DEBRA TURNER,
S271054
IN THE SUPREME COURT OF CALIFORNIA
August 3, 2023
Fourth Appellate District, Division One D076318, D076337; San Diego County Superior Court 37-2017-00009873-PR-TR-CTL, 37-2018-00038613-CU-MC-CTL
Chief Justice Guerrero authored the opinion of the Court, in which Justices Corrigan, Liu, Kruger, Groban, Jenkins, and Evans concurred.
TURNER v. VICTORIA
S271504
Under
An examination of the statutory text, its surrounding context, the legislative history, and the overarching purpose of the director enforcement statutes reveals that the statutes do not impose a continuous directorship requirement that would require dismissal of a lawsuit brought under these statutes if the director-plaintiff fails to retain a director position. Each statute grants a director standing to bring a lawsuit. None expressly requires continued service as a director as a condition for pursuing the lawsuit, and there is no indication that the Legislature intended to impose such a condition.
In finding a requirement of continued service, the Court of Appeal below analogized actions under the director enforcement statutes to shareholder derivative lawsuits. (Turner v. Victoria (2021) 67 Cal.App.5th 1099, 1128–1129 (Turner).) However, the language of the governing statutes is significantly different in the nonprofit and for-profit contexts. Furthermore, the position adopted by the Court of Appeal would permit gamesmanship by directors accused of wrongdoing. Directors who are
An interpretation of the statutes that does not require a director-plaintiff to maintain a director position at a nonprofit corporation throughout litigation is “‘the construction that comports most closely with the apparent intent of the lawmakers,‘” and the one that we “‘[u]ltimately choose.‘” (Lee v. Hanley (2015) 61 Cal.4th 1225, 1233 (Lee).) We therefore reverse the judgment of the Court of Appeal.2
I. FACTUAL AND PROCEDURAL BACKGROUND
“Because this case comes to us at the demurrer stage, we take as true all properly pleaded material facts — but not conclusions of fact or law.” (Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 395.) The plaintiff in this case is Debra Turner; the defendants are Laurie Anne Victoria, Joseph Gronotte, Gregory Rogers, and Anthony Cortes.3 When plaintiff initiated the litigation, she and all four defendants were directors of the Conrad Prebys Foundation (the Foundation), a nonprofit public benefit corporation named for its founder.
Conrad Prebys (Prebys) was a wealthy philanthropist. In addition to the Foundation, Prebys created an inter vivos trust, the Conrad Prebys Trust (the Trust). Prebys funded the Trust and directed it to make distributions to specific beneficiaries after his death. The assets remaining after the gift distributions were to “go to the Foundation to be used for charitable purposes.”
Under the Foundation‘s bylaws, all its directors were also members of the Foundation, and the Foundation had no other members. Most of the directors
In addition to her role at the Foundation, Victoria was the trustee of the Trust. At the initial meeting of the Board of Directors (Board) after Prebys‘s death, Victoria and an attorney informed the directors that Prebys‘s son, Eric Prebys, might contest the Trust.4 Although Eric was originally a beneficiary under the Trust, Prebys eliminated the gift to Eric two years before he died. The Board was informed that Eric had hired counsel with the intention of challenging his disinheritance on the grounds that his father lacked mental competence and was unduly influenced by plaintiff.
In her role as trustee, Victoria wanted to settle Eric‘s claims, and she discussed with the Board an appropriate settlement amount. Plaintiff was the only director who opposed such a settlement. The Board eventually voted to authorize a maximum settlement of $12 million plus the payment of estate taxes. In early 2017, Victoria, on behalf of the Trust, settled with Eric for a total sum of $15 million, paying $9 million to Eric directly and the remainder in taxes.
On May 15, 2017, while she was still a director, officer, and member of the Foundation, plaintiff filed a petition in probate court against her fellow board members. (Turner, supra, 67 Cal.App.5th at pp. 1113–1114.) The suit included claims for breach of charitable trust, breach of the Board members’ duty of care, self-dealing in violation of the Board members’ duty of loyalty, and removal of members of the Board for dishonest acts and gross abuse of authority. (Id. at p. 1114.) All causes of action were based on the Board‘s handling of the settlement with Eric. (Ibid.)
The director-defendants were aware of the lawsuit prior to a board meeting held in November 2017, at which the Board conducted an election of Foundation directors and officers. The four director-defendants nominated and seconded one another for reelection as directors and appointment as officers. No one nominated plaintiff for reelection as a director or an officer, despite plaintiff having made “clear she wanted to remain on the Foundation‘s Board.” As a result, plaintiff lost her position as director, officer, and, consequently, member of the Foundation. Plaintiff alleges that her loss of position was an act of retaliation by the director-defendants in response to her lawsuit.
