State By and Through Pierotti ex rel. Boone v. Sundquist, 02S01-9311-CV-00072

• Decision Date: 29 August 1994
• Docket Number: No. 02S01-9311-CV-00072,02S01-9311-CV-00072
• Citation: 884 S.W.2d 438
• Parties: STATE of Tennessee By and Through John W. PIEROTTI, District Attorney General, ex rel. Col. Lewis P. BOONE, Jr., USAF (Ret.), Otis N. Fussell, and Edgar Johnson, Individually and on behalf of all others similarly situated, Plaintiffs-Appellees, and Psalms, Inc., Involuntary Plaintiff, v. Don SUNDQUIST, Jon Simpson, Fred Grogan, Howard Oakley, Berry Terry, William Morris, III, Martha Sundquist, Mack Browder, and William H. Martin, Defendants-Appellants.
• Court: Tennessee Supreme Court

Page 438

884 S.W.2d 438

STATE of Tennessee By and Through John W. PIEROTTI, District Attorney General, ex rel. Col. Lewis P. BOONE, Jr., USAF (Ret.), Otis N. Fussell, and Edgar Johnson, Individually and on behalf of all others similarly situated, Plaintiffs-Appellees and Psalms, Inc., Involuntary Plaintiff, v. Don SUNDQUIST, Jon Simpson, Fred Grogan, Howard Oakley Berry Terry, William Morris, III, Martha Sundquist, Mack Browder, and William H Martin, Defendants-Appellants.

No. 02S01-9311-CV-00072.

Supreme Court of Tennessee at Jackson.

Aug. 29, 1994.

Petition to Rehear Denied Oct. 3, 1994.

Frank J. Glanker, Jr., C. Barry Ward, Paul R. Lawler, Glankler Brown, Memphis, for plaintiffs-appellees.

Leo Bearman, Jr., Elizabeth E. Chance, Heiskell, Donelson, Bearman, Adams, Williams & Caldwell, Memphis, for defendants-appellants.

OPINION

REID, Chief Justice.

This case presents an appeal by the defendants-appellants, current and former members of the board of directors of Psalms, Inc. ("Psalms"), from the decision of the Court of Appeals that a quo warranto action may be maintained against them pursuant to T.C.A. § 29-35-102. The judgment of the Court of Appeals is affirmed.

Psalms is a corporation chartered by the State of Tennessee in 1981 for the purpose of "fulfill[ing] the social needs of humanity, particularly for the elderly, by providing for the total care of the elderly including housing, sustenance, medical and other physical needs." The corporation has no shareholders or members, and is controlled entirely by its board of directors. It has qualified as a Section 501(c)(3) corporation under the Internal Revenue Code. Psalms owns a retirement community in Memphis, Tennessee, called Kirby Pines Estates ("Kirby Pines").

Each individual plaintiff became a resident of Kirby Pines pursuant to a written contract with Psalms. The contract requires the resident to pay a substantial entrance fee and a monthly maintenance fee. In exchange, Psalms is required to provide the resident with care for life, including care in the Psalms nursing facility, if needed, at no additional charge. Upon the death of a resident, Psalms is obligated to refund 50 percent of the entrance fee to the resident's estate. The contract specifically provides that the residents of Kirby Pines do not obtain any rights, title or interest in the real or personal property of Kirby Pines or Psalms.

The individual plaintiffs sued the board of directors of Psalms individually on the following alternative theories: (1) a derivative action under T.C.A. § 48-56-401 on behalf of the corporation against the directors for grossly negligent management of the corporation; (2) an action for breach of fiduciary duties owed by the directors to the plaintiffs; and (3) violation of the Tennessee Consumer Protection Act, T.C.A. §§ 47-18-101 et seq. The State on relation of the individual plaintiffs, by and through the District Attorney General, joined as a party plaintiff and asserted a cause of action against the defendants in the nature of quo warranto pursuant to T.C.A. §§ 29-35-101 et seq. The plaintiffs did not allege that Psalms had breached any of its contracts with the residents; nor did they allege that the directors had induced Psalms to breach any of its contracts with the residents. Rather, the plaintiffs alleged that the directors have been grossly negligent in the management of the corporation's affairs and their mismanagement has jeopardized the corporation's ability to perform according to the "lifecare" contracts.

The trial court granted the defendants' motion for summary judgment, on the ground that the plaintiffs lacked standing to maintain the action under any theory asserted. The Court of Appeals affirmed the trial court on all issues except the action in the nature of quo warranto. The Court of Appeals ruled that the plaintiffs could not bring a derivative suit, because they were neither directors nor members of Psalms. The Court of Appeals also held that the directors owed no fiduciary duty to the plaintiffs as third persons contracting with the corporation. The Court of Appeals found no cause of action under the Tennessee Consumer Protection Act, because there was no "consumer transaction" between the plaintiffs and the directors. This Court affirms, without discussion, the decision of the Court of Appeals affirming summary judgment for the defendants on these grounds.

