Title: Stewart v. Lady

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  Carrico, C.J., Compton, Stephenson, Lacy, Hassell, 
 and Keenan, JJ., and Whiting, Senior Justice 
 
WARREN D. STEWART, ET AL. 
 
OPINION BY JUSTICE LEROY R. HASSELL, SR. 
v.   Record No. 950850         January 12, 1996 
 
KARL W. LADY, ET AL. 
 
 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
 
J. Howe Brown, Jr., Judge 
 
 
I. 
 
In this appeal, we must decide who are the lawful 
members of the board of directors of The Seniors Coalition, 
Inc. (TSC), a Virginia nonstock, nonprofit corporation which 
has no members.   
 
II. 
 
Warren D. Stewart, James G. Carlen, and Kim R. Pearson 
filed their bill of complaint against Karl W. Lady, James G. 
Aldige, III, and George P. McDonnell.  TSC was named as a 
complainant in the bill of complaint.  Subsequently, the 
chancellor entered an order realigning TSC as a respondent. 
 Paul E. Bramell, chief executive officer of TSC, was 
permitted to intervene as a respondent.  
 
The complainants sought a declaration that they are the 
lawful directors of TSC and that respondents Lady, Aldige, 
and McDonnell are unlawfully acting as TSC's directors and 
officers.  The complainants also sought an injunction 
restraining respondents Lady, Aldige, and McDonnell from 
acting as directors or transacting any business on behalf of 
TSC.   
 
The respondents asserted that Lady, Aldige, and 
McDonnell are the lawful directors of TSC.  The chancellor 
conducted an ore tenus hearing and held, inter alia, that 
Lady, Aldige, and McDonnell are the lawful directors of TSC 
and entered a decree in their favor.  We awarded the 
complainants an appeal.   
 
III. 
 
The chancellor made the following findings of fact 
relevant to this appeal.  In 1979, Daniel G. Alexander 
created a tax-exempt corporation named the Taxpayers 
Education Lobby, Inc.  Among other things, this corporation 
became an advocate for issues of concern to senior citizens. 
 Eventually, the Taxpayers Education Lobby created an 
internal division known as The Seniors Coalition.  This 
division published a newsletter and engaged in fund raising 
and lobbying activities.   
 
In 1990, Alexander caused TSC to be incorporated as a 
separate legal entity.  Jake A. Hansen, an employee of 
Alexander, was the incorporator and sole director.  Hansen 
elected Stewart and Carlen to TSC's board of directors.  
 
Alexander informed Stewart and Carlen that TSC would 
not commence operations immediately and that Alexander would 
advise them when they could begin to exercise their duties 
as directors.  Alexander continued to operate TSC as though 
it was a division of the Taxpayers Education Lobby.  
Stewart, Carlen, and Hansen did not exercise their duties as 
directors, and the chancellor specifically found that this 
board "never acted."   
 
Subsequently, Lady, Aldige, and McDonnell, who were 
members of the board of directors of the Taxpayers Education 
Lobby, convinced Alexander that they should serve as the 
directors of TSC.  Alexander agreed and purportedly elected 
them as directors of TSC.  Alexander also purportedly 
removed Stewart and Carlen from the TSC board and elected 
them to the board of the Taxpayers Education Lobby.  Hansen 
resigned, by letter, from the board of TSC.  The chancellor 
found that neither Stewart nor Carlen had resigned from the 
board of TSC and "indeed, Stewart and Carlen had no 
knowledge of the proposed changes."   
 
In 1992, respondents Lady, Aldige, and McDonnell, 
acting as the board of directors of TSC, "began to operate 
. . . in earnest."  These respondents "squeezed Alexander 
out of control" of TSC's operations and "built it into a 
corporation with significant assets and many activities."   
 
Commenting upon Alexander's role in the Taxpayers 
Education Lobby and TSC, the chancellor found that even 
though  
 
Alexander had no formal position with either 
[Taxpayers Education Lobby] or TSC . . . . he ran 
the companies unimpeded until [the respondents] 
edged him out of control.  There was no need for 
formal meetings or other corporate formalities; 
what Alexander said was the law.  Alexander ran 
the corporations autocratically, rather than 
following established corporate procedures.  After 
[the respondents] took control, [they were] 
treated in all respects, by Alexander and others, 
as if [they were] the lawfully constituted Board 
of Directors of TSC. 
 
