Enforcement Issues

Summary:

If a charitable organization accepts a gift pursuant to an instrument (such as a last will and testament or deed of gift) by which the donor restricts the donee's use of gifted funds, the restriction is generally legally binding on the charity, even if under state law the restriction does not give rise to a trust. The state attorney general can sue the charity to enforce the terms of the restriction imposed by the instrument of gift. Indeed, in many circumstances, the attorney general is the sole enforcer of the terms of a charitable gift. Courts often state that as a general rule, a donor has no standing to enforce the terms of a charitable gift, whether given in trust or outright to a corporate charity. A contributor will be granted such standing only if she has some special interest in the fund. Precisely what type of special interest a donor must retain in order to have standing to enforce the terms of a restricted gift is not clear. The theory behind the general rule is that charitable funds are held for the public, and enforcement on behalf of the public rests in the state attorneys general. If the donor lacks any reversionary or other special interest, a donor's interest in enforcing the terms of the gift is purportedly no greater than that of the representative of the general public (the attorney general). Although this general rule has been subject to some judicial erosion and a great deal of scholarly discussion, it remains the prevailing view of the courts.

 

Citation:

Buckles, Johnny Rex, "When Charitable Gifts Soar Above Twin Towers:  A Federal Income Tax Solution to the Problem of Publicity Solicited Surplus Donations Raised for a Designated Charitable Purpose". Fordham Law Review, Vol. 71, p. 1827, 2003

 Summary:

... The cat is out of the bag: Donors are fast discovering what was once a well-kept secret in the philanthropic sector - that a gift to public charity donated for a specific purpose and restricted to that purpose is often used by the charity for its general operations or applied to other uses not intended by the donor. ... But Attorney General offices are beset with difficulties that make it virtually impossible to monitor how each charity administers its restricted gifts, leaving the charities, for the most part, on the honor system. Donors - whose restricted gifts play a vital role in the charitable sector as a source not only of funding but also mission - are increasingly aware that their restrictions are ignored. Frustrated by lax enforcement mechanisms, donors (and their families) are pursuing standing to enforce their restrictions. …The question of donor standing to enforce a restricted gift to public charity is no mean matter. ... To return to the particulars of the current law with respect to donor standing, nearly all the modern American authorities - decisions, model acts, statutes, and commentaries - deny a donor standing to enforce a restricted gift to public charity absent express retention of a reversion in the donative instrument. ... The UMIFA provision is likely to provide that in a proceeding to release or modify a restriction imposed by a gift instrument, brought by a charity, notice need be given to the attorney general but not to the donor. ... Smithers v. St. Luke's/Roosevelt Hospital Not only did Mr. Smithers not retain a reversion, but the court concedes that New York statutory law (Article 8-1 of the Estates Powers and Trusts Law) designates the Attorney General as representative of undesignated beneficiaries of a charitable trust. ...

 

Citation: 

Goodwin, Iris J. "Donor Standing to Enforce Charitable Gifts: Civil Society vs. Donor Empowerment."  58 Vand. L. Rev. 10, Vanderbilt Law Review, May 2005

Summary:

Part I: Introduction-The Omnipresence of Charitable Organizations ... There are many reasons that a nonprofit organization would want to achieve public charity status instead of the default private foundation status, not the least of which is that all public charities are exempt from the more rigid regulations that are imposed on private foundations in Chapter 42 of the Code. ... In this section, we will first briefly examine the doctrine of standing and how this judicially-created doctrine serves to sharply limit those who may bring an action for breach of fiduciary duty against a charity or a charitable director or executive. ... "Charge"-Informal allegation of misconduct on the part of a charitable organization or insider that is filed with the charitable division of the Office of the Attorney General. ... (3) Where any interested party, as defined in subsection (1) of this statute, alleges misconduct on the part of a nonprofit organization or insider of such organization, a charge of charitable misconduct must be filed with the State Attorney General within 90 (ninety) days of the incident of misconduct or within 90 (ninety) days of the discovery that misconduct has occurred. … Section E: The State Attorney General

