Turner v. Victoria

15 Cal.5th 99

532 P.3d 1101

311 Cal.Rptr.3d 44

Debra TURNER, Plaintiff and Appellant,

v.Laurie VICTORIA et al., Defendants and Respondents.

S271054

Supreme Court of California.

August 3, 2023

Cooley, Steven M. Strauss, Erin C. Trenda, San Diego, and Matt K. Nguyen for Plaintiff and Appellant.

Xavier Becerra and Rob Bonta, Attorneys General, Tania M. Ibanez, Assistant Attorney General, Caroline Hughes, Joseph N. Zimring, James M. Toma and Sandra I. Barrientos, Deputy Attorneys General, for the Attorney General of California as Amicus Curiae on behalf of Plaintiff and Appellant.

Norton Rose Fulbright US, Jeffrey B. Margulies, Los Angeles, and Kelly Doyle Dahan for Jill R. Horwitz, Nancy A. McLaughlin and the California Association of Nonprofits as Amici Curiae on behalf of Plaintiff and Appellant.

Gibson Dunn & Crutcher, Scott A. Edelman, Alexander K. Mircheff, Los Angeles, Megan Cooney, Irvine, Jillian Nicole London, Los Angeles, and Brian Yang for Defendant and Respondent Laurie Anne Victoria.

Henderson, Caverly, Pum & Trytten, Kristen E. Caverly, Lisa B. Roper, San Diego, and Stephen D. Blea for Defendant and Respondent Joseph Gronotte.

Procopio, Cory, Hargreaves & Savitch, Richard A. Heller, J. Christopher Jaczko, San Diego, and Sean Michael for Defendant and Respondent Gregory Rogers.

Seltzer Caplan McMahon Vitek, Reginal Vitek and Scott Walter Perlin, San Diego, for Defendant and Respondent Anthony Cortes.

Brownlie Hansen, Robert W. Brownlie ; DLA Piper and S. Andrew Pharies, San Diego, for Defendant and Respondent The Conrad Prebys Foundation.

Opinion of the Court by Guerrero, C. J.

Under Corporations Code sections 5142 and 5233,¹ a director of a nonprofit public benefit corporation may "bring an action" to remedy a breach of the charitable trust or recover damages for self-dealing transactions by other directors. ( §§ 5142, subd. (a), 5233, subd. (c).) Similarly, under section 5223, the trial court may "at the suit of a director" remove from office any director guilty of malfeasance. (§ 5223, subd. (a).) We granted review to decide whether a director of a charitable corporation who loses that position after instituting a lawsuit against fellow directors under sections 5142, 5233, and 5223 (hereinafter the director enforcement statutes) also loses standing to maintain the lawsuit.

An examination of the statutory text, its surrounding context, the legislative history, and the overarching purpose of the director enforcement statutes reveals that the statutes do not impose a continuous directorship requirement that would require dismissal of a lawsuit brought under these statutes if the director-plaintiff fails to retain a director position. Each statute grants a director standing to bring a lawsuit. None expressly requires continued service as a director as a condition for pursuing the lawsuit, and there is no indication that the Legislature intended to impose such a condition.

In finding a requirement of continued service, the Court of Appeal below analogized actions under the director enforcement statutes to shareholder derivative lawsuits. ( Turner v. Victoria (2021) 67 Cal.App.5th 1099, 1128–1129, 283 Cal.Rptr.3d 136 ( Turner ).) However, the language of the governing statutes is significantly different in the nonprofit and for-profit contexts. Furthermore, the position adopted by the Court of Appeal would permit gamesmanship by directors accused of wrongdoing. Directors who are sued would be able to terminate the litigation by removing the plaintiffs from office, refusing to reelect the individuals, or otherwise making it more difficult for the plaintiffs to retain their positions. Because potential plaintiffs would likely be discouraged from filing complaints, this framework would shift to the Attorney General the burden of initiating lawsuits aimed at ensuring that nonprofit public benefit corporations serve their charitable purpose. But, as we have long recognized, "the need for adequate enforcement" of the law governing charities cannot be "wholly fulfilled" by having the Attorney General act as the exclusive entity empowered to institute litigation. ( Holt v. College of Osteopathic Physicians & Surgeons (1964) 61 Cal.2d 750, 755, 40 Cal.Rptr. 244, 394 P.2d 932 ( Holt ).)