 
The chancellor also found that the complainants knew 
that TSC was operational and published a newsletter which 
complainants Stewart and Carlen had seen.  Complainant 
Carlen had placed an advertisement in the August/September 
1992 edition of TSC's newsletter.  In May 1994, Stewart and 
Carlen elected Pearson to TSC's board of directors.   
 
IV. 
 
A. 
 
TSC was incorporated pursuant to the provisions of the 
Virginia Nonstock Corporation Act, Code §§ 13.1-801 through  
-980.  The complainants contend that the Virginia Nonstock 
Corporation Act vests sole power to elect successor 
directors with the board of directors.  Thus, the 
complainants say that an agent does not have the authority 
to elect successor directors.  The respondents assert and 
the chancellor held that Alexander, acting as agent of 
complainants Stewart and Carlen, had broad express and 
implied authority to elect respondents Lady, Aldige, and 
McDonnell as directors of TSC.  We disagree with 
respondents.   
 
Code § 13.1-803 defines the term "board of 
directors" of a nonstock corporation such as TSC 
as "the group of persons vested with the 
management of the business of the corporation 
irrespective of the name by which such group is 
designated," and "director" is defined as "a 
member of the board of directors."  Code § 13.1-
855(D) states in part, "[d]irectors shall be 
elected or appointed in the manner provided in the 
articles of incorporation."  Code § 13.1-857(B), 
which governs terms of directors generally, 
states:   The directors constituting the initial 
board of directors shall hold office until the 
first annual election of directors or for such 
other period as may be specified in the articles 
of incorporation.  Thereafter, directors shall be 
elected or appointed in the manner and for the 
terms provided in the articles of incorporation. 
 
(Emphasis added). 
 
As previously mentioned, TSC's initial board of 
directors filed articles of incorporation.  The relevant 
provision in TSC's articles of incorporation, which governs 
the election of directors, states: 
 
 
The Directors of the Corporation shall hold 
office for a term of one (1) year, and until their 
respective successors have been elected and 
qualified, and shall, with the exception of the 
initial Director, be elected by a majority vote of 
the Directors in office immediately preceding the 
expiration of each term.  Any vacancy in the Board 
of Directors that shall occur prior to the 
expiration of a term shall be filled by such 
person as shall be elected thereto by an 
affirmative vote of a majority of the then 
remaining members of the Board of Directors and 
the person so elected shall hold office until the 
expiration of the term to which he or she 
succeeded. 
 
(Emphasis added). 
 
Code § 13.1-855(D) mandates that TSC's directors be 
elected in the manner provided in the articles of 
incorporation.  As referenced above, TSC's articles of 
incorporation specify that the directors shall hold office 
for a term of one year and until their respective successors 
have been elected and qualified.  Applying this clear and 
unambiguous language, we hold that complainants Stewart and 
Carlen are the lawful directors of TSC because they neither 
resigned nor elected any successors as required by TSC's 
articles of incorporation.   
 
It is true, as respondents observe, that complainants 
Stewart and Carlen did not conduct annual meetings of the 
corporation or elect any other directors until they elected 
Pearson in 1994.  However, we have held that the 
 
"[f]ailure [of a corporation] to elect officers 
results in continuing the old officers in power.  
Thus, where the corporation fails to hold its 
regular annual meeting for the election of 
directors, the directors then in office hold over 
until their successors are elected." 
 
Blue Ridge Property Owners v. Miller, 216 Va. 611, 613, 221 
S.E.2d 163, 165 (1976) (quoting 2 William M. Fletcher, 
Cyclopedia of the Law of Private Corporations § 344 (Rev. 
Vol. 1969 & Cum. Supp. (1975)).   
 
