DATELINE: April 18, 2008, Chicago
Nonprofit officers and directors should take a look at a recent case coming out of the United States Court of Appeals for the 11th Circuit. In M.S. Koly v. Elizabeth Enney, 2008 U.S. App. LEXIS 5171 (2008), the court was faced with an appeal from a lower court decision involving allegations...
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of libel.
The pertinent facts are as follow: M.S. Koly and Elizabeth Enney were both members of the Rolls Royce Owners Club, a nonprofit organization for car enthusiasts. Enney was the club's regional vice chairman and Koly was both a vice president and board member. Mark Corigliano served as the club's treasurer and also was a board member. In June 2001, Corigliano was asked to replace the club's computer software. At a January 2002 board member, the club's executive director requested that the board approve a $9,000 payment to Corigliano for his work.
Three years later, on July 30, 2005, Enney circulated a memorandum via fax and e-mail to the RROC Regional and Affiliate Chairman which set out the conflicts-of-interest policy and further stated:
At the recent RROC Board of Directors meeting in Greenwich, a past RROC President and current board member (without vote) informed the Board of Directors of an Improper action by the 2002 Board to pay volunteer RROC Treasurer Mark Corigliano $9,000 and most important, a serious conflict of interest. This serious conflict of interest involves VP Regions, M.S. Koly and Mark Corigliano who serve as interlocking Directors on the Rolls-Royce Owners' Club and Delcath Systems, Inc. and failed to notify the RROC as required by the club's disclosure policy. . . .
Shortly [after the Club payed Corigliano, he] purchased approx. $8-9,000 (11,500 shares) of stock in M.S. Koly's Delcath Systems, Inc. in which Mark had only previously owned 1500 shares. Mark Corigliano also serves on the 2 member Compensation Committee of Delcath Systems, Inc. that decides M.S. Koly's total compensation.
Not only is it an impropriety, but the new Disclosure Policy instituted by RROC President Carl Peterson was either not implemented and certainly was not enforced. . . .
The district court granted Enney's motion that the libel claim be dismissed based on the pleadings, but refused to grant sanctions under Rule 11 of the Federal Rules of Civil Procedure. It found that the plaintiffs' claim was weak, but was not based on a theory that had no reasonable chance of success.
The 11th Circuit concluded that the district court abused its discretion by denying Enney's Rule 11 motion. According to the 11th Circuit, libel could not have occurred because this was an intracorporate communication, and therefore, it had not been published—an essential element for any actionable libel claim. Moreover, according to the 11th Circuit, Enney's communication constituted an opinion, and therefore was not actionable under Georgia law. Additionally, the 11th Circuit found that the facts stated in the memorandum were substantially true.
The 11th Circuit's opinion is useful in terms of providing some protection to individuals who want to raise concerns under a conflicts-of-interest policy, particularly when their concerns are grounded in fact and are communicated within the organization to appropriate people.
There are bigger, but unstated, lessons in this case. First, raising a conflict-of-interest violation after the fact always raises the possibility that the persons alleged to have violated the policy will take offense. That means that those who are complaining should do so objectively, supporting any allegations with facts and avoiding inflammatory language. It also is advisable that the communication be limited to as few people as possible and that those people be within the organization.
Those charged with crafting the conflicts-of-interest policy should consider including specific procedures for filing a complaint. Those procedures should help limit the possibility that the allegations will become public. It also puts everyone who is subject to the policy on notice that the organization encourages complaints and provides a process for making and dealing with them. The drafter might go so far as to add a clause that states that those subject to the policy consent to the procedures. Of course having those people sign off on the policy would be helpful.
Finally, although apparently not an issue in Koly, D & O insurance is advisable. Defending a lawsuit such as the one in Koly can be expensive, particularly when there is no opportunity to recover costs from the opposing party. Unfortunately, unless the organization and its directors negotiate the terms of the policy carefully, a typical insured vs. insured clause might eliminate any protection when one director sues another.
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