With regard to the quo warranto action, however, the Court of Appeals reversed the trial court and found that the plaintiffs have standing as relators under T.C.A. § 29-35-102, and held that that statute applies to the "affairs of public or charitable corporations." The Court of Appeals then concluded that Psalms is a "charitable institution," thus making its directors subject to a quo warranto proceeding.

The first issue to be considered in reviewing this decision by the Court of Appeals is whether a quo warranto action may be brought under T.C.A. § 29-35-102 against the directors of a charitable corporation. In State ex rel. Cates v. Standard Oil Co. of Kentucky, 120 Tenn. 86, 110 S.W. 565 (1908), aff'd, 217 U.S. 413, 30 S.Ct. 543, 54 L.Ed. 817 (1910), the Court reviewed the origin of quo warranto:

The writ of quo warranto and the information in the nature of quo warranto have been used against corporations and against persons claiming corporate franchises from the earliest times. The ancient theory of the remedy was that a franchise is a portion of the royal prerogative, granted to the subject and existing in his hands, and that to misuse or usurp this delegated right is an infringement upon the rights of the sovereign; and accordingly, as elsewhere seen, the form of the judgment anciently was that the franchise be seized into the king's hands. In the United States the sovereign power resides in the State, the commonwealth, or the people, according to various theories, and the information in such a case proceeds on the same theory. The theory is that "it is a tacit condition of a grant of incorporation that the grantees shall act up to the end or design for which they were incorporated; and hence, through neglect or abuse of its franchises, a corporation may forfeit its charter as for condition broken, or for a breach of trust," and that, "where there has been a misuser or a nonuser in regard to matters which are of the essence of the contract between the corporation and the State, and the acts or omissions complained of have been repeated and willful, they constitute a just ground of forfeiture." (citation omitted)

120 Tenn. at 121-122, 110 S.W. at 573.

Although neither the ancient writ of quo warranto, nor the information in the nature thereof, was ever in force in this State, the legislature, from time to time, has passed acts that accomplish the same purposes. State ex rel. v. McConnell, 71 Tenn. 332, 335 (1879). Section 8 of the Acts 1845-1846, Chapter 55, stated in pertinent part:

It shall be lawful for the Attorney General to file a bill, in the nature of a bill in equity, in the court of chancery or circuit court, as hereinbefore directed, to restrain by injunction any corporation from assuming or exercising any franchise not granted; to bring the directors, managers and officers of a corporation, or the trustees of funds given for a public or charitable purpose to an account for the management and disposition of the property confided to their care; to remove such officers or trustees upon proof of misconduct; to secure for the benefit of all interested the property or funds aforesaid; to set aside and restrain improper alienations thereof, and generally to compel faithful performance of duty; to prevent malversation, peculation and waste.... (emphasis added)

When codified in 1858, the above provision was separated into multiple sections, which are substantially the same as the current quo warranto statutes, T.C.A. §§ 29-35-101 et seq. The pertinent statutes provide as follows:

29-35-101. Grounds for action.--An action lies in the name of the state against the person or corporation offending, in the following cases:

(1) Whenever any person unlawfully holds or exercises any public office or franchise within this state, or any office in any corporation created by the laws of this state;

(2) Whenever any public officer has done, or suffered to be done, any act which works a forfeiture of his office;

(3) When any persons act as a corporation within this state, without being authorized by law;

(4) Or if, being incorporated, they:

(A) Do or omit acts which amount to a surrender or forfeiture of their rights and privileges as a corporation;

(B) Exercise powers not conferred by law; or

(C) Fail to exercise powers conferred by law and essential to the corporate existence.

29-35-102. Corporate officers--Trustees.--The action also lies against the directors, managers, and officers of a corporation, or the trustees of funds given for a public or charitable purpose:

(1) To bring them to an account for the management and disposition of property intrusted to their care;

(2) To remove such officers or trustees on proof of misconduct;

(3) To prevent malversation, peculation, and waste;

(4) To set aside and restrain improper alienations of such property or funds, and to secure them for the benefit of those interested; and

(5) Generally to compel faithful performance of duty.

A quo warranto action may be brought against five classes of defendants: public officers, corporation officers, usurpers of any franchises, corporations, and trustees. As described in Caruthers' History of a Lawsuit § 604 (8th ed. 1963), there are three general grounds for a quo warranto action:

1. Usurpation. This applies to the first four [classes of defendants]. It consists in unlawfully holding or exercising a public or corporation office, or a franchise, or the powers of a corporation.

2. Acts of omissions which amount to forfeiture. This applies to public and corporate officers,...