Wednesday, June 21, 2017
There have been some interesting developments from the states relating to their bread and butter issues of governance, fundraising, and property tax exemptions, as well as a new law in Texas relating to sermons.
With respect to governance, another round of amendments to the New York Nonprofit Revitalization Act went into effect last month (except for one provision that went into effect on January 1st of this year). The amendments clarified a number of important provisions as well as relaxing some of the stricter rules in the original Act, including those relating to related party transactions. For a helpful summary, see this National Law Review article by Pamela Landman (Cadwalader) and Paul W. Mourning (Cadwalader). One interesting nonprofit governance case under the Act is Schneiderman v. The Lutheran Care Network et al., in which New York Attorney General Eric Schneiderman's office challenged the management fees charged by The Lutheran Care Network (TLCN) to one of its affiliates, in part because TLCN had exercised its authority over the affiliate to render the members of the affiliate's board of directors identical to the members of the TLCN board. The trial court rejected the AG office's position, citing the business judgment rule and the presumption that corporate officers and directors act in good faith, regardless of the decision by TLCN to make the affiliate board's membership mirror that of the TLCN board. The March 13th opinion does not appear to be publicly available, but for coverage see the Albany Times Union stories from March 21st, January 13th, and last October 1st.
NY AG Schneiderman office's was more successful in pursuing a fundraising-related claim against the Breast Cancer Survivors Foundation, Inc. (BCSF) and its President and Founder Dr. Yulius Poplyansky. In that case, the resulting settlement closed the "shell charity" BCSF nationwide and resulted in nearly $350,000 to be paid to legitimate breast cancer organizations. The settlement is one result of a broader NY AG "Operation Bottomfeeder" initiative aimed at such charities. The Nonprofit Quarterly noticed a troubling aspect of this case, however: the person apparently behind BCSF was Mark Gelvan, who has "a long history of such activity" and who also was banned for life from such fundraising by none other than the NY AG's office 13 years ago. What additional penalties he may face is unclear, as the investigation into BCSF is apparently continuing.
Turning to property tax exemptions, last year I mentioned that the Massachusetts Supreme Court was considering what counts as sufficiently "religious" use of real property to qualify for exemption as a house of religious worship under Massachusetts law. We now have an opinion in Shrine of Our Lady of La Sallette v. Board of Assessors, and religious organizations in Massachusetts can (mostly) breath a sigh of relief. While exemption statutes are strictly construed, the court rejected a narrow reading of the statute at issue here that would have subject some supporting facilities to tax. In doing so, the court stated "we recognize that a house of religious worship is more than the chapel used for prayer and the classrooms used for religious instruction. It includes the parking lot where congregants park their vehicles, the anteroom where they greet each other and leave their coats and jackets, the parish hall where they congregate in religious fellowship after prayer services, the offices for the clergy and staff, and the storage area where the extra chairs are stored for high holy days." The court then concluded that because the welcome center and a maintenance building both had a dominant purpose connected with religious worship and instruction they were fully exempt from tax, contrary to the position of the Board of Assessors, which had limited full exemption to a church, chapels, a monastery, and a retreat center. It agreed with the Board, however, that a safe house for battered women (leased to a another nonprofit for this purpose) and a wildlife sanctuary did not meet this test (although if the proper application had been filed, they might have been exempt because their dominant purpose was charitable). More coverage: WBUR News.
Finally, one other religious organization-related state law development. Several years ago attorneys for the mayor of Houston subpoenaed the sermons of five pastors who opposed a city ordinance banning discrimination based on sexual orientation during litigation relating to an attempt to repeal the ordinance. She dropped the subpoenas in the face of nationwide criticism, and the ordinance was repealed by Houston voters in November 2015. Nevertheless, the Houston Legislature and current Texas Governor Greg Abbott felt it was important to bar Texas government officials from ever compelling the disclosure of sermons in the future, and so they enacted legislation along those lines last month.
Tuesday, May 9, 2017
On May 1, the Michigan Supreme Court ruled for-profit college Sanford-Brown College Grand Rapids was not required to pay property taxes on its personal property. Two Michigan statutes exempt property owned by charitable and educational institutions from taxation. Section 211.7n exempts real property owned by "nonprofit theater, library, educational, or scientific institutions," while section 211.9(1)(a) exempts personal property owned by "charitable, educational, and scientific institutions." Note that the word nonprofit is missing from the latter section. (It is unclear whether this omission was intentional or not.)
