## Facts

- A California nonprofit charitable corporation organized to pursue charitable, religious, scientific, literary, and educational purposes received dividend income from securities.
- The corporation’s long-standing practice was to deposit dividends into a checking account and periodically distribute funds to charitable recipients.
- In the late 1950s, serious disputes arose among the three directors regarding governance and distributions, resulting in a prolonged deadlock.
- One director refused to attend board meetings, challenged the status of the other directors, attempted to act unilaterally, and initiated litigation seeking to remove the other directors; those efforts did not succeed.
- During the deadlock, dividend income accumulated for roughly five years in a non-interest-bearing checking account and was neither invested nor distributed.
- The California Attorney General sued to remove the directors and to surcharge them for income that allegedly should have been earned had the accumulated cash been invested.
- The trial court removed the dissenting director but otherwise denied relief, including any surcharge for the alleged lost income.

## Issues

1. Whether directors of a charitable nonprofit corporation should be surcharged for loss of income when accumulated cash remained in a non-interest-bearing account for about five years during a board governance stalemate.
2. What fiduciary standard governs directors of California charitable corporations for purposes of assessing personal monetary liability.

## Decision

- The appellate court affirmed the judgment refusing to surcharge the directors for the alleged lost investment income.
- The court accepted that directors of charitable corporations are subject to fiduciary duties comparable to trustees and stated that proper performance requires compliance with strict trust principles.
- On the record, the court upheld the trial court’s determination that leaving the funds uninvested for the disputed period was not unreasonable under the unusual circumstances of the prolonged governance deadlock.
- The trial court’s removal of the dissenting director was left undisturbed.

## Legal Principles

- Assets devoted to charitable corporate purposes are treated as impressed with a charitable trust, and directors hold and administer them in a fiduciary capacity comparable to trustees.
- Directors of a charitable corporation should comply with strict trust principles, including duties of care, prudence, loyalty, and obedience to charitable purposes.
- A surcharge requires proof of a breach of fiduciary duty that is causally linked to a demonstrable financial loss to the charitable entity.
- Prudence is assessed in context and based on circumstances at the time; personal liability does not arise merely because a different investment approach might have produced greater income.
- Good-faith decision-making during governance uncertainty may justify conservative handling of funds and can defeat a claim that failure to invest was an actionable breach.

## Conclusion

The court held that although directors of a charitable corporation are judged under strict trust principles, surcharge for forgone investment income was not warranted where a prolonged, good-faith governance stalemate made the decision to keep funds in a non-interest-bearing account not unreasonable under the circumstances.


Lynch v. John M. Redfield Foundation, 88 Cal. Rptr. 86 (Cal. Ct. App. 1970)