KAPPA SIGMA v. KAPPA SIGMA

• Decision Date: 31 October 2003
• Docket Number: Record No. 022435.
• Court: Virginia Supreme Court
• Parties: KAPPA SIGMA FRATERNITY, INC. a/k/a Kappa Sigma Memorial Foundation, et al. v. KAPPA SIGMA FRATERNITY, et al.

587 S.E.2d 701

266 Va. 455

KAPPA SIGMA FRATERNITY, INC. a/k/a Kappa Sigma Memorial Foundation, et al. v. KAPPA SIGMA FRATERNITY, et al.

Record No. 022435.

Supreme Court of Virginia.

October 31, 2003.

E. Duncan Getchell, Jr., (R. Craig Wood; Michael E. Derdeyn; Amy M. Pocklington; McGuireWoods, on briefs), Richmond, for appellants.

(Lori Vaughn Ebersohl; Jennifer K. Cannon; David J. Cynamon; Shaw Pittman, on brief), Washington, D.C., for appellees. Appellees submitting on brief.

Present: All the Justices.

OPINION BY Justice BARBARA MILANO KEENAN.

In this appeal, the primary issue is whether a statute of limitations defense is applicable to bar a claim that certain amendments to a nonstock corporation's articles of incorporation are invalid.

Kappa Sigma Fraternity (the Fraternity) is an unincorporated membership association that was founded in 1869 at the University of Virginia. At the time this case was heard in the circuit court, the Fraternity had over 158,000 alumni and about 215 undergraduate chapters located at colleges and universities in the United States and Canada. The Fraternity is governed by a five-member "Supreme Executive Committee" (Fraternity Committee) and meets on a biennial basis at "Grand Conclaves" held every odd-numbered year.

In 1965, the Fraternity acquired a contract right to purchase certain real property in Albemarle County. The Fraternity planned to use the property, which was about 17 acres in size and contained various improvements, as the Fraternity's permanent headquarters and as a "perpetual memorial" to the Fraternity.

In 1966, the Fraternity formed a nonstock corporation, Kappa Sigma Fraternity, Inc., a/k/a Kappa Sigma Memorial Foundation (the Foundation), to hold legal title to the property. The Fraternity assigned its contract to purchase the property to the Foundation, and the Foundation acquired legal title to the property.

At the time of purchase, the property contained a "main house" and a "carriage house." The Fraternity used these facilities to house its administrative offices and a museum dedicated to the history of the Fraternity.

The Foundation's original articles of incorporation stated that the purpose of the Foundation was "to operate an international fraternity and to promote friendship and brotherly feeling among its members." The articles also defined the membership classes of the Foundation:

(1) ACTIVE CHAPTERS shall be those chartered by the Board of Directors of the corporation and shall be composed of four or more male persons who are students at some one college or university.

(2) ALUMNI CHAPTERS shall be those chartered by the Board of Directors of the corporation and shall be composed of ten or more alumni of the fraternity residing in or near the same locality.

(3) ALUMNI MEMBERS shall be those alumni of the fraternity who are not affiliated with an alumni chapter.

The articles accorded each of these membership classes voting rights and provided that each alumni member present at the biennial meeting was entitled to cast one vote. The articles also provided for a five-member Board of Directors (the Board) "elected by the vote of the members of the corporation at the [biennial] meeting of the corporation to be held every odd numbered calendar year."

The Foundation's biennial meeting was intended to coincide with the Fraternity's biennial "Grand Conclave." The five-member Fraternity Committee served as the Foundation's original Board. However, after 1967, the members of the Fraternity Committee, which were elected by the Fraternity every two years, and the membership of the Foundation's Board began to diverge.

In 1967, the Board approved certain amendments to the Foundation's articles of incorporation (the 1967 amendments). These amendments attempted to transform the Board of Directors into a Board of Trustees and provided that the purpose of the Foundation was "to hold property, both real and personal, for the benefit of the Kappa Sigma Fraternity." The 1967 amendments further provided that the "Trustees shall serve for life." The 1967 amendments were not ratified by the members of the Foundation.

