No Trespassing: Donors Lack Legal Standing to Challenge Corporate Acts of Florida Not-for-Profit Corporations
It is a well-established corporate law principle that a director of a not-for-profit corporation must serve the corporation in good faith and in a manner he or she reasonably believes to be in the best interests of the corporation.1 Imagine if, however, each time the NFP's board of directors attempted to make and implement a corporate decision, various people claiming to have made charitable contributions to the corporation were allowed to second guess those business decisions and challenge governance activities of the NFP's officers and directors.
Fortunately, Florida's State legislature has provided, and Florida courts have readily affirmed, a long held principle that donors cannot journey into that area of NFP governance and decision making, and have no right to seek such standing from Florida courts under any theory merely because of their donor status.
The Florida Not For Profit Corporation Act, Chapter 617, Florida Statutes, (the "Act") requires courts to apply not-for-profit corporation law principles, and not charitable trust law concepts, to questions regarding NFPs, including questions involving their governance and the authority of officers and directors to engage in corporate decision making. Fundamentally, the Act vests responsibility for the oversight and management of the NFP's affairs in its board of directors.2 As donors lack the necessary standing to challenge the corporate acts of NFPs and their officers and directors, corporate decision making authority is rightfully kept in the boardroom and out of the courtroom.
Under Florida law, charitable entities can take one of two forms, which include (1) the charitable trust and (2) the corporate form. Indeed, an organization's choice of form has a significant impact upon whether donors to the charitable entity will be entitled to the benefits of public supervision and fiduciary duties. Each form is governed by two distinct and diverse bodies of law which create important legal consequences for officers and directors and the charitable entities for which they serve.
Much like a private trust, a charitable trust is created through the express manifestation of the settlor's intent that the person or entity to which property is given will be held to equitable duties. Also like a private trust, a charitable trust creates a fiduciary relationship between the trustees and the beneficiaries of the trust.3 Unlike a private trust, however, there are no definite beneficiaries under a charitable trust. The community is considered its beneficiaries, and the terms and provisions as expressed in the trust instrument may be enforced by the Attorney General or other public officer.4
Moreover, those organizations whose founders choose to organize a charitable entity under trust law principles invoke the unyielding common law standards applicable to trusts and trustees generally. The trustees of a charitable trust are subject to strict fiduciary standards, and the trustees must obey the provisions of the trust instrument.5 Thus, a trustee may not divert a donor's funds in ways that are inconsistent with the dictates of the trust instrument, even if the donor's funds could be put to a more productive or beneficial use.6
In contrast, when the founders or donors of a charitable corporation give funds to an entity organized under not-for-profit corporation law, they make an outright gift to the corporation to be used in accordance with that entity's articles of incorporation or charter.7 The directors of an NFP do not take on the strict fiduciary obligations set forth under charitable trust law principles, but are instead subject to the more yielding dictates of corporate law principles, under which they owe no fiduciary obligations to donors, but only to the corporation for which they serve.
Notwithstanding these principles, donors have continued to challenge the decision making authority of directors and officers by arguing that they have standing to challenge corporate acts and by seeking to enforce certain aspects of their gifts. In the midst of such challenges and in the exercise of its management responsibilities, a board must often make important decisions about how charitable assets will be utilized by the corporation. Donors who argue, under charitable trust law concepts, that they should be bestowed with standing further complicate matters by attempting to engage directors and officers in an unwinable corporate tug-of-war between attempting to fulfill competing and contradictory fiduciary obligations owed to donors on one hand, and to the corporation which they are obligated to serve in good faith on the other.
Fortunately, the Florida State legislature has simplified these issues. Under the Act, donors have no standing to challenge governance activities and business decisions merely because of their donor status. Indeed, claims of the type which donor-plaintiffs often attempt to bring can only be brought under three express statutory provisions of Florida law, and a donor would need to demonstrate that he or she falls within the ambit of one of those provisions. The three provisions include Florida Statutes §§ 617.0304, 617.2003, and 80.01.
Section 617.0304(2) of Florida Statutes identifies and limits standing to challenge the actions of not-for-profit corporations to the specific categories of individuals named in the statute. Under § 617.0304(2), a NFP's power to act and its governance actions may only be challenged in a proceeding (a) by a member against the corporation to enjoin the act; (b) by the corporation, directly, derivatively, or through a receiver, trustee, or other legal representative, or through members in a representative suit, against an incumbent or former officer, employee, or agent of the corporation; or (c) by the Attorney General, to dissolve the corporation or to enjoin the corporation from the transaction of unauthorized business.8
Thus, unless the donor-plaintiffs also happen to be members, directors, officers, receivers, or someone with a representational relationship to the not-for-profit corporations, they have no standing under § 617.0304 to challenge the acts of the corporation.