The Michigan Supreme Court unanimously ruled that the language in section 211.9(1)(a) was "unambiguous. This statute allows the exemption of personal property from taxes imposed on institutions that are educational in nature. Conspicuously absent from the statute is any language indicating that the tax exemption applies only to nonprofit entities." The College's obligations to pay real property taxes were unaffected by the ruling, but now the College shares the same personal property tax exemptions as any charitable or nonprofit educational institution in the State.
Monday, April 3, 2017
A recent article explains the decision of the Illinois Supreme Court to overrule the appellate court that determined a 2012 state law that exempted nonprofit hospitals from paying property taxes was unconstitutional. The law in question allows nonprofit hospitals to avoid paying property taxes if the value of their charitable service exceeds the value of the property taxes that would have been collected but-for the statute.
Although the Illinois Supreme Court remanded the case, they did not explicitly rule on the constitutionality of the law. Therefore, Illinois nonprofits should be reluctant to rejoice just yet. At issue is what is considered “charity” for a nonprofit hospital. Ultimately, the Illinois Supreme Court ruled the appellate court overstepped its authority when it ruled the constitutionality issue was separate from the rest of the case.
For the time being, nonprofit Illinois hospitals may still enjoy their tax exemption. However, the long-term ramifications of this litigation are far from certain.
David A. Brennen
Wednesday, March 1, 2017
Yesterday, a class action lawsuit was filed against PayPal, accusing the website of redirecting donations made through its "Giving Fund" portal.
The website invites users to donate to more than a million charities through their system, promising that 100% of the funds will go to the identified nonprofit. However, the complaint alleges, if the donee nonprofit does not have a registered account set up with PayPal (and many organizations don't), the money will never reach the intended organization, and instead be redistributed to other nonprofits.
The complaint asserts legal theories of theft, breach of fiduciary obligations, and violation of consumer protection laws.
Tuesday, January 24, 2017
The Supreme Court of Illinois is hearing arguments to determine the constitutionality of a 2012 law which exempts not-for-profit hospitals from paying property taxes, as long as their charity provided is at least equal to their property tax liability.
Some Illinois municipalities believe the hospitals are in fact making a profit, and should be held accountable for their fair share of property taxes. These municipalities believe the exemption may only be constitutionally granted if the property is used exclusively for charitable purposes.
The hospitals under review, however, argue that under the constitution the “exclusive use for charitable purposes” standard may be met as long as the hospital is “made available to all who need it regardless of ability to pay.”
Clearly this ruling will carry important policy implications that will impact the landscape of the health care industry. 156 of Illinois’ approximately 200 hospitals carry a not-for-profit status. Further, a report furnished for this case indicates that 47 Chicago area non-profit hospitals received property tax exemptions worth $279 million.
David A. Brennen
Wednesday, November 16, 2016
Last month Princeton University announced that just days before trial was scheduled to begin it had settled the property tax exemption lawsuit brought by several local residents. As detailed in the announcement, Princeton committed to both pay millions of dollars to Princeton homeownersover six years through a tax credit and to also make over $1 million in contributions over three years to a local nonprofit to help economically disadvantaged residents obtain housing. The total cost to Princeton will be over $18 million.
While the settlement resolves Princeton's property tax exposure for recent years, it leaves open the possibility of suits challenging the university's property tax exemption at some point in the future. It also of course does not resolve the lawsuits currently pending against 35 nonprofit hospitals brought by local officials and challenging the hospitals' exemptions from property taxes, although at least two of those hospitals have already settled the claims against them. Legislation to try to resolve those suits has apparently stalled in the New Jresey Legislature.
Tuesday, May 3, 2016
Targeting Religious Organization Tax Benefits, Religious Orgs Pushing Back, and the Scandal of the Month
A flurry of litigation targets the tax benefits enjoyed by religious organizations and their ministers, including the parsonage allowance exclusion and property tax exemptions. At the same time, religious organizations are pushing back on government regulation by challenging the IRS enforcement of the political campaign intervention prohibition. And of course news outlets are continually searching for possible behavior by religious groups and sometimes finding it.
In the courts, the Freedom From Religion Foundation has refiled its complaint challenging on Establishment Clause and Due Process Clause grounds the parsonage allowance exclusion provided to ministers by Internal Revenue Code section 107. In an attempt to remedy the standing issue that doomed its earlier challenge, FFRF's new complaint asserts that it provides a housing allowance to its officers but solely because they are not ministers that allowance is subject to federal income tax. It remains to be seen whether these changed facts are sufficient to overcome the general prohibition on taxpayer standing, although the Seventh Circuit's earlier decision on this issue indicates they may be.
