Memphis Health Ctr., Inc. v. Grant (Summary)

BOARD OF DIRECTORS – VIOLATION OF FIDUCIARY DUTIES

Memphis Health Ctr., Inc. v. Grant, No. W2004-02898-COA-R3-CV (Tenn. Ct. App. July 28, 2006)

The CEO and two ex-board members of a nonprofit hospital brought a derivative action on behalf of the corporation against the hospital’s board chairman and the other board members. The suit accused the board members of violating their fiduciary duties to the corporation by not taking action, pursuant to corporate bylaws, against the chairman after he was found guilty of submitting false claims in federal court. The trial court issued a temporary restraining order enjoining the hospital board from violating its bylaws or taking any action to amend its bylaws. When the board subsequently failed to investigate the federal claims against its chairman, the CEO and ex-board members filed a motion to hold the remaining board members in contempt for ignoring the provisions of the restraining order. Specifically, the CEO argued that the hospital board had an affirmative duty to take action against the chairman with respect to his involvement in the federal false claims judgment, as this was “conduct unbecoming” of a board member. The trial court agreed, holding the chairman and remaining board members in contempt and ordering their permanent removal from the hospital board. On appeal, the chairman and board members argued that the CEO and two ex-board members lacked standing to file a derivative action, as they were not “directors” of the corporation, as required by state law. They also sought immunity under the federal Volunteer Protection Act (“VPA”). Notably, they did not dispute that they had violated the hospital’s bylaws. The Court of Appeals of Tennessee dismissed the appellants’ arguments. The court ruled that the CEO was an ex officio, albeit non-voting, member of the board in accordance with the hospital’s bylaws and found this sufficient to confer her “director” status. The court further held that VPA immunity is unavailable where a nonprofit organization brings suit against its volunteer board members, as was the case here. As such, the contempt order was sustained and the remedy of permanent removal upheld.