American Center for Education, Inc. v. Cavnar
1978 Cal. App. LEXIS 1436, 80 Cal. App. 3d 476, 145 Cal. Rptr. 736 (1978)
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Rule of Law:
For close corporations or non-profits accustomed to informal operations, a corporate action is valid if a quorum of directors is present and participates in the decision-making process, even without formal notice or procedure. A director validly removed through such an action lacks standing to subsequently bring a lawsuit on the corporation's behalf.
Facts:
- American Center for Education (ACE), a nonprofit corporation, was managed by a small executive committee and board of directors including Hurst B. Amyx (President), Samuel M. Cavnar, and George Todt.
- Strong disagreements over ACE's direction arose between Amyx on one side and Cavnar and Todt on the other.
- On May 15, 1970, Cavnar and Todt attempted to convene an executive committee meeting in Amyx's office to remove him; Amyx immediately left the room upon hearing the word 'meeting'.
- ACE maintained a checking account at United California Bank (UCB) that required the signatures of Amyx and either Cavnar or Todt for any transaction.
- Shortly after the attempt at a meeting, all three men encountered each other at the UCB branch. Amyx voluntarily joined Cavnar, Todt, and the branch manager in a conversation that turned into a 10-minute debate over control of ACE.
- During this confrontation at the bank, Cavnar and Todt, purporting to act as the executive committee, voted to remove Amyx as president and an executive committee member, and elected Robert Davies as a new director.
- Despite Amyx's protests, the UCB branch manager then transferred over $137,000 from ACE's checking account to a new account controlled solely by Cavnar and Todt.
- On May 25, 1970, a board of directors meeting was held by Cavnar, Todt, and the newly elected Davies; Amyx received notice but did not attend. The board voted to ratify the earlier actions and formally removed Amyx as a director.
Procedural Posture:
- Hurst B. Amyx, acting on behalf of himself and American Center for Education, Inc. (ACE), filed a lawsuit in a California trial court against United California Bank (UCB), Samuel M. Cavnar, George Todt, and Robert Davies.
- The trial court, sitting with an advisory jury, found that the defendants had acted wrongfully and negligently in ousting Amyx and seizing control of corporate funds.
- The trial court entered a judgment removing Cavnar, Todt, and Davies from their positions at ACE and awarding $80,000 in damages against the defendants.
- The defendants (UCB, Cavnar, Todt, and Davies) appealed the judgment to the California Court of Appeal.
- ACE filed a cross-appeal, challenging the trial court's denial of its motion for a larger damage award against UCB.
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Issue:
Does a former director, who was validly removed from all corporate positions through informal but procedurally sound actions by the remaining directors, have standing to bring a lawsuit on behalf of the corporation?
Opinions:
Majority - Cobey, Acting P. J.
No. A director who is validly removed from all corporate positions becomes a legal stranger to the corporation and therefore lacks the standing to initiate a lawsuit in its name. The court reasoned that the confrontation at the bank constituted a valid meeting of the executive committee. Although informal, a quorum was established when Amyx voluntarily joined and participated in the debate, thereby waiving any objections to notice or procedure, especially given the corporation's custom of informal meetings. The court found that the executive committee had the delegated authority under ACE's bylaws to remove an officer and a committee member without cause, and to elect a new director to fill a vacancy. Consequently, the subsequent May 25 board meeting, attended by a valid quorum including the newly-elected Davies, was also valid and effectively removed Amyx as a director. Because Amyx was validly removed from all his positions prior to filing the lawsuit, he had no authority to act on behalf of the corporation, and the judgment in his favor must be reversed.
Analysis:
This decision significantly clarifies the standards for corporate action in closely held or non-membership corporations, emphasizing substance over procedural formality. It establishes that directors' customary practices, such as meeting informally without notice, can validate corporate decisions. The ruling serves as a precedent that a director cannot unilaterally prevent corporate action by refusing to attend a formal meeting and then later participate in the same dispute, as such participation can be construed as attendance that establishes a quorum. Finally, it reinforces the fundamental principle that standing is a prerequisite to litigation, and a validly ousted director loses all authority to sue on behalf of the corporation.
