RENDERED: APRIL 23, 2021; 10:00 A.M. NOT TO BE PUBLISHED
Commonwealth of Kentucky Court of Appeals NO. 2018-CA-1074-MR
ROBERT M. BRANT, DEBRA C. BARCLAY, ANNA DUNN DENNIS, LOUDA C. BERRY, LINDA C. MIZE, AND JESSIE M. MASTERS APPELLANTS
APPEAL FROM MADISON CIRCUIT COURT v. HONORABLE WILLIAM CLOUSE, JUDGE ACTION NO. 16-CI-00219
BRENDA TURPIN, BRENT CONGLETON, FRED BRANDENBURG, CHARLES METCALF, WANDA RICHARDSON, MARY KAYLOR, REBECCA ALLEN, PAULA ISAACS, SAMMY JONES, AND FLATWOODS CEMETERY ASSOCIATION, INC. APPELLEES
OPINION AFFIRMING
** ** ** ** **
BEFORE: ACREE, JONES, AND K. THOMPSON, JUDGES.
ACREE, JUDGE: Appellants appeal from the Madison Circuit Court’s May 4,
2017 and June 15, 2018 orders granting summary judgment in favor of Appellees.
Upon careful consideration, we affirm. BACKGROUND AND PROCEDURAL POSTURE
Flatwoods Cemetery Association, Inc. (“FCA”) owns and operates a
cemetery in Waco, Kentucky. In January 1999, FCA reorganized as a non-profit
corporation under the Kentucky Nonprofit Corporation Act, KRS1 273.161, et seq.
Its Articles of Incorporation specified its members would be the “legal
representatives of those holding title to burial lots in the cemetery.” Appellants are
members of FCA; Appellees are FCA members who also comprise its Board of
Directors (“Board”).2 This litigation stems from the Board’s amendment of FCA’s
bylaws.
On April 19, 2015, the Board held a special meeting to discuss the
need to amend FCA’s bylaws. As explained more specifically below, the minutes
of that meeting reflect the Board’s concern about public perception. They feared
the Cemetery was attaining a reputation that it “was not operating legally”; the
Board concluded: “by-laws need[ed] to be updated to agree with the Articles of
Incorporation as well as the need for additional rules in order to stop the
‘aggravation’ from members of the community.” (Record (“R.”) at 663). Copies
1 Kentucky Revised Statutes. 2 Since commencement of litigation, some of the appellees no longer serve on FCA’s Board of Directors. -2- of the proposed amendments were distributed to the directors and they agreed to
hold a second special meeting to vote on the proposed amendments.
The second special meeting convened on April 23, 2015, and the
Board adopted the proposed amended bylaws. Although the bulk of the bylaws
remained unchanged, Appellants found specific reason to object to the
amendments, particularly those regarding election of directors.
The original bylaws provided for members to elect directors at their
annual FCA membership meeting. The amended bylaws effectively divested the
members of their authority to elect directors. Under the amended bylaws, current
Board members elect successor directors from a slate of candidates submitted by a
Nominating Committee comprised of FCA members selected by the Board.
In addition, the bylaws’ amendments eliminated an apparent direct
conflict between the Articles of Incorporation and the original bylaws. The
Articles limited the number of directors to a maximum of seven (7), but the
original bylaws provided for nine (9) directors, no more and no less; each
director’s term was set at one (1) year in both governing documents.
Under the amended bylaws, there initially would be seven (7)
directors (conforming with the Articles) who would serve for not longer than one
year. The amended bylaws provided that, thereafter, there would be nine (9)
directors. During the 1-year term of the seven (7) initial directors, the Nominating
-3- Committee’s first task would be to nominate FCA members to fill a total of nine
(9) director positions. Directors’ terms were increased such that three of the nine
directors had 3-year terms, three had 5-year terms, and three had 7-year terms.
In response, some FCA members, unhappy with these actions, held a
meeting to entertain a motion for a vote of no confidence in the Board. They then
scheduled another members’ meeting for September 27, 2015, to elect a new board
of directors (“New Board”). Notice of that meeting was published in the local
newspaper. At the meeting, the members elected the Appellants as the New Board.
However, the original Board refused to step down, turn over corporate documents,
or relinquish control of the Corporation to the New Board, asserting they were not
properly removed and that the election of the New Board was not valid under the
FCA’s governing documents.
Appellants filed a complaint on May 16, 2016. The complaint was
brought by Appellants “on behalf of Flatwood Cemetery Association, Inc. by and
through the [New Board] (the ‘Corporation’) and individually as the duly elected
president, directors, and members of the Corporation . . . .” (R. at 3-15). It
included five counts:
-4- COUNT I: TURPIN’S[3] BREACH OF FIDUCIARY DUTY
....
