do cherie may vote for her own self interest and vote for their own appointment and a board of directors that's what happened in this case there question is whether a board of directors directors or fiduciary yes directors of pro for profit and not for profit corporations vote on their reelections all the time here where you have a here's phyllis phyllis albert's term until their successor is appointed and qualified this case goes beyond that because then what happened is callan katherine kellen put to put to the board of directors as to whether or not she should be a re appointed or appointed to sick to see you see your own director and dick dormer richard dormer voted no cassie dormer voted yes and because it was herself or because your term had expired because it was her well bolt but i didn't i saw that the argument that he she couldn't vote because her term expired i didn't i've never heard the argument maybe i missed it so the question is whether or not when when kathy callan put it to a vote as to whether or not she should remain on the board she  elbert's decided that this citing vote yes for herself if she's a fiduciary duty she can't go their own self interest what in indiana law prohibits a director from school sort of a corporation from voting on the director's own reelection fiduciary cannot serve himself first and that gets the sort of general statement that's very familiar to all of us but this is a more specific question about corporate governance because your position seems to be that if you've got three a directors in a corporation yes and three is the minimum here right and you have to have a least a minimum yes and if the one is disqualified from voting then you reach deadlock right brief i don't know to my brief here in front of me but i do recall in the brief we talk about she cannot vote for herself you made that argument because her term had expired and she was into the hold over we have the statutes we have the byelaws i didn't see anything in here about the director being unable to vote on her own reelection but why don't you move on to something else ok well because because she breech in him in my opinion your honor named it may be wrong but it's my opinion that if a wounded director under under under board of directors term has expired and then is actually put to  clear it says despite the expiration of the director's term the director continues to serve until a successor is elected designated or appointed and qualified and there's no caviar that if you continue that if you  have to vote on anything and have it has to do with your continued presence on the board that you're excluded because in this case your honor the facts go beyond that st after her term was expired she remained as a as a director for seven months right nothing was done but nothing's wrong here is that a coincidence along with you know nothing let's assume nothing's wrong with that but what happened is yes because he's not a member of the corporations you want to treat him as if you were on the theory that you couldn't possibly have a corporation that would not allow derivative actions right that non profit corporation did not have to have members so this corporation does not have any even peers it doesn't have any shareholders it doesn't have any members so if the board of directors commit some wrongdoing under the fence theory would be a wrong but no remedy because nobody could bring the action no but if you bring a derivative action well actually there are some other remedies and really a lot but my guess my question is whether you think that's a bug or a feature in this the way the statutes are set up since the not for profit corporation when it was rewritten creates this option of a corporation without members so that of somebody who's setting up a family foundation like this and prevent directors from bringing in derivative actions by opting for the no members option and then under the statute we were there are two case that a director could not bring the derivative action in indiana right but that if i could just interrupt because i think i know we are going to get that case simply just says that if you are a director that doesn't disable you from bring into a derivative suit so long as you're also a shareholder it doesn't say so long as you're also a shareholder the court says let there is nothing under any of the law that prevents a director from bringing a issue of whether or not a director may bring a derivative action that's what it says that's what was presented to the court and the court said that just because there is no statute that allows a derivative of a party a director to bring a derivative action that does not preclude a director from bringing a derivative action that's what the court said mr overseer are you familiar with the recount of the cation of indianness corporation laws in late one nine hundred eighty s which was designed in many ways both for for profit and not for profit corporations to narrow remedies and litigation involving matters of corporate governance so i'm i guess i'm that's why i asked my question about whether this absence of members in the absence of somebody to bring in the route of action here is a bug or a feature of this design i don't i don't know how to begin to do the categories of bug or feature your hundred be honest with you but whether it's a mistake or whether it was the intended result of the statutory amendment i don't want to call it a mistake but it was just sit we not dip not go dressed just maybe this will clarify your position on this would it be reasonable for the indiana state legislature to conclude that you know on balance nonprofit corporations they run on the up and up and that to allow derivative suits by directors is more cost than it's worth and so as judge hamilton i think was trying to ask then it's reasonable for the indiana legislature to then eliminate suits by directors well if that's true then it's contrary to the that which case in what the court said in the gurgly case because those two courts addressed that question and they said just because the statu action in fact all of the evidence is to the contrary the indiana supreme court in jian and here craft and indiana court of appeals in brenner of both said that being a member or a shareholder of a corporation  requirement there was hard to bring rivet of action and in fact in an older case called right versus floyd which is quoted in curtly that it would which is the case that extend the derivative standing t nonprofit context the case strongly