Thursday, December 1, 2011

Membership in a Nonprofit Corporation

The Kentucky Court of Appeals Again Addresses
Membership in a Nonprofit Corporation
          The Court of Appeals has again addressed the questions of membership in a nonprofit corporation and obligations owed to the members.  Fenley v. Kamp Kaintuck, Inc., 2011 WL 5443440 (Ky. App. Nov. 10, 2011) (Not to be Published).  This decision follows upon, in various aspects, 1400 Willow Council of Co-Owners, Inc. v. Ballard (reviewed here on September 29) and Tinsley v. Wildwood Country Club (reviewed here on October 4).
        The Fenleys were members of Kamp Kaintuck, Inc., a Kentucky nonprofit corporation.  Under KKI’s bylaws, all active members were required to attend once every three years.  There was no dispute that the plaintiffs did not do so.  On that basis, KKI’s Board of Directors terminated the plaintiffs’ memberships.  They in turn sued for wrongful termination of membership status, made allegations of breach of fiduciary duty, sought an accounting of KKI’s assets and as well its liquidation.
        As to the first complaint, namely that the Fenleys were wrongfully terminated from member status, the Court easily dismissed that count.  They were terminated for violation of the bylaw requirement that they attend the camp at least once every three years.  In support of this conclusion, the Court cited 14A C.J.S. Clubs § 14 (2011).  While no doubt this authority supports the proposition for what it was cited, it is curious that the Audubon County Club decision (785 S.W.2d 501 (Ky. App. 1990)), it having been relied upon by the Wildwood County Club court, was not cited.
          As to the count for breach of fiduciary duty, and consistently with the decision rendered in 1400 Willow v. Ballard, the Court stated that the fiduciary duties run to the corporation and the shareholders/members as a whole.  “Hence, a Board member or officer owes no common-law fiduciary duty directly to an individual shareholder/member,” citing 18B Am.Jur.2d Corporations § 1462 (2011).  From this position, the Court determined that any action for enforcement of those fiduciary duties, whether existing at common law or based upon statute, must be brought in the form of a derivative, rather than a direct, action.  To the extent that the plaintiffs sought to bring a derivative action, in that their membership status had already been terminated, the Court held that they lacked standing to do so.  With respect thereto, the Court cited Bacigalupo v. Kohlhapp, 240 S.W.3d 155, 157 (Ky. App. 2007) for the continuous ownership standard that is applicable in the context of a business corporation.  See also KRS § 271B.7-400(1).  Purely as an aside, why do courts, in addressing statutory requirements, cite cases that talk about the statute rather than directly citing to the statute?  The Court set forth its position that, in any derivative action involving a nonprofit corporation, a similar requirement would be applied, but specifically sidestepped the question as to whether derivative actions exist in nonprofit corporations.  2011 WL 5443440, *3, note 2.
           With respect to the claims for an accounting and for judicial dissolution, the Court held that, as the Plaintiffs were no longer members of KKI, they lacked standing to seek either of those remedies.

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