At the same time, the Massachusetts Supreme Court has taken up the question of what counts as sufficiently "religious" use of real property to qualify that property for tax exemption. Areas of the property at issue include a maintenance shed, a coffee shop, conference rooms, a religious bookstore, and part of a forest preserve. A recent Atlantic article (hat tip: Above the Law) details the possible significant ramifications of the case, both in Massachusetts and nationally, given the increasing financial pressure on local tax assessors to narrowly interpret property tax exemptions. Additional Coverage: WBUR.
Religious organizations are not solely on the defensive, however. The Alliance Defending Freedom, not satisfied with its increasingly popular Pulpit Freedom Sunday challenge to the Internal Revenue Code section 501(c)(3) prohibition's application to churches and other religious organizations, has now filed a Freedom of Information Act lawsuit to force the IRS to disclose its rules for investigating churches. ADF is basing its lawsuit on the disclosure by the IRS, in response to a FFRF lawsuit, that it was actively enforcing the prohibition as against churches. For a discussion of the bind ADF and FFRF are putting the IRS in, see this Surly Subgroup blogpost by Sam Brunson.
Finally, religious organizations continue to be fruitful sources for news outlets looking for scandals. Most recently, the City Church of New Orleans was the subject of a story by WWLTV detailing an ongoing state criminal investigation. The allegations against the church include both ones that are sadly familiar - financial mismanagement and use of church resources to benefit the private business interests of church leaders - and ones that are less common - lying to collect federal education grants and film tax credits. It remains to be seen, of course, whether these allegations are shown to be accurate or not.
Friday, April 22, 2016
A handful of professors have sued their professional society, claiming that the association’s boycott of Israel exceeds the organization’s mission under its charter. According to the Complaint, the American Studies Association’s constitution says:
The object of the association shall be the promotion of the study of American culture through the encouragement of research, teaching, publication, the strengthening of relations among persons and institutions in this country and abroad devoted to such studies, and the broadening of knowledge among the general public about American culture in all its diversity and complexity.
In 2013, the association adopted a resolution boycotting “Israeli academic institutions.” The plaintiffs are current or former association members who disagree with the boycott. In addition to a procedural complaint about the way the vote was held, the plaintiffs argue that the decision to boycott Israel exceeds the purposes of the organization under their charter since it does not further the scholarly objective of the association (breach of fiduciary duty and ultra vires action). (You may recall a similar dispute about this organization arose in 2014, when a professor challenged the organization's tax-exempt status--a challenge John Colombo predicted on this blog was going nowhere fast.)
h/t: Volokh Conspiracy via Jonathan Adler (@jadler1969)
From the perspective of nonprofit law, it will be interesting to see what level of judicial deference gets applied to the board’s decision: does Business Judgment Rule apply or is it a more searching review? And would plaintiffs' argument pass either of these standards?
My quick take is that this suit seems like a stretch. To begin, the boycott causes the association to NOT do something (i.e., decline to engage with one nation’s academics), and I don’t think I’ve ever seen a nonprofit successfully sued for not engaging in some programmatic activity or with some set of prospective clients, even if it is selective, arbitrary, or policy-driven. Also, food banks decline to buy from producers who don’t use environmentally-friendly methods; housing organizations decline to contract with organizations that don’t have certain personnel policies. It’s hard for me to imagine any of these purchasing decisions being successfully challenged in court on the grounds that they exceed the organization’s mission.
Second, judicial review without deference in this case would essentially ask a Court to override the judgment of a group of scholars on what types of activities further their scholarly mission, which I suspect most courts are ill-suited and reluctant to do. Moreover, judicial involvement here could set a precedent of second-guessing nonprofits when they wade into policy disputes or controversial areas, which would undercut the independence of the nonprofit sector. The mere fact that there is passionate disagreement on the issue suggests it is better to be hashed out by nonprofits within the confines of their organizations without courts getting involved. (I'm reminded of the Supreme Court's admonition in Boy Scouts v. Dale, when a lot of people (including me) couldn't understand how excluding gay scoutleaders furthered the organization's mission, yet the Supreme Court heavily deferred to the organization's judgment in the process of concluding that the organization had a constitutional exemption from state laws. If deference is warranted in a constitutional case, then surely it is warranted under usual corporation law principles.)
