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Trusting Nonprofits: Applying Trust Principles to the Assets of Charities

Trusting Nonprofits: Applying Trust Principles to the Assets of Charities

Malachi Brennan

 

First arising in England as charitable trusts with the Statute of Uses in 1601,[1] nonprofit organizations[2] currently represent 10 percent of the U.S. economy.[3] The assets employed by these 1.7 million nonprofits represent an invaluable public resource.[4] Nonprofits alleviate the burden on public funds,[5] and provide important services that private businesses avoid:[6] “For every dollar that a [person] contributes to these public charities, . . . the public gets 100 percent.”[7] But how do we ensure that the public gets 100 percent?

            Ensuring nonprofit assets are used for public benefit, in keeping with their donors’ intentions, requires navigating several legal doctrines. Nonprofits are creatures of corporate law.[8] Shareholders shape the decisions of for-profit corporations, but for nonprofits, “this internal check doesn’t exist.”[9] Nonprofits also live and die by their tax exemptions.[10] And all charitable organizations trace their roots to the law of trusts, which still carries force.[11]

            In fact, courts and attorneys general are increasingly resorting to the old common law doctrine of charitable trusts to resolve questions involving charitable assets.[12] Courts welcome the resemblance to a charitable trust when donor intent is specific.[13] The law is less clear when an asset involves no restriction or intent. In the 80’s and 90’s, nonprofit hospitals across the country began converting to for-profit corporations, putting the issue squarely in the public view.[14] While some attorneys general were successful in defending the public interest in charitable health care on common law grounds,[15] these transactions spurred state legislatures to formally adopt trust-law principles into nonprofit hospital-conversion statutes.[16]

            These hospital-conversion statutes settled much of the uncertainty in such transactions, and provided attorneys general critical tools to protect an important public resource.[17] But they should not be confined to hospitals. The rationale for state scrutiny of these transactions applies anytime a nonprofit disposes of an asset.[18]

This Note argues that the charitable assets nonprofits hold should be held in trust for the public, regardless of donor intent. Part I summarizes the common law developments that led to the hospital-conversion statutes and the recent Model Nonprofit Corporation Act. Part II will analyze how unrestricted nonprofit assets might currently be transacted under several differing states’ approaches. And Part III will suggest uniform adoption and enforcement of modern trust law in the nonprofit context.

[1] Elizabeth Schmidt, Nonprofit Law: The Life Cycle of a Charitable Organization 13 (2d ed. 2017).

[2] For the purpose of this Note, “nonprofit” refers to nonprofit corporations in the strictest sense. That is, exempt organizations under IRC § 501(c)(3). This category includes public charities and private foundations.

[3] J. Fishman & Stephen Schwarz, Nonprofit Organizations: Cases and Materials 12–13 (4th ed. 2010).

[4] Schmidt, supra note 1, at 16.

[5] Bob Jones Univ. v. United States, 461 U.S 574, 590 (1983).

[6] Schmidt, supra note 1, at 25–26.

[7] Bob Jones, 461 U.S. at 590.

[8] Fishman & Schwarz, supra note 3, at 3 (“Most nonprofits of any significance are incorporated.”).

[9] Manhattan Eye, Ear & Throat Hosp. v. Spitzer, 715 N.Y.S.2d 575, 592 (N.Y. Sup. Ct. 1999).

[10] See generally I.R.C. § 501(c)(3) (2016) (defining the scope of tax-exempt charitable organizations).

[11] See Schmidt, supra note 1, at 13 (tracking the origins of modern nonprofit corporations); Terri R. Reicher, Assuring Competent Oversight to Hospital Conversion Transactions, 52 Baylor L. Rev. 83, (2000) (detailing early attorney general suits that relied on common law trust principles to enforce the charitable purposes of nonprofit hospitals).

[12] Carl J. Herzog Found. v. Univ. of Bridgeport, 243 Conn. 1, 6–7 (Conn. 1997).

[13] Id. (“The general rule is that charitable trusts or gifts to charitable corporations for stated purposes are [enforceable].”).

[14] Manhattan Hosp., 715 N.Y.S. at 594.

[15] See, e.g., Queen of Angels Hosp. v. Younger, 136 Cal. Rptr. 36 (Cal Ct. App. 1977) (finding that a hospital must comport with charitable trust doctrine and may not sell assets unless all proceeds go towards providing charitable hospital care).

[16] See, e.g., 18 V.S.A § 9420 (2015) (originally enacted in 2005) (stating that it is the policy of the state that charitable assets are “impressed with a charitable trust”).

[17] See Reicher, supra note 11, at 137–49 (examining the different state approaches to conversion statutes)

[18] See Hawes v. Colorado Div. of Ins., 65 P.3d 1008, 1022 (Colo. 2003) (en banc) (applying Colorado’s hospital conversion statute, and stating that nonprofit entities are all impressed with a public trust).

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