Subsequent to the November 2017 board election, the probate court ordered the four causes of action discussed above severed and transferred for
The Court of Appeal affirmed. Analogizing to the standing rules that apply in shareholder derivative actions, the court concluded plaintiff was required to maintain a “continuous relationship” with the Foundation to proceed with her suit. (Turner, supra, 67 Cal.App.5th at p. 1108; see id. at pp. 1137–1138.) The court disagreed with Summers v. Colette (2019) 34 Cal.App.5th 361 (Summers), which held that a plaintiff who had been removed as a director of a nonprofit corporation did not lose standing to maintain this type of action. (Turner, at p. 1129; Summers, at p. 364.)
We granted review to resolve the conflict in authority.
II. DISCUSSION
This case involves a question of statutory construction, which we review de novo. (See, e.g., Lee, supra, 61 Cal.4th at p. 1232.) Our specific task is to determine whether plaintiff maintained standing under the statutory scheme. “At its core, standing concerns a specific party‘s interest in the outcome of a lawsuit.” (Weatherford v. City of San Rafael (2017) 2 Cal.5th 1241, 1247.) “When, as here, a cause of action is based on statute, standing rests on the provision‘s language, its underlying purpose, and the legislative intent.” (Kim v. Reins International California, Inc. (2020) 9 Cal.5th 73, 83 (Kim).) Consistent with this approach, in part II.A., post, we provide an overview of the director enforcement statutes. We subsequently analyze the provisions’ text (part II.B.), context (part II.C.), and purpose (part II.D.). After concluding that these indicia of intent do not support a continuous directorship requirement, we consider and reject defendants’ remaining arguments in favor of such a requirement (part II.E.).
A. The Relevant Statutes
The provisions at issue —
One type of charity covered by the Nonprofit Corporation Law is the nonprofit public benefit corporation, an entity formed for “any public or charitable purposes.” (
As relevant here, the Nonprofit Corporation Law specifies who may sue to enforce its provisions. Section 5142 addresses breaches of a charitable trust and declares that “any of the following may bring an action to enjoin, correct, obtain damages for or to otherwise remedy a breach of a charitable trust:
- The corporation, or a member in the name of the corporation pursuant to Section 5710.5
- An officer of the corporation.
- A director of the corporation.
- A person with a reversionary, contractual, or property interest in the assets subject to such charitable trust.
- The Attorney General, or any person granted relator status by the Attorney General.”
(
Section 5233 similarly specifies four categories of persons, in addition to the Attorney General, who are authorized to “bring an action” in the face of self-dealing transactions by interested directors. (
- The corporation, or a member asserting the right in the name of the corporation pursuant to Section 5710.
- A director of the corporation.
- An officer of the corporation.
- Any person granted relator status by the Attorney General.”
(
Section 5223, meanwhile, delineates circumstances in which a court may remove a director of a nonprofit public benefit corporation. It reads, “The superior court of the proper county may, at the suit of a director, or twice the authorized number (Section 5036) of members or 20 members, whichever is less, remove from office any director in case of fraudulent or dishonest acts or gross abuse of authority or discretion with reference to the corporation or breach of any duty arising under Article 3 (commencing with Section 5230) of this chapter, and may bar from reelection any director so removed for a period prescribed by the court.” (
Plaintiff asserts standing under all the above provisions, as well as
B. Text
We begin our analysis by reviewing the statutory language, read in context. (See, e.g., Lee, supra, 61 Cal.4th at p. 1232post), the language of the director enforcement statutes is susceptible to more than one interpretation. At the same time, the statutes read in their broader statutory context “seem[] to point” to an absence of a continuous directorship requirement. (Grosset, supra, 42 Cal.4th at p. 1113.)
Sections 5142 and 5233 employ the same wording, allowing a director of a nonprofit public benefit corporation to “bring an action.” (
Here, plaintiff “sue[d],” “institute[d] [a] legal proceeding[],” and “cause[d]” an action “to exist” by filing a petition in the probate court (and a subsequent civil complaint that relates back to the probate filing date). (Accord,
Notably, the language of the director enforcement statutes differs from the language of section 800, the provision governing derivative shareholder suits in the context of for-profit organizations. In contrast to
We addressed the meaning of this latter phrase — “may be instituted or maintained” (
The statutes before us lack language similar to section 800. As the Summers court observed, “[T]he absence of something comparable to the phrase ‘or maintained’ in sections 5233 and 5142 points away from a continuous directorship requirement in the same way that phrase‘s presence in section 800 ‘point[s] to’ (Grosset, supra, 42 Cal.4th at p. 1113) a continuous stock ownership requirement.” (Summers, supra, 34 Cal.App.5th at p. 370.)
