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Can inactive members sue to recoup funds?

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Can inactive members sue to recoup funds?

A nonprofit organization with a mission to preserve and expand the French culture had an endowment of $20,000 and became inactive for approximately 10 years (no annual or other formal meetings) in 1999. The bylaws in effect at the time stated that only the interest on the endowment could be spent unless 2/3 of the membership approved spending the principal and then only 1/2 ($10,000) of the principal could be spent. Since it appeared that the organization was soon to go out of existence, the "interim" president (not elected by the non-existent board) and the elected treasurer made the decision in 2008 to spend the $10,000 on a memorial to the French explorer Champlain. The organization began to function again in 2009 and some members now want to sue the officers who donated the $10,000 to recoup the funds. What legal standing do these members, who were previously not active, have to pursue such legal action? The current board is divided on whether to proceed and wants guidance on this issue.

There are lots of legal issues in this question.  Were the unhappy members actually members at the time of the distribution, or are they new members who joined after the event?  If they weren’t members at the time, they probably don’t have standing to sue.  At the time of the decision, were the president and treasurer the only active members so that 100% of the membership approved?  Will 2/3 of the current members ratify the action?  Are the president and treasurer volunteers protected by a volunteer protection statute or a director protection statute, or a limitation of liability provision in your bylaws?  Are you required under your bylaws to advance defense costs to the officers before you can proceed with a suit against them?

There is an even more practical issue, however.  Who can afford to sue over an expenditure of $10,000, especially when it was made for the purpose of the organization – and not for their personal benefit -– at a time when no one else seemed to care?

Wednesday, March 2, 2011

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