Print Request: Current Document: 1 Time Of Request: Monday, June 23, 2008 14:58:09 EST Send To: MEGADEAL, ACADEMIC UNIVERSE COLUMBIA UNIVERSITY LIBRARY NEW YORK, NY Terms: (Parochialism and Paternalism in State Charity Law Enforcement) Source: Indiana Law Journal Project ID: Page 1 1 of 1 DOCUMENT Copyright (c) 2004 Trustees of Indiana University Indiana Law Journal Fall, 2004 79 Ind. L.J. 937 LENGTH: 46240 words Whose Public? Parochialism and Paternalism in State Charity Law Enforcement NAME: Evelyn Brody * BIO: * 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. SUMMARY: ... "[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 . ." ... The duties of a trustee and the Attorney General are concomitant in so far as assuring that the benefits of a charitable trust are delivered in accordance with the Settlor's intent; but because the socio-economic benefits of a charitable trust extend beyond the designated beneficiaries to the public itself, although ordinarily compatible with each other, the Attorney General has an added responsibility of assuring that compatibility. ... "If that were the case, then the Attorney General could become fully involved in the decisionmaking process of every charitable trust or, for that matter, in every charity in Pennsylvania. ... Neither Missouri nor Kansas has adopted hospital conversion legislation, forcing both attorneys general in the Health Midwest matter to assert their common-law and general corporate jurisdiction over the nonprofit corporations. ... TEXT: [*938] Introduction "[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 . ." n1 "I'm there fighting for the people of Hershey and the people of central Pennsylvania. This is the job that I have as Page 2 79 Ind. L.J. 937, *938 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." n2 "'It just wouldn't have been right to have Hershey Park called Wrigley Field.'" n3 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. n4 A few state constitutions commit jurisdiction over charitable trusts to the courts rather than to [*939] 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 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. n5 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. n6 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. n7 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," n8 and in this context charity very much [*940] begins at home. But this is an incomplete view of the charitable sector. Granted, a trust for governmental or municipal purposes is a charity. n9 But even the broader conception that charities must further the "public interest" or "benefit the community" n10 oversimplifies the purposes for which the law permits charities to be organized and operated. Notably, in concurring in the Bob Jones University v. United States decision, Justice Powell observed that over 106,000 organizations filed information returns as section 501(c)(3) organizations in 1981. He found "it impossible to believe that all or even most of those organizations could prove that they 'demonstrably serve and [are] in harmony with the public interest' or that they are 'beneficial and stabilizing influences in community life.'" n11 More subtly, parochialism is built into our conception of private philanthropy. Donor wishes must be honored, and donors often think locally. The attorney general then becomes tempted to extrapolate the local nature of a charity's founding and current operations to all of its assets, explicitly restricted or not, and so seeks to confine the charity to its "community." Now we mix in paternalism. Charity regulation appropriately concentrates on remedying fiduciary Page 3 79 Ind. L.J. 937, *940 self-dealing rather than second-guessing a board's business judgment, but it is not always easy to separate the dual obligations of loyalty and care. An attorney general, court, or even legislature might become convinced that a charity board acting contrary to the wishes of "the community" is breaching the duty of loyalty to the charity. This Article develops a legal framework for appropriate state enforcement activity in charity matters that tend to invite public parochialism and paternalism. Part I describes the legal structure for state oversight of nonprofits, focusing on charities and the dual strands of charity trust law and nonprofit corporation law. n12 Because the attorney general as prosecutor is only a party in a dispute over charity operations, we also examine the role of the courts. Third, we bring in the legislatures' ambivalence about attorney general oversight of charities, as revealed in budgetary and staffing decisions and jurisdictional impediments. This discussion reminds us that it was ever thus-that regulation of charities' investment assets as well as operating assets can provide a political cushion for the community or the [*941] state. n13 In the last few years, the issues addressed in this Article have played out across the country at an accelerating rate. The case studies in Part II illustrate in detail three troubling levels of increasing state parochialism and paternalism over charity assets: 1. Near-seizure of assets. The Fall 2002 Hershey Trust case is a trifecta: eventually all three branches of Pennsylvania government combined to pressure the Milton Hershey School Trust to abandon plans for selling its controlling interest in Hershey Foods as a diversification of an investment worth over $ 5 billion, thereby preserving the local operations of the publicly traded company. The attorney general, who was running for governor, had won a preliminary injunction against the sale, and participated in a shakeup of the board shortly after losing the gubernatorial election. The outgoing