INCORPORATORS OF THE LEGION FOR THE SURVIVAL OF FREEDOM
ANDREW ALLEN, FREDERICK BERG AND JOHN A CURRY
IN THE DISTRICT COURT OF HARRIS COUNTY, TEXAS
152ND JUDICIAL DISTRICT
This memorandum addresses all of the cross-motions for summary judgment filed by the parties, including:
While the court does not have the time or resources to explain fully the basis of its decision, what follows is some of the court’s reasoning for:
In reaching these conclusions, the court has had to interpret a complex, and at times, confusing factual situation. While many of the parties' exhibits were defective for a variety of reasons, the court has nevertheless referenced various of these exhibits so as to focus on the issues disputed. These references in no way cure or validate any defective summary judgment evidence.
While there are numerous summary judgments under consideration, a few key issues dominate the parties' motions. First, Plaintiffs allege they are “members of a voting member group known as Incorporators,” and therefore have the power and authority to appoint and remove Legion for the Survival of Freedom ("LSF") officers and directors. Further, Plaintiffs allege they have suffered monetary damages and a diminished ability to govern LSF due to Defendants' actions as LSF directors. Defendants contend that
This memorandum focuses on the voting member/"incorporator” issue, examines whether a legal relationship exists between the Carto group and LSF sufficient to allow Plaintiffs to bring this suit, and concludes that Defendants' motions are granted on all grounds.
This case involves a complex set of events spanning approximately 45 years, dating back to 1952. The central issue is a conflict over the corporate control and genealogy of LSF, a Texas non-profit corporation doing business in California. LSF was incorporated on April 14, 1952, pursuant to then-existing Texas law. See Tex. Rev. Civ. Stat. art. 1396 (1899) (repealed 1959). LSF’s principal place of business is in Costa Mesa, California where it operates the Institute for Historical Review and Noontide Press, and publishes the Journal for Historic Review.
In 1993 two of LSF’s directors, Lewis Furr and LaVonne Furr, resigned 1 and Defendants Allen, Berg and Curry were purportedly appointed as new LSF directors. The validity of these appointments was challenged two months later in a California suit brought by Elisabeth Carto 2 and Tom Kerr. 3 Carto and Kerr sought
1. a declaration that the election of Allen, Berg and Curry was invalid;
2. a declaration that they (along with six other persons including Lewis and LaVonne Furr) were actually LSF’s directors; and
3. an injunction against Allen, Berg and Curry prohibiting them from participating in LSF’s management.
The California Superior Court of Orange County, the Honorable J. Polis presiding, denied any injunctive relief, ruling on April 13, 1994 that
1. the appointments of Allen, Berg and Curry were proper; and
2. the Kerr-Carto group were not LSF directors.
Less than four months later, on August 2, 1994, Plaintiffs (Willis Carto and LaVonne Furr) held a special meeting of LSF “voting class members known as incorporators” and proceeded to “remove” Defendants Allen, Berg, and Curry from office. Plaintiffs contended that under the 1952 LSF by-laws, their status as members of the “voting member group” known as “Incorporators" 4 gave them the power to elect and remove directors. After removing Defendants, the Carto group then elected Lewis and LaVonne Furr (who had “withdrawn” her resignations) and Elisabeth Carto as the “legitimate” directors of LSF.
These Carto group directors, operating separately from Defendants, have held several board meetings, and the alleged incorporators have held special meetings resulting in the adoption and filing of LSF Articles of Amendment and new by-laws. 5 In effect, the Carto group directors and Incorporators have acted as shadow LSF entities, separate from the organization Defendants were involved in. The Plaintiff-in-Intervention is the separate “paper-entity” created by the Carto group.
After electing their “directors,” the Incorporators notified Defendants they had been removed as directors, and ordered Defendants to “cease and desist” all activities as directors of LSF. Plaintiffs allege that Defendants “continued to represent themselves a directors of [LSF],” resulting in damages and making it “impossible for Plaintiffs to properly … carry on [LSF] business.”
