The New York State Attorney General has standing to sue the president of a nonprofit club for waste and breach of fiduciary duty in an independent action, despite a similar claim by the Club in pending litigation with the officer. A trial court in New York City has ruled that the Attorney General has statutory authority and that there was no identity of the parties or claims in the separate action. (People v. James, Supreme Ct., New York County, NY, No. 451488/2012, 4/3/13.)
The New York Attorney General sued O. Aldon James, Jr., president of the National Arts Club, in the spring of 2011. The AG sued for breach of fiduciary duty, an accounting and restitution of wasted corporate assets, restitution for failing to properly administer charitable assets, restitution for breach of fiduciary duty in administering a separate charitable fund, and filing an annual report with the state’s Charities Bureau that contained material misstatements. As part of its relief, the AG sought to bar James from serving as an officer or director of any charitable entity organized under New York State law or that solicits charitable contributions in the state.
Shortly after the AG suit was filed, the Club commissioned its own internal investigation and came up with a list of charges against James, his brother John James, and an attorney friend who also served on the board of directors. The three sued the Club to enjoin its disciplinary proceeding and for indemnification for James to defend the Attorney General’s action against him. The Club counterclaimed with claims analogous to those of the Attorney General. James moved in the trial court for dismissal of the Attorney General’s suit.
The Court said that the state Not-for-Profit Corporation Law expressly grants the Attorney General authority to bring suit against an officer or director of a nonprofit corporation. The complaint alleged that James and the others maintained free apartments at the Club as residences and additionally “to hoard the enormous volume of items they acquired in their frequent shopping sprees around the City, many of which they purchased with the [Club’s] debit card and [Club] checks.” The complaint claimed that the board had not approved the free arrangement and that it had deprived the Club of at least $1.5 million in income. It also charged that James had mismanaged a renovation project and misused a separate charitable fund.
Accepting the facts as true for purposes of considering the motion to dismiss, the Court said they supported the claims of breach of fiduciary duty, waste, and injunctive relief. It rejected the claim that the issues were being raised in the separate action between the Club and its officers. “There is only one party in common,” the Court said. The Attorney General was not a party to the other action, and the remaining parties, including the Club, the other two officers and another woman, were not parties to this action. “There is no substantial identity of the parties and the Attorney General did not ‘step into the shoes’ of the [Club],” it said. In addition, some of the relief asked by the Attorney General, particularly the request to prevent James from serving as a director of another nonprofit, could not be granted in the other action.
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It is not surprising that the Court permits the Attorney General’s case to proceed, since the Attorney General has both statutory and common law authority to supervise a nonprofit corporation. The unusual item in this case is the manner in which the Club raised its own claims against the officers and directors — as a counterclaim against the officers’ and directors’ claim for indemnification from the Club. The case does not indicate how the indemnification claim was resolved. It would be interesting to see the corporate bylaws and its D&O insurance policy to see if there is a basis for denying them the costs of defense until there is an adjudication.