An interpretation of the statutes that does not require a director-plaintiff to maintain a director position at a nonprofit corporation throughout litigation is " ‘ "the construction that comports most closely with the apparent intent of the lawmakers," ’ " and the one that we " ‘ "[u]ltimately ... choose." ’ " ( Lee v. Hanley (2015) 61 Cal.4th 1225, 1233, 191 Cal.Rptr.3d 536, 354 P.3d 334 ( Lee ).) We therefore reverse the judgment of the Court of Appeal.²

I. FACTUAL AND PROCEDURAL BACKGROUND

"Because this case comes to us at the demurrer stage, we take as true all properly pleaded material facts — but not conclusions of fact or law." ( Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 395, 247 Cal.Rptr.3d 632, 441 P.3d 881.) The plaintiff in this case is Debra Turner; the defendants are Laurie Anne Victoria, Joseph Gronotte, Gregory Rogers, and Anthony Cortes.³ When plaintiff initiated the litigation, she and all four defendants were directors of the Conrad Prebys Foundation (the Foundation), a nonprofit public benefit corporation named for its founder.

Conrad Prebys (Prebys) was a wealthy philanthropist. In addition to the Foundation, Prebys created an inter vivos trust, the Conrad Prebys Trust (the Trust). Prebys funded the Trust and directed it to make distributions to specific beneficiaries after his death. The assets remaining after the gift distributions were to "go to the Foundation to be used for charitable purposes."

Under the Foundation's bylaws, all its directors were also members of the Foundation, and the Foundation had no other members. Most of the directors had a personal relationship with Prebys. For instance, Victoria was the Chief Executive Officer of a company Prebys owned, and plaintiff was Prebys's "life partner, living [with Prebys] as a couple for over 16 years until his death" in 2016.

In addition to her role at the Foundation, Victoria was the trustee of the Trust. At the initial meeting of the Board of Directors (Board) after Prebys's death, Victoria and an attorney informed the directors that Prebys's son, Eric Prebys, might contest the Trust.⁴ Although Eric was originally a beneficiary under the Trust, Prebys eliminated the gift to Eric two years before he died. The Board was informed that Eric had hired counsel with the intention of challenging his disinheritance on the grounds that his father lacked mental competence and was unduly influenced by plaintiff.

In her role as trustee, Victoria wanted to settle Eric's claims, and she discussed with the Board an appropriate settlement amount. Plaintiff was the only director who opposed such a settlement. The Board eventually voted to authorize a maximum settlement of $12 million plus the payment of estate taxes. In early 2017, Victoria, on behalf of the Trust, settled with Eric for a total sum of $15 million, paying $9 million to Eric directly and the remainder in taxes.

On May 15, 2017, while she was still a director, officer, and member of the Foundation, plaintiff filed a petition in probate court against her fellow board members. ( Turner , supra , 67 Cal.App.5th at pp. 1113–1114, 283 Cal.Rptr.3d 136.) The suit included claims for breach of charitable trust, breach of the Board members' duty of care, self-dealing in violation of the Board members' duty of loyalty, and removal of members of the Board for dishonest acts and gross abuse of authority. ( Id . at p. 1114, 283 Cal.Rptr.3d 136.) All causes of action were based on the Board's handling of the settlement with Eric. ( Ibid . )

The director-defendants were aware of the lawsuit prior to a board meeting held in November 2017, at which the Board conducted an election of Foundation directors and officers. The four director-defendants nominated and seconded one another for reelection as directors and appointment as officers. No one nominated plaintiff for reelection as a director or an officer, despite plaintiff having made "clear she wanted to remain on the Foundation's Board." As a result, plaintiff lost her position as director, officer, and, consequently, member of the Foundation. Plaintiff alleges that her loss of position was an act of retaliation by the director-defendants in response to her lawsuit.

Subsequent to the November 2017 board election, the probate court ordered the four causes of action discussed above severed and transferred for resolution in a separate civil proceeding. ( Turner , supra , 67 Cal.App.5th at p. 1115, 283 Cal.Rptr.3d 136.) The court made clear that the new proceeding "would relate back to the date of the original petition," when plaintiff was still a director of the Foundation. ( Ibid . ) Plaintiff subsequently filed a civil complaint in the superior court, alleging causes of action under sections 5142, 5233, 5223, and 5710. ( Turner , at p. 1116, 283 Cal.Rptr.3d 136.) Defendants demurred, arguing that plaintiff no longer had standing to maintain the lawsuit because she was no longer a director or member of the Foundation. ( Ibid . ) The trial court agreed and dismissed the claims against defendants. ( Ibid . )

The Court of Appeal affirmed. Analogizing to the standing rules that apply in shareholder derivative actions, the court concluded plaintiff was required to maintain a "continuous relationship" with the Foundation to proceed with her suit. ( Turner , supra , 67 Cal.App.5th at p. 1108, 283 Cal.Rptr.3d 136 ; see id . at pp. 1137–1138, 283 Cal.Rptr.3d 136.) The court disagreed with Summers v. Colette (2019) 34 Cal.App.5th 361, 246 Cal.Rptr.3d 116 ( Summers ), which held that a plaintiff who had been removed as a director of a nonprofit corporation did not lose standing to maintain this type of action. ( Turner , at p. 1129, 283 Cal.Rptr.3d 136 ; Summers , at p. 364, 246...