Tuesday, February 1, 2011

Draft Protection of Charitable Assets Act, with Comments

Thanks to Mark Fitzgibbons for passing along to us the Draft Protection of Charitable Assets Act prepared by the National Conference of Commissioners on Uniform State Law.  Fitzgibbons discusses the predecessor draft in the January 13, 2011 edition of the Chronicle of Philanthropy (subscription required).  He was kind enough, though to share his critical thoughts on the current draft, which we reprint below.  By the way, our co-editor Susan Gary served on the drafting committee:

 

Comments on the Protection of Charitable Assets Act, formerly the

Oversight of Charitable Assets Act

Mark J. Fitzgibbons[1][1]

 

I thank NCCUSL and the Drafting Committee on the Protection of Charitable Assets Act, formerly the Oversight of Charitable Assets Act (the “Act”), for allowing me to express concerns about the January 10, 2011 draft of the Act.  My comments do not express all objections I would make, but focus on changes to Section 4 of the Act, and I also make certain comments about the underlying premise of the Act.

The Prefatory Note to the Act states, “the committee has not seen evidence of overreaching by charitable regulators.”  I am not aware, on the other hand, whether the committee has seen evidence of a need for the Act.

History, however, is filled with examples of government abuse of charitable assets and charities, especially for political purposes and even perhaps before private miscreants ever abused charitable assets themselves.  For example, “Shortly after the reign of [Roman emperor] Marcus Aurelius . . . thirty barrack emperors in their struggle to rule Rome between 192 and 324 A.D. ‘borrowed’ funds belonging to charities from the municipal treasuries.”[2][2]  Using the excuse of fiduciary abuses by trustees, King Henry VIII dissolved the monasteries in the 1530s.[3][3]

My own files of just one agency are filled with examples of not merely overreaching, but abuse and unlawful conduct by state charity regulators.[4][4]  Charities are reluctant to publicize or even fight such abuses for two principal reasons:  (1) state regulators control their licenses to solicit contributions, and charities fear officious retaliation, and (2) charities fear that publicizing adversarial actions by states scares donors, and charities tend to enter into agreements with states regardless of whether state regulators engaged in abusive conduct.[5][5]

My friends the state charity regulators consistently turn a blind eye to their own violations of law, and when such violations are brought to their attention, their reaction tends to be, “So sue us.”  The Constitution is the law that governs government, but in addition to constitutional violations, state regulators often abuse, misapply and violate the state laws they purport to enforce.  State regulators are in fact the biggest violators of the laws that govern nonprofits, and any effort by this Committee must protect against abuses and unlawful actions by state officials.

Edits to the Act Fail to Cure Constitutional Defects, and Have Even Added More

The changes to Section 4 of the Act are not only woefully anemic with respect to preventing government abuse of charities, many are actually a step backwards.  Changes to Section 4 include feigned but failed constitutional fixes that will only foster litigation.[6][6]

While the changes provide a thin veil to address 14th Amendment objections I raised in my first set of comments, they fail to abide by all of the requirements of the 4th Amendment.[7][7]  Respondents are not protected against 4th Amendment violations caused by the Act, and would need to expend valuable, often scarce and overstretched resources in courts for the purpose of protecting their rights.

Instead of including protections against 4th and even 1st Amendment violations and abuses at the outset, the Act creates the need for charities to litigate.  Any statute that creates the need to litigate to protect rights is unworthy of consideration.

The Act gives attorneys general the unilateral power to commence investigations, which is a violation of the separation of powers and the principle of checks and balances.  To comply with all of the requirements of the 4th Amendment, including the need for oath and affirmation, the Act should only authorize investigations after oath and affirmation before a court or tribunal truly independent from the attorneys general, and only for actual cause (not upon mere “belief,” which is ripe for abuse).  The Act fails to provide such checks on abusive, unlawful or unconstitutional investigations.

The Comment to Section 4 includes a poor attempt to explain its evasion of the 4th Amendment: “Information often comes to the attorney general in a form much less formal that a sworn complaint; for example, information about abuses and misdeeds is often brought to light in newspaper stories.”

