Thursday, March 19, 2015

Federal Court Considers, Rejects on the Basis of Failure to Make Demand, Derivative Action Brought vis-à-vis a Church

Federal Court Considers, Rejects on the Basis of Failure to Make Demand,
Derivative Action Brought vis-à-vis a Church


            In a decision earlier this month from the Federal District Court in Maryland, the Court considered and ultimately rejected a derivative action brought vis-à-vis an incorporated church.  In this instance, the suit was set aside because the plaintiff failed to satisfy the requirement of either making a demand for action upon the board before filing suit or be able to demonstrate futility.  Here the plaintiff made no demand and her efforts to demonstrate futility were insufficient.  Franklin v. Jackson, Civ. Act. No. DKC 14-0497, 2015 WL 1186599 (D. Md. March 3, 2015).


            Franklin, whose membership in the “Jericho Baptist Church Ministries” was contested by the defendants, brought a derivative action asserting that the directors/trustees were engaging in a wide variety of improper activities including but not limited to financial improprieties.  The defendants directors sought a motion to dismiss or in the alternative summary judgment as to Franklin’s ability to bring suit.


            The Court began by a consideration of diversity jurisdiction and alignment of the corporation as either a plaintiff or a defendant; the defendants sought its realignment as a plaintiff, an action which would have destroyed diversity.  The Court found that the corporation’s alignment as a nominal defendant was proper.  The Court as well considered an Argument based upon Colorado River abstention, one it ultimately rejected.


            The Court then considered the plaintiff’s standing under Article III of the US Constitution and the question of whether this was a dispute that could be considered in light of the Free Exercise Clause of the First Amendment.  Ultimately it determined, based upon the record before it, that the controversy could be heard.


            Turning to the issue of demand futility, the Court applied Maryland law as to when futility is or is not present.  The Plaintiff argued, inter alia, that as the directors, or at least some of them, were alleged to have engaged in the improper conduct, they could not be expected to take remedial actions against themselves; on that basis a demand would be futile.  The Court reviewed the individual allegations and the factual basis for asserting futility, finding them to be insufficient.  The fact that the directors had been party to the challenged transaction alone was not a reason to excuse demand – if the challenge was brought to their attention they could have responded, including by acquiescing to any demand.  Further, the inter-personal relationships among the directors did not render all of them conflicted as to particular actions.


            Tellingly, the Court rejected the notion that Franklin lacked standing “because she has no property rights in Jericho.”  Id. at *13.


            Entirely as an aside, the opinion at one point cites Maryland Code § 4A-801(b) regarding the requirement to plead the demand made or futility.  This appears to be inapplicable as this provision is part of the Maryland LLC Act.



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