Leonor Pagtakhan-So v. Alex Cueto

* The Honorable George Caram Steeh, United States District Court Judge for the Eastern District
of Michigan, sitting by designation.
NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 16a0554n.06
Case No. 16-5320
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
LEONOR PAGTAKHAN-SO, et al.,
Plaintiffs-Appellants,
v.
ALEX CUETO, et al.,
Defendants-Appellees.
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ON APPEAL FROM THE UNITED
STATES DISTRICT COURT FOR
THE EASTERN DISTRICT OF
KENTUCKY
BEFORE: SUTTON and STRANCH, Circuit Judges; STEEH, District Judge.*
SUTTON, Circuit Judge. Most legal disputes are about doing well—protecting life,
liberty, and property. This is a dispute about doing good—determining who should run a
charitable foundation. Three former trustees of the Association of Philippine Physicians in
America Foundation sued the Foundation and two board members, alleging mismanagement in
violation of Michigan law and the Foundation’s charter. But they have not created a justiciable
legal dispute. The three plaintiffs do not meet the requirements for bringing an indirect
derivative lawsuit on behalf of the Foundation. And their new allegations of personal injury do
not give them standing to bring a direct action because the only remedy they seek would not
redress any personal harm. We affirm the district court’s decision to dismiss their claims for
lack of standing.

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I.
The Association of Philippine Physicians in America Foundation is a nonprofit
corporation devoted to supporting the work of physicians with Philippine ancestry. Organized
under Michigan law, the Foundation is the charitable wing of that enterprise, providing services
that include scholarships to students, continuing medical education to Association members, and
support for a free clinic in Payatas, Philippines.
In July 2014, after over a decade of conflict-free governance, a few trustees (the plaintiffs
here) thought something was amiss with the Foundation’s finances. Henry Eugenio and Renato
Judalena sent a letter to Leticia De Castro, a defendant and the Chairman of the Foundation,
requesting that she bring a number of financial documents to the Foundation’s annual meeting.
Eugenio and Judalena were not satisfied with the records De Castro provided, and Eugenio
decided to run against her for the position of Foundation Chairman. It was the Foundation’s first
contested election for a position on its board of trustees.
A dispute over the conduct of that election prompted Eugenio, Judalena, and Leonor
Pagtakhan-So, a Foundation trustee and the Association’s President, to sue the Foundation, De
Castro, and Alex Cueto, the former Foundation Chairman, alleging that they had “unlawfully
usurped control of the Foundation and used it for their own purposes.” R. 14 at 1–2. All three
claimed to file the lawsuit in their “capacity as a trustee of the Foundation.” Id. at 2. They
sought an injunction requiring a full accounting of the use of Foundation funds with
documentary support and a declaratory judgment that the defendants had violated the
Foundation’s constitution and Michigan law. After discovery, the request for financial
documents and a full accounting became moot. But the parties still disputed whether the
Foundation’s record-keeping met the standards set by Michigan law, and which of two similar

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versions of the Foundation’s Constitution should have governed the 2014 board election. The
district court granted summary judgment to the defendants on the grounds that the plaintiffs
lacked standing to sue for the Foundation’s benefit, and that declaratory judgment was
unavailable regardless of whether their claims were derivative or direct. Plaintiffs appeal.
II.
Derivative action. Civil Rule 23.1 applies “when one or more shareholders or members
of a corporation or an unincorporated association bring a derivative action [in federal court] to
enforce a right that the [] association may properly assert but has failed to enforce.” Fed. R. Civ.
P. 23.1(a). But the threshold question—whether a suit is a “derivative action” subject to the
requirements of Rule 23.1—is a matter of state law in diversity cases like this one. See Kepley v.
Lanz, 715 F.3d 969, 972–73 (6th Cir. 2013); Kennedy v. Venrock Assocs., 348 F.3d 584, 589 (7th
Cir. 2003); 12B Fletcher Cyc. Corp. § 5911. The Foundation is organized under Michigan law.
Michigan uses the common definition of a derivative action: “‘Derivative proceeding’ means a
civil suit in the right of a domestic corporation or a foreign corporation that is authorized to or
does transact business in this state.” Mich. Comp. Laws § 450.1491a. Put differently, it is a suit
to “enforce a right belonging to the fiduciary [corporation or association].” Strickland v.
Douglas, No. 298756, 2011 WL 6268189, at *2 (Mich. Ct. App. Dec. 15, 2011) (quoting Black’s
Law Dictionary (9th ed.)). In close cases, Michigan sorts the direct from the derivative by
“determin[ing] the gravamen of a party’s claim based on a review of the entire claim.” Id.
This is not a close case. The wrongs alleged—failure to keep adequate records and an
election of trustees in violation of the applicable Foundation Constitution—amount to classic
harms to the association, here the Foundation. Any injuries to the plaintiffs personally are
incidental to the injury to the Foundation, and Michigan law classifies claims of that sort as

