RIGHTS OF THE MEMBERS OF HSAUWC UNDER CALIFORNIA AND NEW YORK LAW
HSAUWC is either a public benefit corporation or a religious corporation under California law.
<![if !supportLists]>(a) <![endif]>Public Benefit Corporation
Each public benefit corporation is required to keep (1) adequate and correct books and records of account; (2) minutes of the proceedings of its members, board and committees of the board; and (3) a record of its members giving their names and addresses and the class of membership held by each. Members of public benefic corporations shall have access to all books and records of the corporation. That Section provides:
“The accounting books and records and minutes of proceedings
of the members and the board and committees of the board shall be open to inspection upon the written demand on the corporation of any member at any reasonable time, for a purpose reasonably related to such person's interests as a member.”
The rights of members in this respect are more limited than the rights of directors or officers of a public benefit corporation. Unlike members, directors “have the absolute right” to inspect and copy all documents of every kind. Members, on the other hand, must have a purpose reasonably related to their interests as a member. The Code protects this right to inspection for members, specifically stating that the rights of members to inspect books, records and documents “may not be limited by contract or the articles or bylaws.” No such similar provision exists with respect to officers or directors of public benefit corporations.
Members should write to the HSAUWC board members and demand an explanation backed by accounting books, records and minutes.
Any such inspection of the records or reports may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts. In addition, the right of inspection extends to the records of each subsidiary of the corporation. A California public benefit corporation is required to keep at its principal office in California an original or copy of its articles and bylaws. If any record subject to inspection is not maintained in written form, a request for inspection is not complied with unless and until the corporation (at its expense) makes such record available in written form. Cal. Corp. Code § 6310.
The California Nonprofit Corporation Law also provides that if the public benefit corporation refuses to comply with the foregoing request of a member, the superior court may enforce the demand or right of inspection with just and proper conditions. Alternatively such court may, for good cause shown, appoint one or more competent inspectors or independent accountants to audit the financial statements kept in California and investigate the property, funds and affairs of any corporation and its subsidiaries. Id. Any officers or agents who refuse to produce all books and documents in their custody are subject to punishment for contempt of court. Cal. Corp. Code § 6336(b). The member(s) making such application to the court must bear the expenses related to such investigation unless the court orders them to be paid or shared by the corporation. Cal. Corp. Code § 6336(c). Further, if the court finds that the failure of the corporation to comply with a proper demand was without justification, the court may award the member reasonable costs and expenses, including reasonable attorney’s fees. Cal. Corp. Code § 6337; see Moran v. Oso Valley Greenbelt Assn., 92 Cal. App. 4th 156, 160-61 (2001).
<![if !supportLists]>(b) <![endif]>Religious Corporations
Members of corporations formed as nonprofit religious corporations under Part 4 of the California Nonprofit Corporation Law have very similar rights regarding access to information as their counterparts at public benefit corporations. Specifically, “the accounting books and records and minutes of the proceedings…shall be open to inspection upon written demand on the corporation of any member at any reasonable time, for a purpose reasonably related to such person’s interests as a member.” Cal. Corp. Code § 9512. The provision regarding reasonable relation to the member’s interests is the same as in the public benefit Section of the Code.
The remedies for members of religious corporations are comparable to those provided to members of public benefit corporations<![if !supportFootnotes]><![endif]>, except that there is no provision awarding a member reasonable costs and expenses if the corporation’s failure to comply was without justification. Cal. Corp. Code § 9514. Specifically, if the corporation refuses to comply with a member’s lawful demand for inspection, the superior court may enforce the demand or right of inspection with just and proper conditions or may, for good cause shown, appoint one or more competent inspectors or independent accountants to audit the financial statements kept in California and investigate the property and funds of the corporation and any subsidiary. Cal. Corp. Code § 9514(a). All officers and agents of the corporation who refuse to produce the books and documents in their custody or power are subject to punishment for contempt of court. Cal. Corp. Code § 9514(b). And, all expenses of the investigation or audit shall be paid by the member unless the court orders them to be paid or shared by the corporation. Cal. Corp. Code § 9514(c).
Similar to public benefit corporations, every religious corporation is required to keep at its principal office in California the original or a copy of its articles and bylaws as amended to date; these documents must be open to inspection by the members at all reasonable times during office hours. Cal. Corp. Code § 9160. A religious corporation is also required to keep (1) adequate and correct books and records of account; (2) minutes of the proceedings of its members, board and committees of the board; and (3) a record of its members giving their names and addresses and the class of membership held by each. Cal. Corp. Code § 9510.
