Nonprofit Law Prof Blog

From Nonprofit to Benefit Corporation: A viable solution for colleges with a mission

        Earlier this month, the blog featured a piece on for-profit college conversions. Citing a recent New York Times article, the post noted that several for-profit colleges have decided to become nonprofits to escape certain governmental regulations and bad publicity. Interestingly, a third option is becoming apparent for colleges as reported in Inside Higher Education: becoming a benefit corporation. As you may know, a benefit corporation exists in the space between the for-profit and nonprofit sectors and focuses on achieving a double bottom line: profit and social impact. The first regionally accredited college to take the route of benefit corporation status is Alliant International University in California. Alliant was previously a California nonprofit accredited by the Western Association of Schools and Colleges (“WASC”). Last summer, WASC approved Alliant’s change of status. It is anticipated that other nonprofit institutions will follow suit due to the desire to participate in a new system of health sciences institutions known as Arist Education System. Arist Education System is headed up by University Ventures Fund and supported financially by Bertelsmann, the German media giant. Its purpose is to train health professionals who can work in collaborative teams, which is a new focus of a significant number of hospitals and health systems. It is envisioned that this goal will be accomplished through a focus on student outcomes, and Arist is convinced that such focus will be achieved if the social mission of universities is protected.

        The benefit of the change to Alliant is that it may now solicit much needed private funding while still maintaining a public commitment to its mission and public purpose. As a California public benefit corporation, Alliant is required to remain accountable not only to board members and in terms of profit but also to the larger society and in terms of social good. In contrast to for-profit colleges that are changing to nonprofits, Alliance will actually face more regulation as a result of its change in status. As Alliant President Geoffrey Cox noted, by becoming a benefit corporation rather than a for-profit, colleges can preserve their unique missions and attract investors who are looking to leave their funds with them for the long-haul. Finally, I would add that benefit corporation status will keep accountability and transparency in the equation of measuring the performance of colleges in terms of both bottom lines.

 

Khrista Johnson

Should Nonprofits Stay Closer to the Red with Reserves?: A Blue Shield Inquiry

            As seen in a recent post here, the California Franchise Tax Board did not cite a reason for revoking Blue Shield’s state tax exemption. Many have speculated that its unusually large reserves and attendant issues were the main causes. Blue Shield has $4.2 billion in operating reserves, which is four times the amount Blue Cross and Blue Shield Association requires of its members. This raises two interesting questions (1) what should Blue Shield use the reserves for as a nonprofit and (2) should we penalize nonprofits for having large reserves?

            According to the LA Times, public debate has centered on the call for Blue Shield to use its reserves to reduce premiums. Glenn Melnick, a healthcare economist and professor at USC, has noted that Blue Shield should aim to reduce its premiums to a level lower than that of for-profit companies. In thinking about the public purpose of nonprofits, one is perhaps disturbed if the cost of a nonprofit’s service is on par or more expensive than that of a for-profit. To reach this conclusion, one need only look to the recent actions of another big nonprofit in the same healthcare space in California. Kaiser Permanente dropped its rates this year while Blue Shield increased its rates. Albeit, as I posted in December, for-profits certainly would not mind nonprofits’ engaging in price gouging practices as they already feel threatened by the competitive or lower prices of nonprofits and are seeking legal redress. In the ideal world of consumers, Blue Shield would have lower premiums, and for-profit companies would feel increased pressure to lower the amount they charge as Melnick suggests. Instead, Blue Shield already has big plans for a large portion of its reserves, and those plans have nothing to do with passing along reduced rates to consumers. It is planning to use $1.2 billion of its reserves to acquire Care1st, a Medicaid managed-care plan.