Turpin, as the former president and putative agent of the Former Board,[4] owed fiduciary duties to the Corporation, its members, and Plaintiffs as the duly elected president and/or directors, including without limitation discharging her duties as an officer in good faith.
Turpin breached her duties, which included but were not necessarily limited to (a) failing to give notice of the special meeting [to the members] conducted on or about April 23, 2015; (b) failing to seasonably notify the other members that during the meeting, the Former Board had attempted to adopt the Purported Amendment and re-elect themselves pursuant to said amendment notwithstanding prior complaints of mismanagement by members; (c) failing to seasonably produce records, materials, and other items upon request by a member as required by statute; and (d) causing there to be published false notices informing the members and the public that, inter alia, the meeting scheduled for September 27, 2015 was not an authorized election, which constituted a material and false representation, was known to be false or made recklessly, and was made with inducement to be acted upon; and/or (e) continuing to conduct business on behalf of the Corporation after being replaced.
3 Brenda Turpin was a director and President of FCA when the bylaws were amended. 4 The complaint refers to the Board as the “Former Board.” -5- COUNT II: FORMER DIRECTORS’ BREACHES OF FIDUCIARY DUTY ....
[Appellees] owe fiduciary duties to the Corporation and its members including without limitation discharging their duties as directors in good faith.
Said individuals breached their fiduciary duties by (a) conducting a special meeting on or about April 23, 2015, during which they acted ultra vires by failing to give notice of the meeting, despite prior complaints of mismanagement by numerous members, and improperly attempting to amend the bylaws to disenfranchise members and establish [a] self-perpetuating board; failing to notify the members of the purported Amendment and improperly attempting to re-elect themselves pursuant to the purported Amendment; (b) failing to seasonably notify the members of the attempted election; (c) failing to hold an annual meeting of the members on the Sunday before Memorial Day or May 24, 2015 as required by the [original] Bylaws; (d) failing to seasonably produce records, materials, and other items upon request by a member as required by statute; and/or (e) otherwise continuing to conduct business on behalf of the Corporation after being replaced. Said individuals are further liable vicariously for the breaches of fiduciary committed by Turpin as their agent.
COUNT III: DECLARATION OF RIGHTS
An actual controversy exists regarding whether (a) the Former Board had authority on or about April 23, 2015 to adopt the purported Amendment and re-elect themselves pursuant to said Amendment; and (b) whether the new Board was duly elected on September 27, 2015. -6- The Court should declare that (a) the former Board acted ultra vires in attempting to adopt the purported Amendment, with said Amendment being null, void, and in violation Kentucky law [sic] and the Corporation’s governing documents; (b) Plaintiffs were duly elected on September 27, 2015; and (c) that the Former board continues to act ultra vires in conducting business on behalf of the Corporation and refusing to surrender corporate property.
COUNT IV: INJUNCTION ....
This Court should exercise its inherent power, sitting in equity, to permanently enjoin the Defendants from holding themselves out as directors, officer, or otherwise agents of the corporation and from conducting any business on behalf of the Corporation.
The Court should further enter a permanent injunction ordering Defendants and agents to return all corporate assets, records, materials, and other items of nay kind pertaining or belonging to the Corporation.
COUNT V: CONVERSION ....
Plaintiffs, as majority of directors of the duly elected Board, have a legal right to all records, materials, and other items of any kind owned by or pertaining to the Corporation.
Defendants are exercising dominion and control over said records, materials, and other items in a manner that has deprived Plaintiffs of their right to use and enjoy said property belonging to the Corporation, and have failed to return said property on demand.
-7- Plaintiffs are informed and believe that Defendants, acting without authority, have contracted for services to be paid with corporate assets, including without limitation payment of an attorney to represent them in the dispute with the duly elected Board.
Such breaches have actually and proximately caused damage to Plaintiffs and the Corporation in an amount which exceeds this Court’s jurisdictional minimum, which should be awarded to them or, in the alternative, the Court should order Defendants to return all such property to Brant as the duly-elected president of the Corporation and reimburse the Corporation for any funds expended ultra vires.
(R. at 11-14).