We draw further support from federal law. In construing a federal statute penalizing insider trading, the United States Supreme Court relied on the dictionary meaning of the term “institute,” explaining that “the word ‘institute’ is commonly understood to mean ‘inaugurate or commence; as to institute an action.‘” (Gollust v. Mendell (1991) 501 U.S. 115, 124 (Gollust).) Thus, a provision‘s language declaring that actions targeting insider trading “may be instituted at law or in equity . . . by the issuer, or by the owner of any security of the issuer” (
In sum, nothing in the wording of the statutes indicates that they impose a continuous directorship requirement. We acknowledge, however, that the phrase “bring an action” can mean different things in different circumstances. We therefore proceed to consider the statutes’ historical context and purpose. (See, e.g., Kim, supra, 9 Cal.5th at p. 83; Lee, supra, 61 Cal.4th at p. 1233.) We find that these additional indicia of legislative intent reinforce our understanding that the director enforcement statutes do not require continuity in service as a condition for maintaining standing.7
C. Historical Context
As mentioned, the statutes at issue here were enacted as part of the Nonprofit Corporation Law. That legislation was itself a substantial undertaking that yielded “a new, comprehensive” set of regulations to “govern [charitable corporations] to the exclusion of the General Corporation Law,” which had previously guided the conduct of such organizations. (Summary Digest, supra, at p. 141.) Perhaps because the director enforcement statutes (and specifically the subdivisions concerning standing) were only a small part of the “comprehensive” Nonprofit Corporation Law, they did not receive much attention in the available legislative history materials. (Ibid.) Nonetheless, we can draw insight from the history of the director enforcement statutes by comparing them with provisions that were superseded by the new Nonprofit Corporation Law.
Comparing section 5142 to provisions which preceded it reveals the Legislature‘s intent to afford standing to a wider group of individuals. Section 5142 is traceable to Corporations Code former section 9505 (added by Stats. 1947, ch. 1038) and Civil Code former section 605c (added by Stats. 1931, ch. 871, § 1). (Derivation Notes, Deering‘s Ann. Corp. Code (2021 ed.) foll. § 5142.) Both provisions restricted the ability to bring suit to just one entity: the Attorney General.8 In contrast, as previously explained,
The same expansion of standing appears in section 5223.9 The court below described section 5223 as being “similar to the language of section 304 [of the GCL] involving an action to remove a director” of a for-profit corporation. (Turner, supra, 67 Cal.App.5th at p. 1121 number of outstanding shares of any class, remove from office any director in case of fraudulent or dishonest acts.” In contrast, section 5223 allows the court to remove any director “at the suit of a director, or twice the authorized number (Section 5036) of members or 20 members, whichever is less.” (§ 5223, subd. (a).) Accordingly, section 5223 of the Nonprofit Corporation Law enables one more class of persons — directors — to bring suit to remove a board member than does section 304 of the GCL.10
In enacting the Nonprofit Corporation Law, the Legislature thus broadened standing, allowing more persons to bring suit than was previously possible. Although nothing in the legislative history speaks directly to the issue, declining to read a continuity requirement into sections 5142, 5233, and 5223 is consistent with the Legislature‘s intent to expand standing as a means to remedy abuses committed against a charitable corporation.
The drafters of the Nonprofit Corporation Law indeed conveyed that the legislation “follows GCL format and language except where substantive differences otherwise require.” (Assem. Select Com. on Revision of the Nonprofit Corp. Code, Summary of Assem. Bill Nos. 2180 and 2181 (1977–1978 Reg. Sess.) Apr. 21, 1978, p. 2.) “This means,” said the drafters, “not only that the proposed law follows the GCL in general organization, but further, individual sections employ the GCL language whenever the same substantive results are intended.” (Ibid.; see also Recommendation Relating to Nonprofit Corporation Law (Nov. 1976) 13 Cal. Law Revision Com. Rep. (1976) pp. 2227-2228.)
As discussed previously, however, the individual sections at issue here employ language different from that found in the GCL. The provisions of the Nonprofit Corporation Law broadened standing, extending it to directors of nonprofit public benefit corporations. In light of the material changes made and, as discussed below, the purpose underlying the director enforcement statutes, we are not persuaded that the Legislature intended “the same substantive results” to obtain between section 800 and the director enforcement statutes. (Assem. Select Com. on Revision of the Nonprofit Corp. Code, Summary of Assem. Bill Nos. 2180 and 2181 (1977–1978 Reg. Sess.) Apr. 21, 1978, p. 2.)
