### IN THE COURT OF APPEALS OF TENNESSEE AT NASHVILLE October 9, 2001 Se ssion PAUL G. SUMMERS, ET AL 

### . v. CHEROKEE CHILDREN &

FAMILY SERVICES, INC., ET AL 

### . Appeal from the Chancery Court for Davidson County No. 00-2988-I Irvin Kilcrease, Jr., Chancellor

No. M2001-00880-COA-R3-CV - Filed Septem ber 26, 2002

In this appe al, the At

torney Genera l filed suit to dissolve

two nonpr

ofit public

benefit corpora tions. Both the Attorney Ge

neral and the nonprofit corporations filed motions for summary judgme

nt. The trial court granted summary judgment for the Attorney Gene ral f

inding th at the non

profit corporations had aba

ndoned their cha

ritable p urposes a nd devote d themselv es to private purposes
. The trial court ordered the appointment of a rece iver to marshal and pres erve the remaining asset s. For the following reasons, we af firm the decision of the trial court. Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed and Remanded
P AT RICIA J. C OTT RELL , J., delivered the opinion of the court, in whichB EN H. C ANT RELL , P.J., M.S., and W IL LI AM B. C AIN , J., joined. Allan J. Wade, Thomas LangWiseman, and Lori Hackleman Patterson, Memphis, Tennessee, for the appellants, CherokeeChildren a nd Family Service s, Inc., and Cherokee Children Nutrition, Inc.
Paul G. S um mer s, A tt orn ey Gen era l an d R epo rte r; A lb ert L. Partee, Senior Counsel; George

S. Bell, III, AssistantAttorney Gene ral; Michael A. Meyer, Assistant Attorney Ge neral, for the appellee, the Attorney Gene

ral of Tennessee.
OPINION
This is a case of f

irst impre ssion in thisState whe rein the Attorney Genera l sought t o involunta rily dissolve Ch

erokee Children a

nd Family

Service s, Inc. (“CCF S”) and Cherokee Children Nutrition, Inc. (“CCN”) via the authority granted in Tenn. Code Ann. § 48-64-301(a)(1). CCFS and CCN are two related nonprofit public benefit corporations that are tax-exempt under sta te andfederal law. The Attorney General sought appointment of a rece iver to marshal the remaining nonprofi tassets, dissolve the corporations, and distribute the assets to other “legitimate”nonprofi t organ izations. He alleged that CC FS and CCN ha d repea tedly violated the Tennessee N onprofit Corporation Act and specifically questioned numerous transactions, including: (1) rental of propert y1 The trial court denied CCF S’s and CCN ’s motion for st ay pending appeal, ruling that a st ay would “interf ere with the A ttorney G enera l’ s ri ght t o carry out his dut ies. ” The corporati ons sought a stayfrom th is court, wh ich was denied. Thus, the assets have remained under the protection of the r eceiver. -2- ownedby the executive director to the corporations; (2) hiring of the executive director’ s husband as accountant

for the corporation; (3) investment of CCFS monies in a local start up bank; and (4) several transactions and purchases by the corporation for the benefit of the executive director, her family , and fri ends.
A hearing was held in Davidson County Chancery

Court regarding a motion for temporar y injunction and appointment of a custodian pendente lite filed by the Attorney Gene ral. The trial court entere d a tempor

ary inju nction r equiring CCFS and CCN to grant access to their records by the Att orney Genera l, to protect and preserve all books and records, a nd to adhere to a $50,000 a month budget for six months. The trial court declined to appoint a custodian p end ente lite at that time. Both parties then filed motions for summary judgment.
Six months later, the trial court heard oral argument

on both moti ons for su

mmary judgmen t. The Chancellor granted the Attorney General’s motion for summary judgment an d ma de the following finding s:
1. that

the Attorney Ge

neral is entitled to a r eceive r for defendant s and is entitled to proceed with dissolution; 2. that

the Defendants have abandoned their public pur poses andhave devoted themselve s to priva

te purpos es; 3. that this isnot in kee ping with the Tennessee N onprofit Act; 4. that

the Attorney Ge

neral has the autho

rity to take a ction unde

r his statutory supervisory

power overnonprofi

ts and as a

repres entative

of the pub lic interest; and 5. that

there is a

n immediat

e need f or th e A ttorney Gene

ral to take over the assets of the defendants; . . . .
The trial court appointed a receiver and e numerated his duties and responsibilities as well as the scope of his authority unde r Tenn. Code Ann. § 48-64-303. 1
CCFS and CCN appeal arguing that the trial c ou rt impr operly g ranted summary judg

ment in favor of

the Attor ney Genera l and impro

perly denied th eir own motion for

summary judgmen t.2 At that tim e, M rs. M adiso n was W illieAnn D augh erty.
3 The purposes set

forth in t

he origi nal char

ter wer e: (a) To provide comprehensi ve socia l ser vice f or young people from in fancy through nineteen (19) years of age who are teenage mothers, handicap children, under- achievers in s chool and special-problem children. (b) To mobilize and ut

ili ze resources, both public and private; to offer conti nuous and pro gressive ly comprehensi ve socia l ser vices appropriat e to our t arget group or cli entel e. (c) To d o anything necessaryand proper for the accomplishment of the foregoing purpo se and go als, pro vid ed same is not inco nsistent with the laws o f the State of T enne ssee an d the U nited S tate s o f America.
4 According to CCFS, many of the organizers of CCFS were early childhood educators or child care providers and, consequently, t

here had alway s been an emphas is on he lping parents to obtai n chil d care ser vices, and the ch arter was amended to r efle ct this pur pose. -3-

I. Backg round
WillieAnn Madison 2 incorporated CCFS as a nonprofit public benefit corporati on in December

of 1989 under

the auspices of the Tennessee Nonprofit Corporation Act, Tenn. Code Ann. §§ 48-51-101 et seq. According to a charter amendment made April 19, 1990, the purposes of the corporation were: 3

. . . to provide transitional child care services for childre n of low-income familie s referred by the Depa

rtment of Human Services. Funds for this project are provided by Federal and State block grants whi c h are used for tuition pay ments and administr ative expe

nses. The services provided by CCFS include listing and classifi ca tion of child care provider s, referrals of qualified families to appropriate child carecenter s, and the monitoring and supervision of each placement under guidelines provi ded by

DHS. Up on the d issolution of CCFS, all remaining assets will be returned to the Federal and State office s which su

pplied the origina l grant s. 4
CCFS had no members. According to the char ter, as amended , CCF S was intended to operate as a charitable organization within the meaning of section 501(c)(3) of

the Internal Revenue Code of 19 86. I

n fact, t he amend ed char ter inclu ded the f

ollowing in its state

ment of pu

rposes:

. . . exclusively religious, cha ritable, scientific, literary , and educational within the meaning of section 501(c)(3) of the I nternal Revenue Code of 1986 or the corresponding provision of any future United States Internal Reve nue law. Notwithstanding any

other pr ovision of these ar tic les, this organ

izati on shall not carry on any activities not permitted to be carried on by an org anization exempt from5 The others ident ifi ed as offi cers or directors were Watson Anderson, Gwendoly n Mizell, and Samuel Hing ha.
6 The appli cati on for

Recogni ti on of

Exemption under Section 501 (c)(3) of the Int ernal Revenue Code defines
a “disqu alified p erson ,” in relev ant pa rt as “any p erson who, if the applicant organizat ion were a private foundati on, is . . . [a] found ation m anag er . . . [or a] ‘mem ber o f the family’ o f any [suc h] pe rson. . . .”

7 The other in corp orato rs listed w ere W illiam D avis and Ida Porter. Both M rs. Porter and Mr. Davis denied any in vol ve men t i n t

he cr ea ti on or in cor

por at io n o f CCN. -4- Federalincome tax under section 501(c)(3) of the I nternal Revenue Code of 1986 or the corresponding provision of any future United States Internal Reve nue law.
On or about

June 18, 1990, CCFS filed an application for exemption under 501(c)(3) of the Internal Revenue Code. The IRS approved the application for tax exempt status. In the application, CCFS represented that neither Mrs. Madison, William Davis (Mrs. Madison’s father) nor any other individual listed as an officer or director 5 were disqualified persons 6 with respect to the organization. CCFS represented

that its facilities or operations would not be managed by another organization or individual under a contract ual agreement and that the organi zation was not a party to leases . CCFS assertsthat

these statements weretrue at the time they we re made, but could have changed thereafter.
CCFS entere d into a contract with the Tennessee Depar tment of Human Services (“DHS”) to provide childcare brokerag e services to low income f amilies in Shelby County in 1990. CCFS also contracted with DHS to providemeal and related administrative services under the Child and Adult Care Food Program (“CACFP”) a nd certain other services for underprivileged c hildren. C CFS began providing

regist ration a nd transp ortation s ervice s under c ontract s with DHS in 1998. C CFS continuedto work pursuant to contracts with DH S until th e contracts were terminated in 2000.
On November 2, 1998, CCN was incorporated as a public benef it corporation. CCN was organized to handle

certain portions o f the foo d progr am for wh

ich CCFS wa s respons ible in accordance

with contracts between CCFS and DHS. On the initia l corpor ate pape rwork filed with the Secretary

of State, WillieAnn Madison was listed as the incorporator. 7 The Char ter file d with the Secreta

ry of State w as a

fill-in-the-blank form and did not indicate the purpose. Howeve r, in its application for tax exem

pt status, CC N at tac hed th e fo ll owi ng, ent it led , C har ter , P art III Activities and Operational Infor

mation:
The Cherokee Children Nutrition (CCN) will be charte red by the State of Tennessee. Its mission is to

se rve min ority children, infants to age seventeen, in way s that are educati onal, nutritional, he althful, and with social [sic] social services. The target ar ea is th e C it y of

Me mp hi s, Te nn es se e w it hi n t he Co un ty o f S he lb y.
A. CCN will provide brokering services to all know [sic] area child car e provide rs. CCN will work with clients to enable them to identify ac cessible, safe and sanitary child ca re plac ements.8 M r. M adiso n is the hus ban d of W illieAnn M adiso n. 9 Other testi mony and records indicate that as of December 19 99, the cor por at io ns pr opo se d a bud ge t to DHS apportioning M rs. M adiso n’s $125,000 s alar y, wit h $100,000 t o be paid by CCFS and $25,000 by CCN. An employee of DH S testif

ied that t he Department agreed to divide her salary between t he two ent

iti es based upon her

esti mate th at her time was roughly divided based on the number of empl oyees each e nti ty had, approxi matel y 12% to CCN and 88% to CC FS. T his discussion of salary do es not add ress other add itional comp ensation such as b onuses. -5- B. CCN will provide and set up beforeand after school programs for the school-aged child up to nine (9) yea

rs old. C. CCN will oversee basic and specialty health and nutritional services.
D. CCN will

s erve as a resource to child car e providers in training, phy sical improvements, and other components.
E. CCN proposes to provide personal and social counseling to AFDC fa milies at the earliest possible date.
F. Funding Source s: Fed eral grants, federal/state f unds and grants, USDA Food Program, fund-raisers, and donations.
SUMMARY: The plig

ht of minor

it y children deserves urgent attention and a ction for care, enri chment, education and general servic es. Cherokee Children Nutrition (CCN) is formed to respond positively and cultu rally to these needs of a growing population who will become our leaders, parents, and profe ssionals.
The Charter of CCN was amended in 1999 to reflect a new addres s. CCN also had no members. CCN also filed an application with the IRS for exemption under 501(c)(3) of the Internal Revenue Code. In CCN’s I RS exemption application, Mrs. Madison, Mr. Davis, John Madison Sr., 8 andIda Porter were

listed as the Executive Director, Secretary , Tre asurer, an d Chairperson of the Board of Di re ct or s, re sp ec ti ve ly. The application stated that Mrs. Madison was the only person that received compensa

tion from t

he corpo ration a nd that th e amount of that compensation was $50,000. 9 CCN represented

that none of the officers were disqualified pe rsons with respect to the organization andthat the c orporat

ion was not controll e d b y a ny other org anization. CCN failed to answer the question of whether it was the outgrowth of (or succ essor to) another organization or whether it had a special relationship with another organization by reason of interlocking directorate s or other factor s. CCN also sta

te d that its fa cilities and operations would not be managed by another organization or individual under a contractual agreement

and that it was not a party to leases. The IRS ap proved th e applic ation for

tax exempt sta

tus.10 Th e T enne ssee S upre me C ourt re cently state d that:
The first contra ct, exec uted in 1990, was a gra nt cont ract u nder whic h Cherokee perf ormed servi ces on a cos t-reimb ursem ent ba sis. Prior to t he commen cement

of an y wor k by Che roke e, the Sta te wou ld approve “al lowable costs” in advance, t hen Cherokee would spend funds to perform the work a n d invoice the State for reim bursem ent of the app roved costs.

Me mp his Publ’g Co. v. Ch erok ee C hildre n & F am ily Servs

. , Inc. , No. M2000-2382- SC-R11- CV & No. M2000-01705- SC-R11 -CV, 2002 Tenn. LEX IS 379, at *6, ___ S.W .3d ___, ___ (Tenn. Sept. 5, 2002).

11 Th e Sup reme Co urt foun d that:
The seco nd co ntract, in e ff ect from 1992 to 1999, chang ed th e meth od of payment t o a fee- for- servi ces arran gem ent, under

whi ch Cher okee wa s pai d a “commi ssi on” cal cula ted a s a per cent age of the fun ds disburs ed by T DH S to d ay care center s as a res ult of Ch erok ee’s administrat ive servi ces. The money receiv ed by Cherokee under the 1992 contract was dependent only on sati sfactory perf ormance of the work and on the total f unds dis bursed by t

he S tate to d ay care services; the State dis claimed any respo nsibility for lo sses or taxes inc urred by Ch erok ee in the perfo rman ce of the contra ct. Memphis Publ’ g Co. , 2002 Tenn. LEXIS 379, at *6, __ S.W.3d at

___. 12 The affidavit of Dilworth W eathers, assistant to Mrs. M adison, states:

In 1999, the St ate se lect ed Cherokee [CCFS] to admin ist er the chil d care brokerag e program under the new c ost rei mbur seme nt sy stem.

. . . Under th e new program put out f or bid, t he sel ected contr actor

would pay the expenses of th e program in compliance with a budget whi ch had been preapproved by the sta te. Un der the cost re imbu rsem ent co ntract, the sel ecte d cont ract or would subm it to the St ate, on monthlyvouchers, expenses incurr ed by the contract or which the contractor beli eved had been incurre d in ac cord ance with the S tate-ap pro ved bud get.
The corporati ons’ bri ef expl ains t hat at the end of

1998, when Cherokee was preparing to apply for t he 2000 broker
con tract, it was in formed th at i t would be a rei mburse ment/

gran t con tra ct. In or der t o apply forthat contract , CCFS was require d to submit

a proposed budget t o DHS before any reimburs ement cl aim could be made.