            At the same time, is it wrong for a nonprofit to have large reserves as a matter of course? A few years ago, The Chronicle of Philanthropy ran a series of posts on this topic. Rick Moyers argues against the stigmatism and penalties associated with nonprofits’ maintaining reserves. He explains that nonprofit directors and board members generally try to avoid having reserves because it makes their organization appear not to need additional funding. Given Blue Shield’s exemption loss, this issue is brought squarely into the legal arena. Historically, nonprofits have been cautioned informally against “accumulating funds that could be used for current program activities” under the US Better Business Bureau’s Wise Giving Alliance’ standards (which translates into not having reserves totaling more than three years of operating expenses). These standards are mentioned in my forthcoming article, which deals with how we can better measure the performance of charities with the end goal of establishing an efficient charitable market where donations are put to their most productive use. In terms of measuring the performance of for-profits, investors do not disfavor them if they decide against using all available funds to further their objectives. Perhaps what is underlying the uproar is that customers are not receiving a measurable benefit from Blue Shield’s decision.

 

Khrista Johnson

The Public Policy Doctrine Is An Unlikely Solution To Addressing Racism In Greek Organizations

Sigma Alpha Epsilon’s problems seem to be getting bigger by the second. Most recently, an investigation into the events has discovered that the racist chant the chapter at the University of Oklahoma was caught singing was allegedly taught to some members during a national leadership cruise. Sigma Alpha Epsilon National Headquarters has acknowledged this, yet maintains that racism is not a part of the fraternity’s culture and is committed to eradicating it within its ranks. Upon seeing the racist chant, SAE’s national headquarters has revoked the University of Oklahoma chapter’s charter, set up an anonymous hotline by which members may report allegations of racist activity, and created a diversity chair.

In the fallout of SAE’s mea culpa, college social fraternities have come under a great deal of scrutiny. Some have even called for “racist fraternities” to lose tax-exempt status. To be sure, there is precedent for revoking tax-exempt status from an entity for having a policy of discrimination. In Bob Jones University v. United State, the Supreme Court upheld the IRS’s decision to revoke Bob Jones University's tax-exempt status for having a policy that was hostile to romantic interracial relationships. The Court stated  “[i]t would be wholly incompatible with the concepts underlying tax exemption to grant tax-exempt status to racially discriminatory private educational entities. . . . Racially discriminatory educational institutions cannot be viewed as conferring a public benefit within the above 'charitable' concept or within the congressional intent underlying 501(c)(3).”

The Court’s ruling in Bob Jones University is clear: racial discrimination is against public policy and is permissible grounds for the IRS to revoke an organization’s tax-exempt status. However, what is unclear is how Bob Jones University is applicable to the fraternities in question. In Bob Jones University, the school had an explicit policy of discrimination; such is not the case for fraternities today. In fact, one may have a difficult time finding a fraternity with a policy of discriminating on the basis of race, or some other immutable trait recognized under federal law. Many fraternities, like SAE, have a very clear and comprehensive anti-discrimination policy. Any instance of racism in one of the numerous autonomous chapters would be sharply rebuked, and said to have been an isolated incident by its national headquarters.

One might say fraternities at the national level are becoming more progressive. A more cynical view might be that these fraternities have competent counsel familiar with Bob Jones University. In any event the Public Policy Doctrine may be pushed to its limit in these instances. Without demonstrating that a fraternity has an actual discriminatory policy, it is, at best, unclear whether a fraternity could have its tax-exempt status revoked based on the actions of one of its autonomous chapters.

Might there be a more effective approach under federal law in dealing with the problem of racism in fraternities?  See, A. Brennen, Tax Expenditures Social Justice, and Civil Rights: Expanding the Scope of Civil Rights Laws to Apply to Tax-Exempt Charities, 2001 B.Y.U.L. Rev. 167.

DAB

Questions On The Blue Shield Of California Decision

According to an article in The LA Times, Blue Shield of California, the state’s third-largest health insurer, lost its state tax-exempt status—a benefit it has enjoyed since 1939. According to the article, Blue Shield California has received sharp criticism for high executive compensation, insurance rate hikes for consumers, and billions of dollars in financial reserves. Interestingly, the California Franchise Tax Board has not cited any reason for revoking its tax-exempt status and has declined to comment on the matter. Furthermore, the Franchise Tax Board is considering whether to require Blue shield to pay back taxes.

