California Supremes on Nonprofit Derivative Actions: Who has Standing?
Debra Turner and Conrad Prebys, happier times.
Even after teaching Biz Orgs these past few years, I never thought of nonprofit derivative actions. Yeah, its true, such things exist. Directors lacking majority vote on a charity board can still bring an action on behalf of the charity against other directors. Who knew!? The California Supreme Court issued a real primer on “director enforcement statutes” yesterday. Turner v. Victoria talks about the California, Model Nonprofit, and Restatement of Charities provisions allowing individual directors to bring suit on behalf of the nonprofit for other directors’ fiduciary breaches, including self-dealing (private inurement). I feel a little better about my ignorance because even the California Supreme Court admits that hardly anybody ever thinks about nonprofit directors suing one another. New York, Arizona and Tennessee are among the few that have such statutes or judicial opinions on the topic.
Suits by one director against another must be rare, so when it happens, there really must be a juicy backstory. I cut and paste generously from the informative opinion below the fold (the whole thing should be in a nonprofit casebook, its so informative). But that won’t generate clicks, so let’s put our voyeurism on and dig into some of the juicy details well worth a Netflix mini-series. If you want more than I provide check this story from the San Diego Union. And this one from the San Diego Reader referring to Conrad Prebys’ common law wife, Debra Turner, the “furious life partner” suing Laurie Victoria and the other Conrad Prebys Foundation board members over Conrad Prebys’ $1 billion estate.
At last year’s [2016] services for Conrad Prebys, who gave more than $300 million to San Diego nonprofits, Turner and Victoria were very close, planning and dominating the operation, according to Conrad Prebys’s only son, Eric Prebys, a PhD and noted physicist. It was after those services that Eric Prebys learned that he had been completely cut out of his father’s will, having been disinherited in several downward moves of the amount he was to get, beginning at $20 million. Conrad Prebys had left his family after a divorce, when Eric Prebys was only two years old. When he was 16, Eric Prebys found his father — then wealthy and no longer plagued by an alcohol problem — and, he says, they had a good relationship for more than 35 years. Conrad Prebys would visit Eric and his family every year.
Eric Prebys hired attorneys to challenge the disinheritance. San Diego attorney James Lauth, who had been Conrad Prebys’s estate planning attorney, feared that Eric had such a good case that he could get a huge chunk of his father’s estate, thus severely weakening the foundation. (Lauth has not returned calls for comment.) In a settlement, the son got $9 million plus $6 million that would ultimately be paid to the Internal Revenue Service.
Debra Turner, president of the foundation, hit the roof over the settlement, claiming that Eric Prebys should get nothing. She demanded that the other foundation board members — Victoria, Joseph Gronotte, Gregory Rogers and Anthony Cortes — reverse the vote that permitted the settlement. When they refused, she filed a lawsuit May 15 in Superior Court, charging the defendants with breach of fiduciary duty, self-dealing, and other sins. The foundation will be irrevocably devoted to charitable purposes, and there is no argument over that. Turner charges that Victoria made unauthorized gifts from trusts — a breach of duty to the foundation.
So wait, it gets better. At a post-filing director’s meeting where directors were to be elected, all the defendant directors voted themselves back on the board but they formed a block and voted ol Conrad’s main squeeze — the Foundation president, remember — clear off the board. Talk about “let’s have a meeting in your office, and bring a box.” Ruthless, I tell you!
And then to add insult to injury, the other directors filed a motion to dismiss the suit because Turner, having been kicked off the board, they gleefully admitted, is no longer a director and thus does not have standing! Rich folk play chess, they don’t play checkers. And they won! But the California Supreme Court, apparently on first impression, reversed a not-without-good law appellate court opinion holding that plaintiff must be a director when suit is filed and continuously throughout to maintain standing. In addition to some well reasoned law, they took note of the defendant directors’ pretty brilliant strategy, saying a “continuous status” rule would allow wayward defendant directors to stop a suit by voting the plaintiff director off the board. Like these guys did.
So the 8 year old case was remanded and will likely take another 3 or 4 years, with plenty of dirty laundry for TV. I gotta say, Debra might should have left this one alone. She inherited a whole lot in her own name (over $40 million, some houses and cars) and of the billion dollar estate, Eric only got $15 million. Well enough alone, I’da said.
darryll k. jones
So here is some of the less juicy but more important law from the opinion:
Decisions from New York and Arizona, the only two states that have directly addressed the question of whether there is a continuous directorship requirement, have held that a director of a charitable corporation may continue to prosecute an action even after losing reelection for office. (See Tenney, supra, 160 N.E.2d at p. 465; Workman, supra, 382 P.3d at pp. 819–820.) At the same time, decisions from Tennessee and another New York court hold that members (not directors) of a charitable corporation must “retain membership for the duration of the lawsuit.” (United Supreme Council AASR SJ v. McWilliams (Tenn.Ct.App. 2019) 586 S.W.3d 373, 385 (United Supreme CouncilPall v McKenzie Homeowners’ Assn., Inc. (App.Div. 2014) 995 N.Y.S.2d 400, 401–402 (Pall).)
Insofar as an expert consensus exists, it is to be found in the Model Nonprofit Corporation Act and the Restatement of the Law, Charitable Nonprofit Organizations (Restatement). The Model Nonprofit Corporation Act, drafted by the American Bar Association, has consistently taken the view that a director- plaintiff in a derivative proceeding must hold the position “at the time of bringing the proceeding.” (1987 Revised Model Nonprofit Corporation Act, § 6.30 (ABA 1987) [specifying that “[a] proceeding may be brought in the right of a domestic or foreign corporation” by “any director” and that “[i]n any such proceeding, each complainant shall be a . . . director at the time of bringing the proceeding”]; Model Nonprofit Corporation Act, 3d ed. § 13.02 (ABA 2008) [likewise specifying that “[t]he plaintiff in a derivative proceeding must be a . . . director . . . at the time of bringing the proceeding”]; Model Nonprofit Corporation Act, 4th ed. § 502 (ABA 2022) [“the plaintiff in a derivative proceeding must be a . . . director . . . at the time of bringing the proceeding”].) A reasonable inference is that the plaintiff does not need to maintain the position beyond the commencement of the action.
The Restatement likewise adopts an expansive approach to director standing in this context. Under the Restatement, among those that have standing “to bring a derivative action on behalf of a charity” are “a current member of the board of the charity” as well as “a former member of the board of the charity who is no longer a member for reasons related to that member’s attempt to address the alleged harm to the charity.” (Rest.,§ 6.02(b).) The amicus curiae brief submitted by the Reporter for the Restatement offers contextual details supporting this rule, noting that “[c]haritable-nonprofit boards are typically self-perpetuating” and “quite limited in size.”