Among other defenses, Appellees asserted Appellants lacked standing
to bring any of the claims. After denying the substance of the allegations,
Appellees counterclaimed. The counterclaim alleged Appellants falsely claimed
status as FCA officers and directors, effectively usurping the authority of the duly
elected Board and intentionally and improperly interfering with FCA’s operation
and its existing and prospective business relationships.5
On September 29, 2016, Appellants filed a motion for partial
declaratory judgment, temporary injunction, and appointment of a receiver. They
sought a declaratory judgment from the circuit court that the Board’s bylaws’
amendments and elections of new directors were void ultra vires acts. They also
5 Eventually, Appellees would abandon the counterclaim. -8- sought a temporary injunction prohibiting appellees from holding themselves out
as directors, officers, and agents of FCA. (R. at 143-62). Appellees responded and
moved to dismiss the Appellants’ complaint. (R. at 204-08).
The circuit court held a hearing on October 25, 2016 and issued a
ruling from the bench finding the bylaws were properly amended. The circuit
court entered an order on May 4, 2017,6 consistent with its October 25 findings.
The order denied Appellants’ motion for a temporary injunction and appointment
of receiver. Additionally, it held as follows:
The Court finds and declares that the Flatwoods Cemetery Association, Inc. properly amended its bylaws on April 23, 2015 and that the amendment and bylaws themselves comply with, and do not contravene, Kentucky Law, the Association’s original bylaws, and the Association’s Articles of Incorporation.
(R. at 349).
Appellees then filed a motion for summary judgment on the remaining
breach of fiduciary claims. They argued the Board members owed no duties to the
individual members of FCA and, regardless, no duty was breached. Appellants
responded and, for the first time, specifically alleged that their complaint was a
6 This delay occurred because Appellants filed a Petition for a Writ of Prohibition with this Court. The petition was denied. Robert M. Brant, et al v Hon William G. Clouse, Jr. Judge, Madison Circuit Court, et al, No. 2017-CA-0207-OA (Ky. App. June 8, 2017). -9- derivative action they filed as members bringing the claim on behalf of FCA. (R.
at 627-48).
The circuit court granted Appellees’ motion on June 15, 2018. It
concluded that directors of a non-profit corporation only owe fiduciary duties to
the corporation itself, and not to individual members. Accordingly, all individually
named Appellees were dismissed. The court further concluded Kentucky law does
not authorize derivative actions against non-profit corporations and, therefore, the
Appellees were entitled to summary judgment on all counts in the Appellants’
complaint. (R. at 827).
Nevertheless, the circuit court undertook an alternative analysis,
holding as follows:
Even if derivative actions against a non-profit corporation were permissible, the Court still finds summary judgment is appropriate. First, the [Appellants] have had ample time to conduct discovery in this matter and have not produced any evidence giving rise to any of their claims or placing in dispute a material fact. As such, there are no facts in the record supporting [Appellants’] claims. Second, the Court finds that the Board of Directors of [] Flatwoods Cemetery Association, Inc. substantially complied with all common law duties incumbent upon them and substantially complied with the requirements of KRS Chapter 273, the Chapter governing non-profit corporations. Third, the Court finds that, even if the matter were a permissible derivative suit, the [Appellants] do not adequately represent the interests of the members of the Corporation. Finally, the Court has previously determined that the amendment of the Corporation’s bylaws–the root cause of this litigation–was proper, and reiterates that the -10- Board of Directors had the authority to amend same. See KRS 273.191 and Hollins v. Edmonds, 616 S.W.2d 801 (Ky. App. 1981).
(R. at 827-28).
Appellants then appealed from the May 4, 2017 and June 15, 2018
Orders. We set forth additional facts where necessary in the analysis.
STANDARD OF REVIEW
“The proper standard of review on appeal when a trial judge has
granted a motion for summary judgment is whether the record, when examined in
its entirety, shows there is ‘no genuine issue as to any material fact and the moving
party is entitled to a judgment as a matter of law.’” Hammons v. Hammons, 327
S.W.3d 444, 448 (Ky. 2010) (quoting Kentucky Rules of Civil Procedure (CR)
56.03). “Because summary judgment does not require findings of fact but only an
examination of the record to determine whether material issues of fact exist, we
generally review the grant of summary judgment without deference to either the
trial court’s assessment of the record or its legal conclusions.” Id. (citing Malone
v. Ky. Farm Bur. Mut. Ins. Co., 287 S.W.3d 656, 658 (Ky. 2009)).
ANALYSIS
We agree with the circuit court that “the amendment of the
Corporation’s bylaws [is] the root cause of this litigation[.]” However, in addition
to being the root cause, this statement identifies the ultimate fact question – was
-11- amendment of the bylaws lawful or ultra vires? If we accepted Appellants’ first
allegation that they are pursuing their claims as the only lawful Board of Directors,
we would necessarily be prejudging their claim that Appellees were not lawful
Directors, effectively agreeing with Appellees’ second allegation that Appellants
committed ultra vires acts – and that takes us back to the ultimate fact question.