Finally, while there is often a compelling argument for keeping nonprofits close to their mission, the need for judicial involvement here is minimal. Exit is cheap and easy for association members who don’t like the direction of the organization. There’s no forced membership, as in a union or Home Owners Association. Nor are monitoring costs excessively high, as might be the case for a financial donor contributing to a social service charity. Nor is there a huge stockpile of donated money being held in trust for past donors and future beneficiaries. With the ample opportunities of voice (voting) and exit (quitting), the policy argument for courts treating this as a reviewable decision is relatively weak.
This case seems like a tough sell under the usual standards of nonprofit corporation law. I wouldn't have voted the way that the Association did, but a main reason we have the nonprofit sector is to let people freely associate themselves, without me or anyone else agreeing with their choices. I don't think the burden has been met that this association has departed enough from its charter to warrant judicial override.
Readers, what do you think? Does this case state a claim for ultra vires or breach of a fiduciary duty? Should courts review associations’ actions in cases like this?
Wednesday, March 9, 2016
When does an alleged zoning violation justify automatic removal of a property's tax-exempt status? New York State Supreme Court --Appellate Division, Second Department, recently had the opportunity to review the issue.
In Community Assn., Inc. v. Town of Ramapo, 2016 NY Slip Op 01458, 2nd Dept 3-2-16, the Second Department, reversing the trial court, determined that an alleged violation, for which the property owner had never been cited, did not justify the automatic removal of the property's tax-exempt status. The property had been tax-exempt for years as low-income property. The court found that the alleged zoning violation -- that the property owner had more than two residential apartments -- was not incompatible with the tax-exempt use. Therefore, the court held, the alleged zoning violation could not justify automatic removal of the tax-exempt status. Said the court:
[E]ven assuming that a zoning violation had been sufficiently established, the defendants have failed to articulate why such a violation, under the particular circumstances presented, should result in loss of the plaintiff's tax exemption. Not all violations of law automatically result in the loss of a tax exemption ... . 'The concern of the taxing authority is not with the observance or non-observance by plaintiff of regulatory provisions relating to a specific building, but to the use to which the real property as an entity is or is intended to be devoted' ... . This is not a case in which the applicable zoning regulation is incompatible with the occupant's tax-exempt use ... . In such cases, the rationale for denying the tax exemption is simple and clear, as compliance with both the tax-exempt use and the zoning regulation is impossible. Here, by contrast, the tax-exempt use of providing residential housing to low-income tenants is consonant with the property's permitted use as a two-family dwelling. Under these circumstances, the defendants have failed to establish, prima facie, that the nature of the alleged violation (i.e., that the plaintiff had more than two residential apartments) can serve as a valid legal basis for denying the property tax exemption ...".
So to answer the question with which we started, When does a zoning violation justify automatic removal of a property's tax-exempt status? New York's Second Department is clear: When the applicable zoning regulation is incompatible with the property occupant's tax-exempt use.
Tuesday, January 5, 2016
The Chicago Tribune reports that Caryn Benson, a former data records supervisor for Chicago’s Field Museum, has admitted in federal court to embezzling in excess of $400,000 from the Museum. In the plea agreement that she has entered, Benson admits to having embezzled approximately $33,014 of the Museum’s funds in 2014, as well as $376,986 in funds between June 2003 and January 1, 2014. The government contends that the total amount embezzled exceeds $900,000. For purposes of sentencing, the plea agreement provides that “[e]ach party is free to present evidence and argument to the Court on this issue [i.e., the actual amount embezzled]” and that the defendant will pay restitution in an amount ultimately determined by the court.
According to the Tribune piece, Chief Marketing Officer for the Museum, Ray DeThorne, believes that $903,000 was embezzled, an amount “confirmed in the Field’s own audit and in one conducted by the museum’s insurance company before it made restitution to the museum, less a $10,000 deductible.” DeThorne is also quoted as saying that the Museum “has since put into place much stricter oversight over cash transactions.”
