Entire Board Removed As Sanction For Contempt
On Friday, the Court of Appeals published its opinion in Memphis Health Centers Inc. v. Grant, et al. There are numerous legal issues addressed in this derivative case, but the most prominent is the appellate court’s affirmance of the trial court’s decision to remove the entire Board of Directors (with the exception of the derivative plaintiffs) as a sanction for contempt of court.
The contempt stemmed from a violation of a standing court order. The Order enjoined the defendant directors from, among other things, violating the corporate bylaws. One of the bylaws in questions required the Board to investigate and address instances of “conduct unbecoming a board member."
The Court summarized the defendants' most egregious act of contempt as follows:
In this case, the first and most serious allegation of contempt stemmed from the Board’s failure to consider removal, or even investigate, Chairman Grant’s conduct after the United States District Court entered a judgment against him, finding him guilty of 3,306 acts of fraud. Notably, the facts regarding this allegation were undisputed; the Defendants took no action to investigate the judgment despite the fact that the full Board convened on four occasions following the rendering of the federal judgment and at least once after the trial court’s injunctive order was entered. The authenticity of the federal judgment was not called into question. The legal duty of the Board to take action to protect the corporation was likewise not questioned; the Defendants never contested the Plaintiffs’ assertion that the Bylaws imposed a duty on the Board to address the unbecoming conduct of any Board member. Astonishingly, the only defense presented for the Board’s inaction was that the final order of the United States District Court was being appealed to the United States Court of Appeals. The trial court rightfully found this excuse wholly inadequate.
As the Court of Appeals recognized, the wholesale removal of a board of directors is a sanction that is “breathtaking in scope.” Nonetheless, the affirmance of this sanction stands as a stark reminder of the trial court's power to deal with individuals who willfully violate a standing court order.