There is, of course, no “newspaper story” exception to, nor attorney general or state charity regulator exemption from, the 4th Amendment.  This Comment to Section 4, however, is typical of the approach by state regulators to cut corners, evade the law, and often use information less reliable than the higher standard of cause to initiate their investigations (or, for their political cronies, to ignore the need to investigate.  See, “ACORN and the AGs,” included in the exhibits to my comments).[8][8]

Revised Section 4 also includes a new provision that is a remarkably brazen violation of the 5th Amendment, which reads, “An individual may not refuse to answer a material question, produce documentary material, or testify in an investigation pursuant to this section on the ground that the testimony or documentary material may tend to incriminate the individual or subject the individual to a penalty.”[9][9]

That is not only an open and notorious violation of the 5th Amendment, it wasn’t allowed even under English common law.  In The King v. Dr. Purnell, 96 Eng. Rep. 20 K.B. (1748), for example, the Attorney General was denied visitation access to documents from Oxford University, which university was not “private” because it was established by the Crown, on grounds equivalent to the 5th Amendment right against self-incrimination.[10][10]

The Act’s Foundations Are Wrong

Besides the open and notorious violations of the Constitution proposed in the Act, and those it would foster such as violations of the 1st Amendment, the underlying premises of the Act are materially flawed.

State regulators claim they seek to clarify the common law, but they exaggerate the authority of the attorneys general even at common law, bypass common law procedural protections that prevented abuses the Act would authorize, and, under American jurisprudence and principles, attorneys general are bound by a written Constitution.

The attorney general was not initially given power over charities even by the 1601 Statute of Charitable Uses.  Investigations of fiduciary abuses could be brought by parties other than the attorney general, but only after information had been presented to a tribunal of commissioners.  After evidence of malfeasance, a warrant could be issued for the sheriff to gather a jury.  In other words, even at common law, there were distinct procedures, separation of powers, and checks on abusive use of government authority.

Decades after passage of the 1601 Statute the attorney general was given authority to act, but even then only as a relator.  The Act gives attorneys general more powers, both in terms of quantity and substance, than were given attorneys general in old English law.

Also, when a person brought a frivolous charge of fiduciary abuse against a charity, English law provided that a charity could recover damages.[11][11]  I highly recommend that the Act provide such a remedy both against attorneys general and private plaintiffs who use attorneys general as intervenors or relators in their frivolous suits.

American jurisprudence, beginning with Trustees of Dartmouth College v. Woodward, also made the important distinction of the “private” nonprofit corporation that may be “public” in its uses.[12][12]  Corporations of England were usually established by the Crown or the Church, which accounts for why at common law the attorney general had visitation authority.  The doctrine of visitation in America changed to reflect private property rights on which the government could not trespass without due process, or engage in takings or other breaches of private property rights.

American jurisprudence also recognizes the distinction between the privately created charitable corporation, where law applies, versus the charitable trust, where the principles of equity may apply.  The Act fails to make this important, even if misunderstood, distinction.  Indeed,

The new nation vehemently condemned anything reminiscent of English sovereign power or of an aristocratic society as unfit for a democracy.  Not only did some states repeal all English statutes including the Statute of Charitable Uses, but some jurisdictions rejected the doctrine of cy pres because it was mistakenly regarded as being exercisable only by the prerogative power of the king and hence contrary to the spirit of our democratic institutions and in conflict with the doctrine of separation of powers.[13][13]

Not all states recognize that the attorney general has common law authority with respect to charities.  That may be for the reason that not all states initially recognized cy pres, where the state could step in at equity where a charitable bequest was vague.  Attorneys general did have common law authority under cy pres, which isn’t universally recognized.  But even that is far, far different than the mighty powers the Act would grant attorneys general over the assets of privately created nonprofits.

The Act confuses principles and doctrine of private property versus civic charities, corporations versus trusts, law versus equity, and compounds these errors in a massive, unconstitutional power grab.  The Act’s power grab, however, is actually built on sand.

For example, the California Supervision of Trustees and Fundraisers for Charitable Purposes Act, Government Code 12580 – 12599.7 (the “CA Act”) fails to distinguish between a charitable trust and a charitable corporation.  California case law recognizes a common law authority of attorneys general, but the antecedent case on which all other cases ultimately rely is People ex rel. Ellert v. Cogswell, 45 P. 270 (1896).