The New York Not-for-Profit Corporations Law, made applicable to religious corporations by the Religious Corporation Law, enables members to bring derivate suits to enforce directors’ duties to the corporation. A derivate suit must be brought by 5% or more of any class of members of the non-profit corporation. Additionally, each plaintiff must be a member at the time suit is brought. Plaintiffs must also demonstrate that, prior to instituting a derivative action, attempts were made to secure the initiation of such action by the board. N-PCL § 623.
<![if !supportLists]>1. <![endif]>Breach of Fiduciary Duties
Directors of a religious corporation, just as directors of a secular non-profit corporation, are subject to fiduciary duties in administering the assets of a corporation. Under the New York Religious Corporations Law, directors of a religious corporation are treated as trustees entrusted with the custody and control of the “temporalities and property, real and personal, belonging to the corporation.” NY Relig. Corp. § 5. The trustees are charged with administering the property in accordance with the “discipline, rules and usages of the corporation and of the ecclesiastical governing body, if any, to which the corporation is subject.” Id. (emphasis added). Thus, unlike directors of secular corporations, trustees of a religious corporation must adhere to the tenets of the religion in administering the assets of the corporation in addition to adhering to traditional fiduciary duties. As a consequence, members of a New York religious corporation may be precluded from bringing a suit for breach of fiduciary duties when the resolution of the case turns on evaluating trustees’ compliance with religious principles.
<![if !supportLists]>2. <![endif]>Self-dealing
The New York Not-for-Profit Corporations Law, made applicable to religious corporations by the Religious Corporation Law, prevents directors and officers from engaging in self-dealing transactions unless full disclosure of material facts is made and the transaction is approved by the appropriate number of directors. N-PCL § 715. The corporation’s organizational documents may place greater restrictions on self-dealing transactions and may prohibit them altogether. N-PCL § 715(d). Although during our initial research we could not locate a case on point, we would be happy to further explore whether claims of self-dealing transactions by trustees of religious corporations can be resolved based on neutral principles of law so that they can be adjudicated by New York courts.
<![if !supportLists]>3. <![endif]>Diversion of Corporate Assets
Under New York Religious Corporations Law, trustees of church property may not divert such property from the support and maintenance of the corporation or from religious, charitable or educational purposes as duly authorized by members of the religious corporation. NY Relig. Corp. § 5. Based on initial research, it appears that New York courts may entertain suits brought by church members against church officials for diversion of church assets. In Morris v. Scribner, church members brought a diversion claim against church officials to prevent them from continuing to expend funds in efforts to obtain permission to develop church property designated by the state as a landmark. 69 N.Y.2d 418 (1987). Members argued that the funds were not invested for the support of the church but were wasted on a speculative profit-seeking scheme. The court noted that the resolution of the internal dispute by a civil court would not present church-state entanglement issues because the case can be decided on the basis of “statutory interpretation and common-law precedent without reference to matters of religious belief or dogma.” Id. at 422-23. The court reasoned that “the primary purposes of the Religious Corporations Law is to provide an orderly method for the administration of the property and temporalities dedicated to the use of religious groups, and to preserve them from exploitation by those who might divert them from the true beneficiaries of the corporate trust.” Id. at 423. Additionally, the court in Fiske v. Beaty, citing to the same statute, noted that “a court of equity will interfere to restrain all uses of church properties not in accordance with the usages and rules of the religious society with which the corporation is connected.” 201 N.Y.S. 441 (1923).
4. Access to Records
Unlike California, New York Religious Corporations Law does not separately address member access to records. Rather, the provisions of the Not-for-Profit Corporations Law apply to a religious corporation’s obligation to maintain records and to the members’ rights of inspection. (See Tae Hwa Yoon v. New York Hahn Wolee Church, Inc. 870 N.Y.S.2d 42 (2008); Smith v. Calvary Baptist Church, 826 N.Y.S.2d 431 (2006)). The statute mandates a corporation to keep at its office correct and complete books and records and a list or record with the names and addresses of all members. N-PCL § 621(a). A member shall have the right to examine the corporation’s minutes and a list or record of members upon at least 5 days’ notice, provided the member was a member of record during at least 6 months preceding the demand for inspection. N-PCL § 621(b). A corporation may deny a request for inspection only if the corporation requests and the member refuses to furnish to the corporation an affidavit that the information obtained through such inspection will not be used for another business or object and the member has not sold within the past 5 years any list or record of members of any domestic or foreign corporation or aided any person in procuring such list. N-PCL § 621(c). A member may petition the court to enforce the request for inspection. N-PCL § 621(d).
Additionally, a member can demand from the corporation an annual balance sheet or financial statement and any interim balance sheet or financial statement that has been distributed to members or made available to the public, provided the member was a member of record for at least six months prior to demand. N-PCL § 621(e).
<![if !supportFootnotes]><![endif]> See Cal. Corp. Code §6336 for remedies available to members of public benefit corporations.