-6- Under the 1990 c ontract

with DHS, the State

compensated CCFS and CCN by re imbursing the company for

e xp enses incurred. 10 The cont racts in e ffect f rom 1992 to

1999 sig nifican

tly cha nged the pa yment pro gram by pro vidi ng that CCFS and CC N woul d be pa id a pe rcenta ge (between3% and 3.5%) of the funds DHS paid to day care centers for Cherokee -placed c hil dren. CCFS was not require d to repo rt its cost s to DHS und er this ty pe of con tract. 11 From January 1, 2000, to August 21, 2000, the parties operated under a third c ontract that reve rt ed to the c ost reimbursement plan. 12 Our Supreme Court has recently described the relationship between CCFS and the State:
Between 1990 and 2000, Cherokee contracted with TDHS to perf orm cer tain functions re la te d t o g ov er nm en t- su bs id iz ed ch il d c ar e s er vi ce s i n S he lb y Co un ty. It is important to note here that Cherokee did not ‘care for ’ or ‘keep’ c hild ren in the13 The Supreme Co urt found that over ninety- nine pe rc en t ( 99 %) of CCFS’s f unding ca me from govern mental
sourc es. Id . 2002 Tenn. LEXIS 379, at *6, ___ S.W.3d at

___. -7- strictes tsense. Rather, it served as a ‘brokeringagency ’ that screened applicants and assisted eligible applicants in locating approved child ca re provider s. TDHS paid the child care subsidies directly

to the care centers; Cherokee, ther efore, was not involved in the payment of subsidies fo r the c hild care services. Virtually all of Cheroke e’s oper

ating r evenue , howeve

r, came from go vernmen

t source s. Memphis Publ’g Co. v. Cherokee Children & Fa mi ly Services , No. M2000-2382-SC-R11-CV & No. M2000-01705-SC-R11-CV, 2002 Tenn. LEXI S 379, at *5, ___ S.W.3d ___, ___ (Tenn. Sept. 5, 2002).
As the Supre

me Court f

ound, the vast m ajo rity of the income of both CCFS and CCN has come fr om contra

cts with DHS or other

gover nment pro grams. 13 The total revenue received from DHS by CCFS and CCN, including ea rned commissions, was $3,055,004 in 1 998, $ 6,869,465 in 1999, and $4,910,477.08 in 2000. All of CCFS’s employees pe rformed service s under th

e contra cts with the state. Id.
Mrs. Madison has been the Executive

Directo r of CCFS a

nd CCN since their inception. Her compensation included a salary and, from time to time, she has receive d ad ditional compensation or bonuses. A ccordin g to CC FS, this additional compensation was based on the success of the progra m. The State ca nceled i ts contract with CCFS by letter dated August 21, 2000, which termination was to be effective September 22, 2000. CCN received a letter on August 21, 2000, te rm in at in g i ts co nt ra ct wi th DH S e ff ec ti ve th at da y. After the Attorney

General began the investig ation that led to the institution of this action, the curren

t Board of Directors, whic

h consistsof two long

time membe

rs and two

new me mb ers, undertoo k to review past corpora teaction or

transactions, inc luding r

elated p arty

transactions, as w ell as the allegations of the complaint regar ding misapplication or wasting of assets. The Board ratified many of the prior transactions, instituted new controls , reduced its oper ating e xpenses sig

nifican tly because of the loss of the Statecontracts, and se ttled an is sue of re

nt overpa yme nts, as mor

e fully discussed below.
The corpora

te assets of CCFS remaining were reported by the appointed receiver to include approxima

tely $288,000 in cash in various accounts; three (3) vehicl es ; 30,000 sh ares of stock in14 The receiver rep orted that CC FS had 19,00 0 shares and CCN had 11,000, wit h a t otal purch ase pr ice of $300,000.

15 On May 4, 2001, an agr eed order of s ale and compr omise was e nter ed by the tri al court approving the sale of ce rta in i tems , pri mari ly off ice fur nit

ure, to Will ieAnn Madison a nd John Madison f or $5,300. -8- Memphis First Community Bank; 14 real pr operty ; and off

ice equi pment. 15 CNN’s assets included approxima

tely $2,900 in cash in accounts. Theremaining asset s of these nonprofi tcorporations are what is at stake in this litigation. The Attorney Ge neral sought to have a

r eceive r appoint ed to identify and protect those a ssets and to distribu

te them to other

nonprofit entities after dissolution of the co rporations. The c orporat

ions soug ht to mainta

in contro l of the a ssets.
II . The Issues
The Attorney Gene

ral’s action is based on Tenn. Cod e Ann. § 48-64-301(a)(1) which authorizes a

court to dissolve a nonprofit corporation in an action brought by the Attorney Ge

neral if it is established that the corporation: (A) Obtained its charter through fr aud; (B) Has exceeded or abused the a uthority conferr

ed upon it by law; (C) Has violated any

provision of law resulting in the forfeiture of its charte r; (D) Has carried on, conducted, or transacted its business or affair s in a per sistently fraudul ent or illegal man

ner; (E) Is a public benefit corpor ation andthe corporate assets are being misapplied or wasted; or (F) Is a public bene fit corpo

ration a nd is no longer able

to carr y ou t its purpos es; provided, that the e

numerat ion of the se grou

nds for di ssolution sh all not exclude actions or special proceedings by the attorney g eneral an d report er or oth er state officia ls for the dissolution of a corpo ration for other ca uses as pr

ovided in t

his chapter or in any

other statute of this state; . . . .
In such a proceeding, the court also ha s authority to “issue injunctions, appoint a rec eiver or custod ia n pendente

lite with all po wers and duties the court d irects, t ake othe r action required to preservethe corporate assets wherever loc ated, and car ry on the business of the co rporation until a full hearing can be held.” Tenn. Code Ann. § 48-64-302(c).
On appeal, the Attor

ney Genera l argue s t hat several of the statutory gr ounds were established: (1) the corporations abandoned their public purpose and have bee n d evoted to private gain and, co ns eq ue nt ly, the corporate assets were misapplied or wasted; ( 2) the co

rporations have o

perate d in a persistently fraudule

nt and illegal manner; and (3) the corpora tions are unable to car

ry ou t their nonprofit purposes.
In response, the corporations argue tha t: (1) the Atto rney Genera l fail ed to a llege or show that the corporations conducted their b usine ss in a persistently fraudule nt or illegal manner; (2) the16 By 1987 T enn. Pub. Acts, ch. 242, Tennessee adopte d the Revi sed Model Nonprofit Corporation Act, which

became ef

fect ive Janua ry 1, 1988.
17 Cha ritable nonprof

it organ izat

ions are e xempt from f

ederal income ta xati on under provi sions of th e Inte rnal Revenue Code. I n addi ti on, e nti ti es ex empt u nder s ecti on 501(c)(3) are entitl ed to receive tax deductible contri butions from do nors. -9- Attorney General failed to prove that Cherokee’ s corporate assets were misapplied or wasted; ( 3) the Attorney Gene

ral cannot show that the corporations are no lo nger a ble to ca rry out their p

urposes; and(4) the business judgment rule, plead as an aff irmative defense, insulates certain cor porat e actions by creatin g a

presumpt ion of the regula rity of busine ss decisions, and the Attorney G eneral failedto overcome that presumption. In addition , the corporations assert that summary judgment was improper because there are disputed ma terial facts, the Attorney

General fa

iled to meet his burden of proving that dissolution was warranted, no expert proof was pre sentedon issues requiring such proof, and the corporations presented their own

expert pr oof to re but sever al claims

. Fi na ll y, the corporations assert that some of the documents an d re cords fi led by the Attor ney Genera l in support of the motion for summary judgment were unauthenticated and containe d some inadmissib le evidence, should not have been considered by the trial court, but could have been so considered.
II I. Nonprofit Corporations
The two corporations were both formed pursuant to the Te nnes see Nonprofit Corporation Act, Tenn. Code Ann. §§ 48-51-101 et. seq

. 16 Nonprof it corporations in Tennessee can be relig ious corpora tions, public be

nefit co rporations, or mutu a l benefit corporations. Tenn. Code Ann. § 48-52- 102(a)(2). Both corporations herein a re public benefit corporations. Nonprof it corpora tions can be divide d in to two classes. One called donative nonprofi ts or public

benefit corpora tions; the other called commercial nonprofits or mutual benefit

corpora tions. The donative type

is generally

a charitable organization providing service to the gener al public.
1 9 W ILL IAM M EADE F LETCHE R ET AL ., F LETCHER C YCLOPEDIA OF THE LAW OF P RI VATE C ORPORATI ONS § 2:15 (Per m. ed. 199 4) (cita

tions omitte d). Unde

r the Revi sed Model

Nonprof it Corporation Act, public benefit corp orati ons are treated differently from the other two classifications in several areas, including: (1) the a bility to make distributions to members or controlling persons and (2) the supervisory

powers vested in the attorney general of the state of incorpor ation.
Both corpora tions her ein also applied for and received tax exempt status under § 501(c)(3) of the I nternal Revenue Code, and

both adop ted corp orate sta tements indicating their inte nt was to operate as a § 501(c)(3) organization. 17 That section exempts fromtaxation “corporations, and any community

chest, fund, or foundation, organized and opera ted exclusively for religious, charitable, scientific, tes ti ng f or p ubl ic s afe ty, l it era ry, o r ed uca ti ona l p urp ose s.” It also requires that “no part of the net earnings of [the exempt organization] inures to the benefit of any private shareholder or-10-

individual.” This prohibition on the distribution of net earnings is reinforced by federal regulations interpreting § 501(c)(3): [A]n organ ization is n ot organized or operated exclusively for one or more [charita ble purposes] . . . unless it se rves a pu blic rath er than a private interest. . . . [I]t is n e cessary

for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individua ls, the cr eator or his fa mi ly, shareholders of the organization, or pe rs on s c on tr ol le d, di re ct ly o r i nd ir ec tl y, by such private inter

ests. Treas. Reg. § 1.501(c)(3) - 1( d)(1)(ii) (as amended in 1991).
These definitio ns desc ribe t he most co mmonly used and understo od meaning ascr ibed to “nonpro fit” entities. “Nonpro fit corpo rations g enerally

are recognized

to be publi c or cha

ritable in nature.” State ex rel Boone v. Sundquist, 884 S.W.2d 438, 444 (Tenn. 1994). A basic distinction betweenfor prof

it and nonp

rofit entities is the possibility of private enrichment. Thus, “[i]n general terms, a nonpro fit enter

prise is an organization in which no part of th e income is distribu

table to it s members, directors or officers . . . .” R ONALD LEE G IL MAN , T ENN ESSEE C ORPORATI ONS § 11B-1 (2001). To be more precise,

. . . one crucial feature

distinguishes nonprofit corporate governance from that of forprofit corporations: nonprofit corporations are subject to the non-distribution constra int. The non- distributi on constr aint prevents the

organ iz ation from distributing its net earnings to those in control of the corporation; . . . .
Develo pments in the Law - - Nonprofit Corporations , 105 H ARV
. L. R EV . 1578, 1582 (May 1992) (footnotes omitted).
In fact, it has been stated that, “[t]he basic question to be asked in determining whether a corporationis ‘no nprofit’ i s whet her th e corpo ratio n is b eing exploited for direct monetary gain.” F LETCHER , s upra , at § 6 8.05. There is no prohibition on a nonprofit corporation conducting enterprises for income or from accumulating ea rnings. However, suc h revenues must be used for the purposes set forth in the charter and there must be no pecuniary gain to the incorporators or members, and no distribution of income or profits to them. Id

. Under the Model Nonprofit Corporation Act (1964) a “not for profit” c orporation was definedas a corporation no part of the income of which is distributable to its members, directors or office rs. M ODEL N ONPRO FI T C ORPORATI ON A CT § 2 (1964) ; F LETCHER , supra , at § 6 8.05. Alth ough the Revised Model Act did not re tain this de

finition, t hat deci sion has been explained as follows:
The Drafting Committee, on the other hand, took the position that provisions of the Revised Act such as the election between pu blic bene fit and mut

ual benefit status , the limitationson distribu tions to mem

bers or c ontrolling

persons in a

public be nefit18 M s. Moody was ch air of t he Nonprof

it Corporat

ions Commit tee, Sect ion of Business Law of the American Ba r Asso ciation which d rafted th e Re vised M ode l No npro fit Corp oratio n Ac t. -11- corporation, restrictions onunreasonable compensation, and the reg ulatory powers of the attorney

general provided ample reg ulation to insure nonprofi tope rat io n. In addition, the Drafting Committee had concluded that the ability of any corpor

ation to limit the corporate purposes in its articles of i nco rporation provide d ample protection and allow ed the co rporation to obtain

tax exempt sta

tu s and attract specific contribu tions.
Lizab ethA. Mo od y, 18 The Who, W hat, and How of the Revised Model Nonprofit Corporation Act , 16 N. K Y
. L R EV . 251, 281 (1988).
This prohibition on distribution of corpora te assetsor earn

ings to those oper

ating a nonprofi t corporationhas beenreinfor ced by specific statutory provision s. Under Tenn. Code Ann. § 48-63- 101 a nonprofit corporation may make no distributions thatare not authorized by Tenn. Code Ann. § 48-63-10 2. That section pro vides tha t a public benefit corpora tion may make distr

ibutions to i

ts members: (1) who are public bene fit c orporat ions; and ( 2) if in conformity with its ch aritable p urposes. Tenn. Code Ann. § 48-64-102(b). “Distribution” is defined as “the direct or indirec t transfer of asset s or any

part of th e income or profitof a cor

poration , to its members, directors, or officers.” Tenn. Cod

e Ann. § 48 -51-201( 11). Thus , in combin ation, the se statute s clear ly p rohibit the transfer of assets, income, or accumulated r evenue to any

individual who is a

member, director, or office r of the c orporat

ion. The s tatutory

exception

to that prohibition is found in the definition “distribution.”
“Distribution” does not include: (A) The payment of

compensation in a reasonable amount to its members, directo

rs, or officers for services rende red; (B) Conf erring benefit s on its memb ers in co nformity with its pur

poses; (C) Repayment of de

bt obligations in the normal and ordinary course of conducting business activities; or (D) The incu

rrence of indebt edness, w hether d irectly or indirectly (including

throu gh a guaranty), for or on behalf of a member, director or officer.
Id

. I n addition to

these limitations on

distributi ons, nonpr

ofit corp orationsare spe cific all y prohibited from lending money to, or guaranteeing the oblig ation of, a director or office r of t he corporation. Tenn. Code Ann. § 48-58-303.19 The beneficial treatment of no nprofit organiza tions has been d escribed a s follows:

No npro fit organiz ations receiv e thei r most cons picuousl y fav orable t reatment through the t ax laws. They have, hist orically, received privileged t reatment in many othe r area s of the law as well. Spe cifically, nonprof

it s hav e enj oyed s pec ial tr eatment under the laws governi ng unemployment insur ance, ban krup tcy, Soc ial Sec urity, collec tive ba rgaining , securities regula tion, the minimum wage , cop yright, antitrus t, custom duties, a nd p ostal ra tes. Development

s i n the Law - - Nonprof it Corporat ions , supra , at 1677-78. -12- Nonprof it corporations are eligibl e for be neficia l treatme nt in a numb er of ar

eas, 19 particularly

tax ation. Such treatment is in recognition of the benefit to the public good r esulting from the work of most nonprofit or ganizat io ns. Exe

mptio n fro m fed

eral taxat ion a nd taxdeductib ility

of donations are benefits of classification as a § 501(c)(3) entity, but that classification is based upon essentially c haritable purposes where the public good is ser ved, not the pr

ivate interest of any cor porate insider.
The federal tax exemption, which has appeared in federal tax statutes since 1894, see ks “to encou rage the development of priva te instituti ons that se

rve a use ful public purpose or supplement or take the place of public institutions of the same kind.” Bob Jones Univ. v. United States , 461 U.S. 574, 588 , 10 3 S . C t. 201 7, 2 026 (19 83) . It is the unmistakable legislative intent that entit lement to 501(c)(3) tax exemption “depends on meeting certain common-lawstandar ds of cha rity - - namely that an institut

ion se ekin g ta

x-exe mpt status m

ust serve a public purpose a

nd not be c ontrary

to establishedpublic policy.” Id . 461 U.S. at 586, 103 S. Ct. at 2026. The objective of the exemption was to promote

certain charita ble purpo ses, a term

that has b een used

in the law

of char itable tr usts for hundreds of y ears. Id . 461 U.S. at 588, 103 S. Ct. at 2026.
Si mi la rl y, the Tennessee Constitution author izes the legislature to exempt from taxation propert y held and used for

pu rp os es pu re ly r el ig io us , c ha ri ta bl e, sc ie nt if ic , l it er ar y, or educa

tional. Tenn. Const. art. II , § 28. The legislature has enacted statutes providing for such exemption, but has specifically stated the property of institutions shall not be exempt if:
The organ

ization th ere of for any

such avowed purpose be a guise or pr etense for directly or indirectly making

any other pecuniary

profit for such institution, or for any of its members or employee s, or if it not be in goodfaith organized or conducted exclusively

for one (1) or more of these [ religious, charitable, scientific, or educational] purposes. Tenn. Code Ann. § 67-5- 212(a)(3)(B)

