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Natural Organics v. Natural Nutritional Foods Association

December 16, 1998

NATURAL ORGANICS INC., GERALD KESSLER, AND HEALTH FOOD ASSOCIATES, INC., D/B/A AKIN'S NATURAL FOODS MARKET, PLAINTIFFS-APPELLANTS,
v.
NATURAL NUTRITIONAL FOODS ASSOCIATION, DEFENDANT-APPELLEE.



The opinion of the court was delivered by: Justice Burke delivered the opinion of the court.

Appeal from the Circuit Court of Cook County. Honorable Ronald C. Riley, Judge Presiding.

Plaintiffs Natural Organics, Inc. (Natural Organics), Gerald Kessler, and Health Food Associates, Inc., d/b/a Akin's Natural Foods Market, appeal from an order of the circuit court granting defendant Natural Nutritional Foods Association's (NNFA) motion to dismiss plaintiffs' complaint and denying plaintiffs' motion for summary judgment. On appeal, plaintiffs argue that: (1) the trial court erred in finding that the use of irrevocable proxies by not-for-profit corporations is not unlawful under the General Not-For-Profit Corporation Act of 1986 (Not-For-Profit Corporation Act) (805 ILCS 105/107.50 (West 1996)), (2) because the use of irrevocable proxies was unlawful, "[t]he voting results should therefore be retabulated without the illegal 'irrevocable' proxies"; and (3) the trial court erred in denying plaintiffs' motion for summary judgment because "there are no actual or conceivable factual disputes" precluding summary judgment. For the reasons set forth below, we affirm.

Plaintiff Natural Organics, a New York corporation with its principal place of business in New York, conducts business in Illinois and other states, sells dietary supplement products, and is a voting member of defendant NNFA. Plaintiff George Kessler is the Chief Executive Officer of Natural Organics. Plaintiff Health Foods Associates, Inc., an Oklahoma corporation with its principal place of business in Oklahoma, conducts business in Oklahoma and other states, sells natural foods and dietary supplement products, and is a voting member of defendant NNFA.

Defendant NNFA is a national trade association and an Illinois not-for-profit corporation. NNFA is an independent retailer and supplier of natural foods and natural food supplements. The voting rights of NNFA are governed under Article X, Section 4 of the NNFA bylaws, which provides, in pertinent part: "[e]ach regular member shall have one vote." The NNFA bylaws do not contain a section that governs proxy voting. According to Article XV of the NNFA bylaws, amendments to the bylaws may be passed by a two-thirds vote of members at an annual meeting.

The 1997 NNFA national convention and trade show took place in Las Vegas, Nevada on July 13 through July 16, 1997. The annual business meeting of the NNFA was held during the convention on July 15 and 16. Twenty-three amendments to the NNFA bylaws were proposed and noticed for a vote at the meeting. Proposed Amendment 21 would have changed the procedure by which Supply Division and At-Large Retailer Division representatives were elected to the NNFA Board of Directors. It would have provided for their election at the annual business meeting by a vote of the membership at large, instead of by a vote of their respective division membership at meetings which precede that of the full association. Amendment 21, if approved, would have taken immediate effect and would have required that a new election of the Supply Division and At-Large Retailer Division representatives to the Board of Directors be held, under the new procedure specified in the bylaw amendment.

Prior to the annual business meeting, plaintiffs were proponents advocating the passage of proposed Amendment 21. Kessler solicited proxies from NNFA members giving him the right to cast the proxy-givers' votes in favor of Amendment 21. The Chair of the Supply Division, Bill Knudsen, and the NNFA representative of Smucker Quality Beverages, Inc., also solicited proxies from members to use in voting for amendments. The "Knudsen/Smucker" proxy solicitation advised NNFA supply members to vote "no" on Amendment 21, and on the face of the proxy was the phrase, "This proxy is irrevocable."