Therefore, this cannot be our starting point for review.
The nature of these claims and defenses compel this Court to first
address questions that arose only as the Appellants’ cause proceeded below – in
what context did Appellants initiate this action, and did they have standing to do
so? We consider this question in light of the fact that Kentucky is a notice
pleading jurisdiction where the central purpose of pleadings remains notice of
claims and defenses. Pete v. Anderson, 413 S.W.3d 291, 301 (Ky. 2013).
We begin by noting that “the question of who has standing to enforce
the directors’ fiduciary duties - a relatively simple issue in the business context -
becomes rather complex in the nonprofit context.” The Fiduciary Duties of
Directors, 105 HARV. L. REV. 1590, 1594 (1992). Appellants take two approaches.
We address both.
Nonprofit directors owe fiduciary duty to corporation, not individual members
First, citing Ballard v. 1400 Willow Council of Co-Owners, Inc., 430
S.W.3d 229 (Ky. 2013), Appellants suggest individuals injured by the conduct of a
-12- non-profit corporation may bring direct actions against it. However, the
Appellants did not sue the corporation; they sued individuals they claimed owed
them a duty directly. The circuit court correctly cited Ballard for the rule of law
that officers and directors of nonprofit corporations owe a fiduciary duty to the
corporation but not to the individual members. Id. at 241. Their claims that the
officers and directors injured them as members cannot prevail. Furthermore,
because we conclude Appellees engaged in no ultra vires acts, as discussed below,
there is no basis for concluding there was a breach of those fiduciary duties in any
event.
Derivative actions against non-profit corporations
Second, after effectively abandoning the first argument in their brief,
the Appellants claim they brought the action against the Appellees, officers, and
directors, derivatively, on behalf and in the name of the corporation. A strong
argument can be made that the Kentucky legislature purposefully withheld from
members of nonprofit corporations the authority to pursue actions derivatively.
Prior to 2012, among the separate chapters of Kentucky Revised
Statutes governing various forms of business organization,7 only one authorized its
7 KRS Ch. 271B (Business Corporations); KRS Ch. 272 (Cooperative Corporations and Associations); KRS Ch. 272A (Kentucky Uniform Limited Cooperative Association Act); KRS CH. 273 (Religious, Charitable, and Educational Societies; Nonstock, Nonprofit Corporations); KRS Ch. 274 (Professional Service Corporations); KRS Ch. 275 (Limited Liability Companies).
-13- member/shareholders to bring derivative actions – KRS Chapter 271B. KRS
271B.337. That year, the legislature enacted the Kentucky Uniform Limited
Cooperative Association Act, 2012 Kentucky Laws Chapter 160 (HB 441) (2012).
It included a provision creating a new statute expressly stating that “[a] member
may maintain a derivative action to enforce a right of a limited cooperative
association . . . .” KRS 272A.13-010. The Act did not add a similar new section to
Chapter 273 authorizing derivative claims to be brought against nonprofit
corporations.
Then, in 2015, the legislature enacted revisions to many of the
chapters of Kentucky law governing the various authorized forms of business.
2015 Kentucky Laws Ch. 34 (HB 440) (2015). In that Act, the legislature
expressly added to the chapter governing limited liability companies, KRS Chapter
275, the right of members to bring derivative actions. KRS 275.337. The Act did
not add the same authority to Chapter 273 governing nonprofit corporations.8
8 Furthermore, a comparison of HB 440 as posted on February 12, 2015 with the House Judiciary Committee Substitute (February 26, 2015) reveals that Sections 76 through 84 of the Act were deleted before passage. Thomas E. Rutledge, The 2015 Amendments to the Kentucky Business Entity Statutes, 43 N. KY. L. REV. 129, 156 (2016). Although the words “derivative action” do not appear in those deleted sections, reference is made more than once to “a proceeding by or in the right of the corporation in which the director is adjudged liable to the corporation[,]” suggesting the right to pursue a derivative action. These Sections 76 through 84 “were deleted at the request of the Kentucky Nonprofit Network.” Id.
-14- On the other hand, one noted Kentucky authority on derivative actions
concluded that statutory authority is unnecessary. See, generally, Thomas E.