. This exemption and the liberal interpretation applied to tax exempt statutes are based upon the “benef

it confe rred on t he public by s uch institu

tions, and a consequent relief, to some extent, of the burden upon the state to care for and adva nce the interests of

its own citizens.” LaManna v. Elec. Wor ke rs Local Union No. 474 , 518 S .W.2 d 348, 352 (T enn. 1 974) ( quot ing Book Agents of20 Th e official c omm ents to the Revised Act stat e that the general duty of l oyalty i s found in the requi rement

that direct ors act

in good faith and in a manne r they reasonabl y beli eve is in t he best i nteres t of t

he corporati on and that the duty of

care is sta ted i n th e prude nt pe rson in ali ke posi ti on requ ireme nt. R EVI SED M OD EL N ONPROFIT C ORPOR ATI ON A CT § 8.3 cmt. 2 and 4 (198 7). -13- Methodis t

Episcopal Church, South v. Stat e Bd. of Equalization, 513 S.W.2d 514, 521 (Tenn. 1974)). Thus, it

is clear that the b argain made wit h the go vernmen

t, the taxpa

ye rs, and th e public in return for benefits such as tax exemption is that the organization will be operated for the public good and not to e

nrich tho se involved in running it.
Even before the adoption of the Revised Model Nonprofit Corporation Act, it has long been the law in Tennesseethat nonprofit corporations are required to opera te for public purposes and not for individual private gain. See, e.g., Highlander Folk Sch. v. State ex rel. Sloan , 208 Tenn. 234, 240, 345 S.W.2d 667, 669 (1961) (holding that the operation of a school for the personal gain of the individual who controlled the finances and to whom the school’s rea l property wa s given was “a misuse and abuse of its powers, and perversive of the objects for which it was created and injurious to the public”).
Adherence

to the fundamenta

l chara cter of a nonpro fit corpo

ration is intended

to be insured, in part, by the fiduc iary duties imposed on office rs and directors of such corpora ti ons . It is well establishedthat officers and directors of a for pr ofit corporation ow e a fiduciary duty to the corporationand its mem

bers or s harehol ders. Founders Life Corp. v. Hampton , 597 S.W.2d 897, 899 (Tenn. 1 980); Johns v. Caldwell , 601 S.W.2d 37, 41 (Tenn. Ct. App. 1980). Directors and officers of corpo

rations a re bound to the exer

cise of th e utmost go od faith, loy alty , and hone sty towardthe corporation. Knox-Tenn Rental Co. v. Jenkins Ins., Inc. , 755 S.W.2d 33, 36 (Tenn. 1988); Hayes v. Schweikart’s Upholstering Co. , 55 Tenn. App. 442, 466, 402 S.W.2d 472, 483 (1965). “[T]he directo

rs of a c orporat

ion have t o see to it t

hat the c orporat

ion had the

benefit of their b est jud gment and act s olely

and alwa ys with reasonable ca

re in go od faith to

promote it s welfare. ” Neese v . Brown , 218 Tenn. 686, 700, 405 S.W.2d 577, 584 (1964).
Directors and officers of

nonprofit corporations also owe a fiduciary duty

to the corporation. State ex rel Ol iver v. S

oc’y for Pres. of Common Prayer , 693 S.W.2d 340, 343 (Tenn. 1985). There are tw o b as ic fi du ci ar y du ti es : t he du ty o f c ar e a nd th e d ut y o f lo yalty . They ar e embodied in the Revised Model Nonprofit Corporation Act20 and have been enacted in Tennessee: (a) A director shall discharge all duties as a director , i ncluding duties as a member of a committee: (1) In good f

aith; (2) With the care an ordinarily prudent person in a

like positi on would

exercise under similar circumstances; and21 The Re vised Mod el Act provisions reject ed the theory that non pro fit corp oratio ns hold their assets in trust

for th e st ate d pur pose s at th e t ime of acquisition and that the dir ectors are truste es with re spec t to those assets. E velyn Bro dy, The L imits of Cha rity Fiducia ry , 57 M D
. L. R EV . 140 0, 14 27 ( 199 8); M ood y, su pra , at 263. Ado pting the provi sion from th e Revised Model Act, Tenn. Code Ann. § 48-58-302(e) provides t hat “A director shal l not be deemed to be a trustee wi th respect to t he corporation or with respect t o any property held or administered by the corporati on, including without li mitat ion, pr operty t

hat may be subject

to res tri ctions imposed by t he donor or tr ansfe ror of s uch property. ”

22 Th is cour t has stated :
The duty of l oyal ty [in a for pr ofi t cor po rati on] in es sence i nvolves confl icti ng economic or ot her simi lar interes t [a nd] is tr ansgressed when a corporate fiduciary, whether director or off icer, uses his
or her corporat e offi ce to promote, advance or effectuat e a transacti on between the corporation and such person, and that t

ransaction is not substanti vely fair to the corporation.

Ha ll v. Te nnesse e Dress ed Beef Co. , No. 01- A-01- 9510-CH-00430, 1996 Tenn. App. LEXIS 384, at *16 (Tenn . Ct . App. June 28, 1 996 ) (no T enn. R . App . P. 11 app lication filed ) (quo ting 3 F LE TC HE R, supra , at § 837.60). -14- (3) In a manner t he director rea sonably

believe s to be in the best interests of the corporation.
Tenn. Code Ann. § 48-58-3 01. A cor porate office r with disc

retiona ry authority is subjec t to the sam

e standards. Tenn. Code Ann. § 48-58-403.
These statutory standar ds of cond

uct for d irector s and off

icers of nonprofi tcorporations are similarto those f

or their c ounterpa

rts in for prof

it corpor ations. 21 However, because the missions of the two types of cor

porations are d ifferent, th e d ut y of lo yal ty i s d ef

in ed so me wh at di ff

er en tl y. The officers and directors of a for prof it corpor ation ar e to be g uided by their duty to maximize long termprofit for the bene fit of th e corpor ation and the shar eholder s. 22 A nonprof

it public be

nefit corpor ation’s reason for existence, however, is not to gener ate a profit. Thus, a director’s du ty o f loy alty lies in pur suing or

ensuring pursuit of the charitable purpose or public benefit which is the mission of the corporation. “The central purpose of fiduciary duties of officers and directors of nonprofit cor porations is to ensure that a corporation’s resources are used to achieve the corporation’s purposes and not to enrichthe directors.” Developments in the Law - - Nonprofit Corporat ions , sup ra , at 160 1. In particular, the duty of loyalty require s thata director or officer faithfully pursue the inter est of the organization, and its nonprofit purp ose, rat her than his or her own financial or other intere sts, or those of another

person or organization. Harvey J. Goldschmid, The Fiduc iary Duties of Nonprofi t Director s and Officers: Paradoxes, Problems, and Proposed Reforms , 23 I OWA J. C ORP
. L. 631, 641 (1998). Thus, nonprofit directors and officers must be “principally concerned about the effective performance

of the nonprofit’s mission.” Id . Althoug h princip les of law

gover ning for profit corporations generally

govern the activities of

a nonpro fit corpo

ration, th ose who c ontrol a n onprofit corporation“have a special duty to advance its charitable goals and protect its asset s.” Oberly v. Kirby , 592 A.2d 445, 472-73 (Del. 1991).23 Under the Rev ised M ode l No npro fit Corp oratio n Ac t, the approva l by the dis int eres ted, inf ormed boar d of directors of a pu blic benef it corpora ti on must

be mad e in ad vanc e of the tra nsactio n. Br ody, supra , at 142 7-28 ; M ood y, supra , at 2 68. Howeve r, in i ts adoption of the Revised Act, Tennessee did not adopt the “in advance” language appearing in the Revised M odel A ct’s provision on a ppro val by the boa rd of directo rs. See R EVI SED M OD EL N O N PR O FIT A CT § 8.31 ( 1987); 1 F LETCHER , supra , at § 2.75. 10. -15- In addition to

the dutie s of car

e and loy alty , or as pa

rt o f them, certain transactions, called conflict of intere st

transactions, betwee

n the cor poration and a dir ector or office r are su bject to c lose sc ru ti ny. “[C]lose investigation is accor ded a co rporation’s tran sactionswithan officer or director, andthe burden of proof is placed upon the officer or director because of his fi d uciary c apacity.” Johns, 601 S.W.2d at 41( citi ng Interthe rm, Inc. v. Olymp ic Homes Sys. , 569 S.W.2d 467, 471 (Tenn. Ct. A pp. 1978) ). At comm on law, a n absolute

prohibitio n existed a

gainst c ontract s b etwee n corporations with common directors, but that proh ibiti on has been modified by statute. Tenn. Dressed Beef Co. v. Hall , 519 S.W.2d 805, 807 (Tenn. Ct. App. 1974).
A conflic t of inter

est transaction is stat

utorily defined as “a transaction with the corpora tion in which a director or

officer of the corporation has a direct or indirect interest.” Tenn. Code Ann. § 48-58-302(a). A director or office r has suchan interest if, but not only if, “a nother entity in which the directo

r or off icer ha s a mater

ial inter est .

. . is a party to the transa ction” or “another entity

of which the director or officer is a director, of ficer, or trustee is a party

to the transaction.” Tenn. Code Ann. § 48-58-302(c).
Under the Revised Model Non

profit Cor poration Act, any conflic t of inter

est trans action is voidab le by the corpor

ation, and may be the

basis for liability of a director or officer, unless the transaction was fair

at the time

it was ent

ered int o or is appro ved in accordance with statutory provision s. Tenn. Code Ann. § 48-58-302(a). A conflict of interest tra nsaction ma y be approved if: (1) The material

facts of the tra

nsaction and the di

rector ’s or off

icer’s interest

were disclosed or known to the board of directors or a comm i ttee consisting entirely

of members of the boa

rd of dir ectors a nd the boa

rd of dir ecto rs or such committee authorized, approved, or ratified the transaction; (2) The mate

rial facts of the transaction and the director’s or officer’s interest we re disclosed or known to the members and they authorized, appro ved, or ra tified the transaction; or (3) Appr oval is obt

ained fr om: (A) The attorney

general and reporter ; or (B) A court of record having equity jurisdiction in an acti on in which the attorney ge ne ra l a nd re po rt er is jo in ed as a p ar ty.
T enn. Code Ann. § 48-58-302(b). 23 Any approva l by the boar d requir es the af firma tive vote of a majority of the directors who have no direct or indirect inter est in the transaction, but no suc h transaction may be appr

oved by a single member of the b oard . Tenn. Code Ann. § 48-58-303(d).24 Tenn. Cod e Ann. § 4 8-58-30 4 pro vides that a director w ho votes for o r asse nts to a distrib ution m ade in

viol ati on of th e nonprofi t corporation st atut es and does not comply wit h st andards of con duct est abli shed i n Tenn. Code Ann. § 48-58-301 is personally liable t o the corporation. -16- Approval meeting the statutory requirements, however, simply r emoves the voidability of the transaction by th e co rpo rat io n, o r pe rso nal li abi li ty fo r di rec to rs a nd o ffi cer s. In addition, directors considering such approval must comply with their fiducia ry duties in deciding whether to approve. 24 Such approval does not obviate the requirements of nondistribution to co

rporate insiders and use of assets for public benefit purposes.
Where corporate officers and directors do not, contrary to their fiduciary duties, a dvance the corporation’s charita

ble goa ls, prote ct its asse

ts, and ensu

re that it s resour

ces are used toachieve the corporation’s pur poses and not to enr

ich those who contr

ol the cor poration , other r

emediesexist. Tenn. Code Ann. § 48-64-301(a)(2) authorizes dissolution of a nonprofit corporation in a proceeding brought by a specif

ied number or percentage of v oting members upon proof of one of severa l ground s, includi n g where “the corpora te assets are being misapplied or wasted” or where “the directors or those in control of the corporation have acted, are acting, or will act in

a manner that is illegal, oppressive, or fraudulent.” Tenn. Code A nn. §§ 48-64-302(a)(2)(B) & (D).
Even before

the adopt

ion of th e Revised Model Nonprofit Corporation Act, Tennessee recognized

the right of members of

a nonprofit corporation to bring the equivalent of a sha reholder derivative action against the directors and office rs for wasting corporate assets a nd using corpora

te assets for personal gain. Bourne v. Williams , 633 S.W.2d 469 (Tenn. Ct. App. 1981). The Bourne court found tha

t Tenness ee had lo ng rec ogniz ed the right of aggrieved shar

eholders to sue for the benefit of the corporation to rectify a wron g to the co rporation and “tha t membersof nonpro fit corporations have the same rights in this regard a s stockholders of corp o rations for profit,” citing Knapp v. Supreme Commande ry, U.O. G.C. of the World , 121 Tenn. 212, 118 S. W. 390 (1908) and Range v. Tennessee Burley Tobacco Growers Ass’n , 41 Tenn. App. 667, 298 S.W.2d 545 (1955), as cases where such actions were brought but the right to sue as members of a nonprofit corporation was not disputed. Bourne , 633 S.W.2d at 471-472. See also Hannewald v. Fairfield Cmtys., Inc ., 651 S.W.2d 222, 225-26 (relying on Bourne , the Tennessee Corporation Act, and Tenn. R. Ci v. P. 23.06 to find that a member of a nonprofit corporation could bri ng a “d erivativ e” action for the benefit of the corporation).
This right, however, is not effectivewhere, as here , a nonpr ofit corp oration h as no memb ers. Conseque ntly , statutor

y a uthority has been given to the Attorney Ge

neral to act in the public good in enforc ing the r

equirem ents appl icable to nonprofi t corpor ations, pa rticular ly public benefit corpora tions. State ex rel. Adventist Health Care Sys. v. Nashville Mem’l Hosp., Inc

. 914 S.W.2d 903, 907 (Tenn. Ct. App. 1995). The Tennessee statutes mirror the provisions of

the Revised Model Nonprof it Corporation Act, and the authority giventherein

to the Attor

ney Genera l was desi gned to protect the public interest in the operation of nonprofit public benefit corpor ations.25 In addition to the provisi on authorizing the act ion brought herein, purs uant to Tenn. Code Ann. § 48-58- 110(a)(1), the Attorney Gene ral may bring an action to rem ove a direc tor of a pub lic ben efit corp oratio n who is “engaged in f

raudulen t or di shonest

conduct, or gross abuse of a uthori ty or discret ion, wi th res pect to the co rpo ration.” Further, a dis solv ing pu bli c benefit corporation must noti fy the Attorney General of its i ntent to dis solve and the dist ribu ti on of its assets, and no assets may be transf erred until t

he passage of

twenty (20) day s, cons ent by t he Attor ney Ge neral, or notice that the Attorn ey G enera l will tak e no act ion r egardi ng t he t rans fer . Tenn. Code Ann. § 48-64- 103. Under this section, the Attorney Generalhas “au thori ty t o bring anyacti on he deemed necess ary t o protect the pu blic interest

. . . .” State ex re l. Adv entist H ealt h Ca re Sys. , 914 S.W .2d a t 906 . Add itionally, the A ttorney G enera l is authori zed to bring a n actio n to en join a corpor ate act on th e grou nd th e corpor ati on la cked powe r to act. Tenn. Code Ann. § 48-53-104 (b). -17- Since th e e na ct me nt of

th e S ta tu te of

Ch ar it ab le Us es in th e s ix te en th ce nt ur y, a major device for regulating c

harities has been the p ower of the attor ney gener al to regula te or investigate charitable trusts. Over time, this power has been recognized and ap plied to nonprofit corporations organized for charitable pur poses. The Revise d [Model Nonprofit Corporation] Act has extended this concept to reach all nonpr ofit corporations in varying

degrees. The state under the Re vised Act has limited power to regula te mutual b enefit a

nd religious corp orations , but it has broad power of supervision over the public benefit corporation. This is one of the feature s of the Revised Act that is both most criticized and most complimented. The Drafting Committee, however , accepted such p rovisionson the ra

tionale th at pub lic benefit corpora tions, which usually have

no particip ants with a

sufficie nt econom

ic intere st to assure oversight, can only be made accountable for

their use of asset s if there are broadpowers of regulation in a state office r. To that end, the Revised Act

provides standing to the atto

rney gener al to protect the pub lic inter est.
Mo od y, supra , at 262-63. 25 The drafters of the Revised Model Act intended that the Attorney General of the inc orporat

ing stat e have wid

e discre tion and br

oad powe rs inregula

ting publ ic benef it corporations to ensure that they operate as nonprofits. Moody, supra , at 262, 265, 266, and 269.
An offic ial comme

nt to the Revised Ac t provide s: The failure

to set for th an explicit limitation on a nonprofit organization’s activities [in terms of l imiting corporate purposes] does not mean that an enterprising entrepreneur

can im pro per ly an d wi th im pun it y ope rat e in th e no npr ofi t fo rm. In ge neral, public be

nefit an d relig ious corp orationscannot ma ke distributions to members or contr

olling pe rsons. Un

reasona ble compe

nsation c annot be p aid to members or controlling persons. In a ddition, the attorney g eneral has broad powers to ensure that a public benefit corporation is not operating for the private benefit of any individua

l.
R EVIS ED M ODEL N ONPRO FI T C ORPORATI ON A CT § 3.01 cmt. (1987) (citations omitted).-18-

The statute it self, Te

nn. Code A

nn. § 48-64-301, e stablishe s grounds for dis solut ion of nonprofi tcorporations in gener al. Subsection (a)(1) applies to dissolution actions brought by the Attorney General, and subsections (a)(1)(E)and (F) apply only to public b enefit c orporat ions. There can be no question that the legislature intended to provide over sight of p ublic benefit corporation assets to ensure their proper use and preve nt their misapplication. Thus, the Attorney Ge

neral, acting in the public interest, has authority to seek dissolution of a nonprofit public benefit corporation which fails to devote its assets to a public, rather tha n a private, interest. Where such a corpo ration is opera ted for th e privat e benef it of an ind

ividual in contravention of the principles governing nonprofit status and its acc ompanying be nefits, or where, as the trial court phrased it, the corporation has abandoned its public be nefi t, charitable purpose, action by the Attorney

General and the courts is warranted.