D. Purpose
“Standing rules for statutes must be viewed in light of the intent of the Legislature and the purpose of the enactment.” (White v. Square, Inc. (2019) 7 Cal.5th 1019, 1024; see also, e.g., Kim, supra, 9 Cal.5th at p. 83.) In enacting the director enforcement statutes, the Legislature intended to provide safeguards against “breach[es] of a charitable trust” (
A continuous directorship requirement would necessarily mean that when director-plaintiffs lose their positions at nonprofit public benefit corporations, they also lose the ability to continue litigating the lawsuits they had instituted. Knowing this, directors who are accused of wrongdoing could make it difficult for director-plaintiffs to retain their positions—whether by calling elections to remove them (see, e.g., Summers, supra, 34 Cal.App.5th at pp. 364-365; Workman v. Verde Wellness Ctr., Inc. (Ariz. Ct. App. 2016) 382 P.3d 812, 815 (Workman)); refusing to reelect directors when their terms expire; or otherwise erecting barriers to the directors’ reelection (see, e.g., Tenney v. Rosenthal (N.Y. 1959) 160 N.E.2d 463, 467 (Tenney) [“reduc[ing] the membership of the board” so as to “ma[k]e it mathematically more difficult for the plaintiff to be re-elected“]). If successful, these types of actions would effectively quash the litigation initiated by the director-plaintiffs. A continuous directorship requirement would therefore give directors, “themselves charged with fraud, misconduct or neglect,” the incentive—and power—“to terminate the suit by effecting the ouster of the director-plaintiff.” (Id. at p. 466.)
Conversely, a director-plaintiff would have little incentive to initiate a lawsuit, knowing it could lead to the loss of the plaintiff‘s directorship, and then end the lawsuit itself. Construing the director enforcement statutes in such a way would “““defeat[]““” rather than “““promote[]““” the purpose of the statutes: to empower charitable corporate insiders to seek judicial redress. (Lee, supra, 61 Cal.4th at p. 1233.)
Long ago, we explained the need for corporate insiders to “supplement[] the Attorney General‘s power of enforcement.” (Holt, supra, 61 Cal.2d at p. 755.) In Holt, a case decided before the enactment of the director enforcement statutes, we confronted the question of whether “minority trustees of a charitable corporation[] can sue the majority trustees to enjoin their allegedly wrongful diversion of corporate assets.” (Id. at p. 752.) The Attorney General there had not granted relator status to the plaintiffs or otherwise consented to their bringing the action, and he had also decided not to bring his own enforcement action. (Id. at p. 752.) Before us, the defendants asserted that only the Attorney General can bring such a suit. (Id. at p. 753.) We rejected the argument, reasoning that exclusive standing by the Attorney
Although we were not interpreting the same statutory scheme in Holt that is now before us, some of the same considerations apply. As the Attorney General, appearing here as amicus curiae, acknowledges, he cannot “work alone” to enforce the law governing charities. Currently, there are more than 110,000 charitable organizations registered in California, holding assets of over $850 billion. (Charitable Trusts Section, Cal. Dept. of Justice, Attorney General‘s Guide for Charities (June 2021) p. 1, at <https://www.oag.ca.gov/system/files/media/Guide%20for%20Charities.pdf> [as of Aug. 3, 2023] (Attorney General‘s Guide).)11 The Attorney General stresses that he “cannot have the kind of intimate knowledge about the use (or misuse) of charitable assets that directors of charities enjoy,” and he cannot police such a large and diverse group of charitable organizations by himself. Notably, the Legislature did not intend that the Attorney General do so. Instead, the Legislature intended for directors of charitable organizations to sue to enforce the law governing such organizations. We best “““promot[e]““” that intent by not reading the director enforcement statutes as operating to strip director-plaintiffs of their standing as soon as they lose their position at the charity. (Lee, supra, 61 Cal.4th at p. 1233.)
The cases cited by defendants do not support a continuous directorship requirement. Defendants rely on Cal. S. R. R. Co. v. S. P. R. R. Co. (1884) 65 Cal. 394 to support their claim that bringing an action refers to more than just filing a complaint. The corporate defendant in that eminent domain case sought to change the place of trial from San Diego, the situs of the condemned land, to San Francisco, its corporate residence. (Id. at p. 394.)