After the vote, the accounting firm of Piercy, Bowler, Taylor and Kern validated all of the ballots cast and tabulated the votes for and against all of the proposed bylaw amendments. The accounting firm determined that 93 ballots and 246 valid proxies had been cast for a total of 339 votes in favor of Amendment 21. The Kessler proxies accounted for 164 of the proxies cast in favor of the amendment. The accounting firm also determined that 95 ballots and 216 valid proxies were cast for a total of 311 votes against Amendment 21. The Knudsen/Smucker proxies accounted for 178 of the proxies cast against Amendment 21. As a result, Amendment 21 did not receive the required two-thirds votes necessary for passage as required by the NNFA bylaws.

Plaintiffs filed a complaint in the circuit court on September 9, 1997, alleging that: the Knudsen/Smucker proxies stated on their face that they were "irrevocable"; the use of "irrevocable" proxies is unlawful when used by not-for-profit corporations governed by the Not-For-Profit Corporation Act (805 ILCS 105/107.50 (West 1996)); and the use of such proxies, and their validation in the voting conducted at the 1997 NNFA annual meeting was contrary to public policy and void as a matter of law. Plaintiffs sought a declaratory judgment in their favor, declaring that the Knudsen/Smucker proxies, and all voting results at the NNFA business meeting, were invalid, null, and void. Plaintiffs also sought an order directing the revalidation and retabulation of the voting results without the Knudsen/Smucker proxies.

Defendant filed a motion to dismiss plaintiffs' complaint on October 17, 1997, arguing that: the Not-For-Profit Corporation Act specifically authorizes the use of proxies unless a corporation states otherwise in its articles or bylaws; by comparing the Business Corporation Act of 1983 (Business Corporation Act) (805 ILCS 5/7.50 (West 1996)) to the Not-For-Profit Corporation Act, Illinois law permits irrevocable proxies for not-for-profit corporations; and invalidating the challenged proxies would impermissibly disenfranchise the proxy-givers. Defendant therefore maintained that plaintiffs' complaint failed to state a cause of action.

Plaintiffs filed a motion for summary judgment, arguing that: the Not-For-Profit Corporation Act does not authorize the use of irrevocable proxies, and the Knudsen/Smucker proxies were therefore invalid and should be declared null and void as a matter of law; and Illinois law requires that the 1997 NNFA voting results should be retabulated without the Knudsen/Smucker proxies.

At a hearing on the parties' motions on February 25, 1998, the trial court found that "[t]he [NNFA] election should not be declared void and invalid because irrevocable [was] written on the face of the [Knudsen/Smucker] proxies." The trial court also found no basis in the Not-For-Profit Corporation Act that would support plaintiffs' argument that the use of the irrevocable proxies was unlawful. Accordingly, the court granted defendant's motion to dismiss plaintiffs' complaint with prejudice and denied plaintiffs' motion for summary judgment. This appeal followed.

The standard of review applicable to the dismissal of a complaint is de novo. Pryweller v. Cohen, 282 Ill. App. 3d 899, 907, 668 N.E. 2d 1144 (1996). A proper review of the issues presented in the case at bar requires us to apply the rules of statutory construction. "The construction of a statute is an issue of law and our review is therefore de novo." Boaden v. Department of Law Enforcement, 171 Ill. 2d 230, 237, 664 N.E.2d 61 (1996).

Plaintiffs first contend that the inclusion of the phrase, "[t]his proxy is irrevocable," on the Knudsen/Smucker proxies used at the annual business meeting of the NNFA renders the proxies invalid and the votes of the proxy-givers void. Plaintiffs assert that both the Not-For-Profit Corporation Act and the Business Corporation Act, which allow for proxy voting, superseded the common law which did not allow for proxy voting. However, plaintiffs maintain that irrevocable proxies remain invalid as to not-for-profit corporations because the Not-For-Profit Corporation Act does not address irrevocable proxies at all and, therefore, the common law which barred them, remains in effect.

Defendant argues that the Not-For-Profit Corporation Act does not prohibit the use of irrevocable proxies in voting by members of not-for-profit corporations, and that in the absence of an express prohibition, irrevocable proxies are permitted. Defendant further maintains that since the Not-For-Profit Corporation Act omits any reference to irrevocable proxies and was enacted three years after the Business Corporation Act, which ...


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