IV. Summary

Judgment
The standar

ds for re viewing summary

judgmen ts on appe al are w ell se ttle d. Summary judgmen ts are proper in virtuall

y a ny civil case

that can be resolved on the

basis of legal issues alone. Fruge v. Doe , 952 S.W.2d 40 8, 410 (Te nn. 1997) ; Byrd v. H

all , 847 S.W.2d 208, 210 (Tenn. 1993); Church v. Perales , 39 S.W.3d 149, 156 (Tenn. Ct. App. 2000)

. They are not, however , approp riate when genuine disputes regarding material facts exist. Tenn . R. Civ. P. 56.04. Thus, a summary judgment should be granted only

when the undisputed facts, and the inferences r eas on ab ly d rawn from the undisputed facts, support one conclusion - that the party see king the summary

judgmen t is entitled to a judgment as a matter of law. Webber

v. State Farm Mut. Auto. Ins. Co. , 49 S.W.3d 265 (Ten n. 2001) ; Brown v. Birman Managed Care, Inc. , 42 S.W.3d 62, 66 (Tenn. 2001); Goodloe v. State, 36 S.W.3d 62, 65 (Tenn. 2001). Summary judgments enjoy no pr

esumption of correctness on appeal. Scot t v. Ashland Healthca re Ctr., Inc. , 49 S.W.3d 28 1 (Tenn. 2001); Penley v. Honda Motor Co. , 31 S.W.3d 181, 183 (Tenn. 20 00 ). Ac co rd in gl y, appella te court s must make

a fresh determin ation tha

t the req uiremen ts of Tenn. R. Civ. P. 56 have been satisfied. Hunter v . Brown , 955 S.W.2d 49, 50-51 (Tenn. 1997); Mason v. Seaton , 942 S.W.2d 470, 472 (Tenn. 1 997). We mu st conside r the evi dence in

the light most favora ble to the non-moving party , and we m ust resolv e all infe

rencesi n the non- mo ving party's favor. Doe v. HCA Health Servs., Inc. , 46 S.W.3d 191, 196 (Tenn. 2001); Memphis H ous. Auth. v. Thompson , 38 S. W. 3d 504, 507 (T enn. 2001 ). When re viewing the evide

nce, we must determ ine first w hether factual disputes exist. If a fa ctual dispute exists, we must then determine whether the fac t is mater

ial to the c laim or de

fense upon which the summary judg ment is predicated andwhether the disputed fact creates a genuine issue for trial. Byrd v. Hall , 847 S.W.2d at 214; Rutherford v. Polar Tank Trailer, Inc. , 978 S.W.2d 102, 104 (Tenn. Ct. App. 1998).
A party see

king summary judgme

nt has the burdenof demonstrating that its motion satisfies the requirements of Rule 56, includi ng i ts entitlement to judgment as a matter of law. Carvell v. Bottoms , 900 S.W.2d 23 , 25 (Ten n. 1995); Jones v. City of J ohnson City , 917 S.W.2d 687, 689 (Tenn. Ct. App. 1995). When a party see king summary judg

ment makes a prop er ly supported26 Tha t rule provides:

In order to assist

the Court in ascertai ning whether t here are any material fac ts in di sput e, an y mot ion for summar y ju dgment

made pur suan t t o Rule 56 of t he Tennes see Rul es of

Civil Procedure shal l be accompanied by a separ ate conci se st at em ent of the mater ial facts as to which th e mo ving p arty conte nds there is no genuine issue f or trial. Eac h fa ct sha ll be s et f orth i n a separate, numbered para grap h. Eac h fact sha ll be sup por ted b y a spe cific citation to the re cord

. Any party o ppo sing the m otion for sum mary j udgm ent mu st . . . file a response to eac h fact set fo rth by the mo vant eithe r (i) agreeing that the f act i s undis puted, ( ii) agreei ng that the f act i s undis puted for purpos es of

rul ing on th e moti on for sum mary j udgm ent on ly, or (iii) demonstrat ing t hat t he fact is disputed. Ea ch disputed fact must be supp orted by sp ecific citation to the record. Su ch respo nse shall be filed with the pap ers in o ppo sition to the motio n for sum mary j udgm ent.
Tenn. R. Civ. P. 56. 03.

-19- motion, the burde

n shifts to t

he nonmoving par

ty to set forth specific facts wh ich must be resolved by the trier of f

act. Byrd , 847 S.W2d at 215.
This court’srole in re

view of th

e gran t of summar

y ju dgment i s to review the record and determine whether the requirements of Tenn. R. Civ. P. 56 have been met. Staples v. CBL & Assoc. , 15 S.W.3d 83, 88 (Tenn. 2000). Our perspective is the same as that of the trial court. Gonzales v. Alman Const. Co. , 857 S.W.2d 42, 44-45 (Tenn. Ct. App. 1993). Therefore, we must decide ane w if the movant is entitled to summary judgment; that is, whether the material facts a

re not in d

ispute andcon clusively show th at the Attorney Ge neral is entitled to judgment. Because summary judgment “is clearly not de signed to serve as a substitute for the trial of genuine and material factual matter s,” Byrd , 847 S.W.2d at 210, we must first deter mine whatfacts are undisputed and whether any disputed facts are material to determination of the leg al issues involved.
This determin ation is complicate d in the case before us becau se of the

volume of

document s involved and bec ause of general objectio ns by the corpora tions to consideration of a number of documents on the basis they are not properly

in the record. The nature of these objections was set out in res ponse

to the Atto

rney Genera l’s state ment of undisputed f

acts filed pursuan

t to Tenn. R. Civ. P. 56.03. 26 CCFS and CCN began their Response and Objections to the Attorney General’s Statement of Undisputed Facts by

making a gener al evide ntiary objectio n. This objectio n stated, in pertine nt part:
This objection addresses wha t has become a practice of the Plaintiff [Attorney Genera l] w hic h is at odds with the Tennessee Rules of Evidence and Tennessee preced ent. On or about February 23, 2001, P la intiff submitted its Third Notice of Filing refer

encing the fil ing of nineteen (19) exhibits identified by volume and exhibit number. T

hese exhib its were

merely attached to the Thi

r d Noti ce with no attempt to au th en ti ca te or ot he rw is e l ay a foundation for their admissibility and use. Thereafter, upon application f or su mmaryjudgment and in its Statement of27 CCFS and C CN also filed a mo ti on to str ike ma ny of the e xhibits tha t the Atto rney G enera l referen ced in

support of his mo tion for s umm ary jud gme nt and acco mpa nying state men t of und isputed facts. The trial court did not rule on the motio n to strike prior to the gr ant of the Attorn ey G enera l’s moti on for summar y ju dgment

and deni al of CC FS’s and CCN’s motion f or summary j udgment. The Attorney General poin ts out that the moti on to st

rike wa s never set forheari ng. Because thi s court is r equired t o review t he evidenc e in support of summary judgment and determine
anew whether j udgment was pr oper, dis posit

ion of the moti ons t o st rik e is not s ign if ican t t o our s cope or s tandard of review.
28 When asked a t ora l ar gument to be mor e spe cific rega rding the ob jectio nab le evidence, counsel responded that i t was incl uded in t he documents in Boxes 3 and 4 of the record. Consequently, i n order to give thorough consi deration to th e evident iary iss ues, we have rel ied upon the corpora tions ’ iden tif ication in other f

ili ngs of t he disputed mate rial. -20- Undisputed Facts, however, Plaintiff cites to its Third Notice of Filing over 120 times as if the doc

uments co ntained t

h er ein were properly

before this Court. Cherokee objects to this naked filing and use, as ma

ny o f these

documents are inadmissible on the grounds that the Plaintiff has failed to properly a

uthenticate the documents and as th ey a ls o c on ta in in ad mi ss ib le he ar sa y. CCFS and CCN argued that because the objectionab le exhibits were unauthenticated, the exhibits were not properly a part of the record before the court and could not be c o nsidered on a motion for summa

ry judgmen t. 27 The response also incl uded a lis t of some sp ecific e xhibits submitted with the first Notice of Filing which the corporations asserted should be inadmissible for use in deciding summary judgment. In addition, in some of the num bered respons es, the corporations pointed out the specific document being cha llenged and the basis for the challeng e. The Attorney

Genera l filed a r

eply to CC FS’s and CCN’s res ponse an d assert ed, with reference to various specific r esponses, that the corporations had not complied with Tenn. R. Civ. P. 56.03 by not making

specific citationsto the re cord; tha t the def endants had previously admitted somefacts in their verified answers; and that “extraneous s tatements made by De fendants are immaterial.” In addition, the Attorney General addressed some of the evidentiar y deficiencies alleged by

the corporations.
On appeal , CCFS an d CCN have again raised their objection to “ numerous volumes of unauthenticated

documents and records,” alleging that “ [s] ome of

these docum ents a nd fil ings failed to meet even the most basic evidentiary rules” and

to “ n umerous ” affidavits they allege were not basedon personal knowledge and contained hearsay

and other inadmissible evidence. 28 They also argue that because the trial court never ruled on their motions to strike these filings and because the court did not detai l its findings, CCFS is unsure whether the trial court re lied on thisinadmissib le evidence. If it did so rely , they assert, suc h reliance was error.
In connection with his motion for summary judgment, the Attorney

Genera l filed a Tenn. R. Civ. P. 56.03 statement containing some eighty -three (83) undisputed facts. Approximat ely half of those were undispu ted by the corpor ations. CCFS and CNN also submitted a statement of undisputed facts in

suppo rt of their motio n for

summa ry judg ment. We have painstakingly reviewed-21-

these statemen ts, the objections and r

esponses , the depo sitions, af fidavits a nd docume

nts or records filed herein, as well as the pleadings, brief s and ot her fil in gs. In our review, we have resolved the questions of admissibility, where nec essary, whe re raised, and where identifiable, according to the following general principles. See gen erally 10A W RIGH T , M ILLER & K ANE , F EDERA L P RACTICE AND P ROCEDURE : C IVIL § 2722 (3d ed. 1998).
As part of the moving party ’s burden, it must present facts which, if undisputed, demonstr ate its entitleme

nt to judg ment as a

matter of law. Ty pically , the moving party

present s facts to the court in the form of affidavits, authenticated document s, depositions, and other properly -verified factual matters developed throug

h the dis covery pro cess. Ple adings, depositio ns, answe rs to inter rogato ries, admissions on file, a

nd affid avits are

specific ally

allowed to be considered in the determination of whether a genu ine issue of mater ial fact exists and w

hether t he moving

party is entitled t

o judgme nt. Tenn. R. Civ. P. 56.04. The proffered sworn-to testimony and/or properl y- authenti cated do cuments must be admissible at

trial before they

can be considered by

the trial court on s ummary judgmen t. Byrd , 847 S.W.2d at 215.
The mere submission of astatement of undisputed material facts by the moving party

does not, in of itself, constitute proof of the facts therein. However, w hen the opposing party ag rees that a fact is not disputed

pursuant to Tenn. R. Civ. P. 56.03, the court may rely upon that admission in determining whether a genuine issue of materia l fact exists. A party’ssworn pleading based upon person al k nowledg e can constitute a n admission . Similarly , admission s in the br ief of the party opposing the motion may be u sed in determining that there is no genuine issue as to any material fact.
Documen

ts must generally

be authenticated by

and attached to an affidavit or deposition that m eets the requ

irementsof Rule 56 . Judicial, l egisla tive, or a dministra tive rec ords m

ust either b e certified or prope rly subject to

the judic ial-notic e doctrine. Business rec ords are admissible

if accompanied

by a ffidavit or cert ificate from the r

ecords c ustodian. So me records are selfauthenticating pursuant

to the TennesseeRules of E vidence . Uncer

tified or otherwis e inadmiss ible material may be consider

ed if not challenged, and

the objection must

be timely or it will be deemed to have been waived. V. The Evidence Supporting Summary Judgment
Based upon our independent review of the record, w e have det ermi ned that the following facts are supported by

admissible evidence and, unless specifically note d otherwise, are undisputed. A dispute a s to the existence of a fact or an inference to be drawn from a fact does not preclude judgment if resolution of

that dispute is not necessary to a determination that

the movant is entitled to judgment as a matter of law on the undisputed facts. We have earlier set out the leg al principles applicable to the issues before us rega rding the operation of

nonprofi t public be

nefit co rporations. These facts must be considered from the perspective of those principles.29 Mr. Davis was also l ist ed as an i ncorporat or of both corp oratio ns, but h e den ied an y involve men t in their

initi al organizati on.

30 Rev. Joyner’ s church operated a day care center that received a grant of $5,000 from CCFS for playground equ ipme nt.

31 Eve ntually, Rev. J oyner res ign ed fr om the CCFS Boa rd o f D ire ctor s beca use h e fe lt it was aconf

li ct of interest to own a day care c ente r and s imul tane ousl y se rve on th e Board of Di re ct or s. He testified tha t new re quire men ts from DH S ind icated such a confli ct. He also b ased his resign ation o n his form ation o f Me mph is and S helby C ounty Child Care Prov ider s Ass ociat ion, an as soci ati on that operates more or less like a unio n. He felt that regu lations w ould preclude him from also se rving on the C CFS Bo ard of D irectors.

