Monday, July 8, 2024

Who Has Standing to Sue Nonprofit Directors?

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Ellen Aprill reminded a buncha tax lawyers on a listserv last week that there is an expertly crafted dissertation regarding who has standing in nonprofit litigation.  Chapter 6 of the Restatement of Law of Charitable Nonprofit Organizations contains a deep and informative analysis, in fact.  The best thing about restatements is that they collect, analyze, discuss and then codify.  They prove, by intellectual consensus, the logic or illogic of various approaches applied amongst the states.  But the way nonprofits and others are so easily suing other nonprofits makes me think courts are unaware that there even is a consensus.  The courts are more likely expressing a political rather than an intellectual consensus.     

Three pending cases, in particular, have me thinking about standing and how watchdogs with theoretical injuries are going around suing nonprofits “willy-nilly.”  That’s a phrase applied to assorted groups making it their business to go around suing nonprofits under the “it just ain’t right” legal theory of standing.  We already know about American Alliance for Equal Rights whose alleged injury in Fearless Fund the dissent described as “flopping on the field.” By which it was meant that the group faked injury so it could go to court and complain that what Fearless Fund is doing "just ain't right." It seems to be working.

Out in California, a group of students and alumni are bringing what might be described as a derivative action against Golden Gate University.  The plaintiffs are trying to prevent Golden Gate from discontinuing its law program and one of the eight theories asserted in that case is “breach of fiduciary duties.”  In Chicago, a group calling itself “Faculty Alumni and Students Opposed to Racial Preferences” (FASORP) is suing Northwestern University Law for hiring a bunch of “mediocre” and “unqualified” women and minorities instead of superior and obviously much more qualified white men. The plaintiffs are a bunch of assholes, read the complaint for yourself if you don't believe me. 

The third case is out of Raleigh, North Carolina.  Two former board members are suing on behalf of Saint Augustine's University in an effort to save that small private historically black university from closing its doors.  Their lawsuit alleges breaches of fiduciary duties among other things.  The current board filed a motion to dismiss based on the plaintiffs’ lack of standing.  The backstory to that lawsuit includes allegations that white businesspeople are trying to force SAU to merge with Shaw University, another HBCU in Raleigh, so that investors can get their hands on SAU's prime downtown real estate.  I don’t know about that allegation.  It doesn’t explain the million-dollar lien the IRS filed against the university, or how SAU has lost its accreditation. The buzzards might be circling alright, but buzzards only eat what something else has already killed.  

Constitutional Law—Highly Tested MBE Topics, Charts, and a Checklist! - JD  AdvisingSo what are the rules for standing in litigation against or on behalf of a nonprofit organization? Lawsuits against nonprofit organizations, like the suits filed by AAER and FASORP, are usually direct actions and it seems courts these days are too willing to indulge them.   Here is what Section 6.01 of the Restatement of the Law of Charitable Nonprofit Organizations says about standing in direct actions:

In the vast majority of direct actions that private parties bring against charities, the fact that the defendant is a charity is not relevant to whether standing will be recognized. Such direct actions--which include employment, contract, and tort actions--are characteristically no different from direct actions brought by private parties against any other legal entity, such as a for-profit corporation. Therefore, the law external to this Restatement will govern those actions.

The comments go on anyway to state that “courts and legislatures [should] protect charities and board members from meritless and vexatious actions by limiting standing for private parties to bring actions and by establishing clear procedural rules.”  That does not seem to be happening very often, certainly not so far in the Northwestern litigations.  Northwestern will no doubt raise the issue, but the complaint speaks with such righteous indignation that I can't assume the plaintiffs have even thought seriously about standing, never mind the Restatement. To the contrary. FASORP's complaint makes the factual assertion that it has "organizational standing to sue any university that refuses to adopt colorblind and sex-neutral faculty-hiring practices." Have gun, will travel I guess. 

The Restatement's Section 6.02 concerns standing in derivative actions.  It allows current and former members of the board to bring nonprofit derivative actions on behalf of the organization.  It also allows standing for persons with a “special interest.” 

A private party has a special interest for purposes of bringing a derivative action . . . only if

(a) the state attorney general is not exercising the office's authority to protect the public's interest in the charitable assets at issue, as provided in § 5.01; (b) the charitable assets at issue will not be protected without the grant of standing to the private party; (c) the alleged misconduct is egregious or the circumstances are serious and exigent; (d) the relief sought is appropriate to enforce the purposes of the charity or the purposes to which particular charitable assets are devoted; and (e) the private party has a substantial connection to [the action]

I think the plaintiffs in North Carolina might have a good case for standing.  The plaintiffs in California have a slightly weaker case because the plaintiffs do not include a current or former board member.  The plaintiffs include students asserting direct actions, but standing for direct actions does not translate to standing for derivative claims. The bums in AAER and FASORP have the weakest cases, though the brazen abandon with which they are suing all over the country -- willy-nilly -- confirms that courts are applying politics rather than law or logic.

darryll k. jones

https://lawprofessors.typepad.com/nonprofit/2024/07/standing-in-nonprofit-litigation.html

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