Article Archives >> Lead Stories >> September 16-30, 2009
Court Refuses to Decide Control
Of Nonprofit Board Without Trial
Dispute among original directors raises factual issues
that can’t be decided on summary judgment motion
The Court of Appeals of Michigan has reversed a trial court ruling and held that a dispute among original incorporators and directors of a nonprofit corporation cannot be decided on a summary judgment motion because the claims of the parties raise factual questions that can only be resolved by a trial. (Innovative Adult Foster Care v. Ragin, No. 284536, 9/8/09.)
Innovative Adult Foster Care was formed to provide residential care for mentally ill and developmentally disabled adults. Its original incorporators and directors were Gene Harris and his wife Rene, and Rene’s parents John and Mary Ragin. Gene Harris served as president and the organization functioned “smoothly and without significant disagreement” in the early years. After Gene Harris died of a heart attack in 2004, disputes began to develop.
Rene Harris claimed her parents wanted to operate “the business” for their own gain and were threatened by her “meticulous accountability.” The Ragins claimed that Rene Harris wanted to split the company and take over one of its group homes to run independently.
In June, 2007, Rene called a special meeting of the Board. In addition to the three surviving original directors, seven additional individuals attended the meeting. Rene Harris informed everyone that the seven had been elected to the Board at the suggestion of Gene Harris in 1999. They then voted to reaffirm their own status as directors. The Ragins objected to the validity of the meeting and did not vote.
In July, the Ragins called a special meeting and elected seven others to the Board. It was unclear whether Rene Harris received notice, but she did not attend. The Ragins then changed the registered office of the corporation, changed signatory practices with regard to the bank account, and agreed to relocate residents of one group home upon licensing a new facility. Rene Harris and the president elected at her meeting then filed for a declaratory judgment to decide which faction controlled the corporation.
In affidavits, the Ragins claimed the first group of seven had never been elected to the Board and filed copies of tax returns and corporate reports that generally did not include their names, although one state filing did list one of the seven and another woman as directors. The filings after the death of Gene Harris listed only the three surviving original directors. The Ragins claimed that the seven elected at the July meeting were properly seated upon the vote of two of the three surviving directors. Rene Harris, in her answering affidavit, claimed that the original four had met in 1999 and “unanimously agreed” to expand the board with the seven reaffirmed in June.
The trial court relied on the Ragins’ affidavits and the corporate filings and ruled it was beyond a genuine factual dispute that the three original directors remained the sole directors until July 2007 and that the two Ragins legally took action to expand the board. The Court of Appeals has reversed.
Although Rene Harris’ evidence was “sparse,” the Court said, it did constitute admissible evidence and was sufficient to establish the existence of a genuine issue of material fact. In addition, the trial court overlooked the tax return that listed additional directors, the Court wrote, and “it is well settled that the [trial] court may not weigh the evidence or make determinations of credibility when deciding a motion for summary judgment.”
In remanding the case for trial, the Court also said that if the trial court concluded that the Board had not been previously expanded and that the action of the June meeting was improper, it nevertheless had to determine whether Rene Harris received proper notice of the July meeting because state law provides that a special meeting without notice to all is illegal and the action taken is generally invalid.
YOU NEED TO KNOW
Where were the minutes of Board meetings in the eight years between 1999 and the dispute of 2007? In a family controlled nonprofit where there are no disputes and most things are done informally by consensus, it may be easy not to hold formal meetings and not keep the proper corporate minutes. But if the minutes, which are the presumptive history of the organization, don’t exist, as they apparently don’t in this case, there is a whole lot more room for conflicting testimony and lengthy litigation.
The new Form 990 tax information return now asks whether nonprofits make contemporary minutes of their Board and committee meetings. Nonprofits are not required to do so by the Tax Code. But with this prodding and a desire to answer the question “correctly,” they are more likely to do so. It will reduce the likelihood of litigation such as this, with the accompanying squandering of charitable dollars on needless legal fees.
Article Archives >> Lead Stories >> September 16-30, 2009