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derivative. See Mich. Nat’l Bank v. Mudgett, 444 N.W.2d 534, 536 (Mich. Ct. App. 1989).
The remedies sought—a declaratory judgment that the Michigan Non-Profit Act had been
violated, and an injunction to remove the offending board members from office—would benefit
the Foundation. The complaint contains no claims that any individual rights were violated.
Nor do any of the plaintiffs ask for damages or even reinstatement to the board of trustees.
What they want is to remove two officers, whom they suspect of embezzling organizational
funds (though there’s no evidence of that), for the Foundation’s benefit.
This conclusion does not rest on implication or inference. Pagtakhan-So, a trustee at the
time the complaint was filed, claimed to “bring[] this action [in] her capacity as a Trustee of the
Foundation.” R. 14 at 2. Judalena and Eugenio were no longer on the Foundation’s board at the
time of the complaint, but each nonetheless claimed to “bring[] this action in his capacity as a
Trustee.” Id. The complaint sought declaratory judgment and injunctive relief because “[t]he
defendants’ actions . . . may cause the Foundation to lose some or all of its assets[,] lose the good
will of its donors and beneficiaries[, and] may cause the beneficiaries of the charitable work of
the Foundation to lose their ability to provide medical care.” Id. at 8–9. Those are harms to the
Foundation. A suit to prevent them is derivative.
The derivative nature of the claims became even clearer at summary judgment. Faced
with an argument that they had not been hurt by the Foundation’s actions, the plaintiffs
responded that they did not need to show any injury. “It is the Foundation,” they insisted, “that
is harmed by the defendants’ actions. . . . Plaintiffs have not brought this suit in their individual
capacities, rendering any personal damages completely irrelevant.” R. 100 at 19. “Rather,” they
explained, “the Plaintiffs brought this action in their capacity as Trustees of the Foundation in an
attempt [to] obtain declaratory and injunctive relief and to recoup Foundation funds that have

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been improperly diverted. . . . As such, it is the Foundation who has suffered actual damages.”
Id. Exactly: This is a derivative lawsuit on behalf of the Foundation.
That means the plaintiffs must satisfy the requirements of Rule 23.1 to proceed in federal
court. In re Ferro Corp. Derivative Litig., 511 F.3d 611, 617 (6th Cir. 2008). A plaintiff in a
derivative suit must “fairly and adequately represent the interests of [] members” of the
organization. Fed. R. Civ. P. 23.1(a). To do so, the complaint must check several boxes. It must
(1) allege that the plaintiff was a “member at the time of the transaction complained of,”
(2) allege that federal jurisdiction has not been triggered through collusion, and (3) “state with
particularity [] any effort by the plaintiff to obtain the desired action from the directors or
comparable authority [] and [] the reasons for not obtaining the action or not making the effort.”
Fed. R. Civ. P. 23.1(b).
In declining to join the issue on appeal, the plaintiffs effectively concede what is plain:
They have not met any of Civil Rule 23.1’s demands. The complaint ignores all three
requirements. There’s no mention of the period of membership or the absence of collusion. And
the complaint does not state, with or without particularity, “any effort . . . to obtain the desired
action” from the board directly or any reasons for “not making the effort.” See id. As the district
court explained, “[i]t is undisputed that the plaintiffs did not [] request a re-vote following the
election in 2014[,] request to be reinstated to the Board[, or] make any motions to the Board of
Trustees regarding the alleged discrepancies in the Constitution and Bylaws.” R. 134 at 9. Nor
did they “seek positions on the Board of Trustees after the 2014 Annual Meeting[,] or [] take any
other remedial action which would have addressed the plaintiffs’ concerns prior to initiating this
action.” Id. The failure to make any sort of pre-suit demand on the board or to try to explain
why such a demand would have been futile stops these claims in their tracks.

