Seventh Circuit Decides Indiana Nonprofit Corporation Case, Part 1: Board of Directors

[This post was authored by Smith Rayl’s newest member, Rose Shingledecker.]

Last week, the Seventh Circuit Court of Appeals decided Doermer v. Callen, No. 15-3734 (7th Cir. Feb. 1, 2017), a case that illustrates and implicates several important aspects of Indiana nonprofit corporation law. Over the next few posts, we’ll explore some of the key aspects of the case and what it has to say about Indiana nonprofit law.  First up: the board of directors and directors’ terms.

At the center of the case is the Doermer Family Foundation, Inc., a nonprofit corporation formed under the Indiana Nonprofit Corporation Act of 1991 (the “Act”). The initial board of directors consisted of a father; a mother; their son, Richard Doermer; and daughter, Kathryn Callen. Each initial director had a lifetime appointment.

Mother died in 2000. In 2010, Phyllis Alberts was elected to the board of directors for a three-year term expiring in January 2013. Later in 2010, Father died, leaving the board with three directors: Richard, Kathryn, and Phyllis. In September 2013, over Richard’s objection, Kathryn and Phyllis voted to reelect Phyllis for a second term. The board then took several actions that Richard opposed, including making gifts to the University of Saint Francis of Fort Wayne, Indiana, Inc. (Kathryn sat on their board of directors), and electing Kathryn’s son, John, to the board.

Unhappy with the board’s actions, Richard brought suit in federal court on behalf of himself and the corporation, naming Kathryn, Phyllis, John, and Saint Francis as defendants. Specifically, Richard sought the recovery of certain charitable contributions made by the board (including the gift to St. Francis), Kathryn’s removal from the board, an injunction barring Phyllis and John from acting as directors, and the appointment of new directors.

Central to this case is the effect of Phyllis’s term on the board’s actions. You may have noticed in reading the facts above that Phyllis’s term as a director expired in January 2013, nine months before she and Kathryn voted to reelect her to a second term. In his suit, Richard argued that any board actions taken after Phyllis’s first term expired (including her reelection to a second term) were invalid because Phyllis was not a properly-elected director.

Under Indiana law, a nonprofit corporation must have a board of directors. Ind. Code § 23-17-12-1. Just as in a for-profit corporation, the corporation’s business and affairs are managed under the board’s direction and authority. I.C. § 23-17-12-1. The board of an Indiana nonprofit corporation must consist of at least three directors. I.C. § 23-17-12-3.

As to the term of the directors’ service, a nonprofit’s articles of incorporation or bylaws must specify the length of the directors’ terms. I.C. § 23-17-12-5. However, if a term is not specified in the organizing documents, the statutory default term is one year. I.C. § 23-17-12-5. Directors may be elected for successive terms. I.C. § 23-17-12-5.

In Doermer, Phyllis was elected to a three-year term pursuant to the Foundation’s bylaws, which stated that any director other than a surviving founder shall serve for three years. But the Foundation’s bylaws also provided that a director shall serve “until her or his successor is elected and qualified.” This language is consistent with the Act, which provides a safety net when a director’s term expires before the election or appointment of a new director. Despite the expiration, the Act states that “the director continues to serve until . . . a successor is elected, designated, or appointed and qualifies[.]” I.C. § 23-17-12-5(d).

In essence, the Foundation’s bylaws adopted the statutory safety net, and the board resolution first appointing Phyllis to the board in 2010 also used that language. Thus, when Phyllis’s term expired in January 2013, under the statute, bylaws, and board resolution, she continued to serve until her successor (Phyllis herself) was elected in September 2013. As a result, the court held that the expiration of Phyllis’s term prior to her reelection did not automatically render the board’s subsequent actions invalid.

This case illustrates how the Act’s provisions come into play when drafting an organization’s articles of incorporation and bylaws. The Act provides a nonprofit corporation with flexibility in some matters, minimum standards in others, and certain default provisions when the articles or bylaws are silent. A thorough knowledge and understanding of the Act is critical to drafting a nonprofit corporation’s organizing documents so that they both conform with the law and help the organization meet its goals.

If you are considering forming an Indiana nonprofit corporation, please let the attorneys in the Business Law Department of Smith Rayl Law Office, LLC know how we can help.