We reject the respondents' argument that Alexander, as 
agent for Stewart and Carlen, was cloaked with the express 
or implied authority to elect members to TSC's board of 
directors.  Code § 13.1-846(C) states:  "[i]f a corporation 
has no members or its members have no right to vote, the 
directors shall have the sole voting power."  Applying the 
clear and unambiguous language of this statute, we hold that 
Code § 13.1-846(C) does not grant an agent of the board of 
directors the power to elect a director.   
 
B. 
 
The respondents assert that even if the Virginia 
Nonstock Corporation Act prohibits an agent from electing a 
successor director, the chancellor's judgment should still 
be affirmed because "Carlen and Stewart acquiesced in 
Alexander's informal conduct of TSC's affairs, and cannot 
invoke that informality as a shield."  Relying principally 
upon Coastal Pharmaceutical Company v. Goldman, 213 Va. 831, 
836-37, 195 S.E.2d 848, 852-53 (1973), Curley v. Dahlgren 
Chrysler-Plymouth Dodge, Inc., 245 Va. 429, 433-34, 429 
S.E.2d 221, 224 (1993), and Brewer v. First National Bank of 
Danville, 202 Va. 807, 812-13, 120 S.E.2d 273, 278 (1961), 
the respondents argue that this Court has held that strict 
adherence to statutory or corporate formalities is not 
required to render binding the acts of a small, closely held 
corporation.  The respondents contend that Stewart and 
Carlen should not be permitted to "hide behind statutory 
requirements and corporate formalities to invalidate the 
election of the Current Board, because they chose not to 
follow corporate formalities and allowed Alexander to 
conduct TSC's affairs informally." 
 
It is true, as respondents point out, that "we 
repeatedly have refused to invalidate acts of closely held 
corporations simply because certain corporate formalities 
were not observed."  Curley, 245 Va. at 433, 429 S.E.2d at 
224.  But, as we have explained, this rule is designed to 
protect innocent third parties who deal in good faith with 
close corporations that conduct their internal affairs 
informally.  Lake Motel, Inc. v. Lowery, 224 Va. 553, 560, 
299 S.E.2d 496, 500 (1983).  This rule has no application 
here because the respondents cannot be deemed innocent third 
parties in relation to a corporation which they directed and 
managed.   
 
C. 
 
We find no merit in the respondents' argument that the 
complainants are estopped from asserting they are the lawful 
directors of TSC.  We have stated: 
 
To establish equitable estoppel, it is not 
necessary to show actual fraud, but only that the 
person to be estopped has misled another to his 
prejudice, Security Co. v. Juliano, Inc., 203 Va. 
827, 834, 127 S.E.2d 348, 352 (1962), or that the 
innocent party acted in reliance upon the conduct 
or misstatement by the person to be estopped.  
Khoury v. Memorial Hospital, 203 Va. 236, 243, 123 
S.E.2d 533, 538 (1962).  Elements necessary to 
establish equitable estoppel, absent a showing of 
fraud and deception, are a representation, 
reliance, a change of position, and detriment. 
 
T. . . v. T. . ., 216 Va. 867, 872-73, 224 S.E.2d 148, 152 
(1976).   
 
Here, there is no evidence that the complainants 
committed any acts constituting fraud or deception.  
Additionally, the respondents failed to show that they 
relied upon any acts of the complainants or that they 
changed their position in reliance upon any such acts.  It 
is true, as the respondents observe, that Stewart and Carlen 
were aware that TSC was conducting business and that they 
waited before taking action to assert themselves as the 
rightful directors.  However, these facts are not sufficient 
to constitute a representation, which is a necessary element 
of estoppel.   
 
D. 
 
The respondents contend that "equity compels the result 
reached by the [chancellor]."  The respondents, relying upon 
Code § 13.1-861, say that the chancellor has power to review 
elections of directors and, if warranted, grant equitable 
relief.  Code § 13.1-861 states:   
 
 
Any member or director aggrieved by an 
election of directors may, after reasonable notice 
to the corporation and each director whose 
election is contested, apply for relief to the 
circuit court in the county or city in which the 
principal office of the corporation is located, or 
if none in this Commonwealth, where its registered 
office is located.  The court shall proceed 
forthwith in a summary way to hear and decide the 
issues and thereupon to determine the persons 
elected or order a new election or grant such 
other relief as may be equitable.  Pending 
decision, the court may require the production of 
any information and may by order restrain any 
person from exercising the powers of a director if 
such relief is equitable. 
 