Rutledge, Who Will Watch the Watchers?: Derivative Actions in Nonprofit
Corporations, 103 KY. L.J. ONLINE 4 (Apr. 22, 2015).9 He points out that,
historically speaking, “the derivative action is a question of equitable standing that
was later, in certain contexts, reduced to statute.” Id. at 4. He posits that “equity
will provide the rules applicable when the organizational statute does not specify
the rules governing derivative actions.” Id. Whether this erstwhile basis for
claiming standing to bring a derivative action will be embraced remains a question,
given recent Kentucky Supreme Court opinions addressing an analogous question
of attorney fee awards.
Just as derivative action standing was once based in equity, so was the
award of attorney fees. “The courts of the Commonwealth were previously
empowered to award attorneys’ fees as an equitable measure, when, within the
discretion of the court, it was deemed appropriate.” Seeger v. Lanham, 542
S.W.3d 286, 294 (Ky. 2018). In Bell v. Commonwealth, an attorney argued he was
entitled to the circuit court’s attorney fee award based on that equity principle, but
9 https://www.kentuckylawjournal.org/online-originals/index.php/2015/04/22/who-will-watch- the-watchers (Last visited February 2, 2021). -15- the Supreme Court reversed the award, making it clear that “law trumps equity.”
423 S.W.3d 742, 747 (Ky. 2014).
“Modern jurisprudence is first a creature of the governing
constitutions, then of code (statutes), and of case law precedent [and] attorney’s
fees in Kentucky are not awarded as costs to the prevailing party unless there is a
statute permitting it or as a term of a contract[] . . . .” Id. at 747, 748. Whether this
same reasoning will apply to prohibit derivative actions unless there is a statute
permitting them, this Court cannot say.
Fortunately, because of the circuit court’s comprehensive analysis, we
need not decide this standing question. We can presume for purposes of review,
without holding, that Appellants had standing to bring this action. We can even
presume, without holding, that Appellants’ fiduciary duties were owed to
Appellants. We can affirm the judgment on the practical grounds found by circuit
court that Appellees complied with the law and FCA’s organizational documents
and, therefore, breached no duties to anyone.
Appellees did not engage in ultra vires acts by amending the bylaws
Appellants argue adoption of the amended bylaws was an ultra vires
act. Specifically, they contend Appellees exceeded their authority by: (1) electing
directors in violation of KRS 273.201; (2) amending the Articles in violation of
-16- KRS 273.263; and (3) making bylaws inconsistent with the law or Articles in
violation of KRS 273.191. We are not persuaded by these arguments.
Appellants believe their voting rights are secured by statute. We look
to those statutes, especially those noted by Appellants.
The statute governing members voting on any measure, including
election contests, is set out in KRS 273.201. In pertinent part, that statute says
“[t]he right of the members . . . to vote may be limited, enlarged or denied to the
extent specified in the articles of incorporation or the bylaws.” KRS 273.201(1).
Article VII, 1 of the Articles of Incorporation say, “The affairs and business of the
corporation shall be conducted by a board of directors . . . chosen as provided in
the bylaws of the corporation.” (R. at 652). The original bylaws Article III(B)
said, “The Board of Directors shall be elected at the annual meeting of
members[,]” and we must presume the vote was not limited to members who were
also directors in attendance. However, a provision more relevant to these
circumstances is found in the Articles of Incorporation, stating in pertinent part,
“The board of directors . . . shall have the power and authority to adopt bylaws . . .
and to adopt any subsequent amendments thereto.” (R. at 653). The original
bylaws Article VII says:
These by-laws may be amended, altered, changed, added to, or repealed by the affirmative vote of a majority of the Board of Directors if notice of the proposed amendment,
-17- alteration, change, addition, or repeal be contained in the notice of the meeting to the Board of Directors.
Exercising the authority vested in the Board of Directors by these
governing documents, after being given notice on April 19, 2015, the Board acted
by majority vote to amend the bylaws to change the method by which directors
were elected. Notwithstanding Appellants’ dislike of the decision, there was
nothing about the vote that violated any statute, or either the Articles or original
Appellants point to KRS 273.263 and argue Appellees illegally
circumvented FCA’s Articles of Incorporation by creating a self-perpetuating
Board. However, that statute addresses the procedure for amending a corporation’s
articles and provides no support for their argument. Furthermore, as quoted above,
the Articles do not entitle members to elect directors, nor do they authorize
members to be involved in the bylaws’ amendment process.
