412 P.3d 306
Wyo.2018Background
- Susan W. Sullivan and her husband created and funded the Pike and Susan Sullivan Foundation, a Wyoming public benefit nonprofit governed by a board of directors (no members).
- Initial board: Mr. and Mrs. Sullivan and attorney George Harris; after Mr. Sullivan died, Mrs. Harris (George Harris’s wife) was elected to the board by written consent where George Harris also voted and later was paid $150,000/year as Chairman/CEO.
- Mrs. Sullivan sued, seeking (1) declaratory relief voiding Mrs. Harris’s election and the board’s approval of Mr. Harris’s salary (alleged conflict-of-interest violations) and (2) judicial dissolution of the Foundation on the ground the board would be deadlocked if Mrs. Harris and another director’s elections were voided.
- The district court converted a 12(b)(6) motion to summary judgment, denied Mrs. Sullivan’s Rule 56(f)/56(d) request for discovery, and granted summary judgment for the Foundation: (a) the challenge to board actions was derivative and Mrs. Sullivan had not complied with derivative-action requirements, and (b) no deadlock existed while three directors remained.
- On appeal the Wyoming Supreme Court affirmed: a challenge to alleged conflicted board actions is derivative (belongs to the corporation), Mrs. Sullivan failed to pursue the derivative procedure to void the election, and she therefore could not prove a statutory deadlock; the denial of additional discovery was not an abuse of discretion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Mrs. Sullivan can obtain judicial dissolution for board deadlock without first voiding Mrs. Harris’s election | Sullivan: court may resolve validity of election within a dissolution action; if election voided, only two directors remain and management is deadlocked | Foundation: plaintiff must follow derivative-action process to void board actions; as long as three directors exist there is no deadlock | Held: Sullivan must first bring a derivative action to void the election; because she did not, three directors remain and no deadlock exists — summary judgment affirmed |
| Whether the challenge to Mrs. Harris’s election and Mr. Harris’s compensation is derivative | Sullivan: sought declaratory relief directly; argues declaratory relief can be granted in dissolution proceeding | Foundation: actions challenging board transactions for conflict of interest injure the corporation and are derivative | Held: Challenge is derivative in nature and subject to statutory/procedural derivative requirements |
| Whether Mrs. Harris’s election constituted a "conflict of interest transaction" warranting voiding by the court | Sullivan: Harris’s vote to elect his wife and his undisclosed compensation were conflicted and invalid | Foundation: the election/approvals were not a voidable conflict transaction (and procedural derivative requirements were unmet) | Held: Court did not reach merits of whether election was a "transaction" because failure to bring a derivative suit was dispositive; no relief granted |
| Whether the district court abused its discretion by denying a continuance for discovery under Rule 56(d) | Sullivan: additional discovery was necessary to develop facts about the election and conflicts | Foundation: the record already provided the information required to resolve the summary judgment motion; discovery would not affect statutory/pleading deficiencies | Held: No abuse of discretion; denial of discovery was proper because discovery would not cure the failure to meet derivative/dissolution statutory requirements |
Key Cases Cited
- Best v. Best, 357 P.3d 1149 (Wyo. 2015) (Declaratory relief does not expand jurisdiction; courts may grant declaratory relief in actions already within their jurisdiction)
- Wallop Canyon Ranch, LLC v. Goodwyn, 351 P.3d 943 (Wyo. 2015) (distinguishing derivative versus direct claims and explaining derivative recovery inures to the corporation)
- Mueller v. Zimmer, 124 P.3d 340 (Wyo. 2005) (purpose of nonprofit conflict-of-interest statute is to protect the corporation by review from disinterested directors)
- Centrella v. Morris, 597 P.2d 958 (Wyo. 1979) (classic statement of the derivative-action doctrine and when a shareholder may sue for corporation’s rights)