Saturday, November 9, 2019
On November 7, New York Supreme Court Judge Saliann Scarpulla ordered President Trump to pay $2 million in resitution to charity for his breach of his fiduciary duties as an officer and director of the Trump Foundation. The link attached to ordered above is the Judge's actual order. Since this is written up a lot in other places, like here by David Fahrenthold who has been the best chronicler of the Foundation, I only provide resources here for digging deeper into the case.
To fully comprehend what has happened to the Trump Foundation, President Trump, and his children, you have to read more than the order. They all entered into a series of stipulations with the NY AG Letitia James. The stipulations spell out a series of significant admissions of wrongdoing made by President Trump and his three children who sat on the board. The press release issued by the NY AG does a nice job of summarizing all that has taken place. I recommend reading all three.
If interested in seeing all of the evidence held by the NY AG you can go to the NY Supreme Court and search in the case index for the index number of the case (451130/2018). That should take you here, which if it works would save you the time of searching the case index. More information can be found from CREW who did a FOIA search that yielded the Form 4720s and checks filed by the Foundation with the IRS.
I have written about the matter on The Conversation here. In that piece I try to grapple with whether there are any situations in history that place this occurrence in proper historical context. If you get a chance to look at that, and have thoughts about the choice, let me know what you think.
Wednesday, September 25, 2019
Public details are a bit scarce, but according to press reports a three-year investigation by Minnesota Attorney General Keith Ellison has raised questions about a nonprofit's investment of nearly a $1 million in for-profit companies owned by the nonprofit's CEO. Praying Pelican Ministries started a for-profit coffee shop in 2013 in order to raise money, with the CEO as the sole shareholder of the business (even though the board had approved the investment subject to the nonprofit being a 49% owner). After investing nearly $800,000 in the business, the coffee shop was sold for $16,000, with the sales proceeds used to pay off the shop's creditors. During approximately the same time period, the nonprofit referred participants in its mission trip to a travel agency owned by - you guessed it - the CEO. The nonprofit also paid nearly $140,000 to the agency in purported reimbursements, but a later audit revealed that in fact the agency was obligated to repay this amount to the nonprofit.
In the wake of the investigation and the AG's allegations that they had violated their fiduciary duties in numerous ways, the CEO and four board members resigned earlier this year. Earlier this month the AG filed in court a stipulation and proposed order (agreed to by the nonprofit and its new leadership), which if accepted by the court would require the nonprofit to revise its policies and leadership. The "Petition for Order Approving Assurance of Discontinuance" is available here. At least at this point, no criminal charges have been filed.
Friday, March 29, 2019
As the Washington Post details, the end of the Mueller investigation is far from the end of law enforcement actions relating to President Trump. Among those investigations are several tied to nonprofit organizations, specifically the continuing litigation in New York relating to the Trump Foundation and investigations into the President's inaugural committee.
Turning first to the inaugural committee, in late February the District of Columbia Attorney General's office subpoenaed the committee for documents relating to its finances according to several media reports (CNN; NY Times; Politico; Wall Street Journal; Washington Post). This followed subpoenas on the same topic from the New Jersey Attorney General's Office and from the U.S. Attorney's Office for the South District of New York, both earlier that month. The latter subpoena identified a number of possible federal crimes under investigation, including conspiracy against the United States, mail and wire fraud, money laundering, and accepting contributions from foreign nations and straw donors. The DC and NJ subpoenas are more focused on nonprofit-related matters, such as possible private benefit and whether the committee complied with laws relating to soliciting contributions.
As for the Trump Foundation litigation in New York, Courthouse News Service reports that New York Attorney General Letitia James requested judgment against the Foundation, Donald J. Trump, Donald J. Trump Jr., Ivanka Trump, and Eric F. Trump for $2.8 million in restitution and $5.6 million in penalties, as well as injunctive relief. The filing, technically a Reply Memorandum of Law in Further Support of the Verified Petition, argues that the evidence provided by the Attorney General has not been challenged by the respondents or countered by any admissible evidence provided by them, and that it demonstrates breach of fiduciary duties, wasting of charitable assets, and improper use of the foundation for political purposes. Hat tip: Nonprofit Quarterly.
Wednesday, December 19, 2018
I previously mentioned California Attorney General Xavier Becerra's cease and desist orders against three charities for allegedly overvaluing donated pharmaceuticals they received. Now Jim Ulvog, CPA at the Nonprofit Update blog has obtained the numerous and lengthy court filings in this case and begun reviewing them. So far he has posted some preliminary thoughts and also some details relating to discovery disputes. Apparently the three defendant charities have seriously lawyered up (ten attorneys named so far) and also hired impressive (and presumably expensive) expert witnesses. At last report (on December 4th), the case was in its sixth day of hearings out of fifteen scheduled days before an Administrative Law Judge. It will be interesting to see if it results in a public decision or instead a set of quiet settlements, with both sides claiming victory.