All one can do is speculate, but what justification might the state have for pulling Blue Shield’s exempt status? Is this a decision based in popular politics rather than law? How might Blue Cross want to approach a challenge to the Board’s decision?

DAB

South Carolina Tax Authorities Investigate Private School Choice Group

South Carolina tax officials are in the process of investigating a sate nonprofit, Palmetto Kids. Palmetto Kids’ mission includes raising money to help families of children with disabilities pay for private school by awarding tuition grants to worthy recipients. The investigation stems from allegations that Palmetto Kids was soliciting donations, which qualify for state tax credits, in exchange for private school tuition grants. If there is, in fact, a quid pro quo between Palmetto Kids and some of its donors, the donors would be ineligible to receive the tax credits. Palmetto Kids has refused demands by state tax officials to disclose the names of grant recipients; according to a spokesperson for Palmetto Kids, the nonprofit is not at liberty to disclose the names of grant recipients—not even to state tax officials.

Does the fact that a grant recipient may also be a donor mean that the donor’s contribution is not a “gift”? Could better counseling have prevented this inquest by state tax officials? If so, what should Palmetto Kids have done? What should it do going forward?  Read more here.

DAB

Signifigant Changes To Federal Nonprofit Tax Policy May Be A Reality This Year

According to an article in The Chronicle of Philanthropy, Congress is proposing changes in the tax code that could significantly affect nonprofits. Harold Hancock, tax counsel for the House Ways and Means Committee, says changes could include compensation caps for nonprofit executives, a requirement that donor-advised funds distribute their assets to charities within five years, and tighter limits on using the charitable tax deduction. The proposal that has generated the most criticism is the five year spend-down for donor-advised gifts.

What reasons would congress have for imposing such a requirement on donor-advised gifts? As a practical matter, how might the spend-down function? What effect might it have on charitable giving?

DAB

Nonprofit and Voluntary Sector Quarterly February 2015 Issue

The Nonprofit and Voluntary Sector Quarterly has published its February 2015 issue.  Here is the table of contents:

Articles

• Pamela Wicker, Neil Longley, and Christoph Breuer, Revenue Volatility in German Nonprofit Sports Clubs

• Wei-Wen Chang, Chun-Mam Huang, and Yung-Cheng Kuo, Design of Employee Training in Taiwanese Nonprofits

• Joseph Lanfranchi and Mathieu Narcy, Female Overrepresentation in Public and Nonprofit Sector Jobs: Evidence From a French National Survey

• Tracey M. Coule, Nonprofit Governance and Accountability: Broadening the Theoretical Perspective

• Daniela Casale and Anna Baumann, Who Gives to International Causes? A Sociodemographic Analysis of U.S. Donors

• Alasdair C. Rutherford, Rising Wages in the Expanding U.K. Nonprofit Sector From 1997 to 2007

• Daniel W. Curtis, Van Evans, and Ram A. Cnaan, Charitable Practices of Latter-day Saints

• Stephan Grohs, Katrin Schneiders, and Rolf G. Heinze, Social Entrepreneurship Versus Intrapreneurship in the German Social Welfare State: A Study of Old-Age Care and Youth Welfare Services

 

Research Note

• Steven Reesor Rempel and 
• Christopher T. Burris, 
• Personal Values as Predictors of Donor- Versus Recipient-Focused Organizational Helping Philosophies

Book Reviews

• Patricia Tweet, Book Review: Nonprofit governance: Innovative perspectives and approaches by C. Cornforth and W. A. Brown (Eds.)
•  
• Hans Peter Schmitz, 

  Book Review: Importing democracy: The role of NGOs in South Africa, Tajikistan, and Argentina by J. Fisher

• Susan M. Chambré, Book Review: Doctors without borders: Humanitarian quests, impossible dreams of Médicins Sans Frontières by R. C. Fox

Lloyd Mayer

Herzig & Brunson: Racist Fraternities and Sororities Should Have Their Tax-Exempt Status Revoked