Section 80.01 also limits standing to private individuals seeking relief, as a § 80.01 claim is based upon an individual's right to hold office. Not only are the provisions of § 80.01 not the type of claim contemplated in a suit alleging donor standing, but § 80.01 only applies after a demand has been made upon the Attorney General to commence a cause of action.9
Donor plaintiffs lack standing under § 617.2003 because the Attorney General is the only appropriate person entitled to institute proceedings for potential violations under that statute. However, the rights of the Attorney General, are limited under Florida law. Specifically, § 617.2003 allows a citizen to complain to the Department of Legal Affairs that a corporation is being used for purposes inconsistent with those stated in its articles of incorporation or charter. In such cases, Florida law allows the Department to institute proceedings "as may be considered advisable" either to revoke the articles of incorporation or charter, to prevent its improper use, or "to recover on behalf of the corporation or its unknown beneficiaries any profits improperly received by the corporation or its officers or directors."10
But just because the law allows the Attorney General to bring suit does not mean that § 617.2003 is persuasive. The general standards of conduct for NFP directors and officers and the Business Judgment Rule further restrain the Attorney General's already limited power.
First, the Act provides that not-for-profit directors owe fiduciary duties to the NFP for which they serve, and not to third parties, such as those who have made contributions to the corporation.11 Specifically, a director of a NFP must discharge his or her duties: (1) in good faith; (2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner that he or she reasonably believes to be in the best interests of the corporation.12 Accordingly, any alleged breach of fiduciary duty under Florida's NFP corporation law arises from an alleged breach of duty owed to the corporation, and not to third parties. Any resulting liability of officers or directors, were it possible, would run to the corporation, and not to third parties, such as a potential donor-plaintiff.13
Unlike the strict fiduciary obligations applicable to trustees under trust law concepts, the Business Judgement Rule is a corporate law principle which protects the authority of directors and officers to render corporate decisions in good faith and in the best interests of the corporation. Most significantly, the Business Judgment Rule prevents directors from incurring liability for honest errors of judgment, so long as the alleged mistake in judgment was made in good faith, with appropriate inquiry, and with the rational belief that the action or decision taken is in the best interests of the corporation. Under the Rule, a board of directors is given wide discretion to make decisions and a court generally will not substitute its judgment for that of the directors.14 The Rule also provides a director with wide discretion in corporate decision making, so long as he or she meets the "good faith" test and makes the business decision in the absence of fraud, illegality or ultra vires activity.15 Since there is a presumption in favor of the Rule's application, not only does the Attorney General bear the burden of proving that the director of an NFP corporation has breached his or her fiduciary duty under the Act, but the Attorney General also has the additional burden of proof of submitting facts sufficient to rebut the application of the Business Judgment Rule.
How have these rules played out in Florida courts? The case of Persan v. Life Concepts, Inc. illustrates persuasive arguments on both sides of the donor-plaintiff standing issue. The donor-plaintiffs in that case contributed property and funds for the construction of homes for disadvantaged adults in their community.16 When the corporation decided to close the homes after over 15 years of operation, the donor-plaintiffs brought suit, challenging the corporation's decision. They argued, under charitable trust law principles, that the corporation could not use their donations for purposes that were allegedly unrelated to their original donative intent without first obtaining the approval of both the donor "beneficiaries" and the court.17
Florida's Fifth Circuit Court rejected the donor-plaintiffs' arguments and held that donations by members of the public to a charitable, not-for-profit corporation do not create a charitable trust, do not result in the corporation's assets becoming subject to a charitable trust, and do not change the rules of the game from corporate law to trust law.
Indeed, the court explained that "[m]aking a gift to a charity for a specific project or purpose does not create a charitable trust," and that for courts "to suggest that it does would create havoc for charitable institutions."18 Importantly, the court noted, a "charity has to be able to know when a donation is a gift and when it is merely an offer to fund a trust for which a charity is taking on fiduciary responsibilities."19 The court found that the donors did not demonstrate that they made their contributions with the necessary intent to create an express trust, for which the NFP corporation would be bound to assume fiduciary responsibilities on behalf of these specific donors. Rather, the donors had made gifts which could be used by the corporation for purposes that were consistent with its charter allowing freedom of business decision-making by the corporation.
The Persan court further explained that under Florida law, "[t]he creation of such a trust must be express."20 This requires that the owner of the donative property transfer his or her property (1) in writing with a declaration that the property is to be held in trust, and (2) with a manifestation of intent that members of the public are the subjects of its beneficial enjoyment.21 Absent these formalities, however, gifts of funds and property to a not-for-profit corporation cannot create fiduciary duties on behalf of the defendant corporation with respect to the donors.22 Accordingly, the court dismissed the donors' suit.
Florida's Supreme Court, like the Florida legislature and District Courts of Appeal, has also held that individuals and/or groups alleging to be donors to an NFP corporation who attempt to challenge the ownership, management, and governance of not-for-profit corporations do not have standing to bring such claims because of their donations to the not-for-profit corporation. For example, in the case of West Coast Hosp. Assn. v. Hoare, a physician-donor brought suit against a not-for-profit corporation that owned and operated