Failure To Determine Board Meeting Formalities Leads To Six Figure Court Sanctions Against Attorney


The fundamentals of corporate action can seem about as interesting as flossing. Yet, the failure to attend to either is likely to result in unpleasant consequences as one lawyer recently discovered in Winterton v. Humitech of No. Cal., LLC, 2011 Bankr. LEXIS 4164 (9th Cir. BAP 2011).

The case began with a lawsuit in California. That lawsuit resulted in one of the parties – a Nevada corporation named Blue Pine Group, Inc. - commencing a Chapter 7 bankruptcy case. A purported shareholder in Blue Pine responded by filing a motion to dismiss the bankruptcy case on the grounds that the petition had not been properly authorized under Nevada law. Blue Pine responded by submitting two sets of board meeting minutes. Both minutes reflected the attendance of only two of Blue Pine’s four directors. The first set of minutes included resolutions adopted by the two directors purporting to remove the other two directors. The second set of minutes included a resolution that purported to authorize placing Blue Pine in bankruptcy.

The Bankruptcy Court determined that the board of directors of a Nevada corporation must approve extraordinary actions such as a bankruptcy filing. The court also found that under Nevada law, removal of a director requires a 2/3 vote of the stockholders. Because the two absent directors had not been validly removed, there was no valid notice, quorum or vote taken at the meeting purporting to authorize Blue Pine’s bankruptcy. Consequently, the court dismissed Blue Pine’s bankruptcy case.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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