David J. Herzig (Valparaiso) and Samuel D. Brunson (Loyola Chicago) have written the Slate article Subsidized Injustice: Racist Fraternities and Sororities Should Have Their Tax-Exempt Status Revoked.  Drawing on the Supreme Court's 1983 decision in Bob Jones University v. United States, they make the following suggestion:

How can the tax law operate, then, to effect structural change? It can dangle the carrot of their tax exemption in front of them while, at the same time, threatening them with its loss if they do not eliminate discriminatory behavior. We would propose that the IRS begin sending letters to all Greek organizations putting them on notice that if they discriminate, their tax-exempt status will be revoked. They can retain their tax exemption if they demonstrate that they do not discriminate based on race. This provides Greek organizations with a choice. If they are willing to comply with the norms of society, then they can enjoy the benefit of their tax exemption. If they do not wish to conform, they can explicitly signal that desire by forgoing the public subsidy implicit in being exempt from taxation.

Lloyd Mayer

Crossley: Hospitals, Community Health and the IRS

Mary Crossley (Pittsburgh) has posted Health and Taxes: Hospitals, Community Health and the IRS on SSRN.  Here is the abstract:

The Affordable Care Act created new conditions of federal tax exemption for nonprofit hospitals, including a requirement that hospitals conduct a community health needs assessment (CHNA) every three years to identify significant health needs in their communities and then to develop and implement a strategy responding to those needs. As a result, hospitals must now do more than provide charity care to their patients in exchange for the benefits of tax exemption, and the CHNA requirement has the potential both to prompt a radical change in hospitals’ relationship to their communities and to enlist hospitals as meaningful contributors to community health improvement initiatives. Final regulations issued in December 2014 clarify hospitals’ obligations under the CHNA requirement, but could do more to facilitate hospitals’ engagement in collaborative community health projects. The IRS has a rich opportunity, while hospitals are still learning to conduct CHNAs, to develop guidance establishing clear but flexible expectations for how they assess and address community needs. This Article urges the IRS to seize that opportunity by refining its regulatory framework for the CHNA requirement to more robustly promote transparency, accountability, community engagement, and collaboration, while simultaneously leaving hospitals a good degree of flexibility. By promoting alignment between hospitals’ regulatory compliance activities and broader community health improvement initiatives, the IRS could play a meaningful role in efforts to reorient our system towards promoting health and not simply treating illness.

Lloyd Mayer

Urban Institute's Form 990 Online & e-Postcard Systems Hacked

The Urban Institute's National Center for Charitable Statistics reported last month that its e-filing systems had been compromised by apparent hackers.  The Center's website provides the following Security Alert:

Unauthorized parties have gained access to the Form 990 Online and e-Postcard Systems.  If you are a user of either of these sites, we encourage you to reset your password immediately.  Please click here for details and answers to Frequently Asked Questions.

e-Postcard users (if you file Form 990-N) please click here to reset your password.

Form 990 Online users click here to reset your password.

If you have not changed your password since the unauthorized access, the system will require you to change it when you log in.

According to a report in The Hill, improper access appears to have been limited to usernames, passwords, IP addresses, and other account data for nonprofits, with no evidence that the tax filings made through this system were compromised.  The system does not have more sensitive data, such as Social Security numbers or credit card information, so no such data was at risk.  The system is, however, used by between 600,000 and 700,000 organizations.

Additional coverage: Huffington Post;  The NonProfit Times.

Lloyd Mayer

BC Center on Wealth & Philanthropy to Close

The Boston Globe reports that the almost 50-year old Center on Wealth and Philanthropy at Boston College will close with the retirement of its long-time director Paul Schervish and associate director John Havens.  The exact closure date will depend on the pace of current research projects, but could come as early as this summer.  According to the Center's website, the Center's research has focused on "the relation between economic wherewithal and philanthropy, the motivations for charitable involvement, and the underlying meaning and practice of care."