In fact, when pressed on this issue by the circuit court, the Appellants
could never say where any bylaw bestowed upon them this right. At the hearing,
the circuit court noted that “[t]hese Articles are very barebones . . . ,” and asked,
“[W]here in the Articles do these bylaws in any way, shape, fashion, or form
circumvent the Articles? If they did, I think you’ve got an argument, but I couldn’t
find it. Show me where the Articles of Incorporation and bylaws conflict.” (Video
Record (VR) 10/25/2016; 10:59:00). Counsel for Appellants could not answer. -18- Instead, counsel deflected the question by talking about non-profits
and for-profit corporations. (VR 10/25/2016; 10:59:57). The circuit court asked
again, “Show where the bylaws conflict with the Articles?” (VR 10/25/2016;
11:01:54). This time, counsel pointed to Article VII that pertains to “Membership
Meetings.” It says only that “[t]he members of the corporation shall be the legal
representative of those holding title to burial lots in the cemetery.” (R. at 652).
The circuit court then pushed counsel on this issue, asking how Article VII
conflicts with the bylaws because the bylaws do not redefine who comprises the
members. Counsel never presented an adequate answer.
Additionally, Appellants argue amending the Articles was a violation
of KRS 273.191 which says, “The bylaws may contain any provisions for the
regulation and management of the affairs of a corporation not inconsistent with law
or the articles of incorporation.” Id. (emphasis added). They contend the
Appellees’ bylaws’ amendments illegally took away their rights to elect directors
by adopting the disputed bylaws and that said adoption violated the law and the
Articles of Incorporation. Again, we disagree.
The statutes governing FCA support the action taken by Appellees.
According to KRS 273.247(4):
Unless the articles of incorporation provide that a change in the number of directors shall be made only by amendment to the articles of incorporation, a change in the number of directors made by amendment to the bylaws -19- shall be controlling. In all other cases, when a provision of the articles of incorporation is inconsistent with a bylaw, the provision of the articles of incorporation shall be controlling.
Id. The first half of the first sentence does not apply because these Articles do not
provide that the number of directors may be changed only by amending the
Articles. The second half of the sentence does apply – “a change in the number of
directors made by amendment to the bylaws shall be controlling.” Because that
part of the statute controls here, the second sentence which applies “[i]n all other
cases,” is inapplicable.
The bylaws’ amendment changing how directors are elected and the
number of directors on the board is lawful. The Appellees acted well within the
confines of the law. The amended bylaws do not conflict with the Articles, nor do
the bylaws or the Articles conflict with the statutory requirements governing non-
profit corporations.
Appellees did not attempt to conceal their conduct from FCA members
Appellants also assert that Appellees breached their duty of good faith
by failing to notice them of the April 19, 2015 and April 23, 2015 special meetings
in which the Board discussed and adopted the new bylaws and appointed
themselves directors. First and foremost, we fail to see how this claim implicates
any duty owed to the corporation. Nonetheless, for the sake of thorough analysis,
we address it. -20- Appellants consistently refer to these meetings as “secret.” However,
the minutes of both meetings clearly state that these are special meetings of the
Board. (R. at 663-64). The original bylaws, which governed the procedure for
calling a special meeting at that time, states:
The special meeting of the Board of Directors may be called by or at the request of the president or by a majority of the directors in office. Persons authorized to call special meetings of the Board of Directors may fix any place, either within or without [sic] the Commonwealth of Kentucky, as the place for holding any special meeting of the Board of Directors called by them.
(R. at 656).
Special meetings, unlike annual members meetings, call for the
participation solely of the Board of Directors. There is no requirement, in either
the Articles of Incorporation or the bylaws, that members be given notice of such
meetings. Additionally, Appellants’ assertion that Appellees attempted to conceal
their meeting by declaring that copies given to the directors of the then proposed
new bylaws “are not a community document [sic] and are not to be discussed with
anyone since the Board has not discussed or voted on them” does not prove bad
faith. To the contrary, preventing the dissemination of the work product of
proposed corporate action, if anything, demonstrates appropriate business practice.
-21- Appellees did not obstruct a lawful effort to remove them as directors
Appellants learned of the adoption of new bylaws at the June 20, 2015
annual meeting. FCA members responded by subsequently holding a vote of no
confidence. A document in this record, entitled “Flatwoods Cemetery
Members/Shareholders Movement to Elect a New Board of Directors,” states:
As a result of the member/shareholder meeting with the Board of Directors of the Flatwoods Cemetery on June 20, 2015, the following motion was made and seconded: As a vote of “no-confidence” in the areas of finance, management, and member/shareholder cooperation, an election should be held by the members/shareholders for the purpose of electing a new Board of Directors.
