Wier v. Howard Hughes Medical Institute

• Decision Date: 26 October 1979
• Citation: 407 A.2d 1051
• Parties: Richard R. WIER, Jr., Attorney General of the State of Delaware, and William R. Lummis, Delaware Ancillary Administrator of the Estate of Howard R. Hughes, Jr., Plaintiffs, v. HOWARD HUGHES MEDICAL INSTITUTE, a Delaware Corporation, Defendant.
• Court: Court of Chancery of Delaware

Page 1051

407 A.2d 1051

Richard R. WIER, Jr., Attorney General of the State of

Delaware, and William R. Lummis, Delaware

Ancillary Administrator of the Estate of Howard R. Hughes, Jr., Plaintiffs, v. HOWARD HUGHES MEDICAL INSTITUTE, a Delaware Corporation, Defendant.

Court of Chancery of Delaware, New Castle County.

Submitted July 12, 1979.

Decided Oct. 26, 1979.

On Motion to Dismiss the Complaint as to William R. Lummis, Delaware Ancillary Administrator of the Estate of Howard R. Hughes, Jr. Granted.

Henry N. Herndon, Jr., Edward M. McNally and Daniel H. Krapf of Morris, James, Hitchens & Williams, Wilmington, for movant, the defendant, Howard Hughes Medical Institute.

Richard L. Sutton, Jesse L. Burke and Thomas John Allingham, II of Morris, Nichols, Arsht & Tunnell, Wilmington, for plaintiff William R. Lummis, Delaware Ancillary Administrator of the Estate of Howard R. Hughes, Jr.

MARVEL, Chancellor:

This action to determine the appropriate person or entities to manage and control the policies of the defendant charitable corporation was filed jointly in the names of the Attorney General of the State of Delaware and of William R. Lummis, the Delaware ancillary administrator of the estate of the late Howard R. Hughes, Jr. The defendant Howard Hughes Medical Institute is a tax-exempt charitable corporation incorporated in Delaware and founded by the late Howard R. Hughes, Jr., in 1953, the latter having constituted himself at that time Trustee of the Institute with full power to manage and control its affairs as provided for in the defendant's certificate of incorporation. The matter now before the Court in this litigation is whether or not the defendant Institute should be managed and controlled by a Trustee, as the late Mr. Hughes originally intended, or by a so-called Executive Committee.

The defendant Howard Hughes Medical Institute, while conceding the authority of the Attorney General of the State of Delaware to see to the proper administration of a Delaware charitable corporation, has, on the other hand, moved to dismiss this action insofar as it is brought by the plaintiff Lummis on the primary ground that such plaintiff, in seeking to participate in this litigation, has no clear legal right to assert and therefore lacks standing to participate in this proceeding as a litigant, Wm. Penn Parking Garage, Inc. v. City of Pittsburgh, 464 Pa. 168, 346 A.2d 269 (1975), and Investment Company Institute v. Camp, 274 F.Supp. 624 (D.D.C.1967). In response to this contention, the plaintiff Lummis argues that as a matter of law he has succeeded to Mr. Hughes' position as Trustee of the Institute, and that, in any event, as the Delaware ancillary administrator of the Hughes estate he has a duty to see to it that a qualified successor Trustee of the defendant Institute is appointed by this Court. The Howard Hughes Medical Institute was, as noted above, founded in 1953 as a non-profit Delaware corporation, having as its avowed purpose the advancement of human knowledge within the limits of the established sciences and the application of such knowledge to the improvement of the lot of mankind. It continues to perform such function on an increasing scale.

In addition to overseeing its clearly assigned medical research functions, a corporate Executive Committee of the Institute now claims full responsibility for overseeing the handling of the Institute's endowment fund, the growth in the value of which has allegedly permitted the Institute, as noted above, to continue to expand its medical research activities.

Such Executive Committee was established by Mr. Hughes on December 17, 1953, the day on which the Institute was incorporated. At the inception of the enterprise, at Mr. Hughes' direction, the Executive Committee was to " * * * have and exercise such powers, duties, and authorities as the Trustee may from time to time designate." On July 3, 1968, however, Mr. Hughes allegedly caused to be adopted the following so-called "Resolution of Trustee."

"RESOLVED that except as may be otherwise provided in the Certificate of Incorporation or in further resolutions of the Trustee, there is hereby delegated to the Executive Committee all of the duties and powers to manage the affairs of the corporation which Delaware law had conferred upon the boards of directors of corporations organized for profit."

