If the directors of a Tennessee mutual-benefit nonprofit (one with no members) abuse their authority or breach their duties, who can sue them?

Subject

Redress Against Wayward Directors of Mutual Benefit Nonprofit Corporations Without Members

Plain-English summary

Tennessee's Nonprofit Corporation Act sorts nonprofits into three buckets: mutual benefit (acts for the benefit of its members), public benefit (acts for the public), and religious. A mutual-benefit nonprofit is allowed to exist without members, even though that combination is unusual; the corporation is supposed to benefit members it does not have. When the directors of such a memberless nonprofit go off the rails (mismanagement, self-dealing, abuse of authority, illegal acts), the question is who can hold them accountable.

The AG's answer focuses on three pathways. First, another director on the same board can bring a derivative suit on behalf of the corporation against the wayward director. Second, the Tennessee Attorney General has direct-action authority in two scenarios: judicial dissolution under § 48-64-301(a)(1) (where the corporation has been carrying on its business in a "persistently fraudulent or illegal manner," exceeded its authority, or obtained its charter through fraud), and ultra vires actions under § 48-53-104(b)-(c) (where the corporation acts beyond its statutory or charter authority). Third, private citizens who are not members or directors generally have no standing to sue directors of a Tennessee nonprofit because directors' fiduciary duties run to the corporation and its members, not to outsiders. The AG also notes that the Attorney General can intervene as of right in any nonprofit-related proceeding where notice to the AG is statutorily required or where the AG would have authority to bring the action himself.

What this means for you

For directors of Tennessee mutual-benefit nonprofits

If you have concerns that fellow directors are mismanaging, self-dealing, or acting outside the corporation's authority, you have standing to bring a derivative suit. Document specific transactions, demand action from the board first if practical, and consult a corporate-litigation lawyer. Tennessee Code Annotated § 48-56-401 governs the procedural requirements.

For people associated with a memberless nonprofit but not on the board (donors, beneficiaries, whistleblowers)

You probably cannot sue directly. Private citizens have no direct right of action against a director for breach of fiduciary duty. Your most useful step is to report concerns to the Tennessee Attorney General's office, which has direct-action authority and can bring suit if the corporation has acted illegally or beyond its powers.

For the Attorney General's office

The opinion confirms two specific direct-action lanes (judicial dissolution under § 48-64-301 and ultra vires under § 48-53-104) plus broad intervention rights under § 48-51-701(b)(2). The intervention right is "as of right" whenever notice to the AG is statutorily required (e.g., changes to charitable-asset restrictions, or derivative actions involving a mutual-benefit nonprofit holding charitable assets in trust under §§ 48-56-401(g), 48-60-108(c), 48-60-206(b)).

For nonprofit attorneys structuring or defending boards

The opinion is a reminder that Tennessee deliberately limits standing to police nonprofit governance. The corporate veil and the no-private-right-of-action rules can frustrate aggrieved third parties but can also leave a memberless nonprofit with weak internal accountability. Best practice for boards: maintain at least three engaged directors (the statutory minimum under § 48-58-101(a), (d)), document fiduciary compliance, and consider voluntarily admitting members to enable broader internal oversight.

For the General Assembly

The AG flags that policing directors' actions in a memberless mutual-benefit corporation "may present problems." Summers v. Cherokee Children & Family Services already raised this concern. If the legislature wants stronger accountability, options include: lowering the 5%/50-member derivative-action threshold, expanding AG direct-action authority, or requiring at least nominal membership in mutual-benefit corporations.

Common questions

What is a mutual-benefit nonprofit?

A nonprofit organized for the benefit of its members rather than the general public. Tennessee classifies nonprofits as mutual benefit, public benefit, or religious. Tenn. Code Ann. §§ 48-52-102(a)(2)-(3).

Can a Tennessee nonprofit really exist without any members?

Yes. Tenn. Code Ann. § 48-56-103 expressly permits memberless corporations. The AG calls this "unusual" for mutual-benefit nonprofits but legally permissible.

What duties do directors owe?