The Carto group brought the present suit seeking declaratory judgment that the “voting member group called Incorporators” be recognized as the “proper body to control [LSF] in the electing and replacing of directors.” Further, Plaintiffs seek declaration that the Furrs and Elisabeth Carto are LSF’s legitimate directors, and that Defendants be enjoined from acting as LSF directors. 6 Finally, Plaintiffs seek damages on behalf of LSF from Defendants for their actions as purported LSF directors.
Plaintiffs claim that they are the only surviving members of a voting group known as Incorporators, and therefore only they possessed the authority to elect and remove directors. Plaintiffs' claims, indeed their ability to bring this suit, rest on their interpretation of LSF’s charter and by-laws (as amended).
LSF’s original charter, approved on March 31, 1952 ("1952 charter"), conformed with Texas statutory requirements for incorporation. 7 The 1952 charter provided for three directors, and named Jason and Marcia C. J. Matthews and Frances Clark as directors for the first year. Clark and the Matthews were also LSF’s incorporators. 8 LSF’s original incorporators had met earlier in March 1952 to organize the corporation, 9 adopt the original by-laws and elect directors. Under the original by-laws, LSF’s incorporators were to meet annually, “vote upon any motion or other matter," 10 and appoint and elect LSF directors. 11 For the next 10 years, Clark and the Matthews functioned as LSF’s incorporators, directors and officers.
Plaintiffs contend that it was impossible in 1952 to form a non-profit corporation in Texas without having a voting group of members. Referring to article 1396, Plaintiffs contend an association’s ability to incorporate “by the consent of a majority of its members” implies that once incorporated, a non-profit corporation retains a voting group of members. In LSF’s case, this voting group of members would be the Incorporators provided for in the original by-laws, Art. III.
In 1959, the Texas Legislature enacted the Texas Non-Profit Corporation Act, which recognized that a non-profit corporation may or may not have members. 12 Under the Non-Profit Corporation Act, a corporation not having members was required to expressly set forth that fact in its articles of incorporation. 13 Plaintiffs contend that because an association could not incorporate in 1952 without having members, and because the 1952 Charter is silent on the issue, then LSF must have a voting group of members. The provision in LSF’s original by-laws creating a voting group of Incorporators with the authority to elect directors is evidence of the existence of this voting member group. Defendants have presented no contrary evidence. Therefore, the court concludes LSF contained a voting group called Incorporators because the 1952 by-laws created this group.
Article 1396 conditions the creation of a corporation upon the consent of a majority of the association’s members. It does not require or imply that a corporation, once created, must continue to have a voting group of members. Plaintiffs have cited no authority other than the statutes themselves to support the conclusion that a non-profit corporation formed in 1952 had to have members after incorporation. Indeed, the 1959 Texas Non-Profit Corporation Act clearly recognized that a corporation may not have members. Thus, the court reaches its conclusion that LSF contained a voting member group called Incorporators without necessarily accepting Plaintiffs' premise that it was impossible to create a non-profit corporation in 1952 without having members.
While the 1952 by-laws created the voting group of Incorporators, no corporate document provided for the appointment of replacement Incorporators until the by-laws were amended at the LSF’s annual directors meeting in March 1966. 14 Indeed, for a short time LSF had no voting Incorporators.
Plaintiffs trace their claims as substitute incorporators to Marcia Hoyt. According to LaVonne Furr, Marcia Hoyt had “replaced her mother [Marcia C. J. Matthews] in the Legion, being appointed to take over her authority" 15 by Hoyt’s father Jason Matthews. Marcia C. J. Matthews died in 1963, and indeed Marcia Hoyt appears (as a director) 16 on LSF corporate documents in 1964. After Jason Matthews died in November 1964, LSF had only two directors, Hoyt and LaVonne Furr. Given that
1. Plaintiffs have failed to provide any competent evidence to support the validity of Marcia Hoyts appointment as substitute voting incorporator, 17 and
2. LSF’s by-laws were not amended to provided for substitute incorporators until 1966 ("Section Eight"),
the court concludes that upon Jason Matthews' death in 1964, LSF had no remaining voting Incorporators.