In 1974, the Board again voted to amend the Foundation's articles of incorporation (the 1974 amendments) to qualify the corporation as a charitable organization exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. The 1974 amendments restated the purpose of the corporation as follows:

The Corporation is organized for educational and charitable purposes. It shall have the power to hold title to property, both real and personal. It shall have the power to solicit funds, to grant scholarships, to conduct leadership training schools and to cooperate with educational, medical and other charitable institutions.

The 1974 amendments provided that the "[c]orporation shall have no members," but these amendments were approved only by the Board. The members never ratified the 1974 amendments.

In the mid-1970s, the Foundation built a "training center" on the property to serve as a conference center. The training center contained a large meeting room and dormitory space to house visiting members of the Fraternity and other guests. The Foundation sponsored leadership conferences at the training center for the Fraternity's undergraduate chapters. The training center also was made available for the use of other charitable and educational institutions.

There were various "lease arrangements" between the Fraternity and the Foundation. In one such arrangement, the Fraternity entered into a "triple net lease obligation" with the Foundation to lease space on the premises for the Fraternity's headquarters. In exchange for its use of the property, the Fraternity paid all the property's maintenance costs, expenses, taxes, and insurance. In addition, the Fraternity provided all the Foundation's administrative services and supervised the training facility for the Foundation.

In recent years, various disputes arose between the Fraternity and the Foundation concerning the lease arrangement, the solicitation of funds for the Foundation, and the Foundation's use of its charitable assets. In 1999, the Foundation decided to sell the real property for certain stated reasons, including to optimize use of the Foundation's assets and to comply with the Foundation's charitable purpose.

In a letter transmitted in November 1999, the Foundation informed the Fraternity of the Foundation's decision to sell its real property. In April 2001, the Foundation notified the Fraternity that the property had been listed for sale. The Foundation sought a price of $6,500,000 for the property.

The property, which is the Foundation's primary asset, had an appraised value of $4,500,000 at the time it was listed for sale. The Foundation also holds cash and investments which primarily have been donated by members and alumni of the Fraternity.

The Fraternity and three alumni, Thomas P. Bishop, Kevin S. Kaplan, and E.L. Betz, Jr. (the individual petitioners), filed a "Second Amended Bill of Complaint for Declaratory Judgment, Injunctive Relief, and Petition" against the Foundation and the individual members of its board of trustees (collectively, the Foundation). The Fraternity and the individual petitioners (collectively, the Fraternity) asked the chancellor, among other things, to declare that legal title to the property was held in an express trust by the Foundation for the benefit of the Fraternity, and to place the Foundation's funds in a constructive trust "for the furtherance of the charitable and educational goals of the Fraternity."

The Fraternity also asked the chancellor to declare that the original 1966 articles of incorporation "remain in full force and effect and that all subsequent amendments or restatements of the Articles of Incorporation are null and void" because those amendments and restatements were not ratified by the Foundation's members. The Fraternity asked the chancellor to order a meeting of the Foundation's members pursuant to Code § 13.1-840 for the purpose of electing new directors to the Foundation's board. In response, the Foundation raised various affirmative defenses, including that certain statutes of limitation barred the Fraternity's suit.

In briefs submitted to the chancellor, the Fraternity argued that its bill of complaint was not barred by any statute of limitations because "[t]he Fraternity responded promptly when its property rights ... were threatened by sale and it discovered, (through due diligence that it previously had no reason to undertake), that its members had voting rights in [the Foundation]." The Fraternity asserted that the Foundation "did not breach its trust until November 8, 1999, at the earliest," when the Foundation announced its intention to sell the property. The Fraternity also contended that the 1967 and 1974 amendments were void, rather than "merely voidable," because they were not ratified by the Foundation's members.

Former Code § 13.1-236, in effect when the Board approved the 1967 and 1974 amendments, provided in relevant part:

Amendments to the articles of incorporation shall be made in the following manner:

(a) Where there are members having voting rights, the board of directors shall adopt a resolution setting forth the proposed amendment, finding that it is in the best interests of the corporation and directing that it be submitted to a vote at a meeting of members having voting rights, which may be either an annual or a special meeting. Notice shall be given to each member entitled to vote at such meeting within the time and in the manner provided in this Act for the giving of notice of such meetings of members. The proposed amendment shall be adopted upon receiving more than two thirds of the votes entitled to be cast by members present or represented by proxy at such meeting.

The chancellor heard the evidence ore tenus. In a letter opinion, the chancellor concluded that under ...