Tuesday, December 18, 2018
While paling in comparison to other recent developments related to President Trump, the drumbeat of negative news relating to nonprofits associated with him has also continued. The three most recent developments involve a federal investigation into the President's inaugural committee, the revelation that in "an abundance of caution" the President's foundation was reimbursed for six questionable transactions (presumably either by Mr. Trump personally or his companies), and today's announcement that President Trump has agreed with the NY Attorney General to shut down his foundation and give away its remaining money.
The Wall Street Journal broke the story that federal prosecutors are conducting a criminal investigation of the President's inaugural committee, a section 501(c)(4) nonprofit organization formally named the 58th Presidential Inaugural Committee. The investigation is out of the U.S. Attorney's office for the Southern District of New York, which not coincidentally also handled the investigation of Donald Trump's former attorney Michael Cohen; it was a recording seized as part of the Cohen investigation that triggered the investigation of the committee. The latter investigation focuses both on whether the committee misspent any of the $107 million in funds it raised and on whether any donors received improper access or policy concessions in return for their donations. While not formally part of the Mueller investigation, it may be relevant to that investigation if any foreign money flowed to the committee, which would have been illegal. The investigation of the committee is reportedly still at a relatively early stage. Additional coverage: CNN, NPR, N.Y. Times, The Hill.
As for the Donald J. Trump Foundation, its latest IRS annual return showed $271,356 in "REIMBURSEMENTS" (Part I, Line 11 and Statement 2), but the only explanation provided in the return (Statement 5) tied the reimbursement to the auction of a membership to the Trump National Golf Club in 2012. What is odd about this explanation is that the amount relating to this auction was only $158,000 (as first reported by David Fahrenthold at the Washington Post), so even with interest it should have totalled significantly less than the amount reported. The more complete explanation may instead be that there was more than just this one reimbursement: in the November 23, 2018 decision in the state case involving the Trump Foundation, the court noted that the Foundation and the other respondents "point out that the Foundation has already been reimbursed for six individual donations" and in a footnote further noted that "Respondents aver that 'in an abundance of caution,' the Foundation was reimbursed with interest for the following donations: (1) the [$100,000] Fisher House Transaction; (2) the [$158,000] Greenberg Transaction [relating to the auction]; (3) a [$5.000] 2013 DC Preservation League donation; (4) a [$25,000] 2013 "And Justice for All" payment; (5) a [$10,000] 2014 Unicorn Children's Foundation donation; and (6) a [$32,000] 2015 North American Land Trust donation." The links are to the news stories that report more details about these transactions. These amounts total more than what was reported on the 2017 IRS return, which may be because some of them were repaid either before or after 2017. Regardless, they reflect quite a trail of questionable expenditures by the Foundation.
That undoubtedly is part of what led to today's announcement by the New York Attorney General that the Trump Foundation has agreed to resolve under judicial supervision. Coverage: CNN; Washington Post.
Friday, October 19, 2018
This week, the Institute for Justice sued on behalf of an Akron, Ohio, nonprofit that has established an encampment for people experiencing homelessness. (See also this New York Times article about the suit.)
The Homeless Charity and Village has been providing shelter for people without anywhere else to go for more than a year. The organization's logic is that, while camping in a tent is not ideal, an encampment is much better/safer than the likely alternatives, which is either dispersed camping or sleeping "rough." The lawsuit contends that denying the nonprofit the right to use its property in this way, under the circumstances of the case, is an irrational restriction on property rights. (Disclosure: I authored and co-signed a letter in support of the nonprofit on behalf of other local nonprofits and faculty over the summer.) The City of Akron, in contrast, argues that a campground is not an appropriate land use under its zoning code.
In an unrelated case, also filed this week, a Cincinnati church is seeking a writ of mandamus to abrogate a injunction that prohibits people from seeking or offering shelter in a tent on public or private land. (Disclosure: I am counsel of record in this case). The injunction was entered in a nuisance lawsuit brought by Hamilton County against the City of Cincinnati at the City's request. The church, which offers its land as a refuge to people experiencing homelessness, argues that the injunction was not properly issued and cannot apply to non-parties who were not part of the underlying case.
Akron and Cincinnati are certainly not the first or only cities to clash with nonprofits over their land use. Many cities use zoning laws to restrict or exclude houses of worship (often triggering RLUIPA), group homes, schools for kids with disabilities, or other service providers. Some cities establish extensive business districts that expressly exclude nonprofit uses, either because they prioritize the value that businesses provide, or are concerned about the lack of revenue that a tax-exempt use would cause to the city. Although there hasn't yet been a lot of study of local control over nonprofit service delivery, that may change as city versus nonprofit disputes spill over into the courts.
Thursday, May 3, 2018
George Mason University, a state university, is struggling to address a controversy that has erupted over the influence that sizeable donations to its affiliated foundation by the Charles Koch Foundation and others may have given over academic decisions. According to a Washington Post report, a student group, Transparent GMU, has sued in state court seeking access to agreements between the foundation and these donors, arguing that they are covered by Virginia's open records laws. While the group filed the lawsuit over a year ago, it appears to only have received limited coverage (see, e.g., Huffington Post, Fairfax Times) before a recent court hearing.
