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7th Circuit upholds judgment in favor of nonprofit’s board of directors

February 2, 2017

The 7th Circuit Court of Appeals has upheld summary judgment in favor of a sister on the board of directors of a family foundation after finding that her brother lacked standing to bring either individual or derivative claims on behalf of the corporation.

After the death of their parents in 2000 and 2010, Richard Doermer and Kathryn Callen became directors of the Doermer Family Foundation Inc. along with Phyllis Alberts, who had been elected to a three-year term on the board of directors that expired in January 2013. Alberts was elected to a second term after her first term expired, but she did not have Doermer’s support.

Callen and Alberts then begin taking various actions over Doermer’s objections, including authorizing gifts to the University of Saint Francis of Fort Wayne, Indiana Inc. and electing Callen’s son, John Callen, as a fourth board member.

After John Callen’s election, Doermer sued, asserting claims both on his own behalf and derivatively on behalf of the family foundation. Specifically, he requested judgement against his sister for the amount of charitable contributions made after the expiration of Alberts’ first term, recovery of the gifts received by Saint Francis, his sister’s removal from the board, an injunction barring his nephew and Alberts from acting as directors, and the appointment of new directors.

Judge Joseph S. Van Bokkelen of the U.S. District Court for the Northern District of Indiana granted the defendants’ motion for summary judgment and dismissed Doermer’s case, holding that he lacked standing to bring a derivative claim and that his individual claims failed because he lacked standing and because they were meritless. The 7th Circuit Court of Appeals agreed Thursday.

Judge David Hamilton, writing for the unanimous panel, first noted that the Indiana Nonprofit Corporation Act does not permit non-member directors of a nonprofit corporation to bring derivative suits on behalf of the corporation. Further, the panel rejected Doermer’s argument that the prohibition against non-member suits prevents recourse for director misconduct because the Act includes provisions to deal with those situations.

“It is generally prudent for courts to assume that legislatures intend the obvious and natural consequences of the statutory language they enact,” Hamilton wrote. “The obvious and natural consequence of allowing nonprofit corporations without members is that the option forecloses derivative litigation.”

Further, the panel found that Doermer’s individual claim for monetary damages fail because “there is no indication in the complaint that Richard has personally suffered any economic damage.”

“But there’s the rub,” Hamilton wrote. “Even if Richard’s claims had merit…he could not step up as litigation champion on behalf of the Corporation to vindicate its interests. That is what derivative litigation is for – and Richard lacks standing to bring a derivative suit.”

Doermer’s claims fail on their merits because his requests are not supported by state statute, Hamilton wrote. Although Indiana Code 23-17-4-4(b) could possibly support Doermer’s claim for injunctive relief, he failed to plead a plausible basis for such relief because Alberts’ re-election – and, thus, the board’s subsequent actions over his objections – was lawful, the judge said.

The case is Richard Doermer, both individually and derivatively on behalf of the Doermer Family Foundation, Inc. and Kathryn Callen, 15-3734.
 

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