32 Rev . Joyne r desc ribed this arran gem ent as a “s ubc ontra ct.” -22- A. The Corporations
A full understanding of the significance of some of the specific facts demonstrated by the record requires some discussion of the larg er context. Mrs. Madison was the incorporator of both corpora tions. She served as the executive director throughout the c orporate existence. Her husband, John Madison, Sr. was the corporations’ accountant. Her f ather, William Davis, was on the Board of Dir ectors o f CCFS for

a number

of y ears. 29 The Boa

rd also included Re

v. C.E. War

e, Mrs. Madison’s pastor, who testified that Mr. Madison, as presiding elder over the churc h district, was Rev. Ware’s immediate supervisor. Two of Mrs. Madison’s childr en were employees of the corporation(s), as were her ne phew, her stepson, and her husband’s nephew.
Most of the various members of the Board had some association with a childcare provider: as owner, manage

r, director, or e

mployee. Mr. a

nd Mrs. Ma

dison oper

ate d a d ay ca

re center, referred to as L ittle Peopl e. Mr. Da

vis served o n the boar

d of two da

y c are pro viders. Rev. Joyner, also a me mber of t he CCFS Board of Directors for some y ears, was pastor of a church which operated a day c are center. 30 Rev. Ware was the chairman of the board of directors for his church’s day care center. Ida Porter, a longtime Board member, was the director of a day care pr ogram. Phyllis Herrin g, Mrs. Madison’s sister, owned a ch ild care center . As a bro

ker for child ca re services, CCFS providedparentswith lists of availab le child c are ce

nters in th eir are a. All

the Board members who gavedepositio ns testifi ed that CCF S did not dir ectly refer any parentsto their

child care centers; the choice o f cente

rs was ma

de by the pare nts. 31
CCFS regularly

did b usin ess with its officers and directors, as more specifica lly detailed below. The rec ord is re

plete wit h refer ences by the audit ors to related pa

rty transacti ons. They includedpurchasing travel arrang ements through a charter trave l company owned a

nd operated by the church of which Rev. Joyner is the pastor. 32 In addit ion, CCFS purch ased i nsura nce th rough one33 Clarence Mosley , the cur rent Chairman of

the Board of CCFS i s t he owne r of Clarence M osley Insur ance Age ncy. He is also the authori zed agent of Nationwide Insurance, the insurer of CCFS. CCFS has do ne busine ss with Clarence Mosley Insur ance Agency s ince 1990. CCFS curre ntl y pays premiums on at least three polici es sold by Mr. M osley, including: (1) a commercial umbrella policy; ( 2) a business auto policy; and (3) a business package policy. Mr. Mosely was not

on the Board when t

he ini tial insu rance purch ases wer e made.
34 Da rrell K. Thomas, the c urrent Secretar y of t he Board of CCFS, is t

he Chairman a nd Chief Execu tiv e Offi cer of Thomas Consultan ts, Inc., an equipment renta l busine ss that has don e a significa nt amo unt of b usiness w ith CCFS. Mr. Thom as also serves on the Board of Directors of a bank and ba nk holding company in which the corporations inv est ed. Again, it does not appear t hat t he busin ess re lati onship wi th hi s company ori ginat ed whil e Mr. Thomas was on th e Board of

CCFS. -23- Board member33 and has done a significant amount of

business with an equ

ipment re ntal business owned or managed

by a rec ently appointed Boa rd member. 34 As one B oard mem ber expre ssed it:
If a person was giving his time to the Board m ost - - I think it is unkind if you didn’t make pur cha ses fro m t hem . If they were

giving their time serving on the volunteer Board I think it would b e unki nd if they had a busine ss and you needed something they had, I think it would be unkind not to pur chase f rom them. Perhaps the most telling description of how the corp orationsoperated came f rom longtime Board member, Mr. Davis, as he expressed his view of CCFS while testifying about his approval of a particular transaction:
A. Let me say

this. As a Board member I did not know whether we were operating directly for Cherokee[CCFS] or dire ctly for her [Mrs. Madison], I didn’t understand that. Q. Okay . So during Board meetings it was not necessarily clear whether y

ou were operating on behalf of the corpora tion or operating on behalf of y our daughter?
A. That’ s right. Q. Why did you fail to understand that distinction?
A. Because I

thought it was all one. Q. Okay . As a Bo ard memb er you thought that the fina ncial affairs of the corporation and the financial affairs of your daug

hter were the same?
A. Yes.35 CCFS doe s not d ispute the am ounts r eflected herein , but disa grees with the “ charact erizat ion” of t he source of the fun ds as se t out in the A ttorney G enera l’s stateme nt of und isputed facts. There is n o dispute regardi ng the total amount receiv ed from th e Stat e, just with what name to apply to the revenues. The dispute over characterization appears to be re lated to the distinc tion m ade by CC FS in its F orm 990 betwe en go vernm ent gra nts and gove rnment fees and contracts for pro gram service s.

36 For FY 199 8 and 1 999 , this amount includes p ayments und er both the b roker and food co ntracts.
37 This am ount includes p ayments for bro ker, food, registration and transportation co ntracts.
38 The record in cludes the IRS Form 990 ( Retur n of Org aniz ati on Exempt fr om Income Tax) f

il ed by CCFS f

or 1995, 1996, 199 7, 19 98, a nd 1 999

. Each of these forms was signed by WillieAnn Madison as Executive Director and John Mad ison as Preparer. Mr. Madison, as CCFS’s accountant , prepared the Form 990 eac h year f or CCFS. Eac h of the forms in th e reco rd is ac com pan ied b y a “Ce rtificate of O fficial Rec ord ” certifying that eac h is a true c opy o f th e Form 990 for

CCFS and si gned by the Discl osure Offi cer of the D epa rtmen t of the T reasu ry, Internal Revenue Service

. The corp orations object to considerati on of these documents as unauthenti cated and inadmissible. We disagre e. A s certif ied copies of offi cial public records, t hey are self

-authenti cating. Tenn. R. Evid. 902(4). -24- B. Revenue of the Corporations According to a report from the independ

ent audit ors, rev enues received b y CCF S for the p ast few fiscal y ears 35 were: FY 1998: Total Rev enues $3,081,827

From DHS contracts 36 $3,055,004 Inte rest I ncome $ 17,147 Other I ncome $ 9,676
FY 1999: Total Revenues $6,915,310

From DHS contracts $6,869,465 Inte rest I ncome $ 13,310 Other Income (CDA Workshop and Training Fees) $ 26,448 Other Income (Unide

ntified) $ 6,087
FY 2000 Total Revenues $4,979,916.12

From DHS contracts 37 $4,910,477.08 Inte rest I ncome $ 11,483.82 CDA Workshop & Training Fees $ 56,042.60 Other Income (Unide

ntified) $ 1,912.62 Filingsby C CFS with the IRS 38 reflec t the f ollo wing: (Charitable)-25-

Fiscal Year Total Revenue Total Expenses Contributions
1995 $1,143,688 $ 966,648 $ 1,218 1996 $1,576,381 $1,404,184 $ 15,795 1997 $2,231,860 $2,159,181 $ 11,669 1998 $3,081,827 $2,518,843 $ 36,926 1999 $6,915,310 $6,692,649 $ 44,779
The board of

directo rs h as been pro ud of CCFS’s “financial” success, rewar ding key employ ees, especially Mrs. Ma

dison, for that success. The corporations’ bri ef states that CCFS gene ratedrevenue in excess of expenses in a number of y ears, specifically

in each of the last fou r audited y ears asfollows:
1996 $172,197 1997 $ 72,679 1998 $562,984 1999 $222,661
These figures indicate the “profit” left a fter the corpora

tion made charita

ble co ntributions and paid operating expenses. While the contributions were sma ll, many of the oper

ating expenses were significant

and were paid to Mrs. Madison, her family , entities in which she had an interest, or others closely associated with the corporation. C. Compensation to Mrs. Madison
In her posit

ion as e xecutiv e director, Mrs. Madison was paid an annual salary as well as occasional “additional compensation.” According to the corporations, Mrs. Madisonreceived the following compensation:

1994 - 95 $100,000 1995 - 96 $100,000 1996 - 97 $165,508 1997 - 98 $100,000 1998 - 99 $125,000 1999 - 2000 $125,000
These figures coincide with the returns filed with the IRS, except for FY 1997-98, wherein the corporation reported to the I RS that Mrs. Madison’s compensation was $177,00 0. Ac cording to CCFS, Mrs. Madison had “continuou sl y” received salary increases over the term of her employment reac

hing a salary

of $125,0 00 “by

the year 2000 .” The c ompensat ion for 19 96-97 is, ob vi ou sl y, inconsistent with this statement unless thatamount includes compensa tion additi onal to her salary. Tha

t appears to be the case. CCFS has stated that Mrs. Madison “has received additional compensation from time

to time tocompensate her for the enormous successof the pr ogram, both39 Loans to office rs are sp ecifically pro hibited by T enn. C ode Ann. § 48-5 8-30 3. For our purposes, however,

it is not n ecess ary to determi ne whe ther thi s t rans acti on was o riginally a lo an or was alw ays a b onus
. Our foc us i s on whether the corporations were operated for public benefi t or private gai n.

40 An affi davit from the presi dent of the accounting f irm states the firm was app rove d by the Co mptr oller to perform inde pendent

audi ts of CCFS an d CCN, tha t the audi t re ports forFY 96, 97, 98, an d 99 were fi led with th e Com ptroller’s office, and that they were attached to the affidavit as exhibits. -26- financi ally

and programmatically” and, “at least once during her tenure, the Board of Directors voted to give her a $50,000 bonus.” As shown below, corporate records indicate she was given a $50,000 bonus a nu

mber of times. One such $50,000 bonus may acc ount for the 1996-97 compensation figure repor ted by the corporations. That pay

ment, however, has a long explanation. The Attorney G eneral alleged that in November of 1994, CCFS loaned Mrs. Madison or Affordable Homes, a

company owned by the Madisons, $50,000. In response to that alleg ation, CCFS stated, “this $50 ,000 was impro perly recorded as a loan and should havebeen recorded as a bonus.” 39 The statement that this amount was record ed as a lo an is verified

by the rec ord. The independent auditor’s report on audited financ ial statemen ts and suppl emental information on CCFS for the fiscal year ending June 30, 1996, 40 includesthe following stat ement:
In November, 1994, Cherokee loaned $50,000 to a company, [of] which Cherokee ’s executive director is an agent. No repay ment terms have been established. At June 30, 1996, the outstanding balance was $53,508 which includes $3,508 of interest at 8.25 per cent.
The auditor’s Findings and Recommendations accompany ing the audit report

for that yea

r inclu ded th e foll owing:
In Novembe

r, 1994, Ch

erokee loaned a n affilia te compa ny, Afforda

ble Home s , $50,000. At June 30, 1996, the entire loan plus interest remains outstanding and no repayme nt provisions have been established.
Recommendation
If loans are going to be made, c redit procedures and a pay ment plan need to be establishedand provisions for examining the collectability should be implemented. Manag ement Res ponse
We concur . The $50,000 plus interest will be repaid immediately. We will ref rain from all future transactions of this nature.41 The corpora ti ons ha ve obje cted to con side rat ion of “many ” of t

he boar d minu tes as wi thou t proper au then ti cati on and co ntaining inadmissible hea rsay. The m inutes of Octob er 4, 200 0, howev er, were exhibits t o a n authenticating affidavit o f the cor por ate secre tary. W e als o note tha t CCFS t akes the posi ti on th at t he l oan i denti fi ed by the auditors in 199 6 wa s impr ope rly reco rded and w as rea lly a bon us. W e foun d no evide nce in th e reco rd to support that statement other than these minut es and the aud itor’s eng agem ent me mo o f June 3 0, 19 97. In addition, al l the Board minute s in t

he re cord wer e at tach ed to a nd aut hent icated by t

he depos it ion a nd af

fi davit of t he f ormer a nd c urren t secre tary. -27- Despite manage ment’s re sponse ac

knowledg ing the l oan, it

was later decided that

the “loan” de sign ation was inaccurate. The auditors corrected the entry a yea r later as explained in the Engagement Memo of June 30, 1997:
We are aw are tha

t the follo wing ac countin g error has occurred. A bonus was approved for Ms. Madison in 1994 for $50,000. This bonus was never paid as pay roll but instea d wired to Afforda ble Homes , owned by

Ms. Madiso n. This treatment of the bonus is inappropriate and as of the 1996 audit the $50,000 plus interest was rec orded asa rece

ivable f rom Affo rdable H omes.
We approved the following transactions to correct the er ror. Affordable Homes reimbursedCherokee for $50,000 plus interest. Cherokee in turn paid Ms. Madison her bonus of th

e same a mount. The

result of this tr ansaction will eliminate the receivable and pay

the bonus through pay

roll as it should have occurred in 1994.
Becau se Mrs. Madi so n’s repor ted compensation for FY 96-97 was $165,508, it would appear that her bonu s include d the inte rest pre viously calcul ated as due from the “loan” of 1994. The resolution of

the issue as explained by the auditor indica tes that Mrs. Madison received a $50,000 bonus in FY 96-97 that had actually been awarded her in 1994.
In addition to that bo nus, CCFS appears to have awarded her other bonuses of $50,000. The minutes of

a special meeting of the Boar d of Directors of CCFS held October 4, 2000, 41 indicate the Board was briefed on the complaint filed by the At torney Gene

ral starting this litigation. In a discussion of the Board’s review of some prior

corpo rate ac tion s, th e minu tes in clude the fo llow ing:
The Board also reviewed certa in bonuses paid by prior B oards. C her okee pa id WillieAnn a $50,000

bonus in Fisca l Year 96. This was after the Corporation experienced

its two best yearsfinanci ally , $286,767 in 1995 and $222,197 in 1996. Based on the financial performance of the Corpo ratio n, the Board determined a $50,000 bonus was not unreasonable.
An addendum to the minutes of the December 18, 1996 Boa rd Minute s in dicate that the Board reco mmended that Mrs. Madison be given (at the Christmas party , thus in FY 96-97) “the samebonus amount she had received t he previ ous y ear in the amount of $50,000.” An attached schedule of agency personnel salaries indicated Mrs. Madison’s salary for 1995-1996 was $100,000. These documents, therefore indicate Mrs. Madison rece ived a salary

of $100,000 and a $50 ,00 042 For example, Ida Porter, William Da vis and Vivia n B raxto n were listed, resp ectively, a s Pre siden t, Secr etary,

and Treasurer on the Form 990s for 1995 , 1996, and 199 7. For 1998 and 1999 , R.T. Joyner, William Davis, and Vivian Braxton were listed as President, Secretary, and Treasurer.

43 At the October4, 2000 Boa rd m eeting, the Bo ard a ppr ove d and ratified stud ent loa ns ma de p revio usly to Ingrid Warren, Kend al Robinson, and John M adison, Jr. -28- bonus in FY 1995-96 a nd in FY 1996-97. Since she also received the delay ed 1994 bonus plus interest in FY 1996 -97, it

is difficult

to reconcile these numb ers with th e amounts p rovided by CCFS as her annual compensation. Other documents indicate Boa rd approval of a bonus for Mrs. Madison of $50,000 on December 17, 1998. Thus, the records ref lect Mrs. Madison was given a $50,00 0 bonus sev eral time s. Those records al so indica te that CCF S regula

rly gave b onuses to

employees at Christmas.
Rev. Ware testified that CCFS only paid bonuses once and he did not know who rec eive d them. He stated the Board entrusted such matters to Mrs. Madison and would not have questioned a recommendationby h

er to pay bonuses to employ ees. Ida Porter testified she never had occasion as a member

of th e Board to vote on bonuses for employe es, including Mrs. Madison. She was unawar e that an y e mployees had r

eceive d bonuses

. D. Compensation or Distributions to Corporate Insiders
In addition to Mrs. Madison, the corporations also compensated her husband, John Madison, Sr., a certif

ied public accoun tant, who performed accounting servic es for CCFS since 1990 and, after its creation, CCN. The independent auditor testified by affidavit that

Mr. Madison’s accounting firm performed

bookkeeping functions for the corporations year round and had at least one staff person wh o devoted a substantial amount of time to these functions. Mr. Madison was paid $6,000 per month by the corp orations

. According to CCFS’s 990 filings, CCFS paid as compensation to officers and directorsthe follo wing: In FY 95, $100,000 (all to Mrs. Madison); in FY 96, $150,000 (of which $100,000 was paid to Mrs. Madison); in FY 97, $ 165,508 (all to Mrs. Madison); in FY 98, $239,402 (of which $177,000 was p aid to Mrs. Madison) ; in FY 99, $200,000 ( of which $125,000 w as paid to

