allow members to be removed without cause.[42] The footnote in question merely quotes the 2005 Bylaws as if they have already been adopted. As discussed above, absent any evidence or argument that bylaws other than the 2003 Bylaws should apply, I find that the 2003 Bylaws are the operative Rainbow Mountain bylaws, and footnote 2 in the September 21, 2005 written consent of directors misquotes the bylaws.

         The September 21, 2005 written consent also added five new Rainbow Mountain Regular Members. The written consent contained a resolution that:

[H]aving qualified for membership, the following persons be, and hereby are, elected to serve as Class A Members of the Corporation:
Susan Begeman
Jason Begeman
Melanie Ketchum
Bonnie Begeman
Justin Begeman[43]

         Terry challenges whether the Regular Members added in the September 21, 2005 written consent had satisfied the conditions of membership to become Regular Members. But nothing in the record indicates that Susan, Jason, Melanie, Bonnie, or Justin received notice of this litigation, or were given an opportunity to defend their status as Rainbow Mountain members. Regardless, whether Susan, Jason, Melanie, Bonnie, and Justin are members of Rainbow Mountain does not affect the outcome of this case. Thus, this Court expresses no opinion on whether Susan, Jason, Melanie, Bonnie, or Justin are Rainbow Mountain members. Instead, this opinion assumes that they are members and explains that the results of the relevant Regular Member votes would be the same regardless of whether Susan, Jason, Melanie, Bonnie, and Justin are actually Regular Members.

         On June 22, 2010, Cindy, her husband Roger, and Mark signed an affidavit that was submitted to the Nelson Circuit Court in Virginia presumably in connection with litigation in that court, declaring that "should Rainbow Mountain Incorporated still qualify as a non-profit corporation set up to do business in the Commonwealth of Virginia; let the record show that Cindy Dallwig, Roger Dallwig, and Mark Begeman, wish the court to recognize their ongoing interest in membership of said corporation."[44] No evidence suggests that Cindy, Roger, or Mark have disavowed this affidavit since 2010.

         3. Removal of Terry as a director, officer, and member

         Since 2005, relations among the members of Rainbow Mountain have soured, and on November 15, 2008, at a Rainbow Mountain members meeting, the Regular Members voted to remove Terry from the Rainbow Mountain board of directors without cause.[45] The meeting minutes list nine Regular Members: Laurie, Jeffrey, Susan, Jason, Melanie, Terry, Todd, Bonnie, and Justin. Only Laurie, Jeffrey, Susan, Jason, and Melanie were present, and they all voted to remove Terry from the board.[46] The members present at the November 15, 2008 meeting also purported to amend portions of the Rainbow Mountain bylaws.

         On April 29, 2009, at 7:34 p.m., the members of Rainbow Mountain held another meeting at which the Regular Members voted to elect Eric to fill the vacancy left by Terry's removal from the board.[47] The members present at that meeting were the same members present at the November 15, 2008 meeting-namely, Laurie, Jeffrey, Susan, Jason, and Melanie-plus Eric. The record does not reflect when or if Eric became a member of Rainbow Mountain. At the 7:34 p.m. ...


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