Business Law

California Appellate Court Holds that Director of a Nonprofit Public Benefit Corporation Loses Standing to Maintain an Action against the Corporation if She is not Re-elected During the Litigation

On August 17, 2021, the California Court of Appeal, Fourth Appellate District, in Turner v. Victoria, held that a director of a California nonprofit public benefit corporation who brought an action on behalf of the corporation lost standing to pursue her claims when she lost re-election to the board.

Sections 5142, 5223, 5233 and 5710 of the California Nonprofit Public Benefit Corporation Law confer standing upon directors (among others, and including in some cases the California Attorney General and a person granted relator status by the Attorney General) to bring claims on behalf of such corporations for breach of charitable trust (Section 5142); for removal of a director for fraud, dishonest acts, gross abuse of authority or breach of duty (5223); for a self-dealing transaction (5233); and in a derivative action (5710).

In this case, Debra Turner brought actions in probate and civil courts against fellow directors of a foundation, alleging they had breached their fiduciary duties in approving certain matters relating to settlement of a challenge by a disinherited heir against the trust that had funded the foundation. Ms. Turner’s claims included a derivative action under Section 5710 in her capacity as a member of the foundation. A few months after filing the actions, Ms. Turner was not re-elected to the board of the foundation and ceased to be a director, officer and member. The probate and civil courts concluded that she thus lost standing to pursue her claims.

On appeal, the appellate court found that the language in the statute did not provide a clear answer whether continuous status as a director was required to maintain standing. In reviewing legislative history, the court determined that there was a general intention to follow the law applicable to California for-profit corporations and noted a California Supreme Court case, Grosset v. Wenaas, 42 Cal. 4th 1100 (2008), that California law “generally requires a plaintiff in a shareholder derivative suit to maintain continuous stock ownership throughout the pendency of the litigation.”

The court concluded that “Neither the text nor the legislative history of these statutes suggests an intention to depart from the ordinary principles requiring a plaintiff to maintain standing throughout litigation. We conclude the statutory scheme and public policy considerations require a continuous relationship with the public benefit corporation that is special and definite to ensure the litigation is pursued in good faith for the benefit of the corporation. If a plaintiff does not maintain such a relationship, the statutory scheme provides the nonprofit public benefit corporation with protection through the Attorney General, who may pursue any necessary action either directly or by granting an individual relator status.”

The court then remanded the case to the civil and probate courts to grant 60 days leave to amend, with respect to the issue of whether a proper plaintiff could be substituted to pursue the claims, and to provide time during the period for the California Attorney General to decide whether it was appropriate to grant relator status to Ms. Turner or another individual to continue the litigation.

It is worth noting that the court recognized that in the case of Summers v. Colette, 34 Cal. App. 5th 361 (2019), the California Court of Appeal, Second Appellate District, came to a different conclusion in holding that a director who brought an action alleging self-dealing and misconduct by another director of the public benefit corporation did not lose standing when removed from such position. The Turner court disagreed with the Summers court analysis of the statutory language and legislative history and noted that there were equitable considerations involved in removing a director.

This e-Bulletin was prepared by William Ross, of counsel to Hirschfeld Kraemer LLP. Mr. Ross is a member and past co-chair of the Corporations Committee of the Business Law Section of the California Lawyers Association and is its liaison to the Nonprofit Organizations Committee.

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