With no proof to support Marcia Hoyt’s status as substitute incorporator, 18 Plaintiffs have no status as substitute incorporators appointed by Hoyt because under Section Eight, Hoyt could not have appointed a substitute incorporator unless she was herself a substitute incorporator (LSF’s original incorporators were Hoyt’s parents, the Matthews, and Frances Clark). The evidence demonstrates only that Hoyt was a director. Finally, Hoyt could not have been a substitute incorporator in 1964 when the provision allowing for substitute incorporators was not approved until 1966.
Even if the court were to presume Hoyt was validly appointed as a substitute incorporator, Plaintiffs still cannot prevail because the 1966 by-laws eliminated the voting member group called Incorporators. At the March 1966 LSF annual directors meeting, Hoyt and LaVonne Furr appointed Willis Carto to serve as an LSF officer along with themselves. At the same meeting, Section Eight was added allowing incorporators to appoint replacement incorporators. Assuming Hoyt was a substitute incorporator for Marcia C. J. Matthews, two incorporator spots were unfilled owing to the deaths of Frances Clark and Jason Matthews. After Section Eight was adopted, Hoyt appointed Plaintiffs (Willis Carto and LaVonne Furr) to be substitute incorporators, and then resigned her position as an incorporator. LSF’s allegedly precarious financial position and its business transactions with Willis Carto purportedly resulted in Carto’s appointment as incorporator, but the only relevant issue here is the validity of Plaintiffs' appointments. After appointing Carto and Furr as incorporators, Hoyt apparently resigned her poqsition as incorporator.
A month after their purported appointments as incorporators, Carto and Furr held a meeting of LSF directors and incorporators. The minutes reflect that one Bruce Holman was elected as a “third incorporator and/or director” of LSF. Carto and Furr also discussed the relationship between LSF incorporators and directors, as well as other ambiguities in LSF’s original by-laws. Mr. Carto noted that “it appeared to him that new by-laws would be in order or extensive amendments.”
In June 1966, a special meeting of LSF directors was held, and new corporate by-laws were adopted (1966 by-laws). 19 LSF’s new 1966 by-laws differed from the original by laws in several respects:
1. Article I of the 1966 by-laws, provided that “there shall be no members of the corporation;" 20
2. the 1966 by-laws eliminated the voting group called Incorporators;
3. the 1966 by-laws, in Article II § 1, allowed for the election of three to nine directors; 21 and
4. Article IV of the 1966 by-laws created an executive committee to act when LSF directors were not in session, and a nominating committee comprised of three directors appointed by LSF’s chairman.
LSF’s 1966 directors (Willis Carto, Bruce Holman and LaVonne Furr) adopted and approved the 1966 by-laws at the June 1966 meeting. The directors' signatures were authenticated by LaVonne Furr in her deposition.
Plaintiffs contend that the 1966 by-laws are invalid because they were not approved by the voting group Incorporators. However, the validation of the 1966 by-laws do not require approval by the voting member Incorporators. 22 On the contrary, the 1952 original by laws, in Article VIII § I, vested the power to amend LSF by-laws in the board of directors, 23 not the voting group Incorporators. Further, at the time the 1966 by-laws were adopted, Willis Carto, Bruce Holman, and LaVonne Furr each served as incorporators and directors. Thus, while the 1966 resolution declaring the 1952 original by-laws null and void was adopted by the directors (as required under the provision for by-laws amendment), the incorporators can be charged with understanding and approving the 1966 by-laws because they adopted the by-laws in their roles as directors. This fact is evidenced by Willis Carto’s comments at the 1966 LSF annual Directors and Incorporators meeting where he indicated his belief that “new by-laws would be in order or extensive amendments.” Briefly put, the 1952 original by-laws did not provide for incorporator participation in the by-law amendment process. Even assuming incorporator assent was required, however, since Willis Carto initiated the process to change LSF’s by-laws, and because each approving director was also an incorporator, de facto incorporator approval was obtained.
