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Failure to Follow Corporate Practices Leads to Lengthy, Disruptive Litigation

Failure to Follow Corporate Practices Leads to Lengthy, Disruptive Litigation

Putting name of new directors on Facebook page does not comport with required procedures for election

“This is a classic case in which failed corporate governance led to distrust, dissention, and disorganization.  With all the best intentions aside, had these two nonprofit entities followed corporate principles and practices likely no lawsuit would have been filed.”

That is how the Court of Appeals of Iowa began its opinion attempting to resolve several years of litigation between two groups working to preserve an historic covered bridge.  Its final decision essentially left the groups in the same position they were in before the fighting began, but still divided and liable for significant attorneys fees and costs.

The situation began in August 2013 when an historic covered bridge near Kalona, IA was badly damaged in a fire.  When the county board of supervisors announced its intention to demolish the bridge, Scott Allen, Doris Park and several other local residents formed a group called Friends of Bunker Mill Bridge to try to save it.  The North Skunk River Greenbelt Association, a nonprofit corporation with a goal of saving historic bridges, wanted to help.

Friends and the Association signed collaboration agreements.  Because Friends was not considered a legal entity, the Association registered the Friends’ name as a trademark, which allowed Friends to open a bank account to accept deposits.  The county agreed to transfer ownership of the bridge to the Friends and the Association, to vacate existing easements with adjacent landowners so they could be granted to the Friends and the Association to reach the bridge, and to donate $80,000 to the Friends to help with renovation.  The Association deposited some funds for the bridge in its own account, to which the Friends had no access.  Friends also raised an additional $46,000 in donations.

At the beginning of the relationship, the Friends generally supported the work of Julie Bowers, the Association’s executive director, but the support eroded over time.  In late, 2013, the Friends asked the Association to provide an accounting of how the money from the county was being spent, but Bowers refused.  The resulting tension caused several Friends members to resign but Allen and Park continued to support the Association and were elected to its board to provide more “transparency” about the operations.

When almost all of the $126,000 was spent by April 2014, the project stalled and was not completed until March 2016, with most of the additional money necessary to complete the work being supplied by the Association.  In early 2016, after an Association director had resigned. Bowers appointed her daughter to serve on the board and appointed a friend to serve shortly thereafter.  There was no corporate record of these elections, but they were announced on the Association’s Facebook page. 

When the repair work was done, a dispute arose about the right of an adjacent landowner to build a fence that would block access to the bridge.   Allen and Park objected and the dispute “fractured the relationships between the remaining  [Friends] members in [the Association] and Bowers in particular,” the Court said.

In September, the Association called a formal meeting to remove Allen and Park from the board.  With Bowers’ daughter and friend voting in favor, Allen and Park were removed from the board.  A few days later the Association did a “clean-up operation” in which it recognized the daughter’s and friend’s election to the board.

Litigation originally started in June 2016, with the Association suing Allen, Park and other individual defendants.  Over the next year and a half, a series of motions, answers and new claims were processed, ending with a four-day trial starting at the end of February 2018. 

The trial court held that Allen and Park had been legitimately removed from the board.  Although it said that Bowers “only barely followed the rules,” it found no bad faith and that any violations of accepted standards were minimal.  The trial court denied the Association’s claim of title to the bridge and transferred ownership to Friends, which had recently been incorporated.  Based on the Association’s inadequate recordkeeping, it said the Association had failed to prove it was entitled to anything from the Friends.

The trial court denied the Friends' claims for breach of contract, intentional interference and conversion.  It also denied the claim by Allen and Park for indemnification.  Allen and Park appealed. 

The Court of Appeals said there were four issues:  (1) whether Allen and Park were entitled to indemnification; (2) whether they had proven that Bowers and the Association converted Friends' funds; (3) whether Allen and Park had standing to argue that the Association should be judicially dissolved; and (4) whether the court could impose sanctions on the Association and its counsel.

Before dealing with the substance, the Court said, it had to deal with whether Allen and Park had been legitimately removed from office.  It concluded that they had not.

The Court noted that with Bowers as executive director of the Association, “her board lacked knowledge of important principles and practices related to a nonprofit organization.  As time went on, the corporate governance declined so that legal mandates and corporate management became a second thought.”

The Court said that the board held only one meeting in 2015, and the next formal meeting in September 2016 was the one at which Allen and Park were voted off the board.  But the votes of the two new directors provided the required majority to remove them.  There were no records reflecting their election.

Bowers tried to argue that her Facebook postings confirmed their election, but the Court said the posting reflected only her announcement and not a vote of any of the directors then in office.  It held that the two had not been properly elected and that the remaining votes were not sufficient to effect the removal of Allen and Park.

On indemnification, Iowa law provides, as do most nonprofit corporation laws, that a director who is “wholly successful” in defending litigation must be indemnified for attorneys’ fees and costs.  The trial court had denied indemnification on the ground that Allen and Park were not wholly successful because they “did not act in good faith” and “their conduct was not in the best interests” of the Association. 

But the Court said that good faith and the best interests of the corporation are not requirements for indemnification.  It held that they had been wholly successful and were entitled to reasonable fees and costs “associated only with the defense of the director claims” brought against them, and not costs associated with their claims against the Association.

On conversion of funds, the Court agreed with the trial court finding that the Association’s financial records were a “nightmare” and her recordkeeping was “abysmal.”  But it also found that Allen and Park could not produce any clear evidence that the funds were improperly used.

On standing to seek dissolution of the Association, the trial court had ruled that Allen and Park lacked standing because they were no longer directors.  The Court of Appeals said that they were directors and had standing, but did not find dissolution a “reasonable” remedy on the record.  It urged the directors to attend training on the fiduciary duties and responsibilities of directors.

On sanctions, the Court found that the Association and its counsel did not assert “frivolous positions” and that the trial court had not abused its discretion in denying them.  (North Skunk River Greenbelt Association v. Allen, Ct. of Apps., IA, No. 18-0842, 11/27/19.

When a Court opens an opinion with a sentence like the one used in this case, a reader has to take notice.  This is a great case to show what can happen when organizations don’t follow the rules and don’t provide the information required by the members to know whether things are being done properly or not.

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