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The John A. Sheppard Memorial Ecological Reservation, Inc. v. Fanning

Supreme Court of Appeals of West Virginia

November 19, 2019

THE JOHN A. SHEPPARD MEMORIAL ECOLOGICAL RESERVATION, INC., Defendant below, Petitioner
v.
MICHAEL FANNING and MICHAEL SAGER, Plaintiffs below, Respondents

          Submitted: November 5, 2019

          Certified Question from the United States District Court for the Southern District of West Virginia The Honorable Joseph R. Goodwin, Judge Civil Action No. 2:18-CV-01183

          Ryan McCune Donovan, Esq. J. Zak Ritchie, Esq. Michael B. Hissam, Esq. Hissam Forman Donovan Ritchie PLLC Charleston, West Virginia Counsel for the Petitioner

          Kurt Entsminger, Esq. Phillip Estep, Esq. Estep Entsminger Law Group PLLC Charleston, West Virginia Counsel for the Respondents

         SYLLABUS

         1. "A de novo standard is applied by this Court in addressing the legal issues presented by a certified question from a federal district or appellate court." Syllabus Point 1, Light v. Allstate Ins. Co., 203 W.Va. 27, 506 S.E.2d 64 (1998).

         2. "The primary object in construing a statute is to ascertain and give effect to the intent of the Legislature." Syllabus Point 1, Smith v. State Workmen's Comp. Comm'r, 159 W.Va. 108, 219 S.E.2d 361 (1975).

         3. "Where the language of a statute is free from ambiguity, its plain meaning is to be accepted and applied without resort to interpretation." Syllabus Point 2, Crockett v. Andrews, 153 W.Va. 714, 172 S.E.2d 384 (1970).

         4. When the Legislature models a statute after a uniform act, but does not adopt particular language, courts may conclude that the omission was deliberate or intentional, and that the Legislature rejected a particular policy of the uniform act.

         5. Other than as authorized by West Virginia Code § 31E-3-304(b)(2) (2002), the West Virginia Nonprofit Corporation Act does not confer the right upon a director to bring a derivative action on behalf of the nonprofit corporation.

          HUTCHISON, JUSTICE.

         West Virginia Code § 31E-3-304(b)(2) (2002) permits a member of a nonprofit corporation's board of directors to file an "ultra vires" derivative suit against another member of the board of directors to challenge the validity of an action by the corporation. A federal district court has certified a question to this Court: beyond the derivative suit mentioned in West Virginia Code § 31E-3-304(b)(2), may a member of the board of directors file a derivative suit against another director to recover damages or other relief on behalf of the nonprofit corporation?

         As we discuss below, we answer the question in the negative. We find the Legislature intended to preclude such derivative suits on behalf of nonprofit corporations.

         I. Factual and Procedural Background

         In 1976, Edwina Sheppard Pepper incorporated The John A. Sheppard Memorial Ecological Reservation, Inc. ("JASMER"). JASMER was incorporated as a nonprofit corporation under West Virginia law. It has its principal place of business in Kermit, West Virginia, and it owns and leases lands near there. JASMER continues to operate as a nonprofit organization.

         Plaintiffs Michael Fanning and Michael Sager are currently members of the JASMER board of directors. They are also descendants of Ms. Pepper. Both men reside outside of West Virginia.

         On July 26, 2018, the plaintiffs filed the instant case in the United States District Court for the Southern District of West Virginia against numerous defendants including JASMER and various other members of JASMER's board of directors. The plaintiffs later amended their complaint.[1] According to the district court, the plaintiffs' seven-count amended complaint contains two categories of grievances. The first category of grievances, contained in Counts One and Two, sound in property law and allege plaintiff Fanning has a right to occupy certain real property owned by JASMER. These two counts are not at issue in this case.

         The second category of grievances, contained in Counts Three through Seven, are "derivative claims," that is, claims brought by some members of the board of directors against the other purported members of that board to recover damages for the nonprofit corporation. The district court described the second category as follows:

Counts Three through Seven assert numerous related claims arising from an alleged breach of duties and mismanagement by the members of the nonprofit's board. Specifically, Count Three alleges that the board members breached their fiduciary duties; Count Four alleges constructive fraud and private inurement by certain board members; Count Five alleges conversion of property by certain board members; Count Six raises a challenge to the legitimacy of the board members; and Count Seven alleges a civil conspiracy among the board members for ill-described misconduct.

         JASMER, along with other defendants who were members of the board of directors, moved to dismiss Counts Three through Seven of the plaintiffs' amended complaint. The defendants asserted that West Virginia law regarding nonprofit corporations does not authorize the plaintiffs' derivative claims. The defendants argued to the federal district court that the plaintiffs had failed to state a claim upon which relief could be granted under Federal Rule of Civil Procedure 12(b)(6).

         The district court determined that the defendants' motion to dismiss raised a novel question of West Virginia law with significant public policy considerations. SeeBragg v. United States,488 Fed.Appx. 672, 676 (4th Cir. 2012) (suggesting factors for federal courts to weigh when deciding to certify questions to this ...


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