562 N.E.2d 27 (Ind.App. 1 Dist. 1990), 53A01-8912-CV-493, Kirtley v. McClelland

Docket Nº:53A01-8912-CV-493.
Citation:562 N.E.2d 27
Party Name:William F. KIRTLEY, Phyllis Kirtley and Thomas Garrison, Directors of The Pointe Services Association, Inc., and Terry Pierson, as a past director of The Pointe Services Association, Inc., Appellants (Defendants Below), v. Howard W. McCLELLAND, et al, Appellees (Plaintiffs Below). The POINTE SERVICES ASSOCIATION, INC., Cross-Appellant (Defendant Be
Case Date:October 31, 1990
Court:Court of Appeals of Indiana
 
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Page 27

562 N.E.2d 27 (Ind.App. 1 Dist. 1990)

William F. KIRTLEY, Phyllis Kirtley and Thomas Garrison,

Directors of The Pointe Services Association, Inc., and

Terry Pierson, as a past director of The Pointe Services

Association, Inc., Appellants (Defendants Below),

v.

Howard W. McCLELLAND, et al, Appellees (Plaintiffs Below).

The POINTE SERVICES ASSOCIATION, INC., Cross-Appellant

(Defendant Below),

v.

Thomas A. BERRY, Esq., Cross-Appellee (As attorney and in

trust for all Plaintiffs below).

No. 53A01-8912-CV-493.

Court of Appeals of Indiana, First District.

October 31, 1990

Opinion on Denial of Rehearing Feb. 12, 1991.

Page 28

William H. Andrews, Michael L. Carmin, Cotner Andrews Mann & Chapman, Bloomington, for appellants.

Thomas A. Berry, Berry & Mills, Bloomington, David A. Reidy, Jr., Gosport, for appellees.

ROBERTSON, Judge.

For the purpose of simplifying the identity of the parties to this appeal, the appellant-defendants will be referred to as the directors or as Kirtley and the appellee-plaintiffs as the Pointe Service Association (PSA). The appellants, William Kirtley, Phyllis Kirtley, Thomas Garrison and Terry Pierson, present or past directors of The Pointe Services Association, Inc., a unit owner's association, appeal from a judgment rendered against them following the bench trial of a shareholders' derivative action. The judgment ordered payment in the sum of approximately $150,000, an accounting and transfer of funds, and ordered payment of attorneys' fees.

We affirm in part, reverse in part, and remand with instructions.

An overview of the basic facts shows that "the Pointe" is a planned residential community built around a golf course and situated on the shore of Lake Monroe. In 1974, Caslon Development Co., the original developer, created the resort community, starting with four independent condominium villages totaling about 250 units. Eventually, plans called for a total of about 1500 residences. To facilitate general community administration, Caslon subjected the development property to certain covenants and restrictions for the benefit of the community as a whole, incorporated PSA, an Indiana not-for-profit corporation, and delegated to PSA responsibility for:

maintaining and administering the common areas and common facilities, administering and enforcing ... covenants and restrictions, establishing a procedure for assessing its members, and disbursing ... charges and assessments.

For the most part, PSA acts through its managing agent to perform these duties. It handles, for example, road maintenance, snow removal, general grounds maintenance, accounting services and repairs on the television system, all through contractors. PSA has no employees or equipment other than a television tower and antennae.

Caslon created two classes of membership in PSA as a means of maintaining control over the development process: class A consisted of the owners of units or residential lots while class B referred to the 1500 potential memberships held by Caslon. If all went as planned, Caslon would gradually relinquish control over PSA as well as ultimate financial responsibility [Caslon paid no dues but was to fund deficits in PSA's annual budget], such that

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PSA, which had high fixed maintenance and security costs, would become self-funding. In any event, by the terms of the Declaration of Covenants, Conditions and Restrictions (Declaration) Caslon would be out of PSA by January 1, 1990.

However, by 1982, growth of the Pointe had stagnated. Only 344 units had been sold. Financial considerations caused Caslon's successor, Indun Realty, a subsidiary of Indiana National Corporation, to attempt to sell the development. A buyer for the entire project could not be found; but, the country club, 30 residential units, and the golf course were sold to Resort Management Association (RMA), a limited partnership formed by the directors. As part of the agreement to purchase, RMA became the managing agent of PSA.

