Whose Public? Parochialism and Paternalism in State Charity Law Enforcement * EVELYN BRODY TABLE OF CONTENTS INTRODUCTION ......................................................................................................938 I. THE LEGAL FRAMEWORK FOR CHARITY LAW REGULATION...............................943 A. Constitutional Protections .........................................................................943 B. Roles of Branches of State Government.....................................................946 1. The Attorney General as Parens Patriae ............................................946 2. Adding in the Legislature....................................................................950 3. And the Last Word: The Courts ..........................................................954 C. The Complication of Organizational Form: The Charitable Trust and the Nonprofit Corporation ...................................................................................956 1. Historical Roots and Contemporary Challenges .................................956 2. Nonprofit Hospital and HMO Conversion Legislation .......................962 3. Multi-Entity Structures .......................................................................966 4. Transporting Trust Doctrine to Nonprofit Corporation Law...............967 D. Sources of Parochialism in Charity Enforcement .....................................968 1. Operating Assets: Geography Is Destiny ............................................968 2. The Temptation of Charitable Investment Assets ...............................970 E. Ascertaining the Proper Role of Charity Enforcers...................................974 1. Focus on Fiduciary Duties, Not Ends..................................................976 2. Parochialism by Charities: What Is the Effect of Foreign Incorporation? ................................................................................................................979 3. Inappropriate Involvement in Charity Governance.............................984 II. CASE STUDIES ...................................................................................................984 A. Hershey Trust’s Aborted Sale of Control in Hershey Foods Corp ............985 B. The Terra Foundation for the Arts.............................................................999 C. HealthPartners ........................................................................................1004 D. Heath Midwest.........................................................................................1008 E. The Increasing Difficulty of Converting Blue Cross Plans......................1017 1. CareFirst: Conversion Prohibited......................................................1019 2. Empire Blue Cross: Proceeds Paid to State.......................................1026 3. Fallout and Analysis..........................................................................1032 CONCLUSION........................................................................................................1034 INTRODUCTION * Freehling Scholar, 2002-2004, Chicago-Kent College of Law. I am grateful for support from the Norman and Edna Freehling Endowment Fund and from the Marshall D. Ewell Research Fund at Chicago-Kent. This Article benefited from discussions with Thomas Silk and Douglas M. Mancino, and for comments on earlier drafts from Laura Chisolm, Harvey Dale, Alan Feld, James Fishman, Dan Kurtz, Marion Fremont-Smith, Mark Owens, John Simon, Jonathan Small, Eric Talley, and participants at: an October 21, 2002, workshop at the University of Southern California Law School’s Center on Law and Economics; a November 16, 2002, presentation at the annual conference of the Association for Research on Nonprofit Organizations and Voluntary Action in Toronto, Canada; and a February 20, 2003, roundtable at the Nonprofit Forum in New York City. While I am the Reporter of the American Law Institute’s Project on the Law of Nonprofit Organizations, this Article reflects my views only. 2004] CHARITY LAW ENFORCEMENT 938 “[T]he broad interests of the Attorney General necessarily entail protecting the public against any social and economic disadvantages which may be occasioned by the activities and functioning of public charities . .”1 “I’m there fighting for the people of Hershey and the people of central Pennsylvania. This is the job that I have as the attorney general of Pennsylvania. The fact that I’m running for governor in this great commonwealth of ours has absolutely no role in the action that my office and I are taking in this case.”2 “‘It just wouldn’t have been right to have Hershey Park called Wrigley Field.’”3 Assets of nonprofit organizations are not governmental assets. Anglo- American law recognizes the authority