Fiduciary duties of loyalty and care to the corporation and its members. Tenn. Code Ann. § 48-58-301(a); Keller v. Estate of McRedmond, 495 S.W.3d 852 (Tenn. 2016).

What is a derivative action?

A lawsuit brought on behalf of the corporation against insiders (typically directors or officers) who have harmed the corporation. The recovery goes to the corporation, not to the individual plaintiff.

Who can bring a derivative action?

Only members holding at least 5% of the voting power or numbering at least 50, plus directors. Tenn. Code Ann. § 48-56-401(a). Private citizens who are not members or directors are barred.

What is an ultra vires action?

A claim that the corporation acted beyond its corporate powers, defined by its charter or the statute. The Attorney General can bring this kind of suit directly under Tenn. Code Ann. § 48-53-104(b)-(c).

When can the Attorney General seek to dissolve a nonprofit?

Under Tenn. Code Ann. § 48-64-301(a)(1) when the corporation (A) obtained its charter through fraud, (B) exceeded or abused its authority, (C) violated any provision of law resulting in forfeiture of its charter, or (D) carried on, conducted, or transacted its business in a "persistently fraudulent or illegal manner."

Can the AG intervene in private nonprofit lawsuits?

Yes, as of right, when the AG was statutorily entitled to notice or when the AG could have commenced the action himself. Tenn. Code Ann. § 48-51-701(b)(2).

What if the wayward directors are the only board members in a memberless nonprofit?

This is the structural problem the opinion (and Summers) flags. With no members and no other directors willing to sue, internal accountability collapses, and the AG's direct-action authority becomes the practical backstop. This is why concerned outsiders should refer matters to the AG.

Background and statutory framework

Tennessee's Nonprofit Corporation Act spans Tenn. Code Ann. §§ 48-51-101 through 48-68-105. It creates three categories: mutual benefit, public benefit, and religious. Summers v. Cherokee Children & Family Services, Inc., 112 S.W.3d 486 (Tenn. Ct. App. 2002).

A mutual-benefit nonprofit is "organized for the mutual benefit of its members and . . . may make distributions to members upon dissolution." Tennessee permits such corporations to exist without members under Tenn. Code Ann. § 48-56-103, although this is unusual. Every Tennessee nonprofit must have a board of at least three directors. Tenn. Code Ann. § 48-58-101(a), (d). Directors owe fiduciary duties of loyalty and care to the corporation and its members. Tenn. Code Ann. § 48-58-301(a); Keller v. Estate of McRedmond, 495 S.W.3d 852, 880 (Tenn. 2016); State ex rel. Oliver v. Society for the Preservation of the Book of Common Prayer, 693 S.W.2d 340, 343 (Tenn. 1985).

Two mechanisms for challenging nonprofit conduct

Derivative actions are suits brought on behalf of the corporation to redress an injury to the corporation. Keller, 495 S.W.3d at 867-68. Claims based on breach of fiduciary duty to the corporation are derivative because the harm runs to the corporation. Standing under Tenn. Code Ann. § 48-56-401(a) is limited to members holding at least 5% voting power or 50 in number, and to directors. Private citizens have no derivative standing. State ex rel. Pierotti, 1993 WL 166938.

Direct actions are suits brought by a plaintiff on his own behalf. Private citizens generally have no direct-action right against directors because the directors' duties run to the corporation, not to outsiders.

The Attorney General's role

The AG has direct-action authority in two contexts: judicial dissolution under Tenn. Code Ann. § 48-64-301(a)(1) and ultra vires actions under Tenn. Code Ann. § 48-53-104(b)-(c). The dissolution grounds are (A) charter obtained through fraud, (B) authority exceeded or abused, (C) violation of law resulting in charter forfeiture, and (D) persistently fraudulent or illegal business operation.

Ultra vires (literally "beyond the powers") covers acts outside the scope of the corporation's authority under its charter or bylaws. State ex rel. v. Holston Trust Co., 79 S.W.2d 1012, 1016 (Tenn. 1935).