Mrs. Madison). Each of these forms listed by name other corporate officer s and stated that those officers received no compensation. 42 The implication is that the difference wa s paid to directors, but the differe nce is une xplained in

the rec ord befo

re us. CCFS made interest-free loans to several e mployee s. 43 Most significant among those was a loan of $1 0,396 .15 to John Ma dison, Jr., t

he son of Joh

n Madison, Sr. and the

stepson of

Mrs. Madison. He was an employ ee of CCFS at the time of the loan. Ac cording to the independent auditor, CCFS’s books reflected this as a “no interest” loan made May 18, 1999. The auditors listed this loan, describing it as a related party loan, on its FY 99 repor t as a “reportable condition” because IRS regulations require

that interest be charged on a loan e xceeding $10,000. The Madisons testified that the lo an was ma de to John Ma

dison, Jr. to

pay off a stu d ent loan a

nd to foreclose44 It is not clear that these “bonuses ” were i ncluded in t he cor porat ions ’ r eport

of compe nsat

ion t o Mrs. Madis on and othe r officers or directors. -29- garnishment

proceedings. CCFS does not disput e the facts surrounding this loan, but states that interest including

retroa ctive inte rest “wa s eventua

ll y charg ed” to John Madison, Jr. and that he repaid t he loan in full inclu ding all

interest

. The Attorney Gene

ral has pointed out a number of expenditures made by the c orporations which he alleges involve substantial benefit to the Madisons, their family, a nd other persons employed by o r contro lling the

corpora tions, inc luding pr

imarily personal expenses. These include travel expenses, particularly trips to L ondon and Ha waii. In s pecific, the Attorney General’s statement was, “Ma dison paid

her per sonal cr

edit car d with cor porate money . These

bills amounted to and included foreign trips.” The corporations disputed this statement of facts and challeng ed the do cuments relied u

pon as una

uthentic ated and

inadmissib le. I

n their br ief, the corpora tions state : The Attorney Gene

ral also complained of tri ps taken by the executive director and her family and purc

hases made on these trips. The independent auditors had already questioned t hese am ounts, however, and required inclusion of these amounts as pay roll and compe

nsation e xpenses, th

us requir ing the individual s to pay

income tax on the expe

nditures

. Alth ough not at the citation to the record provided by the corpo rations, we have found document ation for this state ment. I n an Eng ageme

nt Memo dated June 30, 1999, the independent auditor noted that there had been several instance s where CCFS paid for personal expenses or trips that had no bus iness pur

pose . The a uditor fixed this problem by adding the value of the personal expenses to the salary or c ompensation of the employee who received the benef

it. T he working papers and other r ecords i ndicate that CCFS pa

id for tra vel to Haw aii in Aug

ust of 1997 by M

rs. Madison; her assi stant, Dilworth Weat hers; Cedric Herring, an employ ee and Mrs. Madison’s nephew; Cris Daugherty

and Chaun Daugherty , Mrs. Madison’s childrenandemploy ees of CCF S. CCFS also paid for personal travel in January , 1998, for Mrs. Madison; her assistant Dilwort h Weather s; Cedric H erring ; Cris Daughe rty ; Chaun Da

ugher ty; a nd William Da

vis, Mrs. Madison’s father. Again, in May

of 1998, Mrs. Madi son, Dilwo rth Weathe

rs, Ce dr ic He rr in g, Cr is Da ug he rt y, Yolanda Herring, and William Davis traveled to L ondon, and CCFS paid those expenses, eve n thou gh it was not a business trip, for a total cost of $24,109. The worksheets indicate that the seven employeesreceiv ed a bonu s in the amount of $3,971.10, which was to be added to their W-2s, and Mr. Davis , not an em

ploy ee but a b oard mem

ber, would rece

ive a W-2 in

the same amount.
Even though the individuals may have been required to report

this cor porate benefit as income and pay taxes on it, it is clear that these per sonal expenditures, unrelated to any business or charita ble purpose, were originally andfinally paid for

by the corpor

ation. The individuals were not requi redto reimburse the nonprofit public benefit corporation. 44 There was no control over th e original expenditure to prevent the corporation from pay ing for per sonal expe

nses. It would appear45 CC FS d escrib es these entities as a d/b/a acco unt.
46 The tot al r ent over t

he f ive year peri od woul d amount

to $257, 982.
47 Th e total re nt und er this leas e for the five year te rm wo uld am ount to $36 0,00 0. -30- CCFS paid for whatever

Mrs. Madison directed, and the accountant, her husband, issued the chec ks without question. E. Real Estate Leasing During the life of these corporations, they used and operated

out of propert ies owne d by

Mrs. Madison or the Ma

disons. Mr s. Madison

held a re al estate

license since 198 8 and cha

nged a ffiliate brokers several times. She use d entities entitled Affordable Homes and/or Affordable H omes Manag ement, Inc. to operate he r rental property

and/or to collect rent there from. 45 CCFS, and eventua lly CCN, ente

red into le ase arr

angeme nts with the se and oth

er entiti e s for rea l proper ty ownedby the Madisons. As Executive Director of CCFS and CCN, Mrs. Madison was responsi ble for signing and ex ecuting leases on behalf of t he corporatio ns. CCFS has used various properties in Memphis owned by

the Madisons, including the following: (1) 1647 Semmes; (2) 2414 Lamar Avenue; (3) 4280 Cherry

Center Drive (“Cherry

Center”); and (4) 2771 Colony Park Drive (“Colony Park”). The most significant transactions involve two of these properties: Cherry Center and Colony Park. (1) Cherry Center The princip al place of bus iness for C CFS has been Cherry Center since 1995. CCN used the same location as its principal office upon its inception. The minutes of a March 17, 1995 Board meeting indicate that Mrs. Madison informed the Board of the “prospect” of moving the main office of CCFS to another

location due to the need for additional space. She informed the B oard the new location would provide approximately three times the spa ce a nd the rentwould be a pproximate

ly three times the amount then paid. The Board approved the move. Shortly after this meeting, in April of 1995, the Ma disons bought Cherry Ce nter, an approxima

tely 9,700 square foot building, for $275,668. L ess that two weeks later, CCFS entered into a five-y ear lease for the building beg inning on May 1, 1995, and ending on June 30, 2000. The lease provided for annual rent in the amount of $49,932. 46 The L essor wa s listed asLew

Harris & Associat es, a real e state bro

kerag e firm wit

h whom Mrs. Madison w as affil iated. Mr s. Madis o n signed the lease on behalf of CCFS as lessee.
Between July 1, 1995, and

June 30, 1996, the Cherry Center lease was renegotiated. The five year term remained, except it was set to run from July 1, 1995, throug h June 30, 200 0. The new lease provided for annual rent of $72,000. 47 Ag ain, the lessor was Lew Har ris & Associates, and Mrs. Madison signed on behalf of the lessee. The r ent increase was retroactive.48 The 9,700 square fee t in cluded a swi mming pool and a t heater , and onl y 7,680 squar e feet of off ice space

. 49 Ro osev elt T. Joyner, Vivian Bra xton, a nd W illiam D avis signed the resolution. B ecause M rs. Mad ison was, in essence, Affordable Homes and receiv ed the mon ey paid as ba ck ren t, the transa ction is clearly a conflict of interest transacti on. Because of his relati onship with Mrs. Madison, M r. Davis had an indirect interest in the t ransaction awarding his daught

er’ s compan y back

rent . Thus , i t appe ars doubtf ul t hat the resol uti on approving the $437,00 0 payment met the approval

requi rement

of Tenn. Code Ann. § 48-58- 302(d) that a majority of disi nterested board members app rove such a t ransact ion af ter f ull discl osure. -31- The lease for the Cherry

Center office space was renegotiated a secon d time prio r to its expiration. The new renegoti ated lease was b etween CCFS and Aff ordable Homes a/k

/a Afforda ble Pr operties Management. Mrs. Madison signed for the le ssee; no signature appears for the l essor
. The lease term was from July 1, 1998, to June 30, 2000, and ref lectedan increase in the per square foot rental rate as well as the calculated square footage of the building. Although the building only hadapproximately 9,700 48 square feet, the lease reflects that CCFS leased 20,000 squarefeet. The changes resulted in an annual re nt increase from $72,000 to $210,000.
Three members of the Board o f Direc to rs 49 approved a resolution dated March 22, 1999, authorizing the payment

of “prorated back rent” for the contract period on the Cherry Center space. The resolution indicates that $228,000 had already been paid ($6,000 per

month x 38 months). A calculation reflected “what would have bee n paid” by multiply

ing the 38 months by the $17,500 per month rental in the newly r

enegotiated lease, for

a total of $665,000. The “Wha t We Owe” column calcula ted the dif

ference as $437,000. Accordingly, Afforda ble Homes received a pay ment of $437,000 for back rent not due, based upon rental ra tes per square foot

not in effect during the 38 months in question, and based upon a square footage e stimate which wa s not occupi ed by CCFS during that 38 mon

ths. Unde r the sec ond rene gotiated lease and the “pro rated back

rent” resolution, the Madisons would have received $1,085,000 for the five y ear lease from May , 1995 through June 30, 2000.
On May 29, 2000, a Memphis newspa per, The Commercial Appeal , publicly disclosed that the square footage origina lly reported to be

in the building at Cherry Center was over stated. M

rs. Madison then sent a letter to DHS purporting to inform DHS of a rent miscalculation at C h erry Center because the actual square footage at Cherry Center

was different from that stated in the lease. At this point in time, CCFS was operating under thereimbursement contract and had been receiving pay ments from DHS based, in part, on the rental paid for the incorre ct squar e footag e. Mrs. Madison stated that she and the Board members of CCFS had alrea dy negotiated

a new re ntal ag reemen t with their lessor (wh o was , of co urse, the Ma diso ns). D HS was alread y aware of t he squ are foo tage miscalculation. CCFS subsequently paid $50,000 back to DHS for amounts received as a result of the miscalculation in square footage.
After the true square footage was discover ed, the lease for the Cherry Center office space was renegotiated

a third tim

e prior to its expirat

ion. The le ssor on the

third le ase was One Source50 The name actual ly appear s on the lease as Source One Management Corporat ion, a mist ake. -32- Commer cial, Inc. 50 instead o f Affor dable Ho mes a/k/a

Afforda ble Prope rties Man ageme

nt. Mrs. Madison had employed this company , with which she was otherwise unrelated, to collect rents on properties owned by her

including Cherry

Center and 2771 Colony Park. The new term of

the leas e was from Janua

ry 1, 2000, to

Decemb er 31, 20 00. The r enegotiated le asereflected the actual square footage of Cherry

Center, approximately 9,700 square feet. As a result, the annual rent on Cherry Center was reduced from $210,000 to $102,327.
In a series of meetings in August throug h Oct ober, 2000, t he new Board of Directors reviewed certain prior transactions of CCFS, including its renta l arran gement s with the M adisons. Minu tes of

the Au gust 3 , 2000 meeti ng refl ect th e foll owing: Specifically the B oard reviewed the amount of rent paid by Cher

okee since May

of 1995. Based upon calculations prepared by staff and attorney s for

the Corporation, it appears that Cherokee may have overpaid Affordable Homes$502,838.00 in rent for this period. In the prior meeting the Board di scussed various options for Affo rdable Homes and/or WillieAnn Madison repaying this amount in rent overpayme

nt to Cherokee.
The Board adopted a resolution stating that CCFS had overpa id $502,838 in rent

andthat this amount represented a debt due from Mr. and Mrs. Ma dison to CCFS. The resolution gave the Madisons the option of conveying the Cherry Cente

r building to CCFS, provided it appraised at not less than the amount due, or to pay the amount due. At its October 18, 2000 meeting wherein the Board reviewed all prior

audits wit

h its attorney, it discussed the re troactive rent

increases disclosed in the 1999 audit report, but “determined that it had already taken appropriate corrective a ction.”
On October 17, 2000, WillieAnn Madison executeda deed transferring her interest in Cherry Center to CCFS and paid it $32,838. Sometime thereafter, John Madison executed the deed. The deedwas recorded on October 31, 2000. As reflected in the Board minutes, the transfer of Cherry Center was intended to repay CCFS for prior rent overpay ment in the amount of $502,838.
With regard

to the lease arrangements with Aff ordable Homes, Rev. Joyner testified that the original arrangement was in effect when he came on the board and, at

that time, he did not know who the rent was being paid to, and that he still did not know who were the princi pals of Afford able Homes. He knew that the Madisons owned the property , but never asked who Affordable Homes was. He testified that he initiated the resolution on the rent increase, called two Board members, and got them to sign the resolution along with him.
With regard to increasing CCFS’s rent

during the term

of the le ase and making th e incre ase retroactive, Rev. Joy

ner coul d not say how it would be in the corpor ation’s best interest, but

he had notthought it was contrary to the corporation’s interest or would harm it in any way. He just thought-33-

it was fair, that CCFS should pay its fa ir share of rent, and that the rental amount had bee n less than fair market value before it was incre ased.
Rev. Ware test

ified he was not pr

esent at a me et ing where the Board voted to incr ease the rent at Cherry Cente

r. He did not

recall s igning

a resolu tion autho rizing it o r exactly what transpired. He did not know who owned Affordable Homes or whether Affordable Homes ever owned the r eal pr op er ty. When presented with the transaction later, he did not a sk whethe r the fig ures we re corr ect, “AllI did w as when t

hey prese nted it I said yes.” He testified he was not required to make a n independent

determination on whether the particular t ransaction was in the best interest of the corporation. He felt itwas in order for the Board to incre ase the rent and make that rent retroactive because the rate per square

foot was lower than other properties in the area

. He testif ied that th e only benefit to the cor

poration from this trans action wa s that the c orporat ion would b e in a bet

ter cas h flow position because DHS reimbursed costs under the new arr angement. He stated he never gave much thought

to the benefit to the corporation from the retroactive pa yment. He knew the $437,000 paid for retroactive rent increase went to Affordable Homes, but did not know if the money ultimately went to the Madisons. “I didn’t question that, I didn’t investigate that.”
Ida Porter testified that she had heard that Mrs. Madison owned Cherry Center. She guessed that CCFS was paying

rent to Mrs. Madison f

or th e building. She did not recall the Board ever voting to lease the property from Mrs. Madison. In her opinion, that decision w ould have had t o have been made by

the chairman of the Board, who at that time was Rev. Joyne r. She did not reca ll the Board passing a resolution to increase the amoun t of ren t paid to Mrs. Madison for Cherry Center. She testif

ied that sh

e did not know any

thing ab out a dec isi on t o increa se renta l pay ments before the expiration of the lease.
Mr. Davis testified that when approving the retroactive rent incr ease, he thought it was appropr iatethat he, as a director, act in his daughter’ s best interest because, to him, the interests of the corporation and those of Mrs. Madison were the same. (2) Colony Park
A few wee

ks befor e the Mar ch 22, 199 9 resolut

ion to pay “prora ted back rent,” t h e Boar d met on March

5, and the

mi nute s reflect a discussion of the need for additional space beyond that occu pied in the Cherry Center . The minutes reflect that Mrs. Madison reported a need to a cquire more office space across the stree t, and explained what offices or functions would be moved. “The Board sugge sted that s he look int o leasing addit ional space.” Across the street from the Cherr y Center were bu ildings k nown as Co lony

Park. At th

e time thisneed for

more spa ce was b rought t o the Board, Colony Par

k was owned by some one else. That situation soon changed. Approximat

ely two weeks after CCFS approved the resolution giving Affordab le H omes $437,000 in “prorated back rent,” the Madisons purchased 2771 Colony Park Drive (“ Colony Park”) andfour other

parcels of

real property

including 2755, 2759, 2763, and 2768 Colony Park Drive for51 The purch ase oc curr ed on Apri l 5, 1999.
52 On July 2, 1999, the Madisons als o conveyed 2759 Colony Park Dri ve to Phyl iss Herring, the s ist er of M rs. Madison, for$300,000.

53 Although CCFS and CCN do not dis pute the exis tence of the l ease f

or Colony Park or the t erms th ereof, they object t o the exhibits reli ed upon by the Attorne y General in allegi ng these facts. Wh ile the first reference to the lease is to a do cum ent filed a ppa rently witho ut a sup por ting do cum ent, the lea se in question actuall y appears several places in th e re cord , i ncl udi ng a s an at tac hmen t t o an a ff ida vi t f rom a DHS official ce rtifying that C CF S filed the lease in supp ort of its ap plicatio n for re imbu rsem ent. -34- approximately $1,083,500. 51 In May of 1999, th

e Madison s transfe

rred one of the pa rcels to Rev. Joyner, one of the member s of the Board of Directors who signed the $437,000 resolution. 52
Rev. Joyner explained the transaction, stating he went to the auction where all theparcel s in ColonyPark

were sold. He intended to purchase 2755 Colony Park, but was un success ful beca use he could not b id on all the parcel s. The Madis ons, howe ver, suc cessfully

bid on all the parcels and acquired them. The

y pa id$250,000 for the parcel identified as 2755 Colony Park, and sold it to him for $300,000.
A littleover a month after the purchase, CCFS entered into a one-y ear lease, beginning June 1, 1999, and

ending July 30, 2000, with Affordable Homes a/k/a Affordable Properties Manag ement for office space at 2771 Colony Park. The a nnua l rent on the property was $31,530. 53 CCFS renegotiated

the lease for the Colony

Park prop erty

on July 20, 2000. The term was extended from July 30, 2000, t

o Decem ber 31, 2 000. The a

nnual re nt on the pr

operty increa sed from

$31,530 to $44,961.
CCN also entered into a lease for office spa ce at 2771 Colony Park from Afforda

ble Properties Management for a one-y ear term beginning June 1, 1999, and ending July 30, 2000. The annual rent on the property pursuant to the lease was $36,785. That lease is for 3,003 square feet of space; nothing in the rec ord indicates the square footage lea sed by CCFS or the total amount of squar e foot age in t he bui ldin g. ColonyPark was in a state of disrepair when it was purchas ed by the Madis ons. There were leaks in the roof and repairs were needed to correct problems with thefloor and the ceiling. Under t he terms of the leases, CCFS and CCN were responsible for maintenanc e and rep airs at Cherr y Center and Colony

Park. The

record is not clea

r as to who

paid for initial sub stantia

l repairs and improveme

nts.
F. Investment of CCFS and CCN Funds MemphisF

irst Corporation (“MFC”) and MemphisFirst Community Bank (“MFCB”) wer

e chartered in 1999 by the State of Tenne ssee. MFCB is a wholly owned subsidiary of MF

C, a bank holding company . Mrs. Madison is an incorporator and member of the Boar d of Directors for MFCB54 This stateme nt of fact was undisputed by the corp orations.
55 Da rrell Thom as was also a member of the boards of both the bank and the ho lding c omp any. He became a member of the Bo ard of CCFS in 1999, apparently after the decision to i nvest in t he bank.
56 Mrs. M adison signed the resolut ion as a witnes s in her capacity as executive direct or. 57 According to the corporations’ bri ef, CCFS made the entire purchase, and 19,000 shares were tit led in the
nam e of C CF S, while 1 1,00 0 sha res we re titled in the name of CC N “a nd d ona ted to that entity.”

