COM. EX REL. BEALES v. JOCO FOUNDATION, Record No. 011794.

• Decision Date: 11 January 2002
• Docket Number: Record No. 011794.
• Citation: 558 S.E.2d 280,263 Va. 151
• Court: Virginia Supreme Court
• Parties: COMMONWEALTH of Virginia, ex rel. The Honorable Randolph A. BEALES, Attorney General, et al., v. The JOCO FOUNDATION, et al.

558 S.E.2d 280

263 Va. 151

COMMONWEALTH of Virginia, ex rel. The Honorable Randolph A. BEALES, Attorney General, et al., v. The JOCO FOUNDATION, et al.

Record No. 011794.

Supreme Court of Virginia.

January 11, 2002.

Edward M. Macon, Senior Assistant Attorney General (Randolph A. Beales, Attorney General; William H. Hurd, Solicitor General; Judith Williams Jagdmann, Deputy Attorney General; Gregory E. Lucyk, Senior Assistant Attorney General; Donald R. Ferguson, Assistant Attorney General, on briefs), for appellants.

(Dianne E.H. Wilcox, Roanoke, for appellees, The JOCO Foundation, Dianne E.H. Wilcox, Judy Jarrells, William John Killinger, and The Phoenix Foundation, Inc.)

No brief or argument for appellees Sun-Trust Securities, Inc. and SunTrust Bank.

Present CARRICO, C.J., LACY, KEENAN, KOONTZ, KINSER, and LEMONS, JJ., and COMPTON, Senior Justice.

Opinion by Senior Justice A. CHRISTIAN COMPTON.

The question presented in this appeal is whether the circuit court has subject matter jurisdiction over this suit instituted by the Attorney General of Virginia, in the name of the Commonwealth. The suit involves a Virginia corporation duly established by the State Corporation Commission under the Virginia Nonstock Corporation Act, Code §§ 13.1-801 through -944 (the Act). The crux of the question is whether the State Corporation Commission is the proper forum for decision of the matters raised in the suit, or whether the Attorney General may proceed in the circuit court under some "inherent power" of the circuit court or under the common law to obtain the relief requested.

This proceeding is one of a series of lawsuits stemming from the 1996 death of Reid Jones, Jr., a philanthropist of Moneta, Virginia.

In January 2001, the Attorney General filed this suit in a pleading labeled "Bill of Complaint for Reformation and Removal of Directors." Among the defendants are The JOCO Foundation, Dianne E.H. Wilcox, Judy Jarrells, William John Killinger, SunTrust Bank, SunTrust Securities, Inc., and the Phoenix Foundation, Inc.

In the bill, the Attorney General asserts that he sues "in his official capacity as legal representative of the charitable beneficiaries of the JOCO Foundation, Inc., a charitable foundation established under the will of Reid Jones." He asserts that "under the common law and by statute," he "is the legal representative of the beneficiaries of all charitable trusts and charitable assets in the Commonwealth." According to the pleading, the "Attorney General possesses the common law authority to act on behalf of the public in matters involving charitable assets."

Further, the Attorney General asserts that The JOCO Foundation "is a Virginia corporation organized under § 501(c)(3) of the Internal Revenue Code to benefit community organizations and created under" the Jones will. He alleges that defendants Wilcox, Killinger, and Jarrells are JOCO's corporate directors, residing in Bedford County.

The bill of complaint states that the Sun-Trust defendants are named parties "because they currently hold the assets" of JOCO. The Attorney General alleges that, "on behalf of the intended beneficiaries" of JOCO, "he asserts this claim to the assets of the Foundation held by SunTrust to ensure that those assets are distributed as Reid Jones, Jr., intended when he created JOCO Foundation."

Additionally, the Attorney General alleges that "The Phoenix Foundation Inc., is a non-stock corporation created by Wilcox as a charitable foundation under her control and funded by money transferred from the JOCO Foundation. [Defendants] Wilcox, Killinger and Jarrells are all directors of the Phoenix Foundation, Inc. The Phoenix Foundation is an offshoot or 'alter ego' of the JOCO Foundation."

Also, the Attorney General asserts that he is "informed and believe[s]" that the individual defendants "have breached their fiduciary duties owed to the JOCO Foundation by acts of self-dealing, by engaging in actions which create conflicts of interest, by accepting and/or paying excessive fees for services rendered, and by taking actions and using assets of the JOCO Foundation for non-charitable purposes and/or purposes that conflict with the stated intentions of the testator, Reid Jones, Jr., all to the detriment of the intended beneficiaries of the JOCO Foundation."