More recently, we declined to “adopt a technical reading of the word ‘brought,‘” appearing in an agreement, “as referring only to the initiation of a lawsuit.” (Mountain Air Enterprises, LLC v. Sundowner Towers, LLC (2017) 3 Cal.5th 744, 755.) The relevant contractual provision in that case stated, “‘If any legal action or any other proceeding, including arbitration or an action for declaratory relief[,] is brought for the enforcement of this Agreement . . . , the prevailing party shall be entitled to recover reasonable attorney fees . . . .‘” (Id. at p. 752, italics omitted.) We determined that an assertion of the agreement as an affirmative defense in a breach of contract action did not trigger the attorney fees provision. (Id. at pp. 747, 752-754.) In rejecting the defendants’ argument that our interpretation conveyed that the contractual term “brought” referred only to the initiation of a lawsuit, we explained we refused to adopt such a “technical reading” of the term because, as used in the contract, the word “‘brought’ simply supplies further context to the relevant phrase ‘brought for the enforcement of this Agreement or because of an alleged dispute.‘” (Id. at p. 755.) Because a provision that reads, “If any legal action . . . is brought for the enforcement of this Agreement” is not substantively different from one reading “If any legal action . . . is for the enforcement of this Agreement,” we did not adopt a cabined view of the word “brought.”
The interpretive issue before us is materially different from the situation in Mountain Air Enterprises. Whereas the context surrounding the word “brought” in that case counseled against a narrow interpretation of that term, here there is no comparable contextual clue that justifies a similarly broad
Curtis v. County of Los Angeles (1985) 172 Cal.App.3d 1243 is similarly distinguishable. The court in that case examined
The authorities cited by defendants simply reveal that phrases like “bring an action” may take on different meanings in different contexts. That is unsurprising. Here, the text of the statutes, read in light of their background and especially their purpose, conveys that the Legislature did not intend to incorporate a continuous directorship requirement when it enacted sections 5142, 5233, and 5223.
E. Other Counterarguments
We also reject as unpersuasive other reasons the Court of Appeal and defendants have provided for adopting a continuous directorship requirement.
1. “Ordinary” Standing Requirement
The Court of Appeal viewed the continuous directorship requirement as a “generally applicable standing principle[]” and concluded that “nothing suggests the Legislature intended to depart” from that principle. (Turner, supra, 67 Cal.App.5th at p. 1123; see also id. at pp. 1108, 1130, 1134.) To support its position that a continuous directorship requirement operates as an “ordinary standing requirement” (id. at p. 1130), the court cited Californians for Disability Rights v. Mervyn‘s, LLC (2006) 39 Cal.4th 223, 232–233
In Mervyn‘s, we were confronted with a unique situation in which the applicable statutory standing requirements were amended during the pendency of the litigation. Although the plaintiff in the case satisfied the initially applicable standing requirements, the plaintiff did not meet the standing requirements as amended. (Mervyn‘s, supra, 39 Cal.4th at pp. 227-228.) It made sense in that context to explain that “standing must exist at all times” in order for a lawsuit “to be allowed to continue.” (Id. at pp. 232-233.) No comparable circumstances exist here, where the standing requirement has been the same throughout the litigation: the plaintiff must have been a director of the charitable organization at the time the lawsuit commenced. Since plaintiff has satisfied this requirement “at all times” during the litigation, she has standing to pursue her claims, consistent with Mervyn‘s. (Id. at p. 233.)
We recently employed a similar approach to ascertain standing—in which we considered the statutory language and other indicia of legislative intent—in Kim. There, we addressed the issue of whether “employees lose standing to pursue a claim under the Labor Code Private Attorneys General Act . . . if they settle and dismiss their individual claims.” (Kim, supra, 9 Cal.5th at p. 80, fn. omitted.) To answer that question, we examined the statutory language, purpose, context, and history of the relevant standing statute (id. at pp. 83–91) and concluded that the employees did not lose standing to pursue Private Attorneys General Act claims when “they settle[d] and dismiss[ed] their individual claims” (Kim, at p. 80). Applying a comparable analysis here, we conclude that the statutes before us do not impose a continuous directorship requirement.
2. Reliance on Grosset
The Court of Appeal relied heavily on the reasoning of Grosset. (See Turner, supra, 67 Cal.App.5th at pp. 1125-1129.) It is true that in Grosset we held that section 800—the for-profit counterpart to section 5710—contains a continuous ownership requirement. (Grosset, supra, 42 Cal.4th at p. 1119.) But we find the circumstances here to be distinguishable.
