Monday, August 14, 2023
A couple of Fridays ago, fellow Nonprofit Law blogger Darryll Jones wrote about the California Supreme Court’s recent decision in Turner v. Victoria. The holding is clear, and for anyone who has thought about these matters, it shouldn’t have been controversial. California state law gives directors of a nonprofit corporation standing to sue the other directors to enforce their fiduciary duties. As Professor Jones noted, Director Debra Turner sued the other directors, arguing that they breached various duties when they agreed to pay $15 million of assets destined to the Foundation to settle a dispute with a spurned heir. All the directors of the Foundation re-elected themselves to the board in the meeting following the lawsuit, but did not elect Turner, thereby removing her from the board. They then moved to dismiss the lawsuit on the grounds that Turner, who was no longer a director, ceased to have standing to pursue the lawsuit. Turner lost at the trial court and appellate court level. The California Supreme Court reversed, holding that the language of the nonprofit standing statute does not seem to require a “continuous directorship requirement.” More importantly, it held that denying standing to a removed director would defeat the purpose of the standing statute, since it would “permit gamesmanship by directors accused of wrongdoing [since] [d]irectors who are sued would be able to terminate the litigation by removing the plaintiffs from office[.]”
My initial response to the holding was “duh.” Of course it doesn’t make sense to permit the kind of gamesmanship described so well by the court. So, why did the litigation get all the way to the California Supreme Court before this reading of the statute prevailed? One possibility is that the Supreme Court’s understanding of the law benefited from an exceptionally clear and persuasive amicus filed by Nonprofit Law Professors Jill Horwitz (who is also the Reporter on the recent ALI Restatement on Charitable Nonprofit Organizations) and Nancy McLaughlin (who is an Associate Reporter). Their brief points out that there was significant discussion at the ALI advisers’ meeting about the issue of director standing. Because of the concern that whistle-blowing directors would likely lose their position on the board, the Restatement permits standing by former directors, if they lost their position because of their attempt to address the alleged harm. California law does not go that far, according to Turner v. Victoria. It just holds that once a director brings a lawsuit against the organization, the director may continue to pursue the lawsuit even if they are removed from the board. Therefore, California law creates a sort of race to courthouse, since directors have standing while they are still directors, but lose it as soon as they are removed from office. If they can file their lawsuit before the board removes them, the lawsuit can proceed.
Of course, if an organization wants to prevent its directors from having standing to bring a derivative action on behalf of the organization, it can always incorporate in a state with less permissive standing rules. Apparently, there aren’t many states that don’t permit director standing, but (according to a recent symposium piece by our own Lloyd Mayer) Indiana is one of them. Honestly, if you’re interested in nonprofit standing, I highly recommend this recent piece by Professor Mayer.
Benjamin M. Leff