of private parties to create, fund, and operate nonprofit organizations for public purposes. Importantly, the public served by a particular charity is not necessarily—or even often—the general public. Rather, a given nonprofit serves the indefinite class of beneficiaries chosen by its creators, funders, governing board, and, in some cases, members—but not by the state. Regulation of the two legal forms of charity—trust and corporate—varies somewhat from state to state both as a matter of formal law and in practice. Basically, every state attorney general enjoys the role known as parens patriae— inherited from the English view of the sovereign as father of the country—to oversee the performance of charitable trusts and their fiduciaries.4 A few state constitutions commit jurisdiction over charitable trusts to the courts rather than to the legislature, and state laws on nonprofit corporations differ as to the authority specifically granted to the attorney general. Moreover, as a practical matter, few 1. Pennsylvania Attorney General, Petition for Citation for Rule to Show Cause Why a Proposed Sale of Trust Assets Constituting the Controlling Interest in Hershey Foods Corporation Should Not Be Conditioned Upon Court Approval at ¶¶ 16-18, In re Milton Hershey School Trust (Orphans’ Court Div., Ct. Common Pleas, Dauphin County, Aug. 12, 2002), available at http://www.attorneygeneral.gov/ppd/charity/PDF/Hershey-Petition.pdf (emphasis in original). 2. Business Center (CNBC television broadcast, Sept. 6, 2002), available at http://www.lexis.com/research, Transcripts File. Subsequently, the voice-over in a Fisher campaign broadcast intoned: “Then he fought to block the sale of Hershey Foods, saving 6,000 more critical jobs.” Peter L. DeCoursey, Pennsylvania Attorney General Will Use Hershey Sale Halt in Campaign Ads, PATRIOT-NEWS, Sept. 26, 2002 (quoting a new “30- second ‘Jobs’ commercial for the campaign ad of Republican gubernatorial candidate Mike Fisher”). 3. Steven Pearlstein, For Hershey Trust, the Outcome Is Bittersweet, WASH. POST, Sept. 19, 2002, at E1 (quoting Attorney General Mike Fisher’s explanation for why he sought a restraining order on the Hershey Trust’s sale of its stock in Hershey Foods, which abandoned talks with Wm. R. Wrigley, Jr. Co.). 4. See, e.g., Commonwealth of Kentucky ex rel. Ferguson v. Gardner, 327 S.W.2d 947, 948 (Ky. App. 1959) (“The asserted right of the Attorney General to intervene . is predicated on the ancient English doctrine that the King, as parens patriae, superintended the administration of charities and acted by the attorney general, who was his proper officer in that respect.”); see generally MARION R. FREMONT-SMITH, GOVERNING NONPROFIT ORGANIZATION: FEDERAL AND STATE LAW AND REGULATION 301 (2004). 2004] CHARITY LAW ENFORCEMENT 939 state attorneys general have the funding and inclination to engage in aggressive charity enforcement. Indeed, the very lack of state involvement with the organization and operation of nonprofit entities might explain how legislatures, attorneys general, and even courts can misconstrue their proper roles in the regulation of charities and other nonprofits. Of course, nonprofit assets and activities exist within a social and political structure.5 Nonprofit wealth and operations attract the most attention when the public sector experiences particular financial stress. For example, it is not surprising that the Connecticut attorney general recently charged Yale New Haven Hospital with failing to make adequate distributions from donated “free bed funds” to those who might otherwise draw on the state’s overburdened Medicaid system.6 More systematically, the ongoing shakeout in the hospital industry and the consequent consolidation of some nonprofit hospitals—or even their “conversion” to for-profit status—has driven many states to seek a more central role in the use of charitable assets. Astonishingly, in New York and possibly elsewhere, the state governor and legislature engineered the conversion of New York’s nonprofit Blue Cross entity in a manner that results in ninety-five percent of the conversion proceeds being paid directly to public coffers.7 When faced with the flight or loss of significant nonprofit assets from a locality, state regulators, courts, and the legislature sometimes mobilize to secure the border. The manifestation of that uniquely state-level syndrome, parochialism, follows a predictable path. Most generally, the rationale for charity—and, in particular, for the tax exemption that charity has enjoyed—is often expressed as “lessening the burdens of government,”8 and in this context charity very much 5. Beyond the scope of this Article are the nonprofit organizations created by, or for the benefit of, governmental bodies. Notably,