In a ruling that has broad implications for the more than 110,000 charities across the state, the California Supreme Court has unanimously ruled that the partner of late philanthropist Conrad Prebys can move forward with a whistleblower lawsuit accusing the other directors of his charitable foundation of misdirecting $15 million to his estranged son. Turner v. Victoria, S271054 (Cal. Aug. 3, 2023)
The Supreme Court’s decision, authored by Chief Justice Patricia Guerrero, focuses on California Corporations Code sections 5142 and 5233, which provide that a director of a nonprofit corporation may “bring an action” to remedy a breach of the charitable trust or to recover damages for self-dealing by other directors, and section 5223, which permits a trial court, “at the suit of a director”, to remove from office any director guilty of malfeasance. All three “director enforcement” sections are part of California’s Nonprofit Corporation Law which was enacted in 1978.
Two years before Conrad Prebys died in 2016, he cut his son and only child out of his will. Hoping to avoid a lengthy, costly and public court battle, four of the five directors of The Conrad Prebys Foundation, which Prebys had established to continue his charitable giving, voted for a settlement with the son, Eric Prebys. The agreement paid $9 million directly to the younger Prebys, and covered $6 million in estate taxes. The one director who opposed the settlement, Prebys’ long-term partner Debra Turner, said Prebys was “adamant” about disinheriting his son, and she sued the other directors alleging malfeasance and a breach of fiduciary duty by the board for using the funds to settle with the son rather than for philanthropic causes.
Shortly after filing the lawsuit, Turner’s term on the foundation’s board of directors expired, while the other four board members nominated and re-elected themselves. This effectively ousted Turner from the board. The trial court dismissed the lawsuit, ruling that, because she was no longer a director, she no longer had standing to continue her case. The Court of Appeals affirmed.
The Supreme Court reversed the lower court, holding that trial courts cannot dismiss a whistleblower’s lawsuit just because the individual loses their seat on a charity’s board of directors. “The position adopted by the Court of Appeal would permit gamesmanship by directors accused of wrongdoing,” Guerrero wrote. “Directors who are sued would be able to terminate the litigation by removing the plaintiffs from office, refusing to reelect the individuals, or otherwise making it more difficult for the plaintiffs to retain their positions.” (Turner, supra, at 3.) The Chief Justice also wrote that board members “would likely be discouraged” from filing complaints if the other board members could terminate the litigation by ousting the whistleblower. (supra)
In analyzing the statutory text, the Chief Justice rejected the analogy of the director enforcement statutes to shareholder derivative suits, noting that sections 5142 and 5233 use the phrase “may bring an action” while Corporation Code 800, governing shareholder derivative suits in the context of for-profit organizations “refers to an action that ‘may be instituted or maintained’ (italics added)” (Turner, supra, at p. 13). She wrote that the absence of any language in the nonprofit director enforcement statutes “comparable to the phrase ‘or maintained’ […] points away from a continuous directorship requirement in the same way that the phrase’s presence in section 800 ‘point[s] to’ a continuous stock ownership requirement.” (Turner, supra, at 14.)
The Supreme Court also noted that a comparison with the provisions of the General Corporation Law that were superseded by the Nonprofit Corporation Law demonstrates that the Legislature intended to broaden standing, and “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.” (Turner, supra, at 19.) The decision also recognized that the heightened responsibility of nonprofit directors “to assure the integrity of the charity’s activities […] would be impeded” by the adoption of “a rule that prohibited directors from pursuing actions aimed at protecting the charities after losing their directorship status.” (Turner, supra, at 32.)