58 The investment dec ision was clearly a conflict of interest transa ct ion because of Mrs. M adison’s and Rev. Joyn er’s inv olveme nt w it h th e bank. Approvalby the boar d forsuch a tr ansa cti on requi res approval by a ma jori ty of the members of

the board who have no direct or indirect interest in t he transacti on. Tenn. Code Ann. § 48-58-303 (d). -35- anda member of the Board of Directors for MFC. Mrs. Madison is also an inv estor in MFC because, as a director, she is requir ed to own a

t least 1% of the stock. She and her family members have made significan

t investme

nts inMFC common stock. 54 Rev. Joyner, a CCFS Board me mber, was also a member

of the B oard of b oth the ba nk and the

holding c ompany . He was a lso a shareholder, having purchased $100,000 of stock initially. He described Mr s. Madison and himself as founders of the bank. 55
Rev. Joyner

testifie d he discu ssed inve stment in the bank by CCFS by

telephone with Rev. Ware, Ms. Braxton, Mr. Davis, and Mrs. Madison. On September 10, 1998, Rev. Joyne r, C.E. Ware, andVivian Braxton signed a resolution authorizing CCFS to purchase $190,000 in stock from MFC at $10 per share. 56 They also signed a resolution authorizing CCN to purc hase $110,0 00 of stock from MFC at $10 pershare. During fiscal y ears 1998 and 1999, according to the auditor, the corpora tions inve sted appr

oximately $300,000 t

o purchase 30,000 shares of common stock issued by MFC. Acc or ding to the receiver and the bank, CCFS owned 19,000 sha res, and CCN owned 11,000. 57 The stock of MFC is not traded on the stock exchange or an ope n market. The corporations assert, however, that there is a market for

the stock and that it can be readily sold and traded.
Rev. Ware testified he was not present at the meeting wh ere the Board approved the investmentin the bank, but he knew about it at the next meeting and “never did ask the que stions of the exact amount.” He identified the resolution approving purchase of stock in the bank including his signatu

re and th at of Rev. Joyne

r, Ms. Br axton, and M

rs. Madison. He had said a quorum was four people, since the Boa

rd had seven members. Mrs. Madison was not a member of the Boa rd, so the resolution was approved by three Board members, one of whom had a financial interest in the bank and served on its board. 58

G. Action

Taken by Indiv idual Bo ard Memb ers of CCFS and CCN
The testimonyof several Board members demonstrate s that they were less than vigilant or probing in examining corporate activities and in remaining kn owledgeab le about the corporation. They relied upon Mrs. Madison for information and recommendations and generally did not question59 Vivian Braxt on and D onna Gra ves res igned from th e B oard on N ove mbe r 30 , 199 9, and Da rrell Thomas was

elect ed secret ary. Rev. Joyne r resi gned on March 23, 2000, and Mrs. Porter agreed t o act as chairman of the boa rd

. On May 30 , 2000, the Board vo ted to accept Clarence Mo sley as a member, and he was later elected chairman.
60 That provision allows i ndemnification of an of ficer, to the same extent of a direct or, for expenses, incl uding counsel fees, incur

red wit h respect to “any threa tened, pending, or completed action , suit or pr oce eding whethe r civil, crimin al, adminis trative, or inves tig ativ e and wheth er formalor inf ormal.” Tenn. Code A nn. § 4 8-28 -501 (7). A corpora ti on may indemni fy a direct or made a part y to such a proceeding because of his st atus as direct or, if: (1) the indiv idual acted i n good fait h; (2) if t

he c onduct wa s in the ca pac ity of corp orate direc tor, the ind ividua l reaso nab ly believ ed tha t his or her conduct was in the co rpo ration’s b est interes t and, if the c ond uct was not m ade in the cap acity of a corpo rate director, that the cond uct at least was not opp osed to the c orpo ration’s best interests; and (3) in the case of any cri minal pr oce eding , the indiv idual h ad no reaso nab le caus e to b elieve th e indiv idual’s c ond uct was unlawfu l. Tenn. Cod e Ann. § 45-58-502 (a).

61 Attending the meeti ng were Mr. M osley, Mr. Thomas, Rev. W are and M rs. Porter.
62 The new byl aws provi de that any ind emn ification sh all be made by the corpora ti on onl y upon a det ermi nati on in a specif

ic cas e that

indemnif

icat ion is proper because t he off icer or dir ector has m et the ap plicab le stand ard o f cond uct. Such deter minatio n is req uired to be made by a majori ty vote of a quorum cons isting of members who were n ot part ies to such action o r proce eding or, if no such q uorum is obtainable, by inde pend ent legal counsel o r by the mem bers. -36- her recommendations. For

example, Rev. Ware testified he did not know if Mrs. Madison was being compensated

by b oth corpo

rations, or by one

on behalf of both, and he did not inquire into it. He also testified that he was not aware of the financia l condition or resources of CCFS; he did not look at financial statements; he had not ever looked into the financial condition of the c orporation. The testimonyof several Board members indicates the ir lack of knowledge of

the duties imposed by law upon corporate directors.
The Board w as reco nstituted d ue to some

resign ations. 59 As discussed earlier, th is “new” Board, in the fall of 2000, reviewed some previous corporate transactions and retroactively approved many of t hem . In addition, the “new” Board, in October of 2000, p

rovided indemnific ation for Mrs. Madison’s legal defense.
The Board had adopted new by laws on A ugust 3, 2000. Mr. Mosley, Mr. Thomas, Rev. Ware, and Mrs. Porter were the directors in attendanc e. Those bylaws included a pr

ovision allowing the corporation to indemnify of ficers and directors in accordanc e with Tenn. Code Ann. § 48-58- 507. 60 The minutes of

an Octob er 18, 20 00 meetin g refl ect that b ecause the corporation’s attorney could not also represent

Mrs. Madi son, the B oard voted unanimou sly 61 to indemnify Mrs. Madison for legal fees for her sepa

rate attorney , A.C. Wharton. 62 The decision was based, in part, on the fact that the corporation had provided legal expenses to Boa rd members.
At a later meeting, the board reaf firmed the indemnification and approved a written indemnification agreement. The minutes reflect that the Board had previously exam ined al l transactions questioned by the State in working with its attorney s to prepare for all the litigation and in preparing for Grand Jury testimony, and

the Board

determined that the member s knew of no facts that would preclude indemnification of Mrs. Madison. Present at that meeting were Mr. Mosley , Mr.-37-

Thomas, Rev. Ware and Mrs. Porter. The written indemnity agre ement inc ludes a provision requiring Mr s. Ma di so n t o r ep ay any expenses advanc ed by

the corp oration if

it is ultimat

ely determinedthat she is not entitled t o indemnif

ication. The ag

reemen t refer ences tw o lawsuits brought by the State, including this one, a nd a grand jury

investigation into the day c are industry in Sh el by C ou nt y.
As part of his argument that the corporations are unable to carry on their ch aritable

purposes , the Atto rney Genera l asse rts t hat th is in demni ty agr eement is unlawful because: (1) it was not includedin the budget appro ved by the trial court; a nd (2) it does not co mply

withthe statute. The Attorney General alleges various proc edural defects in the approval of indem nity , but th e Board made the requ

isite find ings in itsNovembe

r 17, 2000

meeting where it approv ed the actual agreement.
In the main, the Attorney Ge neral asserts that Mrs. Madison is not en titled to in de mn it y. Under the relevant statutes, indemnity is not ava ilable “in connec tion with any other pr

oceeding chargingimproper

persona l benefit to the director [or officer], whether or not involving action in the director’s [or offic er’s] official capacity , in which the director was adjudged liable on the basis that personal benefit

was impro

perly rec eiv ed b y the di rec to r.” Ten n. C ode Ann . § 4 8-5 8-5 02( d)( 2). In addition, no indemnifi cation ma y be made to a

directo r or off icer if a judgmen t advers e to th a t individual establishes his or her liability for: (1) breach of the duty of loyalty; (2) acts or omissions notin good faith; or (3) for unlawful distributions pursuant to Tenn. Code Ann. § 48-58-304. Tenn. Code Ann. § 48-58-509(a).
While we agree that the complaint seeking dissolution of the corporations alleged that personal benefit and unlawful distributions werereceiv ed by Mrs. Madi son and, a

t least im pl ie dl y, that she brea ched he r duty of loy alty to the cor poration s, this law suit

does not di

rectly raise the issue of potentia l persona l liability of Mrs. Madison. Neither the trialcourt nor this court has been called upon to adjudge her personally liable.
Becau se CCFS conditioned its advance of expenses f

or counse l upon rep ayment if it

is later determinedMrs. Madison was not entitledto indemn ification, we cannot agree with the Attorney General that the action of

the Boa rd in inde mnify ing Mrs. Madison upon advice of corporate counsel who was faced with the potential of representing clients with conflicting interests is an illegal action or that it i s another

example of

misapplic ation of f

unds. We are concerned, however, that actual pay ment of advances for attor ney fees ma y vi olate the trial court’s order which was in place at the time of the indemnification agreement. Further , after the trial court’s appointment of a receiver, any expenditures by the corpo rations would be subject to the rec eiver’ s an d the court’s approval. Consequently , we conclude that the issue of whether pay ment of a dvance s can ac tually

be made s hould be d

etermined by

the trial court.63 CCFS contends that all related party, conflict of intere st, or simila r transa ctions w ere d isclose d to its indep end ent aud itor, who repo rted the m in its aud its. -38-

VI. The Determinative Issue - Private Gain or Public Good
On appeal, the corporations argue that the tr ia l court erred in deny

ing their motion for summary judgment and also erred i n g ranting the Attorney General’s motion. In particula r, they assert that the A

ttorney Genera l failed t o establis h undisputed proof of , and that the corpo rations conclusi vely

negated, allegations that the cor porations had con ducted bu siness in a persiste ntly fraudulent

or illegal manner. CCFS takes the position that the Attorney General failed to prove fraud because he fa iled to show: (1) that the corporations made any intentional misrepresentation; (2) failed to disclose a material fact when under a d uty to do so; 63 or (3) that any one reasonably relied on any misrepre sentations and was injured because of that reliance

. The corporations take thesame position with reg ard to the ground alleging cor

porate a ssets were wasted or misapplied. That is, they a ssert that the Attorn ey Genera l faile d to prove and the corporations conclusively neg ated the exi stence of such statutory grounds and assert that the Attorney Gene

ral hadargued that the cruxof his case was that non-profit assets had been diverted through a series of self-dealing transactions. First, the corporations argue that all of

the assertions of waste and

misapplication involved only matters and transa ctions that had occurred

in the past, but that the relevant statute, Tenn. Code Ann. § 48-64-301(a)(1)(E), uses the present tense and requires proof that asse ts “ are being misapp lied or wast ed.” CCFS argues that “[t]his language makes c lear that the statute is designed to prevent the risk of current wa ste or misapplication.” According to the corpora tions’ argument, the current board of directo rs has ma

de dilig ent and pr

udent ef forts to preservecorporate assets and to address and corr ect past acts complained of by the Attorney Ge

neral and there was no proof that assets are c urrently being

misapplied or wasted.
The corporations also assert that the evidence was ins ufficient to establish waste or misapplication of assets as a matter of law, even wi th rega rd to past operation. In particular , the corpor atio ns assert that none of the alleged conflict of interest or self-dealing transactions wer e shown to be unfair to the corporation; that the Board approved a nd/or la ter ratified all the transactions; that the transactions, including the compensation paid to the executive director and

her husband, were re asonable , or that th e reaso nablene ss there of is a matter of d isputed fact; and that personal expenditures for trips and purchases originally paid for by CCFS wer

e eventua lly charged to the employees as a

dditional compensation.
It is not necessary

for this court to address the corpo ra tions’ arguments regarding the sufficiency

of the proof of

fraudul ent or illegal ope

rations; neither mu st we add ress the argume nts as to whether specific transactions constituted a waste or misapplica tion of a ssets. We are of the opinion that the trial court correctly recognized the c entral is s ue in this case: whether the corporations complied with the requirements of nonprofit public benefit co rporatio ns in fulfilling their charitable or

nonprofi tpurposes, or whether they were operated for private f inancial gain. To the extentthe corp orationswere op erated for priv ate ga

in, their assets were misapplied. Thus, the64 If we acc ept the corpora tions ’ st atement that Mrs. Madison conti nuouslyreceiv ed salary i ncreases reaching
a sal ary of $125, 000 by the year 2000, the corporations’ s tatement tha t he r compen sat ion i n FY 98-99 wa s $125, 000, and the corporate r ecords th at she was awarded a $50,00 0 bonus in Decem ber of 1998, we must conclude that her salary was l ess than $100,000 pr ior to FY 1999-2000. -39- questi on is wheth er the undisputed facts demonstrate that CCFS and CCN were opera ted for the private benefit of Mrs. Madison, her family , or other corporate insiders.
A review of the record, specifica lly the facts as se

t out above, leads to the inevitable conclusion th at th e c or po ra ti on s w er e o pe ra te d f or th e p ri va te ga in of Mr s. Ma di so n, he r f am il y, and/or other individuals in control of the corporations. The facts demonstr atea consistent pattern of disregard of the corporations as sepa rate entities from Mrs . Mad ison. They also demonstrate a disregard of the fundamental nature of a nonprofit public benefit corporation.
Even based on the figures provided by the c orporat

ions, although the

y a re not en tirely reconcilable, Mrs. Madison was paid a substantia

l salary , but was r

egular ly awarded bonuses of 50% or more of her

stated salary. Corpor

ate records and corporate memor y are a mbiguous about the exact amounts so paid, although several $50,000 bonuses were a warded her. The corpor ations’ inexact records on this issue simply demonstrate the inattention paid to distributions to Mrs. Madison by anyone other than Mrs. M adiso n. Alt hough the corporations attempt to justify the ra ises in salary andthe larg e bonuse s as merit ed by the succ ess of

the program, including the financial suc cess, that argument misses the point. The goal of a nonprofit public benefit corpora tion is not to ge

nerate profit; neither is it to reduce its “profit” or excess revenues by increasing operating

expenses which enrichcorpora

te insiders. Excess r

evenue s are inte

nded tobe usedto furthe

r the cha ritable o r public benefit mission of the corporation. We do not imply that a public benefit corpora tion cannot reward its officers with salary

increases or

other compe nsati on if t hat co mpens ation is rea sonab le. Al thou gh the corporations argue

vehemently that they

proved that Mrs. Madison’s salary was reasonable, that proof was related

to her 2000 salary disclosed a s $125,000, an amount the corporations describe as the h ighest salar y level sh e reache d. We find n o proo f to su pport an argum ent th at regu lar yea rl y grants of additional compensation of 50% or more of her salary 64 is reaso nable. I

n any event, it is nota questi on of wh ether any particular amount was proven to be reasonable or unreasonable. Rather, the apparently

cavalier way

in which the corporationregularly gave its creator and executive director significant