Additionally, the Attorney General alleges that "the actions and/or inaction" of the individual defendants "have caused the assets of the JOCO Foundation to be jeopardized and threaten to frustrate the stated intent" of Jones.

The Attorney General further alleges that the "original Articles of Incorporation of the JOCO Foundation reflect ... Jones' express intention to use Foundation proceeds to benefit existing charities in the United States and particularly charities in the Roanoke, Virginia community." Instead, according to the allegations, the individual defendants have removed JOCO's assets from the United States to the Dominican Republic, either directly or by channeling the assets through the Phoenix Foundation, Inc.

Also, the Attorney General alleges that the individual defendants have authorized unnecessary or excessive expenditures of JOCO assets both in the United States and in the Dominican Republic, and that they will continue to remove assets "to be used, among other things for construction of a school in the Dominican Republic."

Continuing, the Attorney General lists certain conduct of the individual defendants under the heading "Breaches of Fiduciary Duties and Acts of Self Dealing." Included in the list are; Appointing JOCO directors "who are closely related to or are indebted to Wilcox or subject to her control;" employing Killinger and his company to perform construction work for JOCO, and using JOCO assets to pay Killinger fees and costs in excess of the market rate for services or materials provided; "hiring family members or friends to perform unnecessary services" for JOCO, and paying those persons with JOCO funds; creating in 1999 the Phoenix Foundation for the purpose of using JOCO assets "to travel to and spend time at a resort in the Dominican Republic and to build a school" there, thus contravening Jones' intent in establishing JOCO to benefit existing charities in the United States and in the Roanoke area; and, amending the JOCO articles of incorporation "to delete the geographic limitation ... and give the Board of Directors nearly unlimited discretion in distributing the funds of the JOCO Foundation."

In the prayer for relief, the Attorney General specifically seeks: Removal of the individual defendants as JOCO directors and replacement with "new, independent directors;" rescission or reformation of the JOCO articles of incorporation; appointment of a receiver to conduct audits of JOCO's and Phoenix's financial records; an injunction against SunTrust from releasing or distributing corporate funds; an injunction against the individual defendants prohibiting distribution of Phoenix funds; and, an order requiring Phoenix "to return all funds transferred to it or `donated' to it by the JOCO Foundation."

In the prayer, the Attorney General also asks the court to "order such terms and conditions as it deems appropriate to protect the public's interest in the charitable assets of the JOCO Foundation."

In "Answer[s] and Grounds of Defense," the individual defendants, JOCO, and Phoenix generally deny "that the relief requested in the Complaint is justified under the facts of this case."

In an answer, the SunTrust defendants admit holding "the assets of The JOCO Foundation, Inc.," and state that the court's permission to interplead the assets has been sought in a separate proceeding. SunTrust asks that it be dismissed from this suit and that the court grant its request for interpleader, "which will satisfy the Plaintiffs' goal of preventing SunTrust from releasing or distributing the funds of The JOCO Foundation (except as authorized by further decree or order of this Court)."

The Attorney General then filed a motion "for entry of a preliminary injunction to be entered against defendants Wilcox, Jarrells and Killinger enjoining them from taking any action with respect to the funds and assets of The JOCO Foundation, Inc., or the Phoenix Foundation, Inc., until the claims in this case are resolved, and for a further Order appointing a Special Receiver to manage and operate The JOCO Foundation, Inc. and the Phoenix Foundation, Inc., while this litigation is pending." With a memorandum supporting the motion, the Attorney General filed 14 pages of exhibits. In response, defendant Wilcox filed an extensive memorandum, with 33 exhibits.

During an April 2001 hearing on the motion, at which no evidence was heard, the trial court considered argument of counsel. The Attorney General represented to the court: "Our main objective in this instant action is to preserve the charitable assets until there has been a review of the financial position of the foundation . ..." He argued that the trial court has "inherent authority" to appoint a receiver under these circumstances, and that "the common law" relating to the fiduciary duties of corporate directors applies to enable the court to grant the motion.

During the hearing, the trial court inquired about "the authority of the Court to grant the relief requested." Addressing that inquiry, Wilcox argued: "Corporations are a creature of statute. JOCO and Phoenix are both non-stock corporations governed by the Virginia Non-stock Corporation Act and not by common law. All of the authority cited by petitioners are trust cases, have no applicability whatsoever." She contended that the Attorney General must seek relief through statutes dealing with corporations.

Upon consideration of the bill of complaint, the memoranda of the parties, and counsel's argument, the trial court ruled in a May 2001 order "that it lacks subject matter jurisdiction over the Commonwealth's claims seeking appointment of a receiver...