Monday, August 4, 2008

Charity spends bulk of outlays on its director's legal fees

Is it legal for a charity to spend money on lawyers defending its director against charges of allegedly misusing that money?  That's the question posed by a columnist for the Philadelphia Inquirer about Citizens Alliance for Better Neighborhoods, in an article entitled Nonprofit spends to defend director's deeds.  The mission of the organization, formed in 1991, is to improve Philadelphia neighborhoods by picking up trash, clearing alleys, planting trees, among other activities.  According to its Form 990, the organization granted $208,000 to local charities, compared with the $719,000 it spent on legal fees while its director, Ruth Arnao, 51, was being investigated by the FBI and IRS for misuse of funds. Arnao was indicted in February 2007 on 45 counts, including fraud and obstruction of justice, and she resigned in June of that year.

The column quotes Donald W. Kramer, a Philadelphia lawyer described as an expert on nonprofit issue, for the proposition that Pennsylvania law permits charities "to pay the legal bills for people who are being sued because of activities in connection to the charities."  This assertion is contested by Marcus S. Owens, lawyer and former head of the tax-exempt division of the IRS. "This sounds like another misappropriation.. To me, there's a difference between paying for some suit that's in one's service to the organization that has been approved by the board, and another in paying legal bills due to the unilateral taking of the assets."

Most respondents to an unscientific on-line survey believe the charity shouldn't pay for legal fees in this case.  Of the 69 responses to the column at the Inquirer's website, 25% expressed the belief that state law authorizes the charity to continue paying Arnao's legal bills, while 75% believe that this is "a misuse of funds." 

In truth, Title 15 section 5741 of the Pennsylvania code provides that:

Unless otherwise restricted in its bylaws, a nonprofit corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a representative of the corporation... against expenses (including attorneys' fees)... actually and reasonably incurred by him in connection with the action or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. 


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