Corporate Litigation: How Board of DirectorsShould Deal with Corp

Keith Paul Bishop

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Must A Board Of Directors Authorize The Filing Of A Lawsuit On The Corporation's Behalf?

by: Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP - California Corporate and Securities Law

Friday, October 26, 2018

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California Corporations Code Section 300(a) declares that "the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board." Does this mean that the board of directors must authorize the filing of a lawsuit in the name of the corporation? That question was recently addressed by a California Court of Appeal in an unpublished decision, St. Mary's Holy Apostolic Church of the East v. Benjamin, 2018 Cal. App. Unpub. LEXIS 6030.

The St. Mary's case involved a suit by religious corporation against its former board of directors. The defendants argued that the corporation lost standing when the president who had verified the complaint resigned during trial. The Court of Appeal didn't buy it:

"A corporation has an inherent right to sue without the board adopting a resolution that specifically authorizes the action. (Canal Oil Co. v. National Oil Co.(1937) 19 Cal.App.2d 524, 537 (Canal Oil), citing Kenton Furnace R.R. & Mfg. Co. v. McAlpin (C.C.S.D. Oh. 1880) 5 F. 737, 741 [corporate plaintiff not required to prove it had authority to institute suit; defendant may waive question regarding right to maintain action if not raised].)"

The Court also noted that Section 446 of the Code of Civil Procedure does not require board authorization. ("When a corporation is a party, the verification may be made by any officer thereof."). Finally, the Court found that the allegation that the plaintiff was a California corporation is sufficient to establish the right to sue. (citing Friendly Village Community Association v. Silva & Hill Construction Co. (1973) 31 Cal.App.3d 220, 224 (Friendly Village), citing California Steam Navigation Co. v. Wright (1856) 6 Cal. 258, 261.).

Note to readers: Rule 8.115 of the California Rules of Court prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as may be specified in that rule.