Friday, June 26, 2015
We have been following the Sweet Briar College litigation and settlement on this blog (see here and here). I thought readers might be interested in knowing precisely what the Virginia Supreme Court stated in its order leading up to the settlement. First, let’s be clear on the context of the Virginia Supreme Court order. This high court was considering an order of the circuit court (a lower court) that had granted in part and denied in part a motion for a temporary injunction, filed by the Commonwealth, to restrain the college from facilitating its closure during the legal proceedings. The state supreme court characterized the lower court’s order as having been based, “at least in part, upon the legal conclusion that the law of trusts cannot apply to a corporation.” The Virginia Supreme Court called this conclusion of the lower court “erroneous.” Said the high court:
The law of trusts can apply to a corporation. Jimenez v. Corr, 288 Va. 395, 411, 764 S.E.2d 115, 122 (2014) ("When . . . a trust exists, it is not a separate legal entity being referred to, but a fiduciary relationship between already existing parties, be they real persons or other legal entities."); Restatement (Second) of Trusts § 96(1) (1959) ("The extent of the capacity of a corporation to take and hold property in trust is the same as that of a natural person except as limited by law."); Restatement (Third) of Trusts § 33(1) (2003) ("A corporation has capacity to take and hold property in trust except as limited by law, and to administer trust property and act as trustee to the extent of the powers conferred upon it by law."); see also, e.g., Code § 64.2-706(C) (establishing rules governing the principal place of administration for certain "corporate trustee[s]"). The charitable, non-profit, or non-stock status of a corporation does not alter this legal principle. See Dodge v. Trustees of Randolph-Macon Women’s College, 276 Va. 10, 16, 661 S.E.2d 805, 809 (2008) (holding that Randolph-Macon Woman's College was not subject to the Uniform Trust Code because the College was not a trustee of a trust to which the Uniform Trust Code applies, and not simply because the College is a non-stock charitable corporation).
Accordingly, the circuit court erred to the extent it exercised its discretion in acting upon the motion for a temporary injunction based upon this erroneous legal conclusion.
What the Virginia Supreme Court ruled is not that a charitable corporation is necessarily governed by the law of charitable trusts. Rather, the Court concluded that a charitable corporation can serve as the trustee of a charitable trust under state law. The two are very different legal propositions.
Tuesday, June 23, 2015
We previously blogged about the legal challenge to the attempted closing of Sweet Briar College. As reported in the Richmond Times-Dispatch, Bedford County Circuit Judge James Updike approved a mediated settlement to three lawsuits that had been filed to prevent the closing of the private women’s college. The story reports the following salient details:
[Judge] Updike accepted three consent orders presented by Attorney General Mark R. Herring, whose office brokered a mediation effort that continued over nearly six weeks.
The orders, which take effect today, will allow the transfer of leadership to a new president and board of directors under a plan that requires the alumnae group Saving Sweet Briar Inc. to provide $12 million, with $2.5 million due by July 2.
Herring will release restrictions on $16 million from the college’s endowment, which he said will be a sufficient amount to operate the college for the next academic year.
According to the article, the new president of the school will be Phillip C. Stone Sr.
For a copy of the Memorandum of Understanding serving as the basis of the settlement agreement, click here.
Wednesday, June 10, 2015
One of my least favorite days in Nonprofits class is the day that we discuss the difference between trust and corporate fiduciary duties (Sibley Hospital, anyone?). Lest one think that the distinction is purely academic, along comes the sad case of Sweet Briar College to reaffirm that this area of law remains completely and utterly confusing.
If you’ve not been following the story, Sweet Briar College’s operating entity is a “non-profit corporation” (Complaint, Para. 6) which was created by the Virginia General Assembly “to administer the trust created by the will” of its primary funder, Indiana Fletcher Williams. The Complaint also asserts that SBC is a charitable organization under the Virginia Charitable Solicitation laws and is a “trustee” under Virginia’s version of the Uniform Trust Code. (So I’m confused already….)
According to the Complaint, the provisions of Mr. Williams’ will place his residuary estate in a trust. The trustees of that trust were instructed to create a corporation to run a women’s college in perpetuity. It would appear that in 1901 in Virginia, a nonprofit corporate charter could only be obtained by act of the General Assembly, and so it was. (Complaint, p. 17). The corporate charter incorporated the terms and conditions of Mr. Williams’ will, which required the assets to be held in perpetuity for the women’s college and directed that the assets not be sold.
Fast forward to March, 2015, when the current Board of Directors of the college announced that it would close the doors of the college, and liquidate its assets, including its endowment (Complaint, p. 26) due to the college’s poor financial condition. Litigation, of course, ensued.
The Complaint alleges violations of the Uniform Trust Code, which it asserts is applicable not only the original funding of the College occurred through the trust under Mr. Williams’ will, but also because “the Act of the Assembly creating the College requires that the College be administered in the manner of an express or charitable trust” (Complaint, p. 55). It then states, “Because the College is a charitable corporation, the assets held by Defendants are deemed to be held in trust for the public.” (Complaint, p. 56). Among other things, the original Complaint requested a temporary restraining order and a preliminary injunction restraining actions in furtherance of closing the school.
So the question then becomes, Sweet Briar College a trust? Is it a corporation? Does it matter? Should it?
More on this Nonprofit Law Prof Blog Cliffhanger next time….