Grosset is distinguishable in other respects as well. We noted in Grosset that section 800 “identif[ies] what a plaintiff must allege in a complaint to establish standing in a shareholder‘s derivative action.” (Grosset, supra, 42 Cal.4th at p. 1113.)12 “Given this circumstance,” we said, “the failure to explicitly address an issue that might later arise during the pendency of an action, such as the loss of the plaintiff‘s stock, is hardly surprising.” (Grosset, at p. 1113.) Again, this circumstance does not exist in the present case. The director enforcement statutes do not merely specify “what a plaintiff must allege in a complaint to establish standing.” (Ibid.) The statutes here are distinguishable on their face from the provision examined in Grosset. And indeed the statutory text, historical context, and legislative purpose underlying the statutes all suggest that the Legislature, by specifying who may “bring an action” (
Beyond the statutory text, in Grosset we cited two considerations that led us to hold that section 800 incorporates a continuous ownership requirement. We first focused on the fact that any lawsuit brought by a shareholder on a corporation‘s behalf is necessarily derivative. (See Grosset, supra, 42 Cal.4th at p. 1114.) As we observed, “Because a derivative claim does not belong to the stockholder asserting it, standing to maintain such a claim is justified only by the stockholder relationship and the indirect benefits made possible thereby, which furnish the stockholder with an interest and incentive to seek redress for injury to the corporation.” (Ibid.) A stockholder who stops owning shares in the corporation “no longer has a financial interest in any recovery pursued for the benefit of the corporation.‘” (Ibid.) The loss of this interest divests the stockholder of standing. (Ibid.) In other words, we determined that
This analysis does not carry over to the nonprofit context because a director of a charitable organization is materially different than a shareholder of a for-profit corporation. Unlike shareholders who stand to benefit financially from pursuing derivative actions on behalf of a for-profit corporation (most obviously, through an increase in the value of their shares),13 directors have little to no financial interest in the charitable corporations. Although the law permits directors of a nonprofit public benefit corporation to be paid “reasonable compensation” (
Furthermore, unlike for-profit corporations, charitable organizations do not have shareholders with ownership interests in the charity. This means that, as pointed out by the Attorney General, the responsibility of directors “to assure the integrity of the charity‘s activities” is heightened. This heightened responsibility would be impeded if we adopted a rule that prohibited directors from pursuing actions aimed at protecting the charities after losing their directorship status. In short, as we previously recognized, “The differences between private and charitable corporations make the consideration of such an analogy [between the two settings] valueless.” (Holt, supra, 61 Cal.2d at p. 755, fn. 4; see also Tenney, supra, 160 N.E.2d at p. 466 [although “there may be many similarities between the derivative action brought by a shareholder and one brought by a director—in both cases the action is prosecuted in the right and for the benefit of the corporation—there are important reasons why the rule of automatic disqualification upon loss of status should not be extended to the director‘s action“].)
We were also persuaded in Grosset by the fact that “the vast majority of other jurisdictions that have considered the issue require continuous stock ownership for standing to maintain a derivative lawsuit.” (Grosset, supra, 42 Cal.4th at p. 1114, fn. omitted.) We see no comparable consensus among our sister courts concerning a continuous directorship requirement, in part because it seems few other jurisdictions “have considered the issue.” (Ibid.) Decisions from New York and Arizona, the only two states that have directly addressed the question of whether there is a continuous directorship requirement, have held that a director of a charitable corporation may continue to prosecute an action even after losing reelection for office. (See Tenney, supra, 160 N.E.2d at p. 465; Workman, supra, 382 P.3d at pp. 819–820.) At the same time, decisions from Tennessee and another New York court hold that members (not directors) of a charitable corporation must “retain membership for the duration of the lawsuit.” (United Supreme Council AASR SJ v. McWilliams (Tenn. Ct. App. 2019) 586 S.W.3d 373, 385 (United Supreme Council); see also Pall v. McKenzie Homeowners’ Assn., Inc. (App. Div. 2014) 995 N.Y.S.2d 400, 401–402 (Pall).)
These out-of-state authorities are not uniformly helpful to our analysis here, as they interpret statutory language different from that contained in sections 5142, 5233, and 5223. And, unsurprisingly, our sister courts were often persuaded by the specific text, legislative history material, or surrounding context in reaching their conclusions. (See, e.g., Pall, supra, 995 N.Y.S.2d at p. 402 [“Because the N-PCL specifically eliminated the ability of less than five percent of shareholders to continue an action by posting security for expenses, we conclude that the ownership requirement of N-PCL 623(a) must continue throughout the action in order to maintain standing“]; Workman, supra, 382 P.3d at p. 819.)16
Insofar as an expert consensus exists, it is to be found in the Model Nonprofit Corporation Act and the Restatement of the Law, Charitable Nonprofit Organizations (Restatement). The Model Nonprofit Corporation Act, drafted by the American Bar Association, has consistently taken the view
The Restatement likewise adopts an expansive approach to director standing in this context. Under the Restatement, among those that have standing “to bring a derivative action on behalf of a charity” are “a current member of the board of the charity” as well as “a former member of the board of the charity who is no longer a member for reasons related to that member‘s attempt to address the alleged harm to the charity.” (Rest., § 6.02(b).) The amicus curiae brief submitted by the Reporter for the Restatement offers contextual details supporting this rule, noting that “[c]haritable-nonprofit boards are typically self-perpetuating” and “quite limited in size.” Given the insularity of these boards and the fact that “some portion of the board will be defendants” in cases alleging breach of charitable trusts or fiduciary duties, “it is typical for a member of the board who brings a derivative suit to lose her position on the board.” Moreover, unlike in matters involving for-profit companies where if a shareholder loses standing to bring a derivative suit, “another one of the many otherwise similarly situated people who own shares can easily step in to fill the role,” charities cannot rely on such easy availability of directors to substitute in as a plaintiff. In light of these considerations, the Restatement does not prohibit board members “from maintaining a derivative claim they had standing to file” if they subsequently failed to be reelected. Indeed, the Restatement “goes further,” allowing some former board members to bring a claim. (See Rest., § 6.02(b)(2)(B).)