The Charles Koch Foundation donations at issue include $10 million gift relating to the renaming of the law school for deceased Supreme Court Justice Antonin Scalia and $5 million gift to the economics department to create three new faculty positions. According to a follow-up Washington Post story, the University's president has now stated that some gift agreements "fall short of the standards of academic independence." For example, some of the agreements included terms granting donors a right participate in faculty selection and evaluation for some economics department positions. While the lawsuit is proceeding, the University has already released some of the agreements at issue and, according to a N.Y. Times story, launched an internal inquiry. The University has also noted that those agreements, with one exception, have expired.
The University of Chicago, a private university, is facing a different but related situation. Thomas L. Pearson and twin brother Timothy R. Pearson pledged to give $100 million to the University through their family foundation to create a research institute to advance the cause of world peace. As reported by Bloomberg and student newspaper The Chicago Maroon, the foundation has now filed a lawsuit in federal court (U.S. District Court, Northern District of Oklahoma) alleging numerous breaches of the grant agreement by the University and demanding the return of the $22.9 million it has paid so far. The University is seeking to dismiss the suit, according to a Chicago Tribune report, asserting that the foundation cannot prove that it violated any of the grant agreement's terms. Additional coverage: The Chronicle of Philanthropy (subscription required); The Nonprofit Times.
While these two stories are the most prominent recent ones, there have been recent developments in two other major disputes with donors. The Legal Intelligencer (law.com) reports that last month a federal judge in Pennsylvania ruled that Foremost Industries had to fulfill its $4 million pledge to Appalachian Bible College. The College had sued to enforce its gift agreement with the company, and the court considered the College's motion for summary judgment unopposed after the company failed to file its opposition brief by the deadline set by the court. The company is now closed, which may indicate that it will be difficult for the College to collect on its judgment.
And the The Inquirer (Philadelphia) reports that the Abington School District board of directors has voted to accept a $25 million gift from billionaire Stephen Schwarzman, after rejecting an earlier gift agreement with the donor after gift stirred local controversy because of concerns about its terms and the structure of the nonprofit the board is creating to administer the donation. The controversy erupted when the board initially voted to accept the gift and its then terms, including renaming the high school for the donor, without almost no advance warning to the public and without making the gift agreement public.
Friday, August 18, 2017
Politics: Facts & Circumstances Test Survives Constitutional Challenge; Donor Disclosure Decision & Debate
In a little noticed decision, but perhaps only because of the conclusion it reached, a federal district court in one of the cases arising out of the IRS application controversy rejected a constitutional challenge to the facts and circumstances test for political campaign activity embodied in Revenue Ruling 2004-6. In Freedom Path v. IRS (N.D.Tex. July 7, 2017), the court considered a motion for partial summary judgment asserting that the test was unconstitutionally vague in violation of both the Due Process Clause of the Fifth Amendment and the First Amendment, as well as being overbroad and promoting viewpoint discrimination in further violation of the First Amendment. The court found that the identification of eleven specific and objective, although non-exclusive, factors in the Revenue Ruling was sufficient to defeat the facial challenge to the ruling based on vagueness. With respect to the First Amendment claims, the court distinguished decisions in the campaign finance area on the grounds that the tax rules relate to what types of speech will be subsidized through the federal tax system, as opposed to banning, restraining, or punishing speech, and concluded that the ruling therefore surveyed First Amendment challenge.
The other currently hot constitutional and policy topic relating to politics and nonprofits is the extent to which the government can or should compel the disclosure of information relating to nonprofits involved in political activities or politically sensitive areas. There have two recent interesting developments in this area. First, in Matter of Evergreen Assn. v. Schneiderman (June 21, 2017), a state appellate court in New York limited the scope of a subpoena to a nonprofit organization on the grounds that it "infringed on the First Amendment right of the [nonprofit and its staff] to freedom of association, and was not sufficiently tailored to serve the compelling investigative purpose for which it was issued." The nonprofit at issue operates crisis pregnancy centers and the investigation related to the alleged unauthorized practice of medicine at those centers. The subpoena sought, among other information, a broad range of information relating to individuals and organizations associated with the nonprofit, including all of its staff; the court ordered that the subpoena be limited to information pertaining to the alleged unauthorized practice of medicine, with the trial court to conduct an in camera review of responsive documents to determine which ones satisfied this requirement.
Finally, there was an interesting addition to the ongoing debate about "dark money" and politically active nonprofits. Writing in the American Prospect, Nan Aron and Abby Levine of the Alliance for Justice argue against blanket disclosure of donors to politically active nonprofits such as social welfare organizations, instead supporting an approach that distinguishes between groups that "are funded by a small group of big donors and those that receive broad support from many people." Their arguments echo some of the more thoughtful supporters of campaign finance disclosure rules (see, for example, Richard Briffault (Columbia)), who recognize that the purported goals of such disclosure are not furthered by publicly identifying the many relatively small donors to candidates and political parties, so so such disclosure should be "rightsized" to target the information that is actually helpful to voters.
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.