Lutz v. TANGLWOOD LAKES COMMUNITY ASS'N

866 A.2d 471, 2005 Pa. Commw. LEXIS 17

• Court: Commonwealth Court of Pennsylvania
• Decided: January 12, 2005
• Status: Published

Opinions

OPINION BY

Judge LEAVITT.

Keith Lutz (Lutz) appeals from an order of the Court of Common Pleas of Pike County (trial court) that dismissed as moot his petition to review contested corporate action. The trial court also granted a cross-motion for summary judgment filed by Appellee Tanglwood Lakes Community Association, Inc. (Tanglwood or association). This case concerns the authority of a board of directors of a nonprofit corporation to remove a director for cause and the application of the mootness doctrine. We affirm in part and reverse in part.

Tanglwood is a Pennsylvania nonprofit corporation that is generally governed by the Nonprofit Corporation Law of 1988(Law), 15 Pa.C.S. §§ 5101-6162, by its articles of incorporation and by its bylaws, adopted in 1987.¹ Tanglwood’s operations are overseen by a Board of Directors (Board) composed of fifteen directors who are elected by the membership to staggered three-year terms. Tanglwood’s members first elected Lutz to the Board in 1992 and have re-elected him every year since that time. In 1993 the Board appointed Lutz as Tanglwood’s treasurer, and he served in that position until his resignation in May 2003.

At a special meeting on July 17, 2003, the Board voted 10-0, with 4 abstentions, to remove Lutz as a director. The minutes record that the purpose of the special meeting was to review a financial audit undertaken in April 2003 to investigate irregularities in record-keeping and in the dispensation of compensatory time to Tanglwood employees. The minutes also summarized a presentation by the Board’s Legal Committee, relating that compensatory time had been dispensed in an illegal manner; that certain employees were allowed to use compensatory time as payment of their association dues and other assessments; that these practices were instituted without informing the auditors; and that documents requested during previous investigations relating to Tanglwood’s financial activities were either unavailable, missing or destroyed. The Legal Committee concluded that Lutz and certain employees were responsible. The Board thereafter approved the motion to remove Lutz and motions to discharge several employees.

On August 15, 2003, Lutz filed a petition to review contested corporate action pursuant to Section 5793(a) of the Law, 15 Pa.C.S. § 5793(a).² He alleged that neither Section 5726 of the Law, 15 Pa.C.S. § 5726, relating to the removal of directors, nor Tanglwood’s bylaws authorized the Board to remove a director by its vote alone. Lutz requested that the trial court hold a hearing to reinstate him as a director and to remove those directors who had allegedly abused their authority by removing him. Following discovery, Lutz filed a motion for summary judgment on October 28, 2003, on the sole issue of whether the Board had legal authority to remove him; Tanglwood filed a cross-motion for summary judgment on November 3, 2003, By order of January 5, 2004, the trial court dismissed as moot Lutz’s petition for review and his motion for summary judgment because Lutz’s term as director had expired on December 31, 2003. Accordingly, the remedy of reinstatement was no longer available, and there was no meaningful relief to be ordered.³

In spite of dismissing the petition for review, the trial court granted Tangl-wood’s cross-motion for summary judgment. It held that Section 5726(b) of the Law conferred legal authority upon the Board to remove Lutz as a director for proper cause. In support, the court cited to the minutes of the July 17, 2003, Board meeting which indicated that “[t]he allegations against [Lutz] are substantial and appear to be a justifiable basis for removal.” Trial Court Opinion at 5. Lutz’s timely appeal to this Court followed.⁴

Lutz first argues that the trial court erred in finding that his action was moot. It is well settled that a court will dismiss an action as moot unless an actual case or controversy exists at all stages of the judicial or administrative process. Horsehead Resource Development Co., Inc. v. Pennsylvania Department of Environmental Protection, 780 A.2d 856 (Pa. Cmwlth.2001). Exceptions have been made to this principle when conduct complained of is capable of repetition yet likely to evade judicial review, when the case involves issues of great public importance or when one party will suffer a detriment in the absence of a court decision. Id. We agree with Lutz that the first two exceptions are applicable here.