In sum, defendants’ reliance on Grosset is misplaced, and there is no consensus supporting a continuous directorship requirement. If anything, the prevailing view appears to be that a director of a nonprofit public benefit corporation has standing even if the director-plaintiff fails to retain a director position at the nonprofit. The Court of Appeal‘s decision runs counter to this view.
The Court of Appeal reasoned that the relator process—under which lawsuits may be brought in the name of the people of California or the Attorney General—addresses any shortcomings of a continuous directorship requirement. The court explained that the relator process “provide[s] a mechanism for continued protection of the public benefit corporation if someone who was once within the defined class of individuals entitled to litigate on its behalf loses his or her status with the corporation and, thereby, standing.” (Turner, supra, 67 Cal.App.5th at p. 1132.) According to the Court of Appeal, because a charitable organization “may continue to seek relief for claims of misconduct against its directors through the Attorney General, or through an individual to whom the Attorney General grants relator status under sections 5142, subdivision (a)(5) and 5233, subdivision (c)(4), even if a qualified individual who initiated suit on behalf of the corporation loses standing during the litigation,” the organization is “adequately protect[ed] . . . from gamesmanship or improper attempts by the accused directors to terminate litigation.” (Id. at pp. 1132, 1134.) We are not persuaded that the relator process answers the question before us.17
A relator is “[a]ny person desiring ‘leave to sue’ in the name of the people of the State of California under any law requiring the prior permission therefor of the Attorney General.” (
In addition, a relator remains subject to the Attorney General‘s control throughout the litigation. A relator‘s complaint may be “changed or amended as the Attorney General shall suggest or direct” and, after filing, may not be “change[d], amend[ed] or alter[ed] . . . without the approval of the Attorney General.” (
The Court of Appeal recognized that when “someone who was once within the defined class of individuals entitled to litigate on its behalf loses his or her status with the corporation and, thereby, standing” because of the imposition of a continuous directorship requirement, only two entities remain “to seek relief for claims of misconduct against . . . directors” of the nonprofit corporation: the Attorney General and individuals “to whom the Attorney General grants relator status.” (Turner, supra, 67 Cal.App.5th at p. 1132.) The Court of Appeal was also aware of “limitations on the resources of the Attorney General” to supervise the numerous charitable organizations in the state. (Ibid.) It acknowledged that in addition to “[s]taffing and funding limitations,” “political concerns may discourage [the Attorney General from] ‘investigation of charges against respectable trustees and corporate officers.‘” (Ibid.) In light of these constraints associated with enforcement by the Attorney General, the court below relied on the availability and willingness of relators themselves to litigate on behalf of charities, and concluded that “[u]nder [its] interpretation,” nonprofit public benefit corporations would still receive “adequate” protection against misconduct by its fiduciaries. (Id. at p. 1134.)
Yet, even when relators are entitled to litigate on behalf of a nonprofit public benefit corporation, their mere ability to do so does not alleviate the strain on the Attorney General‘s resources.18 As the Attorney
The Court of Appeal was unsympathetic to the Attorney General‘s argument, declaring that “[t]he Attorney General should not be able to avoid its ongoing obligations to supervise charitable organizations simply because a director begins a lawsuit.” (Turner, supra, 67 Cal.App.5th at p. 1134Ibid.; see also, e.g., Karst, The Efficiency of the Charitable Dollar: An Unfulfilled State Responsibility (1960) 73 Harv. L.Rev. 433, 437 [“if the public‘s interest is to be protected, someone must be assigned the job of supervising charitable fiduciaries. Ordinarily, this task has fallen to the attorney general, and—just as ordinarily—supervision and enforcement have been irregular and infrequent“], fn. omitted.)