Development at the Pointe remained slow. Kirtley became concerned that RMA's investment in the club could be devalued by the plans of potential purchasers of the remaining land and so entered into negotiations with Indun to purchase the undeveloped property at the Pointe. Once the purchase had been consummated, in December, 1982, Kirtley formed a partnership, Pointe Development Company (PDC), and conveyed the property to PDC. Indun assigned the 1500 PSA class B memberships to Kirtley who assigned them to PDC and elected appellants Kirtley, his wife Phyllis Kirtley and brother-in-law Pierson the new directors of PSA. PDC began making changes immediately to encourage the sale of additional units. Among the changes, PDC sold tracts to builders and then diverted part of the purchase price to PSA to fund the deficit.

Over time, discontentment grew among the unit owners who were unable to elect board members, had no say in PSA's decision-making, and were unable to exercise any control over PSA assessments or spending. As a consequence, a group of class A unitowners brought this action against the directors alleging a number of irregularities in the management of the Pointe. One of the points of contention concerns payment to RMA for mowing certain easements and other property shared with PSA. Another involves Kirtley's purchase and sale of television satellite equipment. The issues raised in this appeal are as stated hereafter.

I.

Whether the court erred in denying defendant's motion to dismiss the second amended complaint where no Indiana statutory or common law authority exists for a shareholder's derivative suit against a non-profit corporation.

The directors argue first that the court below erred in denying their motion to dismiss in which they asserted that McClelland and the other plaintiffs, as members of a nonprofit corporation, lacked standing to maintain an action on behalf of the corporation. The directors emphasize the absence of express statutory authorization in the Indiana Not-for-Profit Corporation Act of 1971, Ind.Code 23-7-1.1, and case law addressing use of the derivative remedy by members of nonprofit corporations. They urge a narrow reading of Ind. Trial Rule 23.1, arguing that the language "shareholders" refers to "corporation" while "members" used in conjunction with "unincorporated association" refers solely to members of unincorporated associations.

But for being members of a not-for-profit corporation, PSA has stated a cause of action. The appellees have brought the action to recover losses the corporation wrongfully sustained through the allegedly improper actions of its officers and directors, a situation where relief ordinarily would be obtained through suit by the corporation acting to protect its property and interests but the corporation either actually or effectively refuses to institute suit on its own. Hence, the essence of the question before us is simply whether an equitable forum is available to a corporation formed for purposes other than pecuniary gain to redress injury to its property and interests.

Admittedly, few examples of derivative actions brought by members of not-for-profit corporations or incorporated associations can be found in Indiana case law, but see, e.g., Consumers' Gas Trust Co. v. Quinby (7th Cir.1905), 137 F. 882, cert.

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denied, 198 U.S. 585, 25 S.Ct. 803, 49 L.Ed. 1174 even though corporations organized for purposes other than pecuniary gain have had legislative approval since at least 1901. See e.g. Rev.St. 1889, ch. 79 (Burns' Ann.St. 1901 Sec. 4613). Nonetheless, we are convinced that equitable redress would have been available at common law for members of a nonprofit corporation or an incorporated voluntary association had such plaintiffs sought to utilize it.

First, there is nothing about the remedy itself which warrants distinctive treatment based upon corporate purpose, for a derivative action by nature has as its aim the non-pecuniary benefit of the corporation, not the individual stockholder or member. Scott v. Anderson Newspapers, Inc. (1985), Ind.App., 477 N.E.2d 553, trans. denied; J. Pomeroy, Equity Jurisprudence Sec. 1090 (1941). A stockholder is permitted to sue on behalf of the corporation, not because his rights have been violated, but simply as a means of setting in motion the judicial machinery of the court. The stockholder commences the action and prosecutes it, but in every other respect the action is brought by the corporation; it is maintained directly for the benefit of the corporation and final relief when obtained belongs to the corporation. Pomeroy, Sec. 1095; Dotlich v. Dotlich (1985), Ind.App., 475 N.E.2d 331, 339, trans. denied.

The stockholder plaintiff never has a direct interest in the subject matter of the controversy because he owns no estate, legal or equitable, in the corporation's property. He is permitted, notwithstanding the want of a direct interest, to maintain an action solely to prevent an otherwise complete failure of justice. Pomeroy, Sec. 1095. Equity will not suffer a wrong without a remedy. Dodd v. Reese (1940), 216 Ind. 449, 462, 24 N.E.2d 995, 999. Jurisdiction of a court of equity does not depend upon the mere accident of the court having in some previous case granted relief under similar circumstances. Id. Consequently, courts of equity have granted relief even to a former shareholder of a merged corporation when its equity has been adversely affected by the fraudulent act of an officer or director and means of redress otherwise would be cut off by the merger. Cf. Gabhart v. Gabhart (1977), 267 Ind. 370, 392, 370 N.E.2d 345, 358.

In Indiana, standing is achieved by showing a personal interest in the corporation. Wright v. Floyd (1908), 43 Ind.App. 546, 86 N.E. 971...

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