Kirtley v. McClelland
562 N.E.2d 27, 1990 WL 166995 (1991)
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Rule of Law:
Members of a non-profit corporation may bring a derivative action to enforce corporate rights, and a corporate fiduciary breaches their duty by appropriating a business opportunity that the corporation is financially and technically capable of undertaking and has a legitimate interest or expectancy in.
Facts:
- In 1974, Caslon Development Co. created 'the Pointe,' a planned residential community, established Pointe Service Association (PSA) as a not-for-profit corporation, and delegated community administration and maintenance to PSA, creating Class A (unit owners) and Class B (developer) memberships.
- By 1982, development stagnated, and Caslon's successor, Indun Realty, sold the country club, 30 residential units, and the golf course to Resort Management Association (RMA), a limited partnership formed by the directors (William Kirtley, Phyllis Kirtley, Thomas Garrison, Terry Pierson), and RMA became PSA's managing agent.
- In December 1982, William Kirtley purchased the remaining undeveloped property from Indun, formed Pointe Development Company (PDC), conveyed the property to PDC, and received the 1500 PSA Class B memberships, subsequently electing himself and his family members as PSA directors.
- William Kirtley, as a PSA director, became aware of the members' dissatisfaction with the existing off-air television reception and the desire for cable television services.
- William Kirtley, without exploring PSA's options or obtaining its authorization, personally purchased satellite television equipment and operated a cable television system, billing the unit owners through PSA for the service.
- William Kirtley later sold his television equipment and a covenant not to compete to Pegasus, an independent cable company, for $120,000, while PSA, through William Kirtley, granted Pegasus an exclusive right to operate a cable TV system in PSA's residential units.
- The warranty deed conveying the golf course to RMA included a covenant explicitly requiring RMA to mow the non-paved portions of specific roadway easements, but PSA funds were used to pay for this mowing instead.
Procedural Posture:
- A group of Class A unit owners (appellee-plaintiffs) brought a shareholder's derivative action against the directors (appellant-defendants) for alleged irregularities in managing the Pointe Service Association.
- The directors filed a motion to dismiss the second amended complaint, arguing the plaintiffs, as members of a non-profit corporation, lacked standing to bring a derivative suit, but the trial court denied this motion.
- A bench trial was held, after which the trial court rendered judgment against the directors, ordering them to pay approximately $150,000, provide an accounting and transfer of funds, and pay attorneys' fees.
- The directors appealed the judgment to the Court of Appeals of Indiana.
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Issue:
1. Does Indiana law permit members of a non-profit corporation to initiate a derivative lawsuit against its directors for alleged mismanagement and breach of fiduciary duty? 2. Did a director breach his fiduciary duty to the non-profit corporation by personally acquiring, operating, and later selling a satellite television system when the corporation had an interest and capacity to provide such services? 3. Did the directors breach their fiduciary duty by expending the non-profit corporation's funds for mowing expenses when another entity was contractually obligated to perform that maintenance?
Opinions:
Majority - Robertson, Judge
Yes, members of a non-profit corporation may initiate a derivative lawsuit against its directors. The court found that the derivative action remedy, by its nature, aims for the non-pecuniary benefit of the corporation, making the corporation's for-profit or non-profit status irrelevant to the availability of the remedy. The court cited the inherent equitable power of courts to provide redress for wrongs and noted that Indiana Trial Rule 28.1, which governs derivative actions, is broad enough to include 'members' of non-profit corporations. Furthermore, the Indiana Not-for-Profit Corporation Act does not explicitly bar such actions, and statutory provisions for public oversight of non-profits do not preclude internal member actions to enforce corporate rights. Yes, director Kirtley breached his fiduciary duty to PSA by appropriating a corporate opportunity related to the television service operation. The court concluded that Kirtley, in his capacity as a director, learned of the opportunity to provide cable television, which was in line with PSA's existing business of providing television reception and that PSA had the corporate and financial capacity to undertake this opportunity. By personally acquiring and operating the system without exploring PSA's options, Kirtley diverted a corporate opportunity. The court affirmed the award of $10,367, representing Kirtley's profit from operating the system, to PSA. However, the court reversed the trial court's award of $120,000 (from the sale of the equipment and non-compete covenant), finding insufficient evidence that the non-compete covenant was worthless or that the entire amount was a commission for PSA's business. The court noted that Kirtley, through PDC, controlled undeveloped land at the Pointe, where a secondary market could exist, giving the covenant independent value beyond PSA's exclusive distribution rights in residential units. Yes, the directors breached their fiduciary duty by expending PSA funds for mowing expenses. The court determined that the warranty deed conveying the golf course to RMA clearly and unambiguously required RMA to mow the non-paved portions of the roadway easements at its own expense. PSA was deemed a third-party beneficiary to this agreement, as Indun, which controlled PSA at the time, intended to impose this obligation for PSA's benefit. The court therefore affirmed that the directors wrongfully used PSA funds for expenses that RMA was obligated to cover. The court remanded for a recalculation of prejudgment interest (as simple interest) and attorneys' fees due to the modification of the damages award and affirmed the trial court's rulings on damages for security services (due to speculative calculation) and the denial of treble damages (due to waiver).
Analysis:
This case significantly broadens the scope of derivative litigation in Indiana, confirming that members of not-for-profit corporations have standing to sue directors for breaches of fiduciary duty, similar to shareholders in for-profit entities. It reinforces the application of the corporate opportunity doctrine, emphasizing that fiduciaries cannot self-deal in opportunities that naturally fall within the corporation's business and capacity. The ruling also clarifies how contract interpretation, particularly concerning third-party beneficiaries, impacts director duties regarding corporate expenditures, underscoring the importance of clear contractual obligations.