Lloyd Mayer

Alleged Terms of 1922 Gift Create 2015 Headache for Gordon College

The Boston Globe reports that Gordon College's planned sale of a number of rare books in order to finance the preservation of the rest of the collection has run into a buzz saw of criticism, in part because it appears the original donor conditioned the gift on the collection remaining together.  While the original gift bequest has apparently been lost, later documents indicate and the recollection of the donor's descendants confirm this condition on the gift.  On its website, the College provides more details about the controversy and indicates it is still planning to go ahead with the sale.  Given that the donor's heirs likely lack standing to challenge the planned sale, it remains to be seen whether the Non-Profit Organizations/Public Charities Division of the Massachusetts Attorney General's office chooses to get involved.

Lloyd Mayer

Six Nonprofit Hospitals at Risk as Deal to Buy Them Collapses

The Los Angeles Times reports that a proposed plan for a for-profit company to buy six struggling nonprofit hospitals has collapsed. As detailed in the article, the buyer, Prime Healthcare Services, is blaming California Attorney General Kamala Harris for imposing "impossible" conditions on the purchase, while the AG claims the buyer previously indicated it was fine with the conditions. Those conditions on the proposed $843 million sale included requiring the buyer to keep five of the hospitals open for at least 10 years, maintaining the same level of charity care as before the purchase, and apparently numerous other requirements described in a 78-page document. Regardless of whom is to blame, the Daughters of Charity Health System that owns the hospitals is now saying "[e]very option is on the table, including bankruptcy" given that the System is losing $10 million per month. Before the deal collapsed the System filed a lawsuit against a major union and a private equity firm for allegedly interfering in the sale agreement, according to the San Francisco Business Times.

Additional Coverage: Nonprofit Quarterly; LA Times Editorial; Sacramento Bee.

Lloyd Mayer

Stateline: Should Nonprofits Have to Pay Taxes?

As often reported here, an increasing number of states and localities are challenging the property and other tax exemptions of nonprofits within their jurisdictions.  Some of the most notable recent developments have been in Maine, where the governor's budget proposal includes a tax on "large" nonprofit organizations in the state, and Pennsylvania, where a state constitutional amendment that would shift control over the standard for exemption to the state legislature is working its way through the amendment process.  Along these lines, the Stateline news project of the Pew Charitable Trusts recently published a article titled "Should Nonprofits Have to Pay Taxes?" that provides an overview of recent developments in this area. Besides discussing the the situations in Maine and Pennsylvania, it also discusses developments in Ohio, Vermont, and New York, as well as providing a chart showing the number of federally tax-exempt nonprofits in each state and their assets. Of course those assets include both assets on which the owning nonprofit does pay tax (because no available exemption applies) and also assets that are not subject to property or similar state and local taxes regardless of what type of entity owns them (e.g., investment assets).

Lloyd Mayer 

California Quietly Revoked Blue Shield's Tax Exemption Seven Months Ago

The Los Angeles Times has just published two articles highlighting the State of California Franchise Tax Board's decision to revoke the state tax exemption previously enjoyed by Blue Shield of California seven months ago, but to only announce the fact by including the huge health insurer's legal name  (California Physicians Service) in a thousand plus page document on its website listing hundreds of organizations that had also lost their exemption. Here are links to the articles:

• With Billions in the Bank, Blue Shield of California Loses Its State Tax-Exempt Status

• Why Did it Take 7 Months to Learn Blue Shield Lost Tax-Exempt Status?

The articles report that the revocation came after a lengthy audit, and that Blue Shield is protesting the decision. On the line are tens of millions in state taxes annually. The articles also summarize past criticisms of Blue Shield with respect to executive compensation, multi-billion dollar reserves, increasing premiums, and an alleged failure to serve the state's poorest residents. Blue Shield for its part points to capping its profits at 2% of annual revenues, hundreds of millions give to its charitable foundation over the past decade, and hundreds of millions give back to customers and consumer groups in recent years. It also has reiterated its intention to remain a California mutual benefit nonprofit corporation.

Additional coverage: NPR (Health News); NPR (Morning Edition); SFGate.

Lloyd Mayer

Shameless Self-Promotion: Vote for the Nonprofit Law Prof Blog as a 2015 Best Tax Blog!

