Sullivan v. The Pike and Susan Sullivan Foundation

         Appeal from the District Court of Teton County The Honorable Marvin L. Tyler, Judge

          Representing Appellant: Erika M. Nash and Aaron J. Lyttle of Long Reimer Winegar Beppler LLP, Jackson, Wyoming. Argument by Ms. Nash.

          Representing Appellee: Kim D. Cannon and Holly L. Tysse of Davis & Cannon, LLP, Sheridan, Wyoming. Argument by Mr. Cannon.

          Before BURKE, C.J., and HILL, DAVIS, FOX, and KAUTZ, JJ.

          KAUTZ, Justice.

         [¶1] Appellant Susan W. Sullivan and her late-husband Pike Sullivan established and funded the Pike and Susan Sullivan Foundation, a Wyoming nonprofit corporation (the Foundation). The Sullivans and their friend and attorney, George Harris, served as directors of the Foundation until Mr. Sullivan passed away in 2013, at which time his position on the board was filled by Mr. Harris's wife. Conflicts over management of the Foundation developed between Mrs. Sullivan and the Harrises, and Mrs. Sullivan filed suit. She requested that the district court enter a declaratory judgment to, among other things, void Mrs. Harris's election to the board because Mr. Harris had a conflict of interest when he voted to elect her. Mrs. Sullivan also sought judicial dissolution of the Foundation on the grounds that after Mrs. Harris's election to the board was invalidated, management of the Foundation would be deadlocked.

         [¶2] The district court granted summary judgment in favor of the Foundation on Mrs. Sullivan's declaratory judgment claim. It determined that Mrs. Sullivan's claim seeking to remove Mrs. Harris from the board was derivative in nature, and Mrs. Sullivan did not comply with the statutory and procedural requirements for derivative claims. It also granted summary judgment in the Foundation's favor on her judicial dissolution claim because, with three directors, there was no deadlock in management of the Foundation.

         [¶3] We affirm.

         ISSUES

         [¶4] The parties present several issues on appeal, but the following issues are dispositive:

1. Did the district court err by concluding that Mrs. Sullivan cannot sustain a claim for judicial dissolution of the Foundation based upon board deadlock?

2. Did the district court abuse its discretion when it denied Mrs. Sullivan's request for a continuance of the summary judgment proceeding until discovery was complete?

         FACTS

         [¶5] In 2012, at Mr. and Mrs. Sullivan's request, Mr. Harris incorporated the Foundation as a Wyoming public benefit non-profit corporation. The Foundation applied for and received tax exempt status under 26 U.S.C. § 501(c)(3), and the Sullivans contributed significant assets to it. The Foundation explained its non-profit purpose in its tax filings as follows: "The Foundation's primary purpose is to improve education in America in K through 12 education for children, as well as Quality of Life education for elderly citizens who no longer have full time employment." It committed to giving funds to organizations that aligned with its stated purpose. The Foundation also adopted a conflict of interest policy.

         [¶6] The Foundation has no members and is governed by a board of directors. Mr. and Mrs. Sullivan and Mr. Harris were the initial directors. Mr. Sullivan passed away in May 2013, leaving a vacancy on the board of directors. On September 30, 2013, acting through a written consent in lieu of the annual meeting, Mr. Harris and Mrs. Sullivan elected Mrs. Harris as the third director. In the same written consent, the directors resolved that Mr. Harris would act as "Chairman and CEO" of the Foundation, earning an annual salary of $150, 000. Mr. Harris did not disclose a conflict of interest with regard to either the appointment of his wife to the board or his compensation.

         [¶7] The directors continued to act through written consent in September of 2014 and September of 2015. Each time, they agreed that Mr. Harris would act as Chairman and CEO of the Foundation and receive a salary for doing so. Neither Mr. Harris nor Mrs. Harris abstained from the actions approving Mr. Harris's salary or disclosed a conflict of interest. The written consents also "ratified and confirmed" Mr. Harris's actions as Chairman and CEO during the year, including entering into agreements to contribute Foundation funds to various endeavors.