If you, as a member/shareholder of the Flatwoods Cemetery agree with this motion to elect a new Board of Directors, please sign below:
(R. at 763-73). From what this Court can discern, approximately 153 signatures
appear on this document.10
FCA members then scheduled a member’s meeting for September 27,
2015, to elect the New Board. Notice of this meeting was advertised in the local
newspaper. In response, Appellees published the following newspaper article:
The ad running in the Richmond Register concerning a meeting and election to be held on Sunday, September 27 at Waco Elementary is NOT an official/authorized election of the Board of Directors of the Flatwoods Cemetery. This election is being held by individuals who
10 It is unclear when or where any of these signatures were obtained.
-22- are NOT on the Board of Directors and, therefore, are not legally authorized to hold elections. All elections for Flatwoods Cemetery are held over Memorial Day Weekend as stated in the Bylaws in order for ALL shareholders to have an opportunity to vote.[11]
(R. at 775).
Nonetheless, a gathering of members occurred, at which time a vote
was taken, purportedly electing the Appellants as the New Board. Appellees
refused to step down from their position. Appellants contend Appellees’ refusal to
step down breached their duty of good faith and intentionally obstructed the
Appellants’ lawful effort to remove them. We disagree.
Nothing in the record indicates the meeting was called in accordance
with the corporate documents. Article VII, 1 of the Articles of Incorporation
states, “Special meetings of the members may be called by the president.” There is
no evidence the president called such a special meeting. The effort to remove the
Appellees from their positions by electing their successors was not pursued by
lawful means. The meeting at which a vote took place to elect the New Board was
not a lawful meeting because it was not in accord with the Articles of
Incorporation.
11 We note the new bylaws grants the FCA Board with the authority to elect directors, not members. -23- Nor was the purported removal of existing directors to make room for
the New Board conducted in accordance with the bylaws. Directors may be
removed from office pursuant to any removal procedure provided in the articles of
incorporation or bylaws. KRS 273.211(4). FCA’s Articles of Incorporation do not
provide such a procedure, but its bylaws do. They state:
Any directors may be removed by . . . a vote by the burial right owners (“members”) of the Flatwoods Cemetery Association, Inc. [] consisting of at least one-tenth (1/10) of the Members in favor of removal, having a maximum of one vote per burial right space. In any Member vote, opposing Co-ownership Member votes act to cancel that vote.
(R. at 734). There is no evidence this procedure was followed, nor would it matter
because, without the proper notice, a meeting for any purpose was contrary to
Additionally, Appellees did not “obstruct the lawful effort to remove
them” by publishing the aforementioned advertisement in the newspaper. Nothing
stated in the advertisement is incorrect. In particular, the statement in the
advertisement that the September 27, 2015 meeting was unauthorized is true.
There is no genuine issue of material fact regarding this claim and it was properly
decided in favor of Appellees.
-24- Appellees did not refuse to provide corporate records to members
KRS 273.233 states that “[a]ll books and records of a corporation may
be inspected and copied by any member, or the member’s agent or attorney, for
any proper purpose at any reasonable time.” No Appellant claimed that right.
Instead, one or more members demanded copies of documents be provided and,
subsequently, demanded the records be turned over to the New Board. Nothing in
the corporate documents or the statutes requires the Board to have acceded to
either demand. There is no evidence that Appellants were denied the right to
inspect corporate records.
Appellees did not fail to maintain corporate records
KRS 273.233 requires that all corporate records must be maintained.
Appellants contend “[s]ince Appellees acknowledge that they have failed to
maintain [corporate] records, there is uncontroverted evidence that they have
breached their duties.” Appellants do not cite where Appellees acknowledged not
keeping corporate records or what corporate records were not maintained. We find
no merit in this argument.
Appellants had sufficient time to conduct discovery prior to summary judgment
“[F]or summary judgment to be properly granted, the party opposing
the motion must have been given adequate opportunity to discover the relevant
facts.” Suter v. Mazyck, 226 S.W.3d 837, 842 (Ky. App. 2007). “As a practical
-25- matter, complex factual cases necessarily require more discovery than those where
the facts are straightforward and readily accessible to all parties.” Id.
In its summary judgment, the circuit court concluded that “the
[Appellants] have had ample time to conduct discovery in this matter and have not
produced any evidence giving rise to any of their claims or placing in dispute a
material fact.” We agree.
This is not a factually complex case. Over two years elapsed between
the filing of Appellants’ complaint and the circuit court’s entry of summary
judgment. Appellants had ample opportunity to personally inspect and copy all
corporate documents and to uncover any facts supporting their claims. They failed
to do so. In the interest of finality of judgments, we see no justification in
reversing the circuit court’s conclusion that Appellants had sufficient time to
discover all that was needed to prove their allegations and failed to do so.