WalletHub is calling on the public to vote for the Best Tax Blogs of 2015 from among the 50 finalists chosen by its editors, including the Nonprofit Tax Prof Blog.  If you find this blog informative or otherwise helpful, we urge you to go to the voting website and vote for this blog (as well for other tax blogs you enjoy).

Lloyd Mayer

Mueller: An Argument for Continued Use of Standards to Evaluate the Campaign Activities of 501(c)(4) Organizations

Jennifer Mueller (American) has published "Defending Nuance in an Era of Tea Party Politics: An Argument for the Continued Use of Standards to Evaluate the Campaign Activities of 501(c)(4) Organizations," 22 George Mason Law Review 103 (2014).   The following excerpt is from the introduction (citations omitted):

    As this Article shows below, many of these premises are true: this is a complex area of law, and under the current system the agency’s final determination is, at the margins, unpredictable. When it comes to both tax and campaign finance, there will always be individuals seeking to circumvent the law. And certainly the public should be concerned for the robustness of the entire system. But all of these considerations counsel for retaining, with some modifications, the IRS’s standards-based approach to policing the campaign intervention line. They certainly do not support the contention that bright-line rules will markedly improve compliance or reduce the level of political participation by newly formed social welfare groups. Moreover, notwithstanding the political appeal of anti-IRS rhetoric, constraining the agency’s discretion in these cases will help no one but private actors looking for loopholes.

    This Article reaches this conclusion through two independent lines of analysis. The first is largely theoretical. It examines the characteristics of rules—where the content of a legal command is provided ex ante—and standards—where the exact contours are determined as applied to a concrete set of facts ex post—as set out in legal scholarship over the last several decades. Following the lead of Professor Ellen Aprill, who recently conducted a similar inquiry with regard to 501(c)(3) charitable organizations but reached a different conclusion, this Article relies on the comprehensive framework set out by Professor Louis Kaplow in his article “Rules Versus Standards: An Economic Analysis.”

    The second line of analysis is based on the observed effects of brightline rules in the parallel regime of campaign finance law. Campaign finance is an obvious choice for comparison for several reasons. First, many of the concerns and considerations set forth above, including complexity and circumvention, apply with equal force in the campaign finance arena. Second, it is a natural foil: the Federal Election Campaign Act (“FECA”) is increasingly administered through bright-line rules. Finally, many of those calling for reform of Section 501(c)(4) are motivated by concerns about the evasion of existing campaign finance laws, so there is a practical appeal to testing the hypothesis that rules in this area would be more effective.

Lloyd Mayer

501(c)(4) Update: Handful of Applications Still Pending, Do Lost Emails = A Crime?, and (Another) Court Dismisses Claims Against Lerner

IRC Section 501(c)(4) Applications:  The IRS reported that as of last month it had closed 138 or 95% of the 145 organizations that had applied for recognition of exemption under section 501(c)(4) and were eligible for optional expedited processing because the only issues their applications raised were possible involvement in political campaign intervention or providing private benefit to a political party.  The optional expedited process results in a favorable determination letter if the applicant represents that it devotes (1) 60 percent or more of both spending and time to activities that promote social welfare and (2) 40 percent or less of both spending and time to political campaign intervention.  Of the 106 favorable determination letters issued by the IRS, 43 were the result of applicants choosing this process.  Nevertheless a handful of such applications are still pending, including the application for Crossroads GPS and also several much smaller "mom-and-pop outfits," according to Politico.

Lost Emails:  Politico also reports that in response to questioning from members of Congress a representative of the  Treasury Inspector General for Tax Administration told a congressional Committee that TIGTA's ongoing search for IRS emails has revealed "potential criminal activity" in that the IRS failed to initially disclose some backup tapes and that other tapes were erased.  The TIGTA representatives emphasized, however, that the investigation was still ongoing and it was too soon to determine if the actions were purposeful or the result of ill intent.  A video of the full hearing is available here.