 

Citation:

Nix, Joshua B.  "The Things People Do When No One is Looking: An Argument for the Expansion of Standing in the Charitable Sector." 14 U. Miami Bus. L. Rev. 147, University of Miami Business Law Review, Fall/Winter 2005

Summary:

Nonprofit organizations and their executives have succumbed to widely publicized recent scandals that one might expect from the business world or criminal enterprises. ... In contrast to the charitable trust under which fiduciary responsibilities are governed under the restrictive and demanding principles of trust law, nonprofit corporate law is primarily influenced by the more lenient standards of business corporate law. ... - The word "fiduciary" is frequently used in the context of a trustee of a trust or one who holds anything in trust. ... A fundamental distinction between the business corporation, where shareholders have formal legal authority to assume fiduciary accountability, and the nonprofit organization is the limited nature of standing to sue by the many classes affected by the nonprofit enterprise. ... Information gathering responsibilities and statutory oversight of charitable solicitation do not by themselves make the attorney general an active or efficient monitor of nonprofit organizations or improve charitable accountability. ... A Proposal to Increase Accountability: Advisory Charity Commissions Under the Aegis of the Attorney General ... The charity commission will serve a similar role for nonprofit organizations. ... The charity commissions will encourage adherence to the social norm of following fiduciary rules by increasing the possibility of enforcement and extending the reach, though indirectly, of government investigation. Note: Section A is all about Standing

 

Citation:

Fishman, James J. "Improving Charitable Accountability." 62 Md. L. Rev. 218, Maryland Law Review, 2003

Summary:

Charity shall cover the multitude of sins ... While Attorneys General Eliot Spitzer in New York and Tom Reilly in Massachusetts have proposed various drafts of comprehensive charitable reform bills, conservative objections to the extent of the proposed regulation has stalled this legislation. ... By contrast, under current standing rules, all the daylight in the world on charitable organization activity is not going to enable most private individuals to sue. ... The same public perceptions that hamper comprehensive reform legislation regarding charities may be at work in those actions of the courts which severely limit standing of individual plaintiffs with a stake in charitable operations. ... For example, the "beneficiary" of a charitable trust is said to be the public, who is represented (but only sporadically) by the state attorney general. ... In the charitable sector, however, increased disclosure of information on charities cannot lead to increased "private" regulation due largely to restrictive standing requirements for private litigants. ... I would ask courts to take judicial notice of the inaction of states' attorneys general and willingly grant standing to individuals and institutions with a "stake" in the fulfillment of the charity's charitable purpose. ... As it has done in the for-profit arena, positive law has sought to provide a regulatory framework for the charitable sector. Chiefly, this framework for charities has relied on state attorneys general to enforce the duties of loyalty and care, to which all trustees and directors must submit. Due to attorney general inaction in many states, the federal government increasingly has stepped into a regulatory role in the charitable arena; generally, this has been through the Internal Revenue Service's ("IRS") policing of the charitable exemption under special rules that enable them both to penalize private foundations and to confiscatorally tax excess benefit transactions engaged in by charitable trustees and directors.

 

Citation:

Summary:

It is difficult to predict the extent to which state attorneys general and other interested parties will invoke charitable trust doctrine to ensure that perpetual conservation easements are enforced in accordance with their stated purposes, although some state attorneys general have indicated that they take their role as enforcers of conservation easements on behalf of the public very seriously. In many cases other factors - such as the prohibition on private benefit, the ethical standards adopted by land trusts, and specific provisions concerning modification and termination in an easement enabling statute - will be sufficient to discourage inappropriate modifications or terminations. However, charitable trust rules serve as the ultimate backstop, permitting state attorneys general (and, when state attorneys general decline to become involved or are ineffective, parties with a "special interest") to object when the holder of a perpetual conservation easement nonetheless agrees to modify or terminate the easement in contravention of its stated purposes and the public interest. Indeed, the mere threat of enforcement by state attorneys general and other interested parties pursuant to charitable trust principles will help to ensure that: (i) land trusts adhere to the ethical standards promulgated by the Land Trust Alliance, and (ii) the myriad of state and local government agencies that have acquired perpetual conservation easements continue to enforce those easements and otherwise comply with their fiduciary obligations.

