Nixon v. Lichtenstein
959 S.W.2d 854, 1997 WL 713492, 1997 Mo. App. LEXIS 1999 (1997)
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Rule of Law:
When a charitable trust is converted into a nonprofit corporation and the corporation's articles of incorporation retain the specific restrictions and fiduciary duties of the original trust, the directors of the corporation are held to the stricter fiduciary standards of trust law, not the more lenient business judgment rule of corporate law.
Facts:
- In 1947, David B. Lichtenstein, Sr. created the David B. Lichtenstein Foundation as a charitable trust whose board members served without compensation.
- In 1987, after the founder's death, the Foundation began paying all legal fees for a personal lawsuit filed by Daniel Lichtenstein (the founder's son) and his daughter, even after a court dismissed the Foundation as a party to the suit in 1989.
- In 1990, Daniel Lichtenstein's wife, Aliene Lichtenstein, joined the board, after which the directors began paying themselves annual salaries and charged over $700,000 in personal property purchases to the Foundation.
- In December 1991, Daniel Lichtenstein dissolved the trust and transferred its assets to a newly formed nonprofit corporation, as permitted by the original trust indenture. The new corporation's articles explicitly retained the trust's prohibitions on self-dealing and a 5% cap on director compensation.
- In 1992, Aliene's sister, Arlene Frazier, joined the board and was appointed to a position with a salary that quickly rose to $52,000 per year.
- In 1993, Aliene Lichtenstein was appointed first vice president with a salary that soon increased to $125,000, and she had an extensive telephone system installed in her home at the Corporation's expense.
- After Daniel Lichtenstein died in 1994, Aliene Lichtenstein became president of the Corporation and, as the primary beneficiary of his estate, did not ensure the legal fees from the Boatmen's Litigation were ever reimbursed to the Corporation.
Procedural Posture:
- The Attorney General of Missouri filed a petition in the circuit court (trial court) seeking an accounting and alleging self-dealing and breach of fiduciary duty by the Corporation's board members.
- Seven of the nine board members entered into a settlement agreement with the Attorney General, agreeing to resign and reimburse the Corporation.
- The claims against the remaining board members, Aliene Lichtenstein and Arlene Frazier (Appellants), proceeded to a bench trial.
- The trial court found that Appellants had breached their fiduciary duties, ordered their removal from the board, and ordered them to reimburse the Corporation for improper expenses.
- Appellants appealed the trial court's judgment to the Missouri Court of Appeals, Eastern District.
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Issue:
Are the directors of a nonprofit corporation, formed from a charitable trust that carried its restrictions against self-dealing and compensation limits into the corporate articles, subject to the high fiduciary duties of trust law rather than the more lenient corporate business judgment rule?
Opinions:
Majority - Hoff, Judge.
Yes. The directors of a charitable corporation are subject to the stricter standards of trust law when the corporation was formed from a trust and its governing documents carry over the trust's original restrictions. The court reasoned that the fiduciary duties imposed on those managing trust property are not diminished simply by transferring the assets to a charitable corporation. Citing Hillyard v. Leonard, the court stated that the corporation becomes the 'alter ego' of the trustees, and the directors' actions must be judged in light of the original trust instrument. Because the Corporation’s articles of incorporation explicitly retained the trust's prohibition against self-dealing and the compensation cap, the trial court correctly applied the higher standard of trust law instead of the business judgment rule, which does not protect directors from liability for self-dealing or bad faith.
Analysis:
This decision solidifies the principle that the fiduciary duties of directors of a charitable corporation originating from a trust are defined by the founding instrument's intent, not merely by the entity's legal form. It prevents directors from using the corporate structure and the business judgment rule as a shield to engage in self-dealing or other conduct that violates the specific restrictions of the original charitable trust. The case establishes that when a trust's limitations are expressly carried into a successor corporation's articles, courts will enforce the stricter trustee standard of loyalty and care. This precedent is significant for the governance of charitable organizations, ensuring that the original charitable purposes and restrictions are honored despite changes in legal structure.
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