         [¶8] On October 1, 2015, Mrs. Sullivan and Mrs. Harris signed a written consent in lieu of meeting which addressed the reasonableness of Mr. Harris's compensation. For the first time, Mr. Harris disclosed he was "interested in the transaction" and he did not deliberate or vote on the action. The written consent stated that "the [b]oard believes it is reasonable to pay Mr. Harris reasonable total compensation for each calendar year in the amount of $150, 000."

         [¶9] Disagreement over management of the Foundation and how Foundation funds were being used developed between Mrs. Sullivan and Mr. Harris. On May 8, 2016, Mrs. Sullivan received verbal notice that the annual meeting of the board was scheduled for May 10, 2016. The minutes from the meeting indicate that Mrs. Sullivan was "not available" to attend the meeting, but a quorum, made up of Mr. and Mrs. Harris, was present. The meeting minutes state that Mr. and Mrs. Harris voted to amend the bylaws to increase the number of directors to four and elected Laura Lo Bianco as the fourth director. Mr. Harris was "authorized to continue to make grants as he deems appropriate to serve [the] mission of [the] Foundation."

         [¶10] On September 7, 2016, Mrs. Sullivan filed suit against: the Foundation; Mr. Harris, individually and as a board director; Mrs. Harris, individually and as a board director; and Ms. Lo Bianco, individually and as a board director. In her first cause of action, Mrs. Sullivan requested a judgment declaring the election of Mrs. Harris as a director and approval of Mr. Harris's salary void because the Harrises did not follow the applicable conflict of interest procedures with regard to either of those actions. She also sought a declaration that the amendment to the bylaws which increased the number of directors to four was invalid because she had not been given timely notice of the proposed amendment in accordance with the Foundation bylaws. According to the complaint, if the amendment which enlarged the size of the board to four directors was declared invalid, Ms. Lo Bianco's election would also be invalid.

         [¶11] Mrs. Sullivan's second cause of action sought judicial dissolution of the Foundation. She claimed the Foundation should be dissolved pursuant to Wyo. Stat. Ann. § 17-19-1430(a)(ii)(A) (LexisNexis 2017) because the board was deadlocked in management of the Foundation. Specifically, Mrs. Sullivan asserted that, after Mrs. Harris's and Ms. Lo Bianco's elections were voided, she and Mr. Harris would be the only remaining directors. She claimed to have "fundamental disagreements" with Mr. Harris making them "hopelessly deadlocked in the management of the Foundation's corporate affairs, including election of a third director to break the current deadlock."^[1]

         [¶12] Ms. Lo Bianco resigned from the board of directors, and Mrs. Sullivan amended her complaint to reflect the resignation. Mr. and Mrs. Harris moved to dismiss the individual claims against them, and the district court granted their motions.^[2]

         [¶13] The Foundation filed a motion to dismiss the complaint under W.R.C.P. 12(b)(6). The district court notified the parties that it was converting the Foundation's motion to dismiss to a motion for summary judgment under W.R.C.P. 56 because it planned to consider materials outside the pleadings, including affidavits, in rendering its decision. Mrs. Sullivan filed a motion pursuant to W.R.C.P. 56(f) (2016, repealed March 1, 2017), requesting that the district court either continue the summary judgment proceeding or deny the Foundation's converted motion for summary judgment to allow time for discovery.

         [¶14] On April 5, 2017, the district court entered summary judgment in favor of the Foundation and denied Mrs. Sullivan's Rule 56(f) motion. The district court ruled: 1) Mrs. Sullivan's declaratory judgment claims are derivative in nature and she failed to comply with the statutory and procedural requirements for derivative claims; 2) Mrs. Harris's election to the board of directors was not a "conflict of interest transaction" under Wyoming statute or the Foundation's policy; 3) Mrs. Sullivan could not maintain her action for judicial dissolution because there was no showing of board deadlock; and 4) additional discovery was unnecessary. Mrs. Sullivan filed a timely notice of appeal.

         DISCUSSION

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