The AG also has intervention rights as of right under Tenn. Code Ann. § 48-51-701(b)(2) in any nonprofit-related proceeding where the AG was entitled to notice or could have brought the action. For mutual-benefit nonprofits, notice triggers include changes or elimination of charitable-asset restrictions and derivative actions involving a mutual-benefit corporation holding assets in charitable trust. Tenn. Code Ann. §§ 48-56-401(g), 48-60-108(c), 48-60-206(b).

Citations

• Tenn. Code Ann. §§ 48-51-101 through 48-68-105 (Tennessee Nonprofit Corporation Act)
• Tenn. Code Ann. § 48-56-103 (corporations may exist without members)
• Tenn. Code Ann. § 48-56-401(a) (derivative-action standing)
• Tenn. Code Ann. § 48-58-101(a), (d) (minimum three directors)
• Tenn. Code Ann. § 48-58-301(a) (fiduciary duties)
• Tenn. Code Ann. § 48-53-104(b)-(c) (ultra vires)
• Tenn. Code Ann. § 48-64-301(a)(1) (judicial dissolution grounds)
• Tenn. Code Ann. § 48-51-701(b)(2) (AG intervention)
• Keller v. Estate of McRedmond, 495 S.W.3d 852 (Tenn. 2016)
• Summers v. Cherokee Children & Family Services, 112 S.W.3d 486 (Tenn. Ct. App. 2002)
• State ex rel. Oliver v. Society for the Preservation of the Book of Common Prayer, 693 S.W.2d 340 (Tenn. 1985)
• State ex rel. v. Holston Trust Co., 79 S.W.2d 1012 (Tenn. 1935)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2025/op25-012.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
June 3, 2025
Opinion No. 25-012

Redress Against Wayward Directors of Mutual Benefit Nonprofit Corporations Without Members

Question 1
If the directors of a mutual benefit nonprofit corporation without members breach their fiduciary duties or engage in unlawful actions, how—and by whom—can they be held accountable?

Opinion 1
A court may hold accountable the memberless corporation's director or directors in a derivative action brought by another director on behalf of the corporation. Additionally, the Attorney General may ask a court in a direct action to dissolve the corporation or to provide other remedies in connection with claims that the corporation lacks or lacked the power to act.

Question 2
If affected individuals do not have standing to bring legal action, how are the fiduciary duties of good faith, loyalty, and care imposed upon directors under Tennessee law enforced in practice?

Opinion 2
See response to Question 1.

Question 3
Can the Attorney General and Reporter intervene in cases involving alleged illegal actions or abuse of authority by a mutual benefit nonprofit corporation without members?

Opinion 3
Yes, the Attorney General may intervene as of right in any proceeding brought by others under the Nonprofit Corporation Act if he was required to be provided notice of the proceeding or if he was statutorily authorized to commence the proceeding.

ANALYSIS

The Nonprofit Corporation Act, Tenn. Code Ann. §§ 48-51-101 through 48-68-105, divides Tennessee nonprofit corporations into (1) mutual benefit nonprofits, which act to benefit the members of the corporation; (2) public benefit nonprofits, which act to benefit the public at large; and (3) religious nonprofits, which act like public benefit nonprofits but with a religious mission. Summers v. Cherokee Child. & Fam. Srvcs., Inc., 112 S.W.3d 486, 500 (Tenn. Ct. App. 2002); see also Tenn. Code Ann. §§ 48-52-102(a)(2)-(3), 48-58-601(b), 48-67-101 – 102, 48-68-104. "A mutual benefit corporation is one organized for the mutual benefit of its members and it may make distributions to members upon dissolution." Nonprofit corporations are legally permitted not to have members, Tenn. Code Ann. § 48-56-103, though it would seem unusual for a mutual benefit corporation organized for the mutual benefit of its members to not actually have members. In any case, a mutual benefit nonprofit, like any other nonprofit, must have a board of at least three directors. Tenn. Code Ann. § 48-58-101(a), (d). Directors have a fiduciary duty, including duties of loyalty and care, to their corporation and to the members of their corporation. Tenn. Code Ann. § 48-58-301(a); Keller v. Estate of McRedmond, 495 S.W.3d 852, 880 (Tenn. 2016).