Mrs. Cogswell and her husband created a trust giving their real property to create a school for Californians pursuant to a California act specifically created to encourage such gifts.  Mrs. Cogswell attempted to block the gift on grounds that due to ailments she never understood the scope and breadth of it.  The mayor of San Francisco acted as relator, and the state sought to enforce the trust over Mrs. Cogwell’s objections and efforts to obtain remedy.

California is just one example of a state that has taken minimalist principles in equity and only applicable to trusts or gifts to state institutions, and contorted, expanded and compounded them to aggrandize the authority of the state over privately created charitable corporations.  That approach was rejected in Trustees of Dartmouth College v. Woodward.

If a uniform law were needed, the Act unfortunately takes the worst elements most favorable to aggrandizing government power and harmful to nonprofits, while serving no apparent benefit to the public, especially given the excessive regulation already in place.

My friends the state regulators sadly seek to create yet another inept system adding expense for both states and charities, ultimately financed by taxpayers and donors, where information goes into yet another bureaucratic black hole.  They have already demonstrated inadequate and unlawful administration of current laws, yet they seek to compound the misery through the Act.

A better uniform law would be the online disclosure system I have proposed to state regulators.  It would provide information to even more state regulators than the current charitable solicitation laws and the Act combined would provide.  It would also provide donors more information than current law and the Act combined, which are bureaucratic black holes.  Lastly, the online disclosure system would save both states and charities money, which money is currently diverted from taxpayers and donors’ intended purposes for their contributions and gifts.

The changes to the Act shown in the January 10 draft are not a serious effort.  There are other problems with the Act that I do not address.  After reading the January 10 draft and based on my nearly two decades of dealing with state charity regulators, I am not convinced the Act is a worthy project.



[1][1] President of Corporate and Legal Affairs, American Target Advertising, Inc. (ATA), Manassas, Virginia

[2][2] E. FISCH, D. FREED, E. SCHACHTER, CHARITIES AND CHARITABLE FOUNDATIONS Sec. 18, at 10 (1974).

[3][3] Fishman, The Political Use of Private Benevolence: The Statute of Charitable Uses, DIGITALCOMMONS@PACE, at 29 – 30 (April 23, 2008).

[4][4] I attach as exhibits several published accounts.  There is not a single state with which I deal that hasn’t engaged in abusive or unlawful conduct, and my letters are too voluminous to include as an attachment to these comments.

[5][5]  The Act applies to many more organizations than just charities, such as 501(c)(4) organizations. These comments use the term “charity” to apply to all nonprofits covered by the Act, and even the entities that are not nonprofits covered by the Act.

[6][6] Please, as Thomas Jefferson once wrote to James Madison, pardon my freedom.

[7][7] “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”

[8][8] As the Supreme Court has stated, “Officious examination can be expensive, so much so that it eats up men’s substance.  It can be time-consuming, clogging the process of business.  It can become prosecution when carried beyond reason.” Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 213 (1946).

[9][9] The sentences following the violation of the 5th Amendment feign immunity, but such immunity would not be recognized in jurisdictions other than the state issuing the demand, or by the federal government.

 [10][10] Justice McKenna’s dissent in Wilson v. United States, 221 U.S. 361 (1911), citing to an abundance of common law decisions, explains why the majority opinion misconstrued the common law and Hale v. Henkel, 201 U.S. 43 (1906) in deciding that an individual may not invoke the 5th Amendment when a corporation’s records are sought.  Hale v. Henkel, at 76, recognized, among other things, that corporations are protected by the 4th Amendment, and “an order for the production of books and papers may constitute an unreasonable search and seizure within the Fourth Amendment.”  The Act’s violation of the 5th Amendment doesn’t even confine itself to the limited doctrine espoused in Wilson v. United States.

[11][11] Fishman, at 31.

[12][12] My article “State Regulators Make a Misguided Push to Tighten Control Over Charities” in the January 13, 2011 Chronicle of Philanthropy provides a brief summary.

[13][13] FISCH, Sec. 22, at 21.

 

dkj

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