In addition, even supposing that the Attorney General would always grant relator status when it is in the interests of justice to do so, there may be a dearth of willing relators. As noted, a relator must agree to pay “all costs and expenses incurred in the prosecution of the proceeding in which such ‘leave to sue’ is granted.” (
4. Availability of Equitable Exceptions and Risk of Harassment
We are not persuaded that other considerations invoked by defendants dictate an interpretation of the relevant statutes different from the one we have arrived at.
Recognizing that a continuous directorship requirement empowers accused directors to unilaterally terminate litigation against them, some defendants in this case suggest that equitable exceptions from the requirement may be created when a plaintiff “alleges with particularity facts showing [the director] was ousted in bad faith to block the litigation.” (Accord, Grosset, supra, 42 Cal.4th at p. 1119 [noting, regarding shareholders’ derivative actions in the context of for-profit corporations, that “equitable considerations may warrant an exception to the continuous ownership requirement if the merger itself is used to wrongfully deprive the plaintiff of standing” but declining to “address such matters definitively in this case“]; Turner, supra, 67 Cal.App.5th at p. 1129 [attempting to distinguish Summers, supra, 34 Cal.App.5th 361, on the ground that “the Summers court was concerned with equitable considerations surrounding the removal of a director“].)
We decline to adopt defendants’ proposed approach. Plaintiffs are rarely in a position to offer direct evidence that their removal as directors was retaliatory. An ousted director cannot readily establish fellow board members’ motivations. An ousted director might observe the behavior of fellow director-defendants, but that behavior is inevitably subject to varying interpretations, and, as such, it might often be difficult to plead “with particularity” facts showing that one “was ousted in bad faith.” This might in turn frequently add to the burden of litigation by requiring a hearing to determine the motive for the plaintiff‘s removal.
Defendants further contend that standing should cease when directors fail to retain their positions at the charities because, once separated from the organizations, the directors no longer owe fiduciary duties to the charities. Defendants suggest that allowing former directors to continue litigating would expose the nonprofit public benefit corporations to vexatious litigation, draining their resources from their charitable purposes. We have long been mindful of the need to “protect[] . . . charities from harassing litigation.” (Holt, supra, 61 Cal.2d at p. 755; see also, e.g., Blasko, supra, 28 U.S.F. L.Rev. at pp. 41-42 [explaining that a rationale for “the exclusivity of attorney general
For one, “‘few in number‘” are individuals who are former directors of nonprofit public benefit corporations who have ongoing lawsuits initiated while they sat on the board. (Holt, supra, 61 Cal.2d at p. 755.) For another, these individuals filed their complaints when they were directors “charged with the duty of managing the [nonprofit‘s] affairs” and operating as fiduciaries of the organization. (Ibid.) There is no reason to believe that suits filed by fiduciaries become meritless as soon as the plaintiffs lose their affiliations with the nonprofit organizations, or that they are maintained thereafter purely out of improper motives. For yet another, the derivative nature of the enforcement actions means that any eventual recovery “will accrue to the direct benefit of the corporation and not to the [director] who litigated” the claims. (Grosset, supra, 42 Cal.4th at p. 1114; see also Blasko, supra, 28 U.S.F. L.Rev. at p. 53 [“Any damages recovered as a function of [a derivative] suit go to the corporation, never to those who brought the suit“], fn. omitted.) Even when, as here, a plaintiff prays for attorney fees, the plaintiff cannot obtain such fees without prevailing.20 Accordingly, we conclude that charities are adequately protected from harassing litigation even without the requirement that only current directors are allowed to maintain legal actions brought on their behalf. (See Holt, at p. 755.)
Finally, defendants raise the specter that without a continuous directorship requirement, a director who “just quit,” or voluntarily disassociates from a nonprofit public benefit corporation, can continue harassing the organization through litigation. But of course, the director-plaintiff in this case did not simply quit. According to her allegations, which we must treat as true (see, e.g., Southern California Gas Leak Cases, 7 Cal.5th 391, 395), plaintiff “wanted to remain on the Foundation‘s Board” and communicated as much to her fellow board members. But because none of the directors nominated or seconded her reelection, plaintiff lost her position.
In any event, the possibility that some directors may quit does not persuade us that a continuous directorship requirement should be the default rule. There appears to be no basis in the statutes to distinguish between former directors who were retaliated against and those who simply chose to quit. The statutes themselves do not carve out an exception for when a
III. CONCLUSION
We hold that a director of a nonprofit public benefit corporation who brings a lawsuit pursuant to
GUERRERO, C. J.
We Concur:
CORRIGAN, J.
LIU, J.
KRUGER, J.
GROBAN, J.
JENKINS, J.
EVANS, J.