Federal Court Dismisses Claims Against Lerner:  In a decision issued late last month, the U.S. District Court for the Northern District of Texas (Dallas Division) dismissed claims brought by Freedom Path, Inc. against Lois Lerner without prejudice for lack of personal jurisdiction.  The claims arose out of the IRS's alleged mishandling of Freedom Path's application for recognition of exemption under IRC section 501(c)(4).  The court found that the group's allegations did not demonstrate sufficient contacts with the state of Texas to grant the court personal jurisdiction over Lerner.  The court also rejected several of the group's claims against the IRS and unnamed federal officials, including claims that challenged the constitutionality of two revenue rulings relating to political activity (2004-6 and 2007-41), finding the group had not pled sufficient facts to establish standing to challenge those rulings, and two other claims (for other deficiencies).  The court did, however, give the group 28 days to file an amended complaint although it felt that the defects in some of the dismissed claims appeared to be incurable.

Lloyd Mayer

 

Third Circuit Affirms Multi-Million Damage Awards for Breach of Fiduciary Duties and Deepening Insolvency

Earlier this year, the U.S. Court of Appeals for the Third Circuit affirmed (for the most part) a multi-million jury damages award against the former officers and directors of the Lemington Home for the Aged.  The Home entered bankruptcy in 2005, and the Bankruptcy Court later that same year granted the request of the Committee of Unsecured Creditors to file suit against the former Chief Executive Officer, the former Chief Financial Officer, and the former directors of the Home.  After trial, a jury concluded that the two former officers had breached their duties of both care and loyalty, that the former directors had breached their duty of care, and that all of the defendants had deepened the insolvency of the Home by concealing the board's decision to close the Home and so defrauded the Home's creditors.  The court therefore affirmed an award of $2,250,000 in compensatory damages against all but two of the defendants (jointly and severally) and punitive damages against the former CEO and CFO in the amounts of $1 million and #$750,000, respectively, rejecting only the award of $350,000 in punitive damages against five of the former directors.

The appellate court found that facts supporting the jury's verdict include repeated failures to comply with applicable federal and state regulations, the failure of the CEO to work full-time at the Home despite collecting her full salary and a state law requiring that she be full-time,  and the failure of the CFO to provide a representative of a major creditor with basic financial information, to keep a general ledger for almost a year, and to bill Medicare for $500,000 owed.  The court also found that the directors had failed to remove the CEO and CFO despite being aware of many of their failings, and the Home's failings, in part through independent reports documenting those failings.

This case therefore presents a rare but unfortunately actual case study in how officers and directors can fail to fulfill their fiduciary duties, and the liabilities they can incur as a result.

Additional coverage:  Elder Law Blog; Pittsburgh Tribune-Review.

Lloyd Mayer

 

Federal Court Enjoins Local Solicitation Ordinance on First Amendment Grounds

The City of Mercer Island, a suburb of Seattle, sought to prohibit solicitation activities between 7:00 p.m. and 10:00 a.m.  The nonprofit United States Mission Corporation (doing business as United States Mission) objected because it desired to have the participants in its transition program for homeless people solicit contributions on weekday evenings until 8:00 p.m.  The dispute eventually made its way to the U.S. District Court for the Western District of Washington, which has now granted a preliminary injunction to United States Mission barring enforcement of the 7:00 p.m. curfew on solicitation.  The court concluded that the ordinance as written was content-based because it only reaches individuals or organizations that ask for donations or contributions, but not non-commercial organizations that do not ask for funds, and so is subject to strict scrutiny review under the First Amendment.  Given that there were other, less restrictive ways to address the City's concerns regarding possible crime and protecting residential privacy, the court found a substantial likelihood that United States Mission would succeed on the merits and also that the other requirements for granting a preliminary injunction had been met.

The case demonstrates the difficult line that not only states, which presumably have relatively deep legal resources on which to draw, but also localities that may lack ready access to First Amendment legal counsel, have to walk to ensure that their attempts to regulate charitable solicitation efforts do not run afoul of the Constitution.  Ironically, the ordinance at issue in the case was a newly-enacted one, adopted to replace an earlier ordinance that had been enjoined since 2001, presumably also on First Amendment grounds.  Maybe the third try will be the charm.

Additional coverage: Mercer Island Reporter.

Lloyd Mayer