Plaintiffs next contend the 1966 by-laws are invalid because their provisions are in conflict with LSF’s 1952 Charter. 24 While by-laws provisions may not be inconsistent with an organization’s articles of incorporation, this rule does not make LSF’s 1966 by-laws invalid. According to Plaintiffs, the first area where the 1966 by-laws conflict with LSF’s charter is the by-laws provision increasing the number of directors to nine, from the three directors allowed for in the 1952 Charter. An increase in number is not a conflict. But even if the increase in directors is a conflict, Plaintiffs' claims of invalidity would only relate to the specific 1966 by-law provision increasing the permissible number of directors, and would not invalidate the 1966 by-laws in toto. Thus, the elimination of the voting group incorporators by the 1966 by-laws would not be invalid, regardless of the 1966 provision increasing the number of directors.
Finally, and most importantly, the court concludes LSF has recognized and is estopped from contesting the validity of the 1966 by-laws. LSF has continually elected more than three directors since the 1966 by-laws were enacted. In 1967 the LSF elected seven directors at the corporate annual meeting, with Willis Carto as chairman of the nominating committee which recommended the directors. In 1969, six directors were appointed and elected, again with Willis Carto on the nominating committee. In 1970, five directors were elected. From 1971, six directors were elected to the LSF board each year. From 1974-76, LSF annually elected seven directors. LSF elected more than three directors in every year from 1967-1992 for which the minutes from LSF’s corporate annual meeting are available. In 1992, the year preceding the events giving rise to this suit, LSF had seven directors.
Thus, the court finds that even if the 1966 by-laws' provision permitting more than three directors was inconsistent with LSF’s 1952 Charter, the organization’s course of performance (which Plaintiffs participated in as directors, and members of the nominating committee) estops Plaintiffs from arguing that the 1966 by-laws are invalid. The court finds the by-laws are not invalid as a whole, nor is the provision permitting more than three directors invalid individually.
Plaintiffs also contend that the 1966 by-laws are invalid due to Article I, which states that LSF has no members. Plaintiffs interpret this provision as inconsistent with the 1952 charter because the charter provided for members (voting group Incorporators), and a class of members created by the charter (articles of incorporation) cannot be eliminated through by-laws amendments. This is a variation on Plaintiffs' argument that the 1966 by-laws are invalid as a whole because they were not approved by the voting group Incorporators. Plaintiffs' contention is misconceived, however, because the 1952 charter did not create the voting group Incorporators. The court rejected Plaintiffs' assertion that a voting group of members was created from the vote to incorporate under article 1396. Rather, the voting group Incorporators were born from LSF’s original 1952 by-laws, and as such were subject to amendment, or in this case elimination, by LSF directors who possessed the authority to amend corporate by-laws. The court finds LSF’s 1966 by-laws are valid as a matter of law, and in addition concludes Plaintiffs are estopped from challenging their validity 30 years later due to Plaintiffs' support, adoption, and implementation of the 1966 by-laws at the time of inception.
Plaintiffs' ability to bring this suit, based on their claims as voting group Incorporators, is not available. Other than his claim as a voting member Incorporator, Willis Carto has no legal relationship with LSF which would allow him to sustain this suit. LaVonne Furr resigned her position as an LSF director in 1993. While she now claims that her resignation was withdrawn and that she remains a director and Incorporator 25 Judge Polis determined in the California suit that LaVonne Furr’s resignation as a director was effective when given in 1993. Moreover, the Incorporator voting group was eliminated in 1966, with Furr’s support. In conclusion, the court finds LaVonne Furr has no legal relationship with LSF, and consequently has no ability to bring this suit.
Plaintiff-in-Intervention also lacks ability to bring this suit because it is an entity created by the Carto group after they declared the Defendants' election invalid. Plaintiff-in-Intervention’s claims are only as strong as the Incorporators who created it; thus, the Carto group’s actions in generating a paper LSF, and bringing suit in its name as the Plaintiff-in-Intervention, are without effect.