“additional compensation” plus her also increasing salary demonstrates to us that the corp orations ’ assets w ere tre ated as a ready source o f econom

ic benef it to an individual.
Another example of the manne r in which the corpor ate resources were used involves pay ment for persona l expenses . Mrs. Mad

ison fre ely

used corporate funds for

persona l expensesfor her self andher family, such a s the travel described earlier. I n those instan ces, no one in the corporation appare ntly questioned the original pay ment of the expenses by the corpor ation, and the corporation was never repaid, even though the re is no dispute that the trips had no business purpose.
The use of corporate revenue for private gain is dramatically exemplified in the real es tate andleasing

transactions. Twic e Mrs. Ma dison in fo rmed the Board that CCFS needed additional-40-

space, then purc

hase d real prop erty meeting that need, and leased that real property to the co rporations. She made t he second purcha se, Colony Park, sho

rtly after CCF S had paid he r $437,000 i n “prorated back rent” for use over the past 38 months of 20,000 square feet of space when CCFS could

not have o ccupied

that amou

nt of spac e during

that t ime, at a higher rate per square foot thanCCFS had contracted to pay for that 38 months, and af ter the rate per square foot hadalready

been increased during the ter m of the lease. Members of the Board who appr oved this payment were un able

to explain how this payment could have been in the corporation’s interest. The new Board concluded that Mrs. Madison and her husband hadbeen overpaid in rent from May 1995 in the amount of

$502,838. Thus, it is obvious that the new Board did not consider the prorated back rent pay ment, or apparently

other rental amounts, to be fair to the co rp or at io n. Mo re si gn if ic an tl y, the new Board obviously

determinedthe rent

“overpa yme nt” to have be en an ina

ppropria te expense the corporation should not have paid.
The leasing by

the corporations of space owned by the Madisons raises significant questions because, among other things, the recor d does not indicate any a ttempt to locate other space or compare rental amounts. The increases in rent during the terms of the lea ses are difficult to justify as being in the interest of the corporations and ar e unj ustified in the rec ord befo re us. Ev en these decision s, however , pale in com parison to the remarkable act of giving Mrs. Madison, or her co mp an y, $437,000 on the basis of “proratedback rent” which the corporations were clearly not l iable f or. There is no clearer example of the total disreg ard exhibited toward the interests of the corporations and the furtherance of its public bene fit mission.
The investment of

substantial sums in a bank in which Mrs. Madison, her family, a nd a Board member had a substantial financial interest, and on whose board Mrs. Madison and the CCFS Boa rd member sat, also demonstrates a disregard of the leg al requ irementsfor such transactions. Thos e require ments exist, in par

t, to protect the non

profit co rporation’s assets and to avoid insider economic benefit. Once again, those in control of the corporations abandoned their duty to see that these assets were used to further the cor porations’ public benefit mission.
These circumstances as well as others demonstrate a f ailure of those in con trol of the corpora tions to en sure adh

erence to the basic

require ment of a nonprofi tpublic benefit entity: that it be opera ted exclus ively

for a ch aritable

purpose, that it ser

ve a publi c rathe

r than a p rivate in terest, and that its inc ome or as sets not be distributed to individ

uals in co ntrol of th

e entity . Th e corporations herein fail the test of whether they have been ope

rating as true n onprofit

corpora tions, “whether the corporation is being exploited for direct monetary

gain.” F

LETCHER , supra , at § 68.05. The trial court determined that the corporations had abandoned any public or charitable purposes and hadpursued private interests. Our independent review of the record fully s upports that conclusion.
VII . The Business Judgment Rule
While we need

not speci fically

addresssome of the issues ra ised by the corp orationsbecause they relate to grounds other

than the one we find determinative, there rema ins one argument which we interpre

t as a ge neral de fense to dissoluti on. In e ssence, the corporations argue that they65 Based on these crit eria, it is ar guable, and the Attorney General has argued, that the actions by the origi nal

boards in approvi ng t he various chal leng ed tr ansa cti ons do n ot qualify for t he protect

ion of t he busin ess ju dgment rul e.

-41- establisheda defen se to many of the Attorney General’s allegations beca use the directors’ judgment withrespect to the challenged financial transactions was insulated from “second-guessing”by the business judgment rule. Essentially , the corporations argue that decisions by the Board regarding compensation, payment of expenses, investment, lea sing, etc. are committed to the sound discretion of the Board and should not be second-g uessed by the c ourts.
Tennessee courts recognize and follow the

business j udgmen

t rule in c ertain c ircumsta nces. This cour t has expla

ined the u nderpinn ings of t he rule a s follows:
Tennessee’s cou rts have

consiste ntly followed a noninte rventi onist policy with regar d to internal corporate matters. They have re cognized that directors have broad management

discretion. Chism v. M id-South M illing Co. , 762 S.W.2d 552, 556 (Tenn. 1988) (di scretion

in employ

ing or di scharging cor

porate office rs); Wallace v. LincolnSav. Bank , 89 Tenn. 630, 636, 15 S.W. 4 48, 449 -5 0 ( 18 91 ). Ac co rd in gl y, they have de clined to

substitute

their judg

ment for t h at of a co rporation’s board of directors when the board ha s acted in good f aith and in the exer

cise of honest judgment in the lawful and legitimate furtherance of corporate purposes. French v. Appalachian Elec. Coop. , 580 S.W.2d 565, 570 (Tenn. Ct. A pp. 1978) ; Range v. Tennessee Burley Tobacco Growers Ass’n , 41 Tenn. App. 667, 675, 298 S.W.2d 545, 549 (1955), cert. denied, 355 U.S. 813, 2 L. Ed. 2d 30, 78 S. Ct. 11 (1958). Lewis v. Boyd , 838 S.W.2d 215, 220 (Tenn. Ct. App. 1992).
Where it applies , the business judgmen t rule is a presumpt ion that a corpora tion’s dir ectors, when making a business decision, acted on an infor me d basis, in

good fa ith, and w ith the honest belief that their decision was in the corporation’s best interest. Id . The rule does not apply where there is no conscious decision by board members to act or refrain from acting

. McCall v. Scott, 239 F.3d808, 816 (6th Cir. 2001). The rule does not apply when the director or

office r has an interest in the decision, did not actually make a decision, or made an uniformed decision. Lewis , 838 S.W.2d at 220-21 ; Hall , 1996 Tenn. App. LEXI S 384, at *19-*20; 3A F LETCHER , supra , at § 1036. 65
As some cour

ts have he

ld , the busin ess judgment rule “extends only a s far as the reasons which justify its existence.” Resolution Trust Corp. v. Acton , 844 F. Supp. 3 07, 314 (N. D. Tex. 1994) (quot ing Joy v. No rth , 692 F.2d 880, 886 (2dCir. 1982), cert. denied , 460 U.S. 1 051, 103 S. Ct. 1498 (1983)). Because of the re asons for its creation, therule does not apply to decisions which breach the duty of loy alty . The business judgment rule was deve

lo ped b y the courts to protect corpora te management from liability for mistakes in business judgment. 5 F LETCHER , supra , at § 21 04 . T hu s, th e d ut y of

ca re is im pl ic at ed , n ot th e d ut y of lo yal ty.-42-

The business judgment rule developed concurrently with the duty of car

e. In fact, the cases in which c ourts orig inally ar ticulated the duty of ca re also discussed the business judgmen

t of directors and o fficer s. Many of these early cases simply stated that directors and officers were not liable for honest mistakes or e rrors of judgm

ent. Other cases held that directors and officers incurred liability only for err

ors “of the grosse st kind. ” Several courts and commentators have ar ticulated their own formul ations of the business judgment rule. The rule basically states that if any rational business purpose e xists for dir

ectors’ or offic ers’ de cisio ns, they are not liable for errors in judgment

when the ir decision s result in

an unfav orable outcome for the corporation. . . .
Thomas A. D’Ambrosio, et al, Special Project: Director and Office r Liability , 40 V AND
. L. R EV
. 599, 614-15 (April 1987).
Becau se the rule

was developed to analyze duty of care issues, “ courts do

not ty pically apply the business judgment rule to duty of loy alty issues.” Hall , 1996 Tenn. App. LEXI S 384, at *20. See also 3 F LETCHER , supra , at § 837. 60 (stating that g enerally, the rule does not apply wher

e there is a breach of the duty

of loyalty

).

. . . if the d irector s or offic ers are

unable to prove full disclosure or fairness, they may be liable in damages or the court may resc ind the transaction. The business judgment ru le pr ov id es no sh el te r for di re ct or s a nd of fi ce rs wh o b re ac h t he du ty o f l oya lt y. D’Ambrosio, supra , at 628. See also Brody, supra , at 1424- 25 (stating that the busines s judgment ruleis used in reviewing directors’ duty of care and insulates directors from liability for mistakes in judgment exercised without

divided lo ya

lty) . As explained earl

ier in this opinion , a director’s duty to ensure that a nonprofit public benefit corporat i on opera te so as to

further its public interest pu rp os e i s p ar t o f t he du ty o f l oya lt y. The business judgment rule has application as a pote ntial def ense in tw o situation s: (1) where officers or directors face personal liability ; and (2) where the corporation (g enera l ly through shareholders in a derivative action) seeks to void a decision of or transaction approved by the board. Neither situation is present herein. The Attorney General does not

seek monetary

damages from any member of the boa

rd for br each of fiducia ry duties. Ne

ither doe s he seek

to set asid

e or inva lidate any particular transaction. I

nstead, this action is maintained unde r Tenn. Code Ann. § 48-64-301 under which the Attorney Ge

neral is authorized to act in the public interest to ensure that a nonpro fit public benefit corporation is not operated for private g ain. Thus, althoug

h the business judgmen

t rule is g enerally a

pplicabl e to nonprof

it corpor ations,
see Burke v. Tennessee W

alking Horse Breeders’ and Exhibitors’ Assoc iation , No. 01A01-96 11-CH

0 0511, 1997 Tenn. App. LEXI S 378 (Tenn. Ct. App. May 28, 1997) (no Te nn. R. App. P. 1 1 application filed); 5 F LETCHER , supra , at § 2104, it is not a defense to dissolution for misapplication-43-

of corporate assets by

operating for p

rivate gain. Although directors of nonprofit corpor ations may be entitled to the pr

otection of the bus iness judg

ment rule in some situ ations, Neverth eless, charita

ble or non

profit co rporations are g enerally s ubject to statutory supervisory

authority of the at torney gener al, who ma

y in stitute judi cial p roceed ings for mismanag ement by

the dire ctors or

trusteesof the co

rporation or in

exceeding or failing to carry

out its charitable or corporate purpose.
5 F LETCHER , supra , at § 2104.
We conclude

that the business judgment rule has no application to the case be fore us. While the business judgment rule reflects a judicial policy of declining

to substitute a court’s judgment for that of a c or po ra ti on ’s di re ct or s w he n t he y have act ed in go od faith a nd in the e

xercise o f honest j udgment in furtherance of corporate pur poses, French v. Appalachian Elec. Coop ., 580 S.W.2 d 565 , 570 (Ten n. Ct. App. 1978 ), that po licy has no ap

plication to alleg ations tha

t a public

benefit corporationhas abandoned any charitable purpose and has pursue d priva te, rather than public, interest s. Similarly, while Tennessee c ourts have adopted a non-interventionist policy withregard to internal corporate matters, McRedmond v. Estate of Mariane lli , 46 S.W.3d 730, 736 (Tenn. Ct. App. 2000), that policy is inapplicable he re because the legislature h as s pecifically g iven the Attorney General and the courts authority and responsi

bility to ensure that nonpr

ofit public

benefit corporations operate in the public interest and not for private g ain. The public policy of this state, as expressed by the leg

islature, is that the Attorney Ge neral and the courts inter v ene in such situations because

the public

interest is involved and the activities involved are not merely “internal corporate matters.”

VII I. Protective Order During discovery , the corporations sought to depose the Attorney Genera l, Paul Summe

rs, andPaul Givens, an employee of the Co mp tr ol le r o f t he Tr ea su ry. The Attorney G eneral sought and was granted

a protective order against these de positions. The corporations herein appeal from that decision.
The granting or deny

ing of a protective order rela tive to discove r y pr

ocedure s rests within the sound discretion of

the trial court. Tenn. Dep ’t of Comme rce and I ns. v. Firs tTrust

Money Servs., Inc. , 931 S.W.2d 226, 230 (Tenn. Ct. App. 1996). Such a discretionary decision i s reviewed for abuse of discretion. Id

. The b urden of

establish ing abu se of disc

retion is o n the par

ty s eeking

to overturn the trial court’s ruling on appeal. Ballard v. Herzke , 924 S.W.2d 652, 659 (Tenn. 1996).
Under the abuse of discr etion standard, a t

rial cou rt’s ruling ‘will

be upheld so long as reas onable

minds can disagree as to the propriety of the decision made.’ A trial courta buses its discretion only when it ‘applies an inc orrect legal standard , o r reaches a decision which is a

gainst l ogicor reas oning or that cau ses an inj ustice to-44-

the party complaining .’ The abuse of discretion standard does not permit the appella te court to substitut

e its judgment for t

hat of the trial cou rt. Eldridge v. Eldridge , 42 S.W.3d 82, 85 (Tenn. 2001) (citations omitted).
The correct standard to be applied in ruling on a motion for protective order isfound in Rule 26.03 of th

e Tenne ssee Rule s of Civil Pr ocedure , which pr

ovides in p ertinen

t part: Upon motion by

a party or by the pers on from whom disc o very is soug ht, and for good cause shown, the court in which t he acti on is pending may ma ke any orde

r which justice r

equiresto protect a party

or perso n from an

noy ance, e

mbarra ssment, oppression, or undue burden or expense. . . .
There is nothing

in the re cord bef

ore us to indicate

that the tr

ial cou rt did not a

pply this standard.
On ap peal, the corporations argue they should have been allowed to depose the Attorney General to test the factual basis fo r the allegations of fraud, illegal conduct, and waste. The corporations do not, however , assert that they were un able toobtain inf

ormation r

egard ing the b asis for these allegations from other sources. They point to no disadvantage they suffered because of the protective orders. They

admitted a number of the facts which are the ba sis for the complaint andare the basis for the trial court’s and this cour t’s d ecision th at the co

rporations were

used for private gain. We cannot find that the corporations suffered an injustice fr om t he grant of the protective orders.
Co ns eq ue nt ly, we find that the trial court did not abuse its discret ion in g ranting the protective orders.
IX. Conclusion In granting

summary judgme

nt, the trial court stated:

. . . the Cour

t has gon e over th e factsin this cas e se veral times, and the Court has considered

the affidavits filed by

the parties, the memoranda of law fi le d by the parties, the arguments of counsel in support of their positions. From all of tha t, the Courtis of the opinion and finds that the A ttorne y Gener al’s motion for summary judgment should be granted and is granted a nd defendants’ motion f

or summary judgmen t, for both defendants, those mot ions for summary judgment are denied. Th at is to sa y, that the Attorney Ge neral is entitled to have a receiver appointed for these two corporations, and that he’s entitled to proc eed with di ssolution based on the statute, in accordance with the statute . . . . I also need to say that . . . the Court bases its ruling on the fact that the Court is of the opinion that the defendants have abandoned

their public purpose and have devoted their activities towar d a privat e-45-

purpose which the

Court find s is not in keeping with the sta tute per taining to nonprofi tcorporations. So for that reason under the statute, the Attorney Ge neral has authority to take action in a case like this. He has authority un de r the stat

ute to supervis e nonprofi

torganizations and, of course, he represents the public interest. .

. . After a careful consideration of the rec ord, we have determined that the trial court was correct in granting summary

judgment for the Attorney General, app ointing a receiver, and order ing the dissolution of CCFS and CCN. Therefore, we affirm the decision of the trial court and re mand the case for any f urther procee dings consistent with this opinion which may be necessa ry. The c osts of this appeal are taxed to Cherokee Children a n d Family Service s, Inc. and Cherokee Children Nutrition, Inc., for which execution may issue if necessary

.

___________________________________ PATRICIA J. COTTREL L, JUDGE