CONCLUSION
Based on the foregoing, we affirm the Madison Circuit Court’s May
4, 2017 and June 15, 2018 Orders.
JONES, JUDGE, CONCURS.
THOMPSON, K., JUDGE, CONCURS IN RESULT ONLY AND
FILES SEPARATE OPINION.
-26- THOMPSON, K., JUDGE, CONCURRING: I agree summary
judgment was appropriately granted in this case because the appellant members of
the Flatwoods Cemetery Association (FCA) have not established a factual dispute
as to wrongdoing on the part of its Board of Directors. I write separately to
express my concern that special care needs to be taken in reviewing the Board’s
decision to eliminate established voting by the members, as such an action is
typically not in the best interest of a nonprofit corporation. Had the members
presented evidence, rather than mere supposition, that the Board was using the
elimination of voting rights to harm the nonprofit by facilitating wrongdoing, I
would rule that equity allows for redress through a derivative action.
The directors have a fiduciary duty to act in good faith towards the
nonprofit corporation. Kentucky Revised Statutes (KRS) 273.173(1); Ballard v.
1400 Willow Council of Co-Owners, Inc., 430 S.W.3d 229, 241 (Ky. 2013).
The business judgment rule provides “a presumption that in making a
business decision, not involving self-interest, the directors of a corporation acted
on an informed basis, in good faith and in the honest belief that the action taken
was in the best interests of the company.” Allied Ready Mix Co., Inc. ex rel.
Mattingly v. Allen, 994 S.W.2d 4, 8-9 (Ky.App. 1998) (quoting Spiegel v.
Buntrock, 571 A.2d 767, 774 (Del. 1990)).
-27- While the Board may not have been acting illegally or in
contravention of the articles of incorporation or bylaws in amending the bylaws so
that members could no longer vote for directors, who would now nominate and
vote for directors themselves, my concern is whether such a change was in the best
interest of the corporation and what check there is upon the Board’s actions going
forward. The argument appears to be, because the directors were not forbidden
from changing the mechanism for voting to concentrate power in themselves, this
action comports with what is in the best interest of FCA pursuant to the business
judgment rule and must be permitted.
I do not agree that this is necessarily so. While many of the
amendments to the bylaws clearly would be protected by the business judgment
rule, the changes to the voting system could be a self-interested change which
benefits the directors in their effort to maintain power rather than benefiting the
nonprofit itself.
The act of amending the bylaws cannot be considered in isolation.
The amendments came at a time when appellants allege cemetery members were
legitimately concerned with mismanagement, nepotism, and vote tampering during
recent elections. The depth of their concern was understandable given the fact that
these actions could imperil their expectations regarding the final resting place for
themselves and their loved ones.
-28- The way the Board acted in changing the election scheme contributed
to an atmosphere of distrust and suspicion. While the directors may have acted
within the confines of their power, just because something is permitted does not
always mean it is wise. Rather than announce that the Board was considering
changes to the bylaws or announcing the changes once they were adopted, the
Board acted in a secretive manner which members interpreted as suspicious when
the Board failed to call the annual meeting as scheduled in the previous bylaws or
provide an explanation as to why the meeting was not called at that time. Further,
once the Board called a meeting and admitted the bylaws had been changed, the
Board appeared to be denying the members the opportunity to review the changes
by setting a $35 fee for a copy of the new bylaws, an exorbitant cost for a short
document. The Board treated the members’ concerns as bothersome. In this
context, it is understandable why the members reacted as they did.
If the Board of Directors had nefarious purposes, eliminating the
check of their election by the members would conveniently prevent the members
from “voting the crooks out” and replacing them. Although the bylaws retain a
mechanism to remove directors by a vote of the members, without a right to elect
replacements it is not an effective tool.
We live in a country that values democracy and the power of the vote.
While it may be argued that electing our governmental representatives is a distinct
-29- privilege from other types of voting, and the voting involved here is of less
importance, courts should exercise extreme caution in upholding actions which
remove the right to vote from the governed.
I believe that the retention of voting rights by members is usually in
the best interest of a nonprofit corporation, even in the relatively small bailiwick of
a cemetery association. While nefarious purposes and harm to the nonprofit
corporation could not be established here, the majority opinion should not be read
to foreclose redress through a derivative action in an appropriate case.
Accordingly, I concur.
BRIEFS FOR APPELLANTS: BRIEF FOR APPELLEES:
G. Cliff Stidham Brooks Stumbo Lynn C. Stidham Mount Olivet, Kentucky Sandra L. Manche Lexington, Kentucky
-30-