Board Members Retain Standing to Pursue Enforcement Actions Under the Corporations Code After Removal From Board

CATEGORY: Nonprofit News
CLIENT TYPE: Nonprofit
DATE: Nov 03, 2023

Debra Turner was a director on the Board of the Conrad Prebys Foundation, a nonprofit public benefit corporation named for its founder, who was a wealthy philanthropist.  In addition to the foundation, Prebys created a trust, and directed it to make distributions to specific beneficiaries after his death.  The assets remaining after the gift distributions were to go to the Foundation to be used for charitable purposes.

Under the Foundation’s bylaws, all of its directors were members of the Foundation, and the Foundation had no other members. Most of the directors had a personal relationship with Conrad Prebys.  For example, Turner was Prebys’ longtime partner, and the two lived as a couple for over 16 years.

After Prebys passed, there was a contest over Prebys’ trust, as Conrad Prebys’ son, Eric, was originally a beneficiary of the trust and eliminated from the trust two years before Conrad Prebys died.  Laurie Anne Victoria, another Board member and the trustee of the trust, wanted to settle Eric’s claims and discussed an appropriate settlement amount with the Board.  Turner was the only director who opposed the settlement.  Eventually, the Board authorized a settlement amount of $12 million, and Victoria settled with Eric for a total of $15 million, paying $9 million to Eric directly and the remainder in taxes.

In May 2017, Turner filed a petition in probate court against her fellow Board members (director-defendants), seeking to enforce provisions of the Corporations code related to breach of charitable trust against the Corporation under Corporations Code section 5142, the approval of self-dealing transactions in violation of the Board members’ duty of loyalty under Corporations Code section 5233, the removal of members of the Board for dishonest acts and gross abuse of authority under Corporations Code section 5223.  All of these statutes give certain persons’ standing to bring such actions, including, but not limited to directors of the corporation. All causes of action were based on the Board’s handling of the settlement with Eric.

The directors were aware of Turner’s lawsuit prior to a Board meeting held in November 2017, at which the Board conducted an election of Foundation directors and officers.  The four director-defendants nominated and seconded one another for reelection.  No one nominated Turner for reelection, despite Turner making it clear that she wanted to remain on the Board.  As a result, Turner was no longer a director, officer, or member of the Foundation, which she alleged was an act of retaliation in response to her lawsuit.

The probate court transferred Turner’s claims to a civil court and made clear that the new proceeding would relate back to the date of the original filing, when Turner was still a director of the Foundation.  Nonetheless, when Turner filed the civil complaint, the directors argued that Turner no longer had standing to maintain the enforcement action because she was no longer a director or member of the Foundation.  The trial court agreed and dismissed the claims, and the Court of Appeal affirmed.

The California Supreme Court reversed the Court of Appeal’s ruling, finding that Turner was not required to maintain a continuous relationship with the Foundation to proceed with her suit.  The Court considered the language of these statutes and the legislative history of the statutes, and held that these enforcement statutes clearly indicate that they require an individual who brings an action under them as a director to be a director at the time that person initiates the action. However, they do not contain a continuous directorship requirement that would require dismissing the suit if a director fails to stay in a director position.

The Court was also concerned about the practical effects of upholding the Court of Appeal decision, namely the gamesmanship by directors accused of wrongdoing.  For example, director-defendants would be able to end a director’s enforcement action by removing director-plaintiffs from office, refusing to reelect these director-plaintiffs, or otherwise making it more difficult for director-plaintiffs to retain their positions.  At the same time, a director-plaintiff would have little incentive to bring a lawsuit, knowing it could lead to the loss of their directorship and then an end to the lawsuit.

Turner v. Victoria (2023) 15 Cal.5th 99.

Note: This case establishes a new precedent in California.  It is relevant for boards at nonprofit organizations who should be aware that former directors can bring enforcement actions under the Corporations Code against board members after those former directors are removed or otherwise leave the board.

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