Whether a director of a nonprofit public benefit corporation who brings an action on behalf of the nonprofit public benefit corporation can lose standing to pursue its claims if the director is not reelected during the litigation?
Yes. 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 preceding reflects a California appellate court’s decision in Turner v. Victoria (8/17/2021). In this case, the plaintiff, formerly a director and president of a California nonprofit public benefit corporation, alleged that the other directors breached their fiduciary duties in approving a settlement range in a dispute with one of those directors in her role as a trustee of a separate trust.
According to Black’s Law Dictionary, standing to sue “means that party has a sufficient stake in an otherwise justiciable controversy . . . to obtain judicial resolution of that controversy. . . . Plaintiff must have a legally protectable and tangible interest at stake in the litigation.”
Section 5142 of the Nonprofit Public Benefit Corporation Law provides the following persons with the ability to bring an action to enjoin, correct, obtain damages for or to otherwise remedy a breach of a charitable trust:
(1) The corporation, or a member in the name of the corporation pursuant to Section 5710.
(2) An officer of the corporation.
(3) A director of the corporation.
(4) A person with a reversionary, contractual, or property interest in the assets subject to such charitable trust.
(5) The Attorney General, or any person granted relator status by the Attorney General.
Section 5233 of the Nonprofit Public Benefit Corporation Law provides the following persons with the ability to bring an action relating to a self-dealing transaction (if the Attorney General is joined as an indispensable party):
(1) The corporation, or a member asserting the right in the name of the corporation pursuant to Section 5710.
(2) A director of the corporation.
(3) An officer of the corporation.
(4) Any person granted relator status by the Attorney General.
Different Result Where Former Director Was Removed
In Turner, the Court recognized that the Second Appellate District Court held differently in a case where the former director did not maintain their position as a director due to a removal and not a failure to be elected:
We recognize that our colleagues in the Second District reached a different conclusion in Summers v. Colette (2019) 34 Cal.App.5th 361, 364 and determined a director of a nonprofit public benefit corporation who brought an action alleging self-dealing and misconduct by another director did not lose standing after the board removed her from her position as a director. The Summers court also concluded the trial court erred in that case by not granting leave to amend to add the Attorney General as an indispensable party after the plaintiff failed to give proper notice.
We disagree with the Summers court’s interpretation of the statutory language and legislative history as pointing away from a continuous directorship requirement for standing, for the reasons we have explained. (Summers, supra, 34 Cal.App.5th at pp. 369–370.) However, we note the Summers court was concerned with equitable considerations surrounding the removal of a director and the absence of notice to the Attorney General. These considerations are not before us.
As noted above, Sections 5142 and 5233 provide standing for the suits described therein to, among others, any person granted relator status by the Attorney General. A relator is a party in interest who is permitted to institute a proceeding in the name of the People or the attorney general when the right to sue resides solely in that official.
If the Attorney General deems it appropriate to grant relator status to an individual, such as a former director, to litigate the matter on behalf of the public benefit corporation, the relator is responsible for all costs and expenses incurred in the prosecution of the matter. … This cost-shifting mechanism addresses the limited public resources of the Attorney General and operates as a pragmatic check on an individual pursuing his or her personal interests over those of the public benefit corporation.
Moreover, the Attorney General is charged with oversight of the relator proceedings, which serves as an additional check against any retaliatory or harassing litigation tactics by a person who no longer holds a distinct and special relationship with the corporation. (Cal. Code Regs., tit. 11, § 8 [“The Attorney General may at all times, at any and every stage of the said proceeding, withdraw, discontinue or dismiss the [relator’s status], as to him may seem fit and proper; or may, at his option, assume the management of said proceeding at any stage thereof.”) “In principle, the use of a relator allows the attorney general to bring suit in absentia–to draw upon private resources for the conduct of the suit, but simultaneously retain ultimate control of the proceeding.” (Standing to Sue, at p. 49.) California’s relator statute and regulations expand “the availability of relator actions …, which may encourage ‘public spirited citizens’ to supplement the attorney general’s efforts while still protecting the charity from frivolous suits.” (Id. at p. 50.)
Under our interpretation, the statutory scheme adequately protects the nonprofit public benefit corporation and its beneficiaries from gamesmanship or improper attempts by the accused directors to terminate litigation brought under the statutory scheme. It gives the Attorney General primary responsibility for oversight where it has historically rested, but also allows the Attorney General to grant relator status, if appropriate and in the public interest, to an individual who may continue litigating on behalf of the public benefit corporation. The rules requiring oversight of a relator and requiring the relator to bear the costs, serve as a check against vexatious litigation. This minimizes the risk that a nonprofit public benefit corporation and its directors could become embroiled in expensive retaliatory or harassing litigation by a disgruntled individual who no longer has a “dog in the hunt.”