Article Archives >> Lead Stories >> August 1-15, 2009

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Court Refuses to Intervene
In Dispute Over Term Limits
Nonintervention appropriate when facts
do not amount to fraud or arbitrary action

An appellate court in Maryland has agreed that it is not appropriate for the courts to intervene in a governance dispute among members of the United States Naval Academy Alumni Association.  The state Court of Appeals has affirmed a trial court decision that it would not hear a challenge to the seating of certain members of the Board, allegedly in violation of term limit provisions, when the Board’s actions were pursued in good faith and were not fraudulent or arbitrary.  (Tackney v. United States Naval Academy Alumni Association, No. 108 Sept. Term, 2008, 5/14/09.)

The Association’s bylaws contained several provisions affecting term limits.  Section 4.9 provided that trustees would serve for a term of three years and may serve up to two consecutive terms.  Section 4.7 provided that the immediate predecessor of the Chair would serve as a trustee and assume that office automatically upon completion of his or her term as Chair.

The dissident faction objected to the election of the Board Chair, who was elected to a second term in 2006.  They said he had to serve as the immediate predecessor of the Chair, and not in an independent term.  They objected to the continuation of another person as immediate predecessor of the Chair because he was continuing beyond two terms. And they objected to another trustee who had been elected to a third term in 2005 but only after his situation had been approved by the Board in a restructuring in 1998. 

They also objected to the process of the elections, in which one nominee for Chair had been removed from a recommended slate, and as a write-in candidate, the removed nominee had won about 41% of the votes in a losing effort.

After the 2006 elections, the Association had considered the objections and asked for a legal opinion from an attorney who was an Association member.  The attorney said the dissidents’ claims had “no merit.”  Following receipt of the opinion, the Board voted 24-2 to retain the three trustees as they were.  The Board subsequently revised the bylaws, including Sections 4.7 and 4.9.  The objectors sued, seeking to undo the disputed elections and overturn the revised bylaws. 

The trial court applied the principle of nonintervention, holding that the facts alleged by the dissidents did not amount to fraud, or arbitrary action which would permit intervention into the affairs of a private association.  The Court of Appeals has affirmed.

The dissidents argued that the Board’s actions were arbitrary and in violation of the bylaws.  The Board argued that the bylaws were ambiguous and that they acted reasonably under the circumstances. 

“Mindful that the Association is a nonprofit, voluntary membership organization,” the Court applied the “business judgment rule” and said it would intervene in the dispute “only if the Board’s actions were fraudulent or arbitrary.  We do not consider actions pursued in good faith, in purported compliance with the Association’s bylaws, to be fraudulent or arbitrary.”

Although the dissidents’ interpretation of the tenure provisions is “plausible,” the Court wrote, it does not preclude the existence of other reasonable interpretations.  A reasonable layperson could conclude, as to the interplay between §§ 4.7 and 4.9, that a trustee may serve for six years and that he or she would have a choice between serving” (1) two elected terms as Chair; or (2) a single elected term as Chair followed by a single term as Immediate predecessor of the chair.  In addition, a reasonable layperson could conclude that a trustee could serve two terms as Chair and then serve as Immediate Predecessor of the Chair pursuant to § 4.7, notwithstanding the two-term limitation of § 4.9. these conclusions are plausible because a layperson could reasonably believe that an issue as important as a prohibition against a person running for a second elected term as Chair would be expressly stated in the Bylaws.  There is, however, no such express limitation.  Moreover, a reasonable layperson could believe that the six-year limitation applies to elected terms and that subsequent service as Immediate Predecessor is exempt from that provision.”

Citing the Board’s prior conduct consistent with its current interpretation, the Court went on to say that “because the Association’s Bylaws are ambiguous as to the interplay between §§ 4.7 and 4.9, we cannot say that the Board acted in a manner sufficiently arbitrary to invoke intervention by a Maryland Court.”

The Court also rejected claims objecting to the election and nomination procedures.

YOU NEED TO KNOW

We have often stated our view that term limits are not appropriate for most nonprofits (See Ready Reference Page:  “Term Limits Are For Cowards.”), and this litigation would have been much less likely and would have had much less basis if there were no such limits.  But the case also shows how difficult it can be to draft absolutely unambiguous bylaw provisions that essentially foreclose such suits.  Bylaws are not often parsed carefully unless there is a dispute within the corporation, and that is the time you want them to be as clear as possible.  (See Ready Reference Page: “Bylaws Function As Constitution of Nonprofit Corporations.”)  Most people will follow the rules when the rules are clear.  When a lawyer can argue that they are not clear, litigation is much more likely.

Article Archives >> Lead Stories >> August 1-15, 2009