 

Citation: McLaughlin, Nancy A.  "Amending Perpetual Conservation Easements: A Case Study of the Myrtle Grove Controversy." 40 U. Rich. L. Rev. 103, University of Richmond Law Review, 5/1/2006

 

Summary:

Commentators have advanced one prominent additional theory of standing for enforcement actions; it focuses on the treatment of the conservation easement as a "charitable trust" and hinges on the role of state Attorneys General as supervisors of charitable trusts on behalf of the public. Unfortunately, due to the relative novelty of conservation easements, there has been little opportunity to put this theory to the test in actual litigation. … The continuing validity of conservation easements depends, in large part, on the ability of those with an interest in conservation to enforce the terms of the easements. Enforcement case law thus far has come out in a number of different directions concerning the fundamental question of who may enforce a conservation easement. In order to ensure that conservation easements last in perpetuity, courts should give liberal construction to enforcement provisions in order to carry out the policy objectives behind conservation easement statutes. One example of this interpretation was seen in Bright Par, where the court liberally construed the word "beneficiary" to include all citizens of the state of Tennessee. Where statutory language is not as clear, however, there are a number of possible legal frameworks that would allow broad citizen enforcement of conservation easements. It is necessary that courts allow broader enforcement powers in order to protect the public benefits of conservation easements, lest those benefits be lost forever.

 

Citation:

Summary:

In sum, the mandates, capabilities and incentives of attorneys general motivate them to focus their enforcement efforts on nonprofits' lapses of financial accountability. Unfortunately, as will be shown below, these same factors discourage AGs from prioritizing enforcement of mission and organizational accountability … AGs do indeed seem to be ramping up their enforcement efforts in the nonprofit context. They are using their authority to initiate litigation and their regulatory powers to expand monitoring of nonprofits. At the vanguard, a few AGs have advocated for new nonprofit legislation using Sarbanes-Oxley as a model. In each of these efforts, the priority of financial accountability to AGs is apparent. The New York Attorney General's Office has billed its reforms for the nonprofit sector as consumer protection, though this time for donors, and its safeguards are specifically described as protection against the dissipation of charitable assets. Massachusetts Attorney General Tom Reilly described his draft legislation as addressing the need for charities "to restore the trust and confidence of donors, the public and regulators in their financial competence and integrity;" California Attorney General Bill Lockyer likewise hopes his legislation will "shore up donor confidence." The substance of these proposed reforms demonstrates, once again, that financial accountability concerns dominate AGs' nonprofit enforcement agendas, bearing out the predictions of AG priorities made in Part II. Thus, even activist state AGs will fail to assure comprehensive nonprofit accountability. With this in mind, Part V begins the process of considering alternative mechanisms by which nonprofits' mission and organizational accountability might be enforced effectively. … V. Thoughts on Complements to AG Enforcement … Renewed vigor by AGs to regulate charitable solicitation, to litigate duty of loyalty violations, or to legislate additional disclosure or auditing mechanisms does not address mission and organizational accountability - or impacts them only as unintended, if positive, consequences. Thus, some other mechanisms must be found or created to tackle these real, though often less concrete, challenges. Various commentators have advocated the establishment of new government entities or the use of other governmental or regulatory pathways in order to deter failures of nonprofit accountability. This Part takes a different approach and instead offers initial thoughts on the extent to which self-regulatory means of addressing accountability problems may be used to improve organizational integrity and control mission creep in the nonprofit sector. Of course, a full evaluation of these techniques is a topic for another day. The purpose of this Article is to explain the financial accountability bias of state AGs and the need for additional enforcement mechanisms to complement AG efforts. The discussion that follows is intended only to begin the quest to find these complementary methods of enforcing nonprofit accountability.

 

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