There are two mechanisms for challenging the actions of a nonprofit: derivative actions and direct actions. A derivative action is a suit brought on behalf of the corporation to redress an injury sustained by, or to enforce a duty owed to, the corporation. Keller, 495 S.W.3d at 867-68. A direct action, by contrast, is brought by a plaintiff on his own behalf, not on behalf of the corporation. The viability of each type of action depends on the nature of the alleged wrongdoing and the party bringing suit.

"[A] claim based on directors' or officers' breach of fiduciary duty to the corporation through mismanagement of the corporation, waste of corporate assets, or self-dealing is usually considered derivative in nature, because any harm resulting from the wrongful conduct was to the corporation." Id. at 869. As a result, claims of breach of fiduciary duty by corporate directors may lie in derivative actions.

Certain nonprofit members and nonprofit directors may bring derivative actions under the Nonprofit Corporation Act. Tenn. Code Ann. § 48-56-401(a). By statute, only members having at least five percent of the voting power or being at least fifty in number may bring a derivative suit. Plaintiffs not meeting these requirements are barred from bringing such suits. State by and through Pierotti, 1993 WL 166938, at *3. Private citizens who are not members or directors of the corporation also have no direct right of action against a director for breach of fiduciary duty because generally a director's fiduciary duties are owed only to the corporation and its members. These restrictions, among others, may present problems in connection with policing directors' actions in a memberless corporation. Summers, 112 S.W.3d at 506.

The Nonprofit Corporation Act does, though, allow the Attorney General to bring a direct action against a corporation or its directors in at least two contexts. First, the Attorney General may ask a court to dissolve the corporation for various reasons, including illegal activity. Tenn. Code Ann. § 48-64-301(a)(1). Specifically, the Attorney General may seek judicial dissolution of a mutual benefit nonprofit corporation that has obtained its charter through fraud, exceeded or abused the authority conferred upon it by law, has violated any provision of law resulting in the forfeiture of its charter, or has carried on, conducted, or transacted its business or affairs in a persistently fraudulent or illegal manner. Tenn. Code Ann. § 48-64-301(a)(1)(A)-(D). Additionally, the Attorney General may bring an ultra vires suit directly against the corporation or a wayward director if the corporation lacked the power to act in the way it did or in a proposed manner. Tenn. Code Ann. § 48-53-104(b)-(c). The term ultra vires designates acts beyond the scope of a corporation's powers, as defined by their charters or acts of incorporation. State ex rel. v. Holston Trust Co., 79 S.W.2d 1012, 1016 (Tenn. 1935). Accordingly, the Attorney General may bring an ultra vires suit when wayward nonprofit directors act outside the scope of their authority under the corporation's charter or bylaws.

The Attorney General, moreover, may intervene as of right in some cases brought by others involving nonprofit corporations. By statute, the Attorney General may intervene as of right in any proceeding brought by others when he was required to be provided notice of the proceeding or if he was statutorily authorized to commence the proceeding. Tenn. Code Ann. § 48-51-701(b)(2). Accordingly, the Attorney General could intervene as of right in a suit brought under Tenn. Code Ann. § 48-64-301 for judicial dissolution or under Tenn. Code Ann. § 48-53-104(b)-(c) regarding claims that a corporation lacked the power to act because he was authorized to bring those actions.

JONATHAN SKRMETTI
Attorney General and Reporter

J. MATTHEW RICE
Solicitor General

ANDREW C. COULAM
Deputy Attorney General

Footnote: In connection with mutual benefit nonprofits, such notice must be given regarding changes or elimination of restrictions on charitable assets or derivative actions regarding a mutual benefit nonprofit holding assets in charitable trust. Tenn. Code Ann. §§ 48-56-401(g), 48-60-108(c), 48-60-206(b).

Requested by:
The Honorable Michele Reneau
State Representative
425 Rep. John Lewis Way N.
Suite 522 Cordell Hull Building
Nashville, Tennessee 37243