indicates that being a director alone is just not enough to confer standing to bring a derivative action now some states have extended rivet have standing to directors of the nonprofit context the north carolina for example as has the revised model nonprofit corporations act but indiana hasn't gone down rohde what indiana has done has  provide a very limited remedy for directors to sue and that's contained in the anna code twenty three seventy four four and it says that directors can bring either a declaratory judgment action or an injunction action to challenge the corporation's power to act when third parties haven't acquired rights now the mere existence of that statute implies that the general assembly did not and assume that directors can bring a derivative action there's the problem here of demand mr dormer failed to make a demand on the board prior to filing suit and he's not excused from having done so to excuse demand under indiana law and the relevant case here is i t t there has to be a particular i's to show that there is reasonable doubt that a majority of the board of directors could exercise disinterested business judgment in responding to the demand and to be interested for purposes and to me in futility requires more than a mere threat of personal liability there has to be a substantial likelihood of personal liability  establish that we have to go to the general a statute on liability for directors which is in the end a code twenty three seventeen thirteen one and it says for a director to be liable of the director has to have failed to exercise her business judgment in good faith fail to act as an ordinarily prudent person would under like circumstances and fail to act in a way that she reasonably believed was in the best interests of the corporation and all of those failures have to amount to willful misconduct or recklessness and richard simply hasn't alleged facts as his his obligation to establish demand futility on any of those points here and if i could allow me to focus in particular on catherine catherine's liability his sister because richard seems to focus on her and he claims that she should be held liable for voting to make distributions to the university of st francis because she's a board member on the university where there's a statute and again that governs the situation it's indiana code twenty three seventeen thirty four and the government's personal liability of directors before making wrongful distributions and it requires a couple of shelves one showing is that the distribution has to be wrongful in the sense that it violates the nonprofit code or the articles and secondly the breach has to be again amount to willful misconduct or recklessness and again mr dormer simply hasn't left facts to establish either of those conditions there's nothing in the bylaws of the articles or the code that precludes a board member from voting to make a distribution to an organization on whose board she sits and second of all and and maybe just as important that the distribution to the university here was squarely within the foundation's mandate as expressed in the articles of incorporation which is to primarily benefit for wayne area charitable organizations educational religious and otherwise and the university you s francis falls squarely within so that's derivative standing then there's the question of individual standing and again i think that let's take the claims in parents his most serious crime again i think is against his sister catherine for voting to make these distributions to the university in the corollary claim is a claim of unjust enrichment that the university has been unjustly enrich by these distributions the problem that richard faces here however is that the money he's after it would go to the foundation it is the foundations money after all that was given to the university in fact it's not his money and so the only way he could recover that is on behalf of the university and to do that he would have to bring or be able to bring it rivet of action and in fact the statute again governing personal liability for directors for wrongful distribution says liability runs quote to the corporation then the second pairing of claims is his claim that katharine should be removed from the board and two directors appointed but the removal statute the statute allowing the removal of directors says it can only be a removal actually can only be initiated either by the corporation or by ten percent of a class of members who can vote for the directors and we know the corporation hasn't initiated a lawsuit here and neither have ten percent of the members because there are no members because there are no members no mr a dorm or says well members doesn't mean members in the context the removal statute i'm a director so i'm part of a class that can vote for other directors and there are a couple of problems with that number one the term member is defined in the act in that definition applies throughout the act according to the removal statute and secondly the nonprofit act specifically contemplates in the chapter dealing with members that there can be multiple classes of members so one class might be able to vote for directors other classes might not be able to and so really what the removal statute is addressed to are they are the classes of members who can vote for dra correct to the indiana statutes provide for the founder of such a not for profit corporation the option as to whether to set up a corporation with members or not correct and what what goes into that consideration to the exercise of a choice i think it's entirely left up to the corporations discretion there is no criteria in the statute governing the corporations decision on whether to include members or not but a consideration as human decay did earlier judge hamilton that the corporation might want to take into account is that it might not want to rector's to bring derivative actions because to do so to allow directors to bring it right of action  could theoretically cast a specter over all board to base all disagreements among the board there would be a a pall over over all aboard discussions the director could always threaten to bring a derivative action if he's not getting his way and the indiana general assembly might have thought that that is not conducive to good board relations and good corporate governance but it's an option you're certainly counseling let me ask you if i could under about the statutory remedy that a director has under section for dish one if i understood your argument