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Dimitry K., Esq.
Dimitry K., Esq., Attorney
Category: Legal
Satisfied Customers: 38356
Experience:  Multiple jurisdictions, specialize in business/contract disputes, estate creation and administration.
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Customer Question

What legal remedies are available for commencing involuntary dissolution of a nonprofit corporation that blatantly acts with unequivocal disregard of its bylaws and continued failure to observe basic corporate formalities?
Submitted: 1 year ago.
Category: Legal
Expert:  TexLaw replied 1 year ago.
Hi,

Thank you for your question.

What is your standing in relation to the nonprofit? Are you a member or director?

You say that there has been a failure to observe basic corporate formalities, does this involve fraud or theft of money from donors?
Customer: replied 1 year ago.

I am the secretary, corresponding & recording. Basic formalities involve keeping/recording proper minutes (almost none for the BOD in 38 yrs), annual audit required but not done, clearly delineated membership/election procedures not followed. Minimal, very defective procedure in transacting business in meetings. Seven entire years are corporate records are non-existent (minutes, etc.) I do not have direct knowledge of fraud, though the records states they have "taken over" (don't know what that really means) another entity which is a 501(c)(3) yet no accounting or auditing of that entity and its charitable fund-raising is in this corp record. Ilegal meetings held and electronic voting both dissallowed under both State law and bylaws. Former secretary secretly engaged in proxy voting, in violation. Meetings without quorums. I am a retired attorney, not licensed in WA, and business law was not my primary practice. I have advised of importance of following procedure and why, but the entire board acts in contravention of unambiguous bylaw language. It seems textbook anarchy but I can find no real legal remedy.


Expert:  TexLaw replied 1 year ago.
Hmmmm. The state code on involuntary dissolution for a non-profit seems to indicate that it may only take place when initiated by the state for failure to file the proper reports:
"""
§ 24.06.290. Proceedings for involuntary dissolution -- Rights, duties, and remedies -- Penalties -- Fee set by rule


Failure of the corporation to file its annual report within the time required shall not derogate from the rights of its creditors, or prevent the corporation from being sued and from defending lawsuits, nor shall it release the corporation from any of the duties or liabilities of a corporation under law.

A corporation shall be dissolved by the secretary of state upon the conditions prescribed in this section when the corporation:

(1) Has failed to file or complete its annual report within the time required by law;

(2) Has failed for thirty days to appoint or maintain a registered agent in this state; or

(3) Has failed for thirty days, after change of its registered agent or registered office, to file in the office of the secretary of state a statement of such change.

A corporation shall not be dissolved under this section unless the secretary of state has given the corporation not less than sixty days' notice of its delinquency or omission, by first-class mail, postage prepaid, addressed to the registered office, or, if there is no registered office, to the last known address of any officer or director as shown by the records of the secretary of state, and unless the corporation has failed to correct the omission or delinquency before expiration of the sixty-day period.

When a corporation has given cause for dissolution under this section, and has failed to correct the delinquency or omission as provided in this section, the secretary of state shall dissolve the corporation by issuing a certificate of involuntary dissolution containing a statement that the corporation has been dissolved and the date and reason for which it was dissolved. The original certificate of involuntary dissolution shall be filed in the records of the secretary of state, and a copy of the certificate shall forthwith be mailed to the corporation at its registered office or, if there is no registered office, to the last known address of the corporation or any officer, director, or incorporator of the corporation, as shown by the records of the secretary of state. Upon the filing of the certificate of involuntary dissolution, the existence of the corporation shall cease, except as otherwise provided in this chapter, and its name shall be available to and may be adopted by another corporation after the dissolution.

A corporation which has been dissolved by operation of this section may be reinstated within a period of three years following its dissolution if it completes and files a current annual report for the current reinstatement year or it appoints or maintains a registered agent, or files a required statement of change of registered agent or registered office and in addition pays the reinstatement fee as set by rule by the secretary of state, plus the full amount of all annual fees that would have been assessed for the years of administrative dissolution had the corporation been in active status, including the reinstatement year plus any penalties as established by rule by the secretary of state. If during the period of dissolution another person or corporation has reserved or adopted a corporate name which is identical or deceptively similar to the dissolved corporation's name, the dissolved corporation seeking reinstatement shall be required to adopt another name consistent with the requirements of this chapter and to amend its articles accordingly. When a corporation has been dissolved by operation of this section, remedies available to or against it shall survive in the manner provided by RCW 24.06.335 and thereafter the directors of the corporation shall hold title to the property of the corporation as trustees for the benefit of its creditors and shareholders."""

It does not seem to that this would apply.


Assuming that you would be acting alone and could not get the board of directors to adopt a resolution to dissolve the corporation voluntarily, I believe that your remedy lies in filing a shareholder derivative claim. However, even in that claim you would not seek the dissolution of the company. Rather, you would seek an injunction ordering the company to follow the by-laws. You could potentially also assert personal liability against the directors for failing to follow the by-laws if there is some damage that you would be able to show.

I'm a bit uncomfortable on saying that this is the only answer. It's the only thing I saw in the statutes, but I'm going to opt out and allow another expert to pick up the question and see if they can give you a more confident answer on this subject.

Best Regards,
ZDN
Expert:  Dimitry K., Esq. replied 1 year ago.
Thank you for your post. A different professional here. Your previous professional asks me to review and potentially double-check his findings.

Do you mind giving me about 13-30 minutes to run my own research and see if I can find anything different than from what the previous professional provided?
Customer: replied 1 year ago.

Fine, but I have already read the RCW corp statutes. I don't have subscrip to westlaw/lexis so cannot research case law anymore. I cannot see the policy rationale for statute requiring adoption of bylaws and corporate formality with no legal or equitable remedy to enforce them. (For instance, TN law has grounds for conducting business in "persistently fraudulent or illegal manner.") Shareholder deriviative seems economically unwise in view of small financial stake. Begins to sound like relief is only available to the wealthy.


Expert:  Dimitry K., Esq. replied 1 year ago.

Thank you for your follow-up.

I do not see it as a remedy for just the wealthy. Since you are a Secretary of the non-profit, you are a member of the board and that permit you to file suit on behalf of the non-profit against the other members on grounds of breach of fiduciary duty, something that from your facts is very likely to have taken place. In addition a non-profit is a federally granted designation, which means that contacting the IRS and have them investigate the entity is fully within your power. For a breach of fiduciary duty claim, if you end prevailing, you have the right to have the legal fees reimbursed since the suit was on behalf of entity and not yourself. Hence that may be at least a valid option to consider.

Please let me know if I can assist in any other way.

Expert:  Dimitry K., Esq. replied 1 year ago.
I see that you rated my subsequent answer as 'poor'. What specifically did I fail to address to your satisfaction? Please be aware I was simply attempting to add information to what was a fairly complete analysis already provided to you. Please advise.

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