A largely dormant nonprofit corporation has been taken over by 60 new members who paid their $25 annual dues, called a special meeting of members, voted out the old board of directors and replaced them with a new slate of their own choosing. 

An appellate court in Washington has said, after nearly four years of litigation, that the organization’s bylaws offered “open and unlimited” membership to all persons who shared the organization’s interest in historic preservation and paid the annual dues.  The few old members whose dues might be current could be out-voted by the new members who joined in a group to take over the organization.  (Matthews v. Island Landmarks, Ct. of App., WA, No. 73426, 4/4/16.)

Island Landmarks was incorporated in 1995 to preserve the historic architecture and landscape on Vashon and Maury Islands.  Ellen Kritzman was one of the founding directors.  Mary Matthews was the officer who managed day-to-day operations.  In the early years, it had about 200 members and enjoyed widespread community support.  It acquired an historic landmark in 2000, but then struggled to manage grant money and to maintain the site.

Matthews and her husband became board members in 2001 and retained their positions after they moved out of the area.  By 2002, the corporation had only about ten members.  In the late 2000s, Kritzman became frustrated with the lack of activity and began meeting with community members about regaining control of the corporation and “rescuing” the property.

When Matthews held a board meeting in September 2010, the minutes listed five board members and three other members of the corporation.  In May 2012, Kritzman drafted a membership form declaring interest in historic preservation on Vashon Island.  About 60 people signed the form and wrote checks for $25 for their dues.  Kritzman deposited the checks into the corporate account without informing Matthews.  Eleven of the new members then called a special meeting of members, voted out the old board and elected a new slate of directors to run the organization.  Several of the Kritzman group sued to obtain a declaration that they were the rightful directors of the corporation.

A trial court dismissed the suit on the ground that the new members did not follow all the necessary procedures to become members.  On appeal, the appellate court said that 10 percent of the “members entitled to vote” could call a special meeting but that the record was not sufficient to resolve the conflicting claims about whether the new members had qualified. On remand, the trial court found that the new members had qualified.  The Court of Appeals of Washington has affirmed.

The corporation’s bylaws provide that “membership shall be open and unlimited to all persons who have an interest in promoting historic preservation” on the islands and that “in order to qualify for membership, a member shall pay annual membership dues which shall initially be $25.”

The Matthews group argued that the rules of a voluntary membership organization could be interpreted only by the organization, or if taken to court, the court should defer to the interpretation of the incumbent directors.  The Court said the group was “mistaken.”  The case cited by the Matthews group for this proposition involved a local chapter of a national organization, which was not the situation here.

The Matthews group argued that the new members had not been accepted into membership and therefore had no voting rights.  But the Court said the issue was controlled by the language of the bylaws and the only requirements for membership of the corporation were to have an interest in its purpose and to pay annual dues.  There was no requirement for acceptance.

The Matthews group also argued that the bylaws set forth duties of the secretary to maintain a membership list and the treasurer to deposit all funds of the corporation.  But the Court said that these were responsibilities of the officers, not requirements for membership.

The Court also rejected a series of contentions that the Kritzman group had not given notice to all possible members of the corporation prior to the special meeting.  The Court said that the Matthews group had provided no evidence that others had paid annual dues in the prior year that would be necessary to be considered a member.

YOU NEED TO KNOW

This is exactly the kind of litigation that can be avoided by providing an acceptance of membership provision in the corporate bylaws of a nonprofit membership corporation.  (See Ready Reference Page: “Bylaws Function as ‘Constitution’ of Nonprofit Corporations”)  We have seen too many membership corporations being taken over by an insurgent group, usually surreptitiously, because the incumbents don’t have an opportunity or the mechanism to determine who should be admitted to membership.  The provision is not hard to write in, but it can be devastating if it isn’t.

These people have spent nearly four years litigating what probably would have been compromised if the disaffected outsiders had been required to deal with the incumbents and had not had the totally legitimate opportunity to stage a coup.  And if the incumbents had not been willing to compromise, at least everyone would probably have been spared four years of litigation.

For more on how bylaw provisions can be written to avoid litigation, consider listening to our webinar “Bylaws: the ‘Constitution’ of Nonprofits: the Art and Science of Making Them Work.”