Wednesday, May 13, 2015
The oral argument before the Supreme Court in Obergefell v. Hodges (the same-sex marriage case) included the following exchange between Justice Alito and Solicitor General Verrilli (on page 38 of the transcript):
JUSTICE ALITO: Well, in the Bob Jones [University v. United States, 461 U.S. 574 (1983)] case, the Court held that a college was not entitled to tax-exempt status if it opposed interracial marriage or interracial dating. So would the same apply to a university or college if it opposed same-sex marriage?
GENERAL VERRILLI: You know, I -- I don't think I can answer that question without knowing more specifics, but it's certainly going to be an issue. I -- I don't deny that. I don't deny that, Justice Alito. It is -- it is going to be an issue.
The possibility that the contrary to fundamental public policy limitation found by the Court in Bob Jones to be included in Internal Revenue Code section 501(c)(3) might prohibit 501(c)(3) organizations from engaging in discrimination based on sexual orientation had been raised before this argument, including by fellow blogger Nicholas Mikay (Creighton) in a 2007 article (where he concluded a statutory amendment prohibiting discrimination would provide a stronger legal basis for such a prohibition). This exchange highlights the fact that how the Supreme Court decides the same-sex marriage case could have strong ripple effects for tax-exempt organizations, even though the IRS has for more than 30 years been reluctant to apply Bob Jones beyond the context of racial discrimination and even though any supporters of LGBT rights will have difficulty establishing their standing to force the IRS' hand in this area.
In another court in DC, the government found itself on the defensive as a three-judge panel expressed shock that the Justice Department would even assert that the IRS' treatment of applications for recognition of exemption under section 501(c)(3) during the 270 days before such applicants gained the right to go to court (assuming no substantive interaction with the IRS during that period) could somehow escape scrutiny under the Constitution. During oral argument (large MP3 file) before the U.S. Court of Appeals for the D.C. Circuit in case involving the application of Z Street, judges repeatedly expressed skepticism that somehow the application process was shielded from constitutional requirements, including First Amendment concerns. Additional coverage: Wall Street Journal (opinion); see also previous blog post.
Finally, the U.S. Court of Appeals for the Sixth Circuit recently upheld a preliminary injunction barring the enforcement of a local ordinance that banned outdoor, unattended donation bins. The court found that plaintiff Planet Aid (a 501(c)(3) organization) had demonstrated a strong likelihood of success on the merits of its constitutional claim under the First Amendment, finding that the ordinance was a content-based regulation of speech because it only applied to outdoor receptacles with an express message relating to charitable solicitation and giving. As such, it is subject to strict scrutiny, and the court concluded that the ordinance likely would not survive such scrutiny given the weak relationship between the ban and the city's interest in aesthetics and preventing blight and the availability of other, lesser content-neutral restrictions that could further the same interest.
Thursday, April 2, 2015
The Supreme Court of Pennsylvania has decided to consider an issue that could have far-reaching consequences for the way attorneys and charities interact. The issue before the court is whether an attorney who has reason to believe that charitable assets are being diverted to private individuals may inform the Attorney General. This issue deals with Rule 1.6 of the Rules of Professional Conduct, which permits breaching attorney-client confidentiality in very limited cases, e.g., to prevent death or serious bodily harm. Not surprisingly, a cloud of secrecy has surrounded the case since late last year, and the order permitting consideration of this issue was only made public in March. A recent article explores this case and its possible implications.
Interestingly, the petitioner’s argument is not based upon Rule 1.6 but rather on the idea that counsel has a fiduciary duty to report unlawful diversions of charitable assets to the Attorney General since the general public is affected. In addition, the petitioner claims that since the charity is a tax-exempt entity supported by the public, it has waived its rights under Rule 1.6. As pointed out in the article, Rule 1.13 is also relevant. Rule 1.13 details the steps an attorney may take within an organization before going outside of it. For example, an attorney may choose to report the matter to higher-ups within the organization. As noted, attorney-client confidentiality serves an important purpose in our society. Overall, we want to promote the seeking out of legal counsel when there is a problem, and this will not happen if potential clients are afraid their confidences will be shared. As noted above, limited, dire circumstances must exist for an attorney to breach attorney-client confidentiality.
At the same time, one must ask whether the attorney-charity relationship calls for a different rule, particularly in the case of public charities. After all, these charities are accountable to the public. Also, given the recent problems associated with IRS oversight and the growing number of charities, attorneys may provide a more helpful, rather than hurting, hand in the quest to monitor an ever-increasingly large number of organizations.
