Trying to Fight the System from Within

Say you’re an activist who got involved in a nonprofit advocacy group — a gun rights group, an ideologically minded radio station, an environmentalist organization, or the like. You get elected to a board that helps run the group, but you decide the group has lost its way. You then take public action to try to redirect the group, including doing things that might harm the group temporarily in order to try to help the cause in the long term. After all, you’re volunteering because you care about the greater good, not in the success of any particular organization.

So here you are, feeling proud of your crusade, and then — you get sued. For what, you ask? For breach of fiduciary duty, since as a director of the group you legally owe a duty of loyalty to the group, and not to the greater good. Here’s a story about this very thing from California, from Borgstrom v. Wilkerson, Cal. Ct. App. Aug. 31, 2012) (not for publication), beginning with the plaintiff’s allegations:

KPFA 94.1 FM is a nonprofit Bay Area radio station owned and operated by Pacifica. Pacifica is a national charitable nonprofit foundation that owns five … radio stations. Pacifica’s corporate structure enables the national Board of Directors to delegate specific duties and responsibilities to an LSB [Local Station Board] at each of their five stations to oversee local matters. Pacifica and their LSB’s are governed by the amended and restated bylaws of the Pacifica Foundation (bylaws). [Defendants Margy Wilkinson, Conn Hallinan, Daniel Siegel, and Malcolm Burnstein were elected members of KPFA’s Local Station Board.]

[I]n November 2010, Pacifica terminated KPFA’s popular “Morning Show” and terminated several KPFA employees due to financial problems. In December 2010, KPFA held a five day on-air fundraiser in order to raise revenue lost from KPFA mismanagement. The station continued to ask for donations on-air following the fundraiser per its standard practice.

At the same time, defendant[ board members] initiated and participated in a competing campaign to raise money under the name “Save KPFA.” “Save KPFA” encouraged KPFA listeners to donate to the competing fundraiser instead of directly to KPFA, with the stated goal to raise $80,000 in order to bring back the terminated employees and revive the “Morning Show.” Pacifica’s Board of Directors did not authorize the “Save KPFA” fundraiser….

And here’s what the court held in affirming the district court’s conclusion that plaintiff — “a listener-sponsor member of the nonprofit radio station” bringing a “shareholder’s derivative lawsuit” on behalf of Pacifica — “is likely to prevail on each of the elements necessary to establish his breach of fiduciary duty claim”:

The introductory paragraph to article seven, section three of the bylaws states that “[e]ach LSB, acting as a standing committee of the Foundation’s Board of Directors, shall have the following powers, duties and responsibilities related to its specific radio station, under the direction and supervision of the Foundation’s Board of Directors.” These duties include reviewing and approving the station’s budget, screening and selecting a pool of candidates for both the General Manager and Program Director positions, and initiating the process to fire the General Manager. (Id. at paragraphs A, B, D, and E.) In addition, paragraph M requires the LSB’s “[t]o exercise all of its powers and duties with care, loyalty, diligence and sound business judgment consistent with the manner in which those terms are generally defined under applicable California law.”

If plaintiff can establish that defendants exercised the powers granted to them in the bylaws, specifically in paragraphs A, B, D, and E, then he could establish defendants had a fiduciary duty to Pacifica and KPFA under paragraph M…. Defendants’ argument that LSB members are nothing more than “nominal” officers with no management authority is not supported by any of the pleadings or evidence they submitted. To the contrary, plaintiff has presented competent evidence which establishes defendants likely owe a fiduciary duty of loyalty to Pacifica….

[As to the breach of the fiduciary duty,] the “Save KPFA” fundraiser was a substantial factor in causing actual harm to Pacifica in that defendants raised over $61,000 in contributions, funds that were diverted from KPFA’s own fundraiser. [Footnote: Specifically, “Save KPFA” solicited donations from active KPFA donors and listeners, sending letters and other advertisements directly to their homes during KPFA’s fundraiser and continued fundraising efforts. These letters induced potential donors to give to “Save KPFA” by stating that 100% “Save KPFA” donations would go to KPFA whereas a smaller percentage of funds donated directly to KPFA would go to KPFA because Pacifica would take a “levy.” The letters explained however, that the funds would only be transferred contingent upon KPFA “doing the right thing.” Any funds diverted from KPFA to “Save KPFA” caused economic harm to KPFA and Pacifica. To date, no funds received by “Save KPFA” have been turned over to KPFA or Pacifica.] …

The business judgment rule “establishes a presumption that directors’ decisions are based on sound business judgment, and it prohibits courts from interfering in business decisions made by the directors in good faith and in the absence of a conflict of interest.” However, “[a]n exception to this presumption exists in circumstances which inherently raise an inference of conflict of interest.” Accordingly, “[t]he business judgment rule does not shield actions taken without reasonable inquiry, with improper motives, or as a result of a conflict of interest.”

Here, while defendants have no personal economic interest in the “Save KPFA” fundraiser, defendants’ withholding of these funds from KPFA contingent upon bringing back the “Morning Show” raises an inference of a conflict of interest that precludes a determination that the business judgment rule defeats plaintiff’s claim. Plaintiff need only establish a probability of prevailing over each defense, and he has reached that relatively low bar here.

Plaintiff’s against the directors can therefore proceed.

I’m not an expert on nonprofit law, but the analysis seems sound. Directors generally owe their organizations a duty of loyalty, even when the directors are volunteers. If they want to do things that undermine the organization, such as putting on a competing fundraiser — even planning to turn over the money to the organization if their demands are met — they need to quit the directorship first.

The same might be the case, I think, if they publicly protest the organization’s actions, aiming to create public pressure (including through lost contributions) on the organization’s management. To be sure, such public protest is normally protected by the First Amendment, but so is organizing a rival fundraiser (as the Court of Appeal acknowledged); it’s just that joining a board of an organization, and assuming the fiduciary duty, essentially waives your rights to say things that undermine the organization, so long as you remain on the board.

In any case, I thought some of our readers — including ones who are activists themselves, of whatever political stripe — might find this interesting.