correctly in the brief you're claiming that the other directors are third parties who have interests in being directors and i frankly had some trouble with that notion well the let me address that directly in the no address related point  directors are the third parties in the sense that he is seeking to remove them from the board and they are not taking part in that decision they have acquired the right they have been lawful elected according to the bylaws and the articles to the board but could one director but it's a little hard for me to see that statute reaching other officers of directors of the same corporation if it's of it's a fair point it's a fair point  maybe you don't get money back you don't get money back button but it doesn't allow the this statute that allows a director to bring a cause of action only allows the director to challenge the corporation's power to act not the exercise of discretion of any individual director nor does that allow a director to bring a removal action as i indicated earlier you either have to be the corporation or ten percent of the members to bring a removal action so that statute is very circumscribed the other thing i would say is that the bylaws in the code as you were discussing with mr rizzi earlier very clearly contemplate that board members hold over a past the expiration of their term that's number one number two they can serve consecutive or nonconsecutive terms in number three of the by law specifically say that a board member may be elected whose term quote has expired and that's precisely what happened here phyllis is term expired she continued to hold over and then she was reelected and there's nothing in the in the bylaws the articles or the code that are hidden under that theory then by  arguments that's being made is my gosh we have these not for profit corporations this is a relatively modest one there are some who have but but you know billions hundreds of billions of dollars are tied up in not for profit corporations what happens what terrible things might happen if we get renegade boards and so on and your theory could you identify other mechanisms that are available to reign in the renegades of course there's number one simply because there derivative action available doesn't preclude the corporation itself from suing when it's been wronged a number two again the removal statute specifically says that a corporation me and knew she ate an action to remove a rogue director and number three there's a statute again that i mentioned earlier that allows directors to be hell personally liable for making wrongful distributions and there's nothing particularly in a corporation from suing a director for for  perhaps proposing or voting for a distribution that was in which the facts were not fully disclosed here i should mention that it was no secret that katharine was a member of the universit board and richard doesn't allege otherwise and as i mentioned earlier is simply nothing that precluded her from voting to make the distributions to the university even if we get past standing there is the problem of a failure to state a claim in richard's claims really rest on two promises one is that the board was improperly constituted and i think we've established that the code the bylaws and the resolution for that matter to the board all make quite clear that the board was properly constituted and the second premise of his claims is that the distributions to the university should be clawed back because the board was improperly constituted and because  katherine sits on the university's board again and board was properly constituted and no matter how you look at it the distributions were valid here if you look at it from the perspective of whether katherine can be held personally liable for those distributions we've gone through that analysis and richard has an alleged facts as to why she could be held liable for those distributions if you look at the transaction and want to know whether the transaction itself is void because of this quote you go to indiana code twenty three seventeen thirteen two point five which says that a distribution or a contribution of this sort is not the whites soley because the board members on both sides of it and in fact that statute goes on to say that affirmatively that the transaction is not void if the transaction is fair to the corporation and richard house and alleged facts indicating in any way that the fact that the distribution was not fair to the corporation again it fell squarely within the mandate of the foundation and her katherine's membership on the university's board was disclosed it finally if all of that were not enough there are two additional reasons for dismissing the unjust enrichment claim one being that a gift is not the appropriate subject of an unjust enrichment claim secondly unjust enrichment claims are not appropriate when there is a contract governing the relationship and here there was a grant agreement governing lation beat before he said that can i just ask that because there was some reference to this being this derivative standing issue being at twelve the one subject matter jurisdiction issue it isn't really a subject matter jurisdiction issue you know i thought about that judge chang i think it is because it goes to whether richard is the correct person to bring that action whether he falls within the class of people entitled to bring a derivative action it seems to me that that does make it an article three question likewise i think his dunno demanded clean doesn't make any sense in this case in my opinion because kathy and phyllis are defendants in this case there are ones that aren't deaf were making a claim against them not the man so what do you make them the indiana little council what do you make of the indiana statute about a substantial risk of personal liability not just the fact that you're naming them as defendants being sufficient or can you run it by me against reason you may have heard mr paul explain the indiana statute the deals with when directors are deemed interested or disinterested and the fact that you simply name someone as a defendant under the indiana statutes is no longer sufficient to render them interested in the in the league ation you know you have to show a substantial risk of personal liability personal liability by the pla the of the director who is acting upon the request for pursuing a derivative or actually no because there is  in a misdeed acquiesce or does nothing they themselves are personally liable and what we're saying