THEREFORE, Defendants' Second Amended Motion for Summary Judgment, including Defendants' First Supplemental Motion for Summary Judgment, is granted. Defendants' Motion for Summary Judgment as to Directors' Liability in Damages is granted. Intervenor’s Motion for Summary Judgment, including Intervenor’s First Supplemental Motion for Summary Judgment, is granted. Plaintiffs and Plaintiff-in-Intervention’s motions for summary judgment and requested declaratory relief are denied. The court declines to award attorneys' fees to any party. 26 All costs incurred shall be assessed against the party incurring same. All relief not expressly granted herein is denied. It is so ORDERED.
Signed on this 6th day of February, 1998.
HONORABLE HARVEY BROWN, Judge Presiding
1. At the time of the Furr’s resignation, LSF’s remaining director, Tom Kerr, called a special board meeting which resulted in the appointment of Defendants Allen, Berg, and Curry. Kerr later filed suit with Elisabeth Carto in California claiming he was mistaken in appointing Defendants as directors because he did so under the belief that he was LSF’s only director. According to Kerr at least four other LSF directors existed, and thus Defendants' appointments as directors were invalid.
3. See Kerr et al v. Legion for Survival of Freedom, Andrew Allen, Frederick Berg and John Curry, Cause No. 720973, Superior Court for the State of California, Orange County. The California Court of Appeals dismissed the Plaintiffs' appeal, noting that neither Kerr nor Elisabeth Carto had standing to appeal because the trial court found that Kerr had resigned as an LSF director and Elisabeth Carto was never appointed as one. The California Court of Appeals decision was issued on August 28, 1996, and the trial court judgment is now final. Defendants' collateral estoppel contentions are based on this lawsuit and final judgment.
4. Willis Carto and LaVonne Furr consider themselves the only surviving members of a voting group known as “Incorporators.” Their claim as Incorporators follows a winding path. Briefly, LSF’s original incorporators in 1952 were Frances Clark, Jason Matthews and Marcia C. J. Matthews. Plaintiffs assert that in 1964, Jason Matthews appointed his daughter, Marcia J. Hoyt, as a member of the “voting group called Incorporators,” replacing Marcia C. J. Matthews. According to Plaintiffs, Marcia J. Hoyt was the sole remaining member of the “voting group called Incorporators,” after the death of Jason Matthews. In 1966, Ms. Hoyt appointed Plaintiffs Carto and Furr as members of the “voting class called Incorporators,” replacing herself and the deceased Jason Matthews.
5. LSF initiated litigation against the Carto group in July 1994. Specifically, LSF filed an action in the California Superior Court of San Diego County, Legion for the Survival of Freedom, Inc. v. Willis Carto, et al, Cause No. N64584. On November 21, 1996, the Honorable Runston G. Maino ordered a decision for LSF and against Plaintiffs Carto and Furr for over six million dollars in damages, and granted an injunction for LSF prohibiting Plaintiffs from holding themselves out as members, directors, officers, or employees of LSF. Judge Maino’s eight-page letter opinion and judgment serves as the basis for LSF’s res judicata argument.
7. Tex. Rev. Div. Stat. art. 1304 (1874) (repealed 1959) set forth the following six requirements for a corporate charter: (1) name; (2) purpose; (3) place of business; (4) term of existence; (5) number of directors; and (6) amount of capital stock. See also Tex. Non-profit Corp. Act Ann. art. 1396-3.02B (Vernon 1997) (current version requiring an affirmative statement in the articles of incorporation if a corporation is to have no members.)
