This case involved a dispute between the nine directors for a property owners association (“Association”) in Pennsylvania over efforts by eight of Association’s director removal the remaining director and prevent him from serving on Association’s board of directors. The dispute was based on allegations that he was in violation of Pennsylvania Nonprofit Corporation Law, Section 5726(c), which provides for court removal of a director on the application of any member or director for “fraudulent or dishonest acts, or gross abuse of authority or discretion with reference to the corporation, or for any other proper cause.” The statute also empowers a court to bar a director who is removed for a period prescribed by the court. The eight directors sought court removal of the remaining director by a court based on their claims that the director’s repeated insulting and demeaning behavior toward other directors and his refusal to cease that behavior constituted sufficient “other proper cause” for his removal by the court under the language of Section 5726(c) of the Pennsylvania Nonprofit Corporation Law.
The Trial Court Ruling
The trial court found that, while the history of conduct by the director whose removal was being sought was uncivil, insulting, unprofessional, and in violation of Association’s Board Code of Conduct, it did not constitute grounds for removal of the director through court intervention. The trial court ruled that judicial intervention in the governance of a nonprofit corporation by ordering removal of a director is a drastic remedy that cannot be granted for merely undesirable or offensive behavior of a director. Accordingly, the trail court granted judgment in favor of the defendant director and refused to remove him from office. The remaining directors appealed.
The Appellate Court Ruling
On review, the appellate court stated that “proper cause” under Section 5726(c) of the Pennsylvania Nonprofit Corporation Law requires a showing that the director committed fraud, dishonesty, gross mismanagement, violation of the Nonprofit Corporation Law or other illegal or ultra vires conduct. The appellate court further stated that “proper cause” for the removal of a director by a court requires a different showing than the proper cause that justifies the removal of a director by board action because the board of directors is charged with the management of the corporation’s affairs and the removal of a director by a court is a judicial intrusion in the management of the corporation’s affairs. The court further stated that removal of a director by the court interfered with the rights of Association’s members who had the ability to disapprove of board action through the power of their votes, but they had no redress against a court’s removal of a director.
In affirming the trial court’s judgment, the appellate court ruled that, absent proof of illegal conduct, fraud, dishonesty or extreme mismanagement of the corporation, it is for a corporation’s board to properly remove a director for conduct that is merely a violation Association’s Board Code of Conduct or otherwise detrimental to the corporation, but which does not rise to the level of fraud, dishonesty, and criminal conduct.
Pennsylvania Appellate Court decision (May 7, 2018).