Monday, January 19, 2015
The Nebraska Supreme Court last week faced the issue of whether records held by Falls City Economic Development and Growth Enterprise, Inc. (EDGE), a Nebraska nonproit corporation, were "public records" within the meaning of Nebraska's disclosure laws because of the relationship EDGE has with the City of Falls City, Nebraska and other governmental entities. In a unanimous decision, the court concluded EDGE's records were not public records and so were not subject to disclosure, reversing a state trial court.
Citing an earlier opinion as well as similar tests applied by courts in other states, the Nebraska Supreme court stated that records held by a private party are public records if: "(1) The public body, through a delegation of its authority to perform a government function, contracted with a private party to carry out the government function; (2) the private party prepared the records under the public body’s delegation of authority; (3) the public body was entitled to possess the materials to monitor the private party’s performance; and (4) the records are used to make a decision affecting public interest." Finding that EDGE was not controlled by government officials, although two city officials served among the 21 voting members of EDGE's board of directors and another official served in a non-voting, ex-officio capacity, that the government funding provided to EDGE was under the control of its board, and that EDGE had separate financial records, separate offices, and separate employees from the governments with which it worked, the court concluded that EDGE was not the functional equivalent of a government agency and so its records were not public records subject to legally required disclosure. If, as the court suggested, the test it applied represents a growing consensus among state courts regarding how to approach this issue, this decision likely has ramifications beyond the State of Nebraska.
In 2012 the nonprofit Avera Marshall Regional Medical Center's board of directors unilaterally decided to repeal and replace the hospital's medical staff bylaws. Two individual physicians and the Medical Staff as a whole objected, eventually filing a lawsuit against the hospital that reached the Minnesota Supreme Court on two important governance issues for nonprofit hospitals. First, did the Medical Staff, as an unincorporated association, have the legal capacity to sue? Second, did the medical staff bylaws constitute an enforceable contract between the hospital and the Medical Staff? In a December 31, 2014 opinion, the Minnesota Supreme Court answered both questions in the affirmative.
With respect to the first question, the court acknowledged that the common law rule in Minnesota is that unincorporated associations are not legally distinct from their members and so do not have legal capacity to sue or be sued in their own right. The court found, however, that the Minnesota legislature had overridden this rule when it enacted Minnesota Statute section 540.151, reading that statute as granting an unincorporated association that met the criteria described in the statute the capacity to sue and to be sued. Those criteria are having two or more persons associate and act under a common name, criteria that the court found the hospital's "Medical Staff" satisfied.
With respect to the second question, the Minnesota Supreme Court concluded that even though the hospital had a legal obligation under Minnesota administrative rules and the hospital's corporate bylaws to adopt medical staff bylaws, both sides still provided consideration. More specifically, the hospital granted privileges at the hospital in exchange for the prospective Medical Staff member agreeing to abide by the bylaws. The court therefore concluded that there was a bargained-for exchange of promises and mutual consent to the exchange, creating an enforceable contract. The court therefore remanded the case for consideration of the plaintiffs' claims that the repeal and and replacement of the medical staff bylaws violated the terms of that contract.
The result in this case, which may be significant to many hospitals, for-profit and nonprofit, was not a foregone conclusion as both the state trial court and the state appellate court had reached the opposite result on both questions. Indeed, two members of the Minnesota Supreme Court dissented from the five justice majority's opinion.
Thursday, November 20, 2014
The Boston Globe reports that seven Harvard students (including some at the Harvard Law School) have filed a lawsuit in Suffolk County Superior Court against the president and fellows of Harvard College for its investment in stocks of companies that produce fossil fuels. The complaint – said to contain 167 pages of exhibits – reportedly alleges “mismanagement of charitable funds” and asserts a tort, “intentional investment in abnormally dangerous activities.” The story states that the 11-page complaint seeks a judicial order to compel divestment.
Relatedly, the law students filing the complaint have taken the opportunity to publicize their effort through an op-ed, also appearing in the Boston Globe. Among the more interesting remarks:
Our legal claims are simple. Harvard is a nonprofit educational institution, chartered in 1650, to promote “the advancement and education of youth.” By financially supporting the most dangerous industrial activities in the history of the planet, the Harvard Corporation is violating commitments under its charter as well as its charitable duty to operate in the public interest.
Our suit charges that the Harvard Corporation is breaching its duties under its charter by investing in fossil fuel companies. Our second count is a novel tort claim, intentional investment in abnormally dangerous activities, that is based in well-established legal principles regarding liability for promoting especially hazardous behavior.
