Article Archives >> Lead Stories >> June 16-30, 2004

Court Has Power to Approve Settlement
Of Foundation Dispute Without Assessing Fairness
Directors investigated by AG are not “interested” in outcome
and are not prevented from voting on settlement supported by AG

A long-running dispute about the future of the Terra Foundation art museum in Chicago may have taken a step towards resolution recently. An Appellate Court of Illinois has confirmed that a trial court had authority to approve a settlement of “tortuous” litigation agreed by the Foundation’s Board and the state Attorney General.

The Court has denied an appeal by directors who opposed the settlement and complained that the trial court did not independently assess its fairness and that two directors were “intimidated” into voting for the plan because they feared that the Attorney General might pursue separate charges against them personally if they did not approve. (Buntrock v. Terra, Ct. of App., First Dist., Fifth Div., No. 1-01-3152, 5/28/04.)

Daniel Terra was a wealthy industrialist, diplomat and philanthropist, an avid art collector, a financier for the Republican Party, and the first ambassador at-large for cultural affairs appointed by President Reagan. In 1978, he and his wife established the Terra Museum of American Art. The museum was first opened in Evanston and moved to North Michigan Avenue in Chicago in 1987. His gifts of money and art to the museum were valued at about $450 million.

Terra’s wife died in 1982, and in 1986 he remarried Judith Banks (Terra), who lived in Washington, D.C.

In 1992, the corporation changed its name from Terra Museum of American Art to Terra Foundation for the Arts in contemplation of opening the Giverny Center, another museum of American Art to be located in France adjacent to the well-known museum devoted to the works of Claude Monet.

Terra died in 1996. In 2000, after the settlement of his estate, the Board appointed a strategic planning committee to consider a co-operative relationship with a major arts institution. The Foundation received proposals from the Art Institute of Chicago, the Corcoran Gallery of Art and the National Gallery of Art in Washington, and the Museum of Fine Arts in Boston.

In August, Board member Paul Hayes Tucker circulated a memo advocating the closure of the Chicago museum and relocation of its collection to the National Gallery in Washington. At the Board meeting, Director Margaret Daley, wife of Mayor Richard M. Daley, objected to “abandoning” Chicago, while Dean Buntrock, former CEO of Waste Management, complained that a relocation had not been previously discussed. Tucker said the Board should make a decision at its next meeting.

Before the next meeting, Buntrock and Director Ronald Gidwitz, chair of the State Board of Education, filed suit in Chicago against Directors Tucker, Judith Terra and Alan K. Simpson, former U.S. Senator from Wyoming, and an unofficial adviser to Judith Terra. They alleged mismanagement of the Foundation and sought an injunction to prevent the Board from holding a meeting they said was being called to remove Buntrock from the Board. They also sought to prevent the Board from considering the plan to move the collection.

They alleged various breaches of fiduciary duty, including a “conscious effort” to “cause the failure” of the museum in Chicago, “stacking” the Board with friends of Judith Terra, and taking advice from the fourth defendant who had no official role with the Foundation.

The Attorney General intervened as a matter of right, and Daniel Terra’s son, one of the original directors of the corporation, was permitted to intervene as Terra’s heir and his executor seeking to prevent the move.

The Court granted a preliminary injunction and ordered the parties to mediate a possible settlement. The Attorney General agreed to mediation but stated his opposition to any settlement which would move the collection from the Chicago area.

During the course of the mediation, when it appeared that settlement might not be reached, the Attorney General drafted an amended complaint adding Director Theodore Stebbins as an additional defendant for allegedly breaching his fiduciary duties to the Foundation in connection with potential purchases of artworks. About the same time, the Attorney General initiated an informal inquiry of another charity in which Board member Stephanie Marshall was engaged. The AG promptly determined that there was no violation at the other charity and closed the investigation.

In June 2001, the Board met to consider a negotiated settlement. Eight of 11 members were present in person or by telephone and voted 6-2 to accept the settlement. Terra and Tucker voted no. (Simpson wasn’t present.)

The Court approved the settlement over the objections of Terra, Tucker and Simpson.

On appeal, the three directors argued first that the original suit by Buntrock and Gidwitz was a “derivative” suit because it alleged no injury distinct from the alleged injury to the Foundation. They argued that the trial court could not approve settlement of a derivative suit without an independent inquiry whether it was fair, adequate, reasonable, and in the best interests of the corporation.

But the Court found that the original suit was brought to enjoin alleged “ultra vires” actions, i.e. actions beyond the power or authority of the corporation, under the state’s Not for Profit Corporation Act. The Act permits a director to bring an action to prevent the transfer of property for lack of capacity or power to make the transfer.

The two directors’ complaint “did not state a claim for a shareholder derivative action, but rather asserted a statutory, non-derivative claim by directors,” the Court said. “The complaint was not brought ‘by the corporation,’ but rather ‘by a director’ as provided” under the Act.

“An ultra vires claim against a corporation is not a derivative action,” it held, and therefore the trial court did not have to make an independent review of the fairness of the terms.

The three directors also argued that the Attorney General coerced the settlement by leading two of the directors to believe that they might have personal legal troubles if they didn’t go along.

But the Appellate Court pointed to the trial court’s findings of fact that the directors were not intimidated. “There is a strong policy in favor of settlement in order to avoid costly and time-consuming litigation,” the Court wrote. The three directors did not make out a prima facie showing that the directors who were investigated had interests in conflict with the interests of the Foundation. Nor did they establish that the investigated directors were “interested” in the settlement or were “directly or indirectly a party to the” settlement as required by the Act in order to establish a conflict of interest.

The Court affirmed the decision of the trial court.

YOU NEED TO KNOW

Although we have no personal knowledge about the underlying facts of the case, and without the Appellate Court even describing the ultimate settlement, there are a couple of universal principles evident in this case.

First, whose organization is it? Although it was set up as a family-controlled operation, it appears that the Foundation is now run by a self-perpetuating board not answerable to any family authority. As a result, it “belongs” to a majority of the board, however that majority may shift on any particular issue.

Second, having individuals of prominence on a Board does not assure harmony, competent decision-making, or that the Board won’t become dysfunctional, especially when there are strong emotional issues in play.

Third, it’s really hard to move a museum out of the jurisdiction when the Attorney General opposes it. As a political animal, it is usually in the Attorney General’s personal political interest to be seen as protecting the state from the loss of a collection of any quality. And the Attorney General has a broad discretionary power within which to persuade the museum that it isn’t really a very good idea to move.

Article Archives >> Lead Stories >> June 16-30, 2004