First and foremost, this case presents issues of great importance to the governance of Pennsylvania nonprofit corporations: Under what circumstances may a board of directors remove one of its members for proper cause? Must the bylaws of the organization specify what constitutes “proper cause?” Such fundamental issues of nonprofit corporate governance are likely to reoccur. Second, given the typically short term of a directorship, in this case three years, a director removed at mid-term or later, or a director elected to less than a three-year term, would likely see his term expire before final resolution of any legal challenge to his removal.⁵ Because the issue raised by Lutz is one of great public importance, which is capable of repetition yet likely to evade judicial review, we shall determine the propriety of his removal by the Board.

This case turns on the meaning of Section 5726 of the Law, 15 Pa.C.S. § 5726, which sets forth specific procedures for removal of directors. Pertinent to the case is subsection (b), which provides as follows:

(b) By the board. — Unless otherwise provided in a bylaw adopted by the members, the hoard of directors may declare vacant the office of a director if he is declared of unsound mind by an order of court or is convicted of a felony, or for any other proper cause which the bylaws may ■specify, or if, within 60 days, or such other time as the bylaws may specify, after notice of his selection, he does not accept such office either in writing or by attending a meeting of the board of directors, and fulfill such other requirements ... as the bylaws may specify.

15 Pa.C.S. § 5726(b) (emphasis added).⁶

There is no dispute that the first two grounds for removal by the Board are inapposite here; Lutz was neither declared of unsound mind nor convicted of a felony. The parties also agree that Tanglwood’s bylaws are silent on the subject of removing a director.⁷ Tanglwood justifies the Board’s decision on the third ground enumerated in Section 5726(b), arguing that a board of directors may remove a director “for any other proper cause” regardless of whether or not the bylaws define “proper cause.” Lutz counters that an organization’s bylaws must specify what constitutes “proper cause” before a board may remove a director on this ground.

It is an axiom of statutory construction that “[w]ords and phrases shall be construed according to rules of grammar and according to them common and approved usage.” Section 1903(a) of the Statutory Construction Act of 1972, 1 Pa.C.S. § 1903(a). It is also well settled that the “object of statutory construction is to ascertain and give effect to the intent of the legislature [and that] courts must construe every statute, if possible, to give effect to all of its provisions so that none are rendered mere surplusage.” White v. Associates in Counseling & Child Guidance, Inc., 767 A.2d 638, 642 (Pa.Cmwlth.2001) (citations omitted).

Applying these principles, we agree with Tanglwood’s interpretation of Section 5726(b). In the phrase “or for any other proper cause which the bylaws may specify,” the word “which” is a nondefining, nonrestrictive pronoun. William Strunk, Jr. and E.B. White, The Elements of Style 59 (4th ed., 2000). Therefore, the clause “which the bylaws may specify” is not essential to defining “proper cause.” The legislature’s use of the permissive word “may” rather than the imperative “shall” only lends further support to this interpretation.⁸ Thus, construing Section 5726(b) according to rules of grammar and common word usage, we conclude that proper cause, standing alone, is a basis for removal of a director by a board of directors; the bylaws of a nonprofit corporation may, or may not, specify what constitutes proper cause.⁹

In sum, we find that Lutz’s action, while technically moot, is reviewable since it raises an issue of public importance that is capable of repetition yet likely to evade review. As a matter of law, we hold that Section 5726(b) of the Nonprofit Corporation Law of 1988, 15 Pa.C.S. § 5726(b), permits a board of directors to remove a director for proper cause irrespective of whether the organization’s bylaws specify what constitutes “proper cause.” Accordingly, we reverse the trial court’s order insofar as it dismissed as moot Lutz’s petition for review and motion for summary judgment. We affirm on different grounds the trial court’s order granting Tangl-wood’s cross-motion for summary judgment. The trial court’s remaining discovery rulings are also affirmed.

ORDER

AND NOW, this 12th day of January, 2005, the order of the Court of Common Pleas of Pike County dated January 5, 2004, in the above-captioned matter is affirmed in part and reversed in part in accordance with the foregoing opinion.