The respondents' reliance upon Code § 13.1-861 is misplaced. 
 Here, there has been no contested election.  The 
complainants are the holdover directors and, as we have 
held, Alexander simply did not have the statutory authority 
to elect successor directors.   
 
We also reject the respondents' argument that the 
chancellor, exercising his equitable jurisdiction, is 
empowered to declare the respondents the lawful directors.  
Under the facts and circumstances of this case, the 
chancellor simply has no statutory authority to elect 
directors.   
 
E. 
 
The respondents assert that the doctrine of laches bars 
the complainants' cause.  The respondents say that "the 
Former Board slept on their rights from 1990 until July 
1994, in a context where such delay is prima facie 
unreasonable."  We disagree.   
 
We have held that "no rigid rule can be laid down as to 
what delay will constitute laches; every suit must depend 
upon its own circumstances."  Puckett v. Jessee, 195 Va. 
919, 930, 81 S.E.2d 425, 431 (1954).  We have defined laches 
as "the neglect or failure to assert a known right or claim 
for an unexplained period of time under circumstances 
prejudicial to the adverse party."  Princess Anne Hills v. 
Susan Constant Real Est., 243 Va. 53, 58, 413 S.E.2d 599, 
602 (1992); Masterson v. Board of Zoning Appeals, 233 Va. 
37, 47, 353 S.E.2d 727, 735 (1987).  The burden of proving 
laches and prejudice is upon the litigant asserting that 
defense.  Princess Anne Hills, 243 Va. at 58, 413 S.E.2d at 
602.  Even though a finding of laches rests primarily within 
the discretion of the chancellor, we will not approve such 
finding if the party asserting this defense fails to prove 
prejudice.  Masterson, 233 Va. at 48, 353 S.E.2d at 735.   
 
Respondents McDonnell and Aldige knew, or had reason to 
have known, since April 1992 that complainants Stewart and 
Carlen were the lawful members of the board and that they 
had not elected any successor directors.  In April 1992, TSC 
filed its annual report with the State Corporation 
Commission, and that report identified Stewart, Carlen, and 
Hansen as the board of directors.  In May 1992, TSC prepared 
an issues memorandum that identified Aldige, Jerry Tolson, 
McDonnell, Carlen, and Stewart as members of TSC's board of 
directors.  The respondents filed a registration statement 
with the State of New York identifying the same individuals 
as members of the board of directors.   
 
In November 1992, even though the respondents knew that 
Stewart and Carlen had not resigned, McDonnell drafted a 
memorandum stating in part: 
 
We need a set of minutes for the Board meeting in 
early January, 1992 that accepted Jake Hansen's 
resignation and named Jim Aldige, George McDonnell 
and Jerry Tolson to the Board. 
 
A draft of certain proposed minutes was attached to the 
memorandum which stated in part: 
 
On March 2, 1992, Jerry Tolson, George McDonnell 
and James Aldige met and declared that all members 
of the Board were present.  They accepted the 
resignations of W.D. Stewart and Jim Carling 
[sic].   
 
In November 1992, McDonnell wrote another memorandum 
questioning in part: 
 
What happens if they [Stewart and Carlen] won't 
[sign]?  Can we draft a statement that would cover 
that situation as was suggested before?   
 
We hold that even though the complainants could have 
asserted their claims earlier, their failure to do so did 
not prejudice the respondents because they had actual 
knowledge since 1992 that the complainants were the lawful 
directors of TSC.   
 
V. 
 
Accordingly, we will reverse the judgment of the trial 
court, and we will enter a declaration here declaring that 
the complainants, Warren D. Stewart, James G. Carlen, and 
Kim R. Pearson are the lawful directors of The Seniors 
Coalition, Inc.  We will remand this proceeding to the trial 
court for the entry of any injunctive relief which may be 
necessary to effectuate this declaration. 
 
Reversed and remanded.