As noted above, the original certificate of incorporation of the Institute had provided that the Institute was to be managed and controlled by a Trustee to be named by the incorporators, and on December 17, 1953, such incorporators had named Howard R. Hughes as such Trustee, a position he continued to hold until his death on April 5, 1976.

Such certificate of incorporation further provided that successor Trustees were to be chosen either by an incumbent Trustee or in the manner designated by the original Trustee. Inasmuch as Mr. Hughes died without naming a successor Trustee, or designating a means for selecting such a successor, the affairs of the Institute have in recent years been largely controlled by Mr. F. W. Gay and Mr. Chester C. Davis, majority members of the so-called Executive Committee of the corporation.

On March 1, 1957, the Internal Revenue Service had ruled that the Institute was a charitable corporation exempt from federal income taxation under the provisions of § 501(c)(3) of the Internal Revenue Code of 1954, and after passage of the Tax Reform Act of 1969, the Internal Revenue Service continued to be of the opinion that the Institute, being directly engaged in the continuous active conduct of medical research in conjunction with hospitals as described in Section 170(b)(1)(A)(iii) of the Code, was tax exempt. The basis of these rulings is found in the fact that Mr. Hughes prior to his death did not have any pecuniary interest in either the Institute or its assets, inasmuch as the Institute, as in the case of any other tax exempt charity, could not have attained § 501(c)(3) status if either its articles of incorporation or applicable state law were to permit its assets upon dissolution to be distributed to its members or shareholders, or its net earnings in any manner be made to inure in whole or in part of the benefit of private shareholders or individuals. ¹

The Institute's methods of operation were recently reviewed by the Internal Revenue Service, which noted the growth of the Institute's medical research activities which had occurred since January 1, 1972, and reaffirmed its earlier opinion that the Institute is directly engaged in the active conduct of medical research and thus tax exempt.

On July 10, 1978, the Executive Committee of the Institute under the aforesaid alleged control of Messrs. Gay and Davis purported to amend defendant's original certificate of incorporation and corporate by-laws so as to abolish the powers, duties, and office of the Trustee and to vest the authority of such office in themselves and a Dr. George W. Thorn, constituting a so-called Executive Committee, ² it being noted that Mr. Hughes had allegedly approved an earlier by-law providing that in the absence of a Trustee, the Executive Committee should also possess and exercise the powers of the Trustee.

The plaintiff Lummis now claims, as noted above, that as the personal representative of the estate of the late Mr. Hughes in the State of Delaware he has by operation of law become the Member and the Trustee of the Institute. Alternatively, said plaintiff contends that if he has not thus become the Trustee of the Institute, then as the Delaware ancillary administrator of the Hughes estate, he has the duty to see to it that an appropriate successor Trustee is appointed by the Court.

It is the Institute's present position that both of these contentions fail as a matter of law, and while the Institute has taken the position that the appointment of a successor Trustee is in any event unnecessary because of the powers now allegedly vested in the Executive Committee, it must be assumed for the purposes of the pending motion that the Institute's certificate of incorporation, as of prior to the July 10, 1978 amendment, is the controlling document, and that a successor Trustee is accordingly required, Tatro v. Esham, Del.Super., 335 A.2d 623 (1975).

In support of its first contention that Mr. Lummis did not as a matter of law succeed to the office of Trustee upon Mr. Hughes' death the Institute argues that as Mr. Hughes' Delaware ancillary administrator Mr. Lummis' sole duties are to collect the assets of the estate of the late Howard R. Hughes, pay such decedent's debts, and finally to distribute any residue and remainder to his domiciliary representative, or to the beneficiaries of his estate, New York Trust Co. v. Riley, 24 Del.Ch. 354, 16 A.2d 772 (1940). It is therefore contended that the professed interest of Mr. Lummis in the internal affairs of the Institute must necessarily exist only to the extent that any interest of Mr. Hughes in the defendant Institute constitutes an asset of his estate.

Referring to paragraphs of its certificate of incorporation as well as applicable by-laws, the Institute submits that Mr. Hughes' interests in such organization at the time of his death were solely those having to do with the appointment and removal of corporate officers, interests which had no pecuniary value and which could not conceivably pass to an executor or administrator.

Turning to the nature of the interest, if any, of the estate of the late Howard R. Hughes in the Institute, it is clear, first of all, that a member of a non-stock corporation has no vested right in such a membership in that unlike stock held in a business corporation, membership in a non-stock corporation may not be transferred or inherited unless the corporate charter or by-laws of such a corporation so provide, McCaffrey v. Pittsburgh Athletic Ass'n, 448 Pa. 151, 293 A.2d 51 (1972), and In re Mt. Sinai Hospital, 250 N.Y. 103, 164 N.E....