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August 15, 2011
Nonprofit Organization Report - Special Supplement (Summer 2011)
WHO IS THE ATTORNEY GENERAL?
Regardless of the state in which your nonprofit operates, the specter of the Attorney General often hovers over and above management and the governing board – at least when serious, non-routine matters are being considered. How often have you heard an executive director or a board member ask: “I wonder what the Attorney General would say?”
This question has been presented to us many times and our answers have taken different forms, such as: Let’s ask for his or her opinion and guidance. You need to fix things before he or she finds out! It’s none of his or her business. Depending on the circumstances each of these answers was an appropriate response – which illustrates the point that there are some matters for which the Attorney General’s involvement is necessary and appropriate and others where it is neither necessary nor desirable. While the lines separating the different categories of issues are nuanced and vary from state to state, it is important for board members to have a general understanding of where they are drawn.
To put the issue in its proper perspective we must go back in time to Elizabethan England (1601) and the adoption of the “Statute of Charitable Uses.” This statute embodied the English law of charity as it had evolved – and this body of law was carried over the Atlantic where it eventually (but not without controversy) became part of American jurisprudence. In essence, this statute and the body of law that has developed around it allow any person (a donor) to impose a perpetual and legally enforceable spending and/or use restriction on property donated for charitable purposes.
For example, if in 1711 a donor gave Harvard ten pounds sterling to be used as a permanent endowment to support the study of religion, Harvard must continue to use the donation (the modern dollar equivalent) for the same purpose in 2011 and at all times thereafter.[1] The question begged by this scenario is a function of the fact that donors are finite and charitable purposes are perpetual. In other words, after the donor has passed away who will be there to make sure Harvard does not misuse or misappropriate the funds? Under our jurisprudence the duty and the power to do this – to protect the interest of the public in the gift – have fallen upon the Attorney General. As the Massachusetts Supreme Judicial Court stated in an 1867 decision, the duty to protect the interests of the public “vested in the Commonwealth, and is exercised here, as in England, through the Attorney General.”
However, the above articulation of the Attorney General’s traditional powers is as important for what it excludes as for what it includes. First, the Attorney General’s customary powers apply only to donated charitable assets, and not to other funds or revenue – such as tuition, fees, sales proceeds, and the like. Second, there is nothing in the law giving the Attorney General a voice or a role in the general fiduciary and management business decisions that board members and management must regularly make to operate the organization they serve – such as hiring and firing, program expansion or termination, leasing or buying assets, merging or dissolving, and the like.[2]
While these two limitations on the role of the Attorney General have generally withstood the test of time, in some states they have been challenged and/or modified by a combination of politics, litigation and legislative action. Some examples: First, all states have some type of charitable solicitation registration statute designed to prevent fraud and abuse in the solicitation of charitable funds. Typically the Attorney General will be given the power and the obligation to enforce these statutes and to bring litigation against violators. Second, in 2002 the Connecticut Supreme Court concluded in Blumenthal v. Barnes that the Attorney General did not have the authority to sue a woman who had misappropriated funds from a charter school because the monies in question were tuition dollars and not donated charitable funds. In response to this case, the Connecticut legislature adopted a statute authorizing the Attorney General to recover “any property” misappropriated from a charitable organization.[3]
With the above as background (and subject, of course, to any specific rules in your state), here are a few general principles to help understand this issue:
1. Whenever donated charitable funds are involved – such as when they are used in violation of a spending or use restriction or, even worse, when they are actually misappropriated (stolen) – the Attorney General has a valid interest in the issue. If a board becomes aware of either problem it should develop a plan to correct and adjust for the improper use (possibly with Attorney General involvement) and/or to recover what was misappropriated (definitely with Attorney General involvement).
2. If there are “close calls” that need to be made – such as a lack of certainty about the interpretation of a donor’s restriction – approaching the Attorney General to ask for guidance and an opinion is often a wise and prudent action.
3. It is a good idea to be aware of specific statutes in your state which expand the traditional powers of the Attorney General – such as the charitable solicitation registration statutes.
4. However, when it comes to the myriad management and fiduciary judgment calls and decisions that must be made on a regular basis, the Attorney General does not and should not have a role to play. The Attorney General is not a member of the nonprofit’s governing board, nor does he or she have a right to attend board meetings or to second guess board judgments on issues outside of his or her office’s authority.
The Reid and Riege Nonprofit Organization Report is a quarterly publication of Reid and Riege, P.C. It is designed to provide nonprofit clients and others with a summary of state and federal legal developments which may be of interest or helpful to them. This Special Supplement of the Nonprofit Organization Report was written by John M. (Jack) Horak, Chair of the Nonprofit Organizations Practice Area at Reid and Riege, P.C., which handles tax, corporate, fiduciary, financial, employment, and regulatory issues for nonprofit organizations. While this supplement provides readers with information on recent developments which may affect them, they are urged not to act on this supplement without consultation with their counsel. For information or additional copies, or to be placed on our mailing list, please contact Carrie L. Samperi at (860) 240-1008 or info@rrlawpc.com, or members of Reid and Riege, P.C., One Financial Plaza, Hartford, CT 06103. For other information regarding Reid and Riege, P.C., please visit our website at www.rrlawpc.com.
[1] The law does, of course, have mechanisms to deal with a designated purpose which no longer exists. For example, if the gift was given to maintain the horse trough outside the Harvard faculty lounge, the courts would find an alternative purpose that is as “near as possible” to what the donor would want the funds used for in 2011.
[2] Of course, the Attorney General could intervene if board or management decisions caused the misappropriation or misuse of charitable assets.
[3] Here are some other examples. In some states the legislature has given the Attorney General authority over nonprofit to for-profit hospital conversions. In Massachusetts the legislature refused to give the Attorney General the power to regulate the payment of fees to nonprofit board members. See our prior Spring 2011 newsletter entitled “Coakley Strikes Out” at http://www.rrlawpc.com. Readers interested in the topic of the Attorney General and charitable funds may want to read the recently published Model Protection of Charitable Assets Act, a work product of the Uniform Laws Commission, which is available at http://www.nccusl.org/.