I certainly appreciate that the filing of this lawsuit has given these students a springboard for publicizing their viewpoint. While I would benefit from a review of the complaint (which I do not have), just by reading the press reports, I believe the suit clearly faces obstacles, both procedural and substantive.
The most obvious procedural issue is whether the students have standing. Although some have argued for student standing to bring lawsuits alleging mismanagement by university fiduciaries, see, e.g., Sara Kusiak, Comment, The Case for A.U. (Accountable Universities): Enforcing University Administrator Fiduciary Duties Through Student Derivative Suits, 56 Am. U. L. Rev. 129 (2006), I am skeptical that a court would grant standing to the students in this case. For one thing, I doubt that they are harmed more particularly, in any material way, by Harvard’s investment policy than is the public at large – assuming that the public is harmed in the first place.
Even more important, it seems to me, is the difficulty of convincing a judge that the claims of the students have substantive merit. One could plausibly argue that an environmental organization is violating its mission by investing in fossil fuel company stocks solely for the prospect of earning profits. But Harvard? It is far from clear that Harvard’s investment policies are anti-educational. Of course, one could argue more broadly that all charities must operate in a manner consistent with the public interest by not violating public policy (remember Bob Jones in the tax-exemption qualification context?). However, could we really expect a court to conclude that buying oil company stocks is contrary to established public policy? Imagine the implications! (I say that with a modest chuckle, for “imagining the implications” may be precisely what is driving the legal action.)
And as for that “novel tort claim, intentional investment in abnormally dangerous activities” – I do not know what sanctions apply for raising frivolous claims in Massachusetts state courts, but if I were one of the plaintiffs, I would be concerned enough to research the issue thoroughly (if I had not yet done so) and prepare myself to drop that one from the complaint.
One final point. To doubt the legal merits of the students’ claims is not to deny the ability of charities, such as Harvard and its nonprofit affiliates, to engage in socially conscious investing. There is a major difference between (1) maintaining that charity fiduciaries are free to engage in socially conscious investing without violating their duties to the nonprofit corporation/its charitable purposes, and (2) asserting that charity managers violate their fiduciary duties by making investments that some consider contrary to socially conscious investing. The former respects the right of charity managers to exercise discretion on the matter. The latter can easily take the form of supplanting fiduciaries’ judgment with the judgment of others.
Those interested may wish to consult additional coverage in the New York Times.
Wednesday, September 24, 2014
March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well? (Part III)
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installments can be found here and here (NLPB) and here and here (BLPB).)
In prior posts we talked about what a benefit corporation is and is not. In this post, we’ll cover whether the benefit corporation is really necessary at all.
Under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. (Delaware law warrants inclusion in any discussion of corporate law because the state's law is so influential, even where it is not binding.)
Back in 2010, Josh Fershee wrote a post questioning the need for such legislation shortly after Maryland passed the first benefit corporation legislation:
I am not sure what think about this benefit corporation legislation. I can understand how expressly stating such public benefits goals might have value and provide both guidance and cover for a board of directors. However, I am skeptical it was necessary.
Not to overstate its binding effects today, but we learned from Dodge v. Ford that if you have a traditional corporation, formed under a traditional certificate of incorporation and bylaws, you are restricted in your ability to “share the wealth” with the general public for purposes of “philanthropic and altruistic” goals. But that doesn't mean current law doesn't permit such actions in any situation, does it?
The idea that a corporation could choose to adopt any of a wide range of corporate philosophies is supported by multiple concepts, such as director primacy in carrying out shareholder wealth maximization, the business judgment rule, and the mandate that directors be the ones to lead the entity. Is it not reasonable for a group of directors to determine that the best way to create a long-term and profitable business is to build customer loyalty to the company via reasonable prices, high wages to employees, generous giving to charity, and thoughtful environmental stewardship? Suppose that directors even stated in their certificate that the board of directors, in carrying out their duties, must consider the corporate purpose as part of exercising their business judgment.
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Tuesday, August 26, 2014
The Oregonian reports that lawyers have filed a class-action lawsuit in state court against Regence BlueCross BlueShield, claiming that the (taxable) nonprofit is acting like a for-profit company. More specifically, the lawsuit asserts that Regence is accumulating excess funds to support large, executive salaries instead of using those funds to benefit its members. The lawsuit points specifically to a public-purpose clause in Regence's bylaws that it claims is violated by these practices. The article further reports that Regence has responded by stating that the claim is without merit and that it intends to aggressively defend itself against the allegations.