“Fired” Director Retains Standing to Sue Nonprofit for Dissolution and Appointment of Receiver

On October 18, 2016, the Arizona Court of Appeals handed down its decision reversing the superior court in Workman vs. Verde Wellness Center, Inc., a case involving a director’s attempt to involuntarily dissolve a nonprofit corporation and have a receiver appointed to handle its wind down affairs.  Workman was on the board of director’s of Verde, and became disturbed about the fashion in which the corporation, which was of the nonprofit variety, was conducting its business.  As such, Workman brought a law suit seeking the corporation’s judicial dissolution because “[t]he directors…have acted, are acting or will act in a manner that is illegal, oppressive or fraudulent” and “corporate assets [are] being wasted, misapplied or diverted for non-corporate purposes.”  In very short order after being served with Workman’s Complaint, Verde’s other board members called an emergency meeting at which Workman’s tenure as a director was terminated effective immediately.  Verde moved to dismiss Workman’s complaint claiming that it was moot in that, once Workman was terminated, she had no further interest in the corporation or its operations, and therefore did not have standing to sue.  The superior court granted Verde’s motion to dismiss.

On appeal, the appellate court noted that in order [t]o initiate a claim, a party must have standing — that is, ‘a personal stake in the controversy’s outcome’ caused by ‘a distinct and palpable injury.'”  It went on to note that “a case becomes moot if an event occurs that ends the underlying controversy and transforms the litigation into ‘an abstract question which does not arise upon existing facts or rights.'” Verde’s argument was to the effect that Workman’s termination served as the event mooting her claim, because she no longer had a personal stake in the corporation’s operations or affairs.

The court, however, went on to cite the statute relating to nonprofit corporations, A.R.S. Sec. 10-11430(B)(2),(4) which provides that “the court may dissolve a corporation in a proceeding…by a director” if the other directors “have acted, are acting or will act in a manner that is illegal, oppressive or fraudulent” or ‘[t]he corporate assets are being wasted, misapplied or diverted for non-corporate purposes.”  It pointed out that as Workman urged, the statute would be rendered meaningless were Verde’s argument correct in that any future litigation involving such claims could be mooted by the defendant’s simply terminating the plaintiff’s position on the board absent any consideration by the court of the underlying merits of the claim.  Because of the public policy to be served by not allowing boards of directors of nonprofit corporations to act in an “illegal, oppressive or fraudulent” fashion,” the court noted that under those circumstances existing in this case,  a party should not by its own unilateral conduct after filing render the issues of the case moot resulting in dismissal with no consideration of the wrongdoing alleged.  Indeed, were Verde allowed to do so, it could be, in essence, improperly and effectively “profit by its own wrongdoing,” which has never been sanctioned by the courts.

As such, the superior court’s dismissal was reversed and the case remanded for further proceedings consistent with the court of appeals’ decision.

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