Case Name: Singh v. Kumar, et al.
Case No.: 1-14-CV-272725

Defendants Shirdi Sai Darbar (“SSD”) and Ashok Kumar (“Kumar”) separately demur to the complaint (“Complaint”) filed by plaintiff Uday Singh, an individual suing derivatively on behalf of SSD (“Plaintiff”).

This is a derivative action which, among other things, seeks declaratory and injunctive relief for purported corporate mismanagement. SSD is a non-profit corporation that was founded in August 2010 by Plaintiff, Kumar and Tarun Mehra (“Mehra”) for the purposes of establishing a Hindu Temple and Shirdi Sai Cultural Center. (Complaint, ¶¶ 7, 8.) At that time, Kumar was installed as SSD’s President, Singh as its Secretary, and Mehra as its Treasurer, with the three collectively comprising SSD’s Board of Directors (the “Board”). (Id., ¶ 12.)

Plaintiff alleges that beginning in January 2011, Kumar began to take efforts to unilaterally control SSD and in doing so, operated outside the scope of his authority and breached his fiduciary obligations to the corporation. (Id., ¶¶ 20-29.) According to the allegations of the Complaint, Kumar now maintains complete control over SSD’s finances and has refused and continues to refuse to hold or participate in Board meetings. (Id.)

Plaintiff filed the Complaint on November 3, 2014 asserting the following claims: (1) breach of fiduciary duty (against Kumar); (2) conversion (against Kumar); (3) money had and received (against Kumar); (4) accounting (against Kumar); (5) declaratory and injunctive relief (against Kumar); and (6) constructive trust (against all defendants).

On December 22, 2014, Kumar and SSD filed the instant demurrers to the Complaint in its entirety on the ground of failure to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subd. (e).)

I. SSD’s Demurrer

The entire basis of SSD’s demurrer is that Plaintiff lacks standing to maintain the instant action. As SSD notes in its papers, while a corporation “has no ground to challenge the merits of a derivative claim filed on its behalf and from which it stands to benefit” (Patrick v. Alacer Corporation (2008) 167 Cal.App.4th 995, 1005), it “may assert defenses contesting the plaintiff’s right or decision to bring suit, such as asserting the shareholder plaintiff’s lack of standing ….” (Id., citing Corp. Code, § 800, subd. (b)(1); Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 185.)

Specifically, SSD asserts that Plaintiff is not authorized to file a derivative action pursuant to Corporations Code section 800 because (1) SSD is a non-profit corporation without shareholders or members and (2) the grounds for a derivative action by a director of a religious non-profit corporation are purely statutory and there is no statute authorizing the action filed by Plaintiff. SSD argues that each of Plaintiff’s claims, regardless of title, is based on nothing more than allegations of mismanagement and such conduct does not give a director of a religious non-profit corporation the legal right to file a derivative action against a director or the corporation.

SSD is correct, as Plaintiff essentially concedes, that he cannot maintain a derivative action pursuant to Corporations Code section 800. That section provides for shareholder derivative actions and states that such lawsuits may only be initiated by shareholders (of record or beneficially) or holders of voting trust certificates at the time of the transaction upon which the action is based. Per the allegations of the Complaint, SSD is a “religious, non-profit corporation organized under the Nonprofit Religious Corporation Law ….” (Complaint, ¶ 8.) Thus, SSD does not have shareholders or holders of voting trust certificates and Corporations Code section 800 is inapplicable.

SSD is also correct that there are limitations with respect to what actions may be maintained by a non-profit religious corporation. Such corporations are governed by Corporations Code section 9110, et seq., which is referred to as the Nonprofit Religious Corporations Law, and is one part of the broader set of laws known as the Nonprofit Corporation Law (Corp. Code, § 5000 et seq.). The other parts are the Nonprofit Public Benefit Corporation Law (Corp. Code § 5110, et seq.) and the Nonprofit Mutual Benefit Corporation Law (Corp. Code § 7110, et seq.). Most of the provisions governing religious corporations such as SSD are similar or identical to those governing mutual and public benefit corporations. However, there is a critical difference with regard to laws governing derivative actions against these types of corporations. Mutual and public benefit corporations are subject to detailed statutory requirements governing such lawsuits. (See Corp. Code, §§ 5710 and 7710.) In contrast, there are no comparable provisions which apply to religious corporations. Consequently, the statutory scheme which governs non-profit religious corporations does not contemplate and thus permit general derivative lawsuits as do the statutes which govern the other types of non-profit corporations. What is contemplated, however, are several types of actions which are explicitly carved out and authorized by the provisions of the Nonprofit Religious Corporations Law. Limitations on the activities, purposes or powers of religious corporations and their officers and directors, as appears to be the aim of Plaintiff’s lawsuit here, may be raised only in the following, specified proceedings :

(1) a proceeding to enjoin unauthorized activities by the corporation or the officers brought by the authorized number of members under Corporations Code section 5036 or by one authorized by the articles or the bylaws to bring the action (Corp. Code, § 9141, subd. (a).);
(2) a proceeding against officers or directors for violation of their authority brought by the authorized number of members under Corporations Code section 5036 or by one authorized by the articles or the bylaws to bring the action (Corp. Code, § 9141, subd. (a);
(3) an action to remedy the breach of a trust under which any or all of the assets of the corporation are held (Corp. Code, § 9142); and
(4) an action to remedy the improper use of property contributed by an affiliated person to the religious corporation for a specific purpose other than the general support of the corporation’s activities that is used in a manner contrary to the specific purpose (Corp. Code, § 9143).

Here, Plaintiff’s claims against Kumar are based on allegations that he committed several acts which fell outside of the scope of his authority and were not authorized by the Board as they were required to be. With this action, Plaintiff seeks, at least in part, to enjoin such conduct, an act that is permissible under Corporations Code sections 9141, subdivision (a) and 5036, provided that Plaintiff qualifies as a party authorized to do so under the latter statute. It is not clear from the allegations of the Complaint that Plaintiff so qualifies under Corporations Code section 5036, i.e., has standing to maintain the claims asserted in this action. Consequently, SSD’s demurrer to the Complaint on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

II. Kumar’s Demurrer

Kumar’s demurrer to the Complaint is based on the same argument regarding lack of standing as SSD’s. Accordingly, for the same reasons, the demurrer to the Complaint on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.