1 . As described in the bylaws, the membership of Tanglwood is composed of the record owners of lots located in the planned community known as Tanglwood Lakes. Tanglwood regulates and inspects the properties to ensure adherence to the community’s rules and regulations. Article VII of the bylaws states that the powers of the association are invested in the Board of Directors (Board), whose fifteen members are elected by the general membership at an annual meeting to serve three-year, staggered terms of office (one-third elected each year). Article VII .also provides that the Board has the power to appoint and remove association officers (president, treasurer, secretary, etc.) and to hire and fire association employees. Article VIII provides that members may seek Board membership by submitting a petition or by being nominated by the Board's nomination committee. Article X describes the duties of association officers and states that the positions of president, two vice-presidents and treasurer shall be filled only by Board directors.

2 . It provides that “[u]pon petition of any person whose status as, or whose rights or duties as, a ... director ... of a nonprofit corporation are or may be affected by any corporate action, the court may hear and determine the validity of such corporate action.” 15 Pa.C.S. § 5793(a).

3 . The trial court also dismissed as moot Lutz's motion to compel discovery and Tangl-wood's cross-motion to strike same.

4 . The Commonwealth Court’s review of a trial court order granting or denying a motion for summary judgment is limited to determining whether the trial court abused its discretion or committed an error of law. Fogarty v. Hemlock Farms Community Association, Inc., 685 A.2d 241, 242 n. 1 (Pa.Cmwlth.1996). Summary judgment is appropriate only when, after examining the record in a light most favorable to the nonmoving party, there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Green Valley Dry Cleaners, Inc. v. Westmoreland County Industrial Development Corp., 832 A.2d 1143, 1150 n. 5 (Pa.Cmwlth. 2003), appeal denied, 578 Pa. 696, 851 A.2d 143 (2004).

6 . Subsections (a) and (c) provide for removal of directors by the members or by a court upon petition of any member or director. 15 Pa.C.S. § 5726(a) and (c). Neither of these provisions is applicable in the present case.

7 . We disagree with the trial court's determination that the Board has an implied right under Tanglwood’s bylaws to remove directors. See Trial Court Opinion at 4. The bylaws cited by the court pertain to the Board's authority to remove officers for cause and members for violation of the association’s rules or bylaws. Tanglwood Lakes Community Association, Inc., By-Laws, Article VII, §§ 1(e), (h); Reproduced Record at 20a-21a (R.R. —). Article I, Section 5 and Article 10 of the bylaws clearly contemplate that "members” and "officers” are distinct from "directors.” R.R. 16a, 24a. The trial court's erroneous interpretation aside, we agree with the trial court’s conclusion that the Board is empowered to remove directors for proper cause. That authority is derived solely from Section 5726(b) of the Law, however, as explained more folly in the text.

8 . We note that the word "may” is synonymous with "shall” only in certain limited contexts that are not applicable here, i.e., when a statute gives power to public officials and individual rights call for the exercise of that power. In such cases, "the exercise of such statutory power by public officials is a 'remedy to those ... who would otherwise be remediless.' ” Belcher v. State Harness Racing Commission, 728 A.2d 425, 427 n. 9 (Pa.Cmwlth.1999) (quoting Hotel Casey Co. v. Ross, 343 Pa. 573, 23 A.2d 737 (1942)).

9 . The dissent offers a different reading. We note that the disputed clause in 15 Pa.C.S. § 5726(b) comes into play only in the absence of a bylaw specifically limiting the power of the Board to remove a director. The operative language is as follows:

Unless otherwise provided in a bylaw adopted by the members, the board of directors may declare vacant the office of a director ... for any other proper cause which the bylaws may specify.

15 Pa.C.S. § 5726(b) (emphasis added).

Under the construction offered by the dissent, a director may not be removed for “proper cause” unless the bylaws specify the grounds therefor. This construction disregards the introductory phrase in Section 5726(b), and it is not consonant with sound public policy. The legislature's default provision is that a Board may remove a director for cause. The nonprofit corporation still retains the ultimate authority to restrict that power through an appropriate bylaw provision, as provided in the introductory clause.