Any religious society, charitable, benevolent, literary or social association, may, by consent of a majority of its members become a body corporate under this title, electing directors or trustees, and performing such other things as are directed in the case of other corporations, and when so organized, shall have all the powers and privileges, and be subject to all the restrictions in this title contained, for the objects named in the charter, and shall have the same power to make by-laws for the regulation of their affairs as other corporations. (emphasis added)
See also Tex. Non-profit Corp. Act Ann. art. 1396-3.01(B) (Vernon 1997) (setting forth current procedure for a religious, charitable, benevolent, literary or social association to incorporate itself as a non-profit corporation; i.e. by the consent of a majority of its members).
At every such meeting each Incorporator shall be entitled to cast one vote upon any motion or other matter coming before such meeting.
12. See Acts 1959, 56th Leg., p. 286, ch. 162, art. 2.08 ("Members") (current version at Tex. Non-profit Corp. Act Ann. art. 1396-2.08(A) recognizing a corporation may have one or more classes of members or no members).
Section 8: In the event of death or resignation of any of the incorporators, the remaining incorporators or directors shall appoint a substitute incorporator for such deceased incorporator or any who have resigned. Such substitute incorporator shall have all of the powers and duties of the original incorporator.
16. While Marcia Hoyt was apparently appointed LSF director by her father prior to 1964 (her name appears as a director in the Minutes of LSF’s 1964 annual directors' meeting), the court finds no evidence supporting Marcia Hoyt’s status as a substitute incorporator prior to her being notified of her purported position by an LSF attorney in 1966.
17. The court finds no evidence, other than LaVonne Furr’s affidavit, which indicates that Ms. Hoyt was appointed a substitute voting incorporator by Jason Matthews. No evidence is presented to show that LaVonne Furr has personal knowledge that Jason Matthews appointed Marcia Hoyt to replace Marcia C. J. Matthews. Defendants' objection to Ms. Furr’s affidavit is sustained. Hoyt’s status as an LSF director is not disputed, as she appears in the minutes of the 1964 LSF annual directors meeting. However, Plaintiffs have not provided any LSF corporate documents (prior to 1966) which demonstrate that Hoyt was appointed substitute voting incorporator. In fact, the by-laws which allow for the appointment of substitute incorporators suggest that no substitute incorporators were selected before that date.
18. Defendants and Intervenor’s First Supplemental Motions for Summary Judgment note this point in concluding that no evidence exists which demonstrates that Plaintiffs had any role as officers, directors, incorporators, or substitute incorporators of LSF dating to at least September, 1993.
20. The 1959 Texas Non-Profit Corporation Act required corporations to expressly set forth a statement in their articles of incorporation if the corporation is to have no members. See Acts 1959. 56th Leg. p. 286, ch. 162, art. 3.02 (amended) (current version Tex. Non-Profit Corp. Act Ann. art. 1396-3.02) (Vernon 1997). However, the 1959 Act allowed for the continued existence of corporate charters created prior to 1959 which did not meet the 1959 Act requirements. Id. The 1959 Act required such pre-existing corporations to come into conformance with the 1959 Act charter requirements if the corporation charter was amended subsequent to the enactment of the 1959 Act. Id.
Defendants contend that the 1966 by-laws statement that LSF has no members should be construed in conjunction with the savings or “grandfather” clause in art. 1396-3.02(B). Specifically, Defendants interpret LSF’s 1966 by-laws statement regarding no members as an attempt to bring LSF into compliance with the 1959 Act. However, the 1966 by-laws merely superseded the 1952 by-laws; the 1966 by-laws did not amend or alter LSF’s corporate charter.
Amendments to these by-laws may be made, by a vote of a majority of the Board of Directors and/or Trustees at any annual meeting, or at any regular monthly meeting when written notice of any proposed amendment has been given to all Directors and/or Trustees not less than 10 days prior to the date of such meeting.
26. A request for attorneys' fees pursuant to the Declaratory Judgment Act is subject to the trial count’s discretion. See Deck & Assoc. v. Crispin, 888 S.W.2d 56, 62 (Tex. App. — Houston [1st Dist.] 1994, writ denied); Knighton v. International Bus. Mach. Corp., 856 S.W.2d 206, 210 (Tex. App. — Houston [1st Distr.] 1993, writ denied).