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Federal courts have “leeway to choose among threshold grounds for denying audience to
a case on the merits,” Sinochem Int’l Co. v. Malaysia Int’l Shipping Corp., 549 U.S. 422, 431
(2007) (quotation omitted), and we thus need not waste ink addressing the (perhaps messy)
questions of whether the plaintiffs, none of whom remains a trustee, are “members” or
“beneficiaries” of the Foundation under Michigan law, or whether they might still have a
“special relationship” sufficient to afford them standing to sue on behalf of the Foundation. No
matter the answers to those questions, the plaintiffs have failed to meet the demands of Rule
23.1, and the district court rightly dismissed their claims as a result.
Direct action. Faced with this obstacle to a derivative suit, the plaintiffs try to skirt what
they cannot conquer. For the first time in this case, they argue on appeal that their challenge to
the 2014 board election is “a direct claim, not a derivative one,” and that they “belong on the
board” and would like to serve on it. Appellants’ Br. 17–18. There are many good reasons to
reject this argument. First, for the same reasons this is a derivative action under Michigan law, it
is not a direct action, as the injuries invoked and remedies sought are of and for the Foundation.
Second, “absent exceptional circumstances, a court of appeals will not consider an
argument by an appellant that was not presented to or considered by the trial court.” Estate of
Quirk v. Comm’r of Internal Revenue, 928 F.2d 751, 757–58 (6th Cir. 1991). Raising new
arguments on appeal in an attempt to reverse an unfavorable judgment “is not only somewhat
devious, it undermines important judicial values.” Id. (quotation omitted); see also Greco v.
Livingston Cty., 774 F.3d 1061, 1064 (6th Cir. 2014); Isaak v. Trumbull Sav. & Loan Co., 169
F.3d 390, 396 n.3 (6th Cir. 1999).
Third, the plaintiffs lack Article III standing to sue directly. Article III’s familiar
requirements are: (1) “an injury in fact”; (2) “a causal connection” between the alleged injury

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and the defendants’ conduct; and (3) redressability—that the injury will “likely . . . be redressed
by a favorable decision.” Lujan v. Defs. of Wildlife, 504 U.S. 555, 560–61 (1992) (quotations
omitted); Klein v. U.S. Dep’t of Energy, 753 F.3d 576, 579 (6th Cir. 2014). Even if we assume
that the use of the wrong constitution in the 2014 election caused the plaintiffs to suffer a
concrete injury (which is assuming a lot), they still lack standing because they cannot show that
their personal injuries—no longer serving on the board—are likely to be redressed by the relief
they request. Judalena served a two-year term as a trustee, in accordance with both versions of
the Foundation Constitution, and his term expired five days before the contested 2014 election.
That election, and the dispute over which Constitution should have governed, had nothing to do
with the end of his tenure on the board. Eugenio stormed out of the 2014 board meeting and
withdrew from the election for chairman. He has disclaimed any continuing desire to serve on
the board. And Pagtakhan-So remained a trustee until 2015, and eventually her term expired, as
it would have regardless of any of the alleged violations of Michigan law or the Foundation’s by-
laws.
The only relief the plaintiffs ask for is (1) a declaratory judgment stating that the 2014
election was illegal and that the Foundation had failed to follow proper accounting procedure,
and (2) an injunction to nullify the 2014 election and remove De Castro and Cueto from their
positions as trustees. Neither of those remedies would return the plaintiffs to their positions as
trustees or hand the position of chairman to Eugenio, who does not want the job anyway.
Perhaps winning this lawsuit and removing De Castro and Cueto from office would increase the
plaintiffs’ chances of being reelected to the board one day (though none of them has run for a
trustee position since 2014). But any prospect of “obtaining relief from . . . a favorable ruling”
is, on that theory, “too speculative” on this record. Allen v. Wright, 468 U.S. 737, 752 (1984).

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If the remedies requested benefit anyone, it is the Foundation. And if the plaintiffs suffered
personal injuries, they have not asked for relief that would redress them. They lack standing on
that basis.
The plaintiffs’ failure to establish direct Article III standing only goes to show that their
claims, if any, are indeed derivative. But they have not met the requirements for a derivative suit
either. There is, we suppose, something noble in the plaintiffs’ attempt to ensure that a
charitable foundation is being administered in good faith while asking nothing for themselves.
But Article III has no exception for well-meaning lawsuits, and asking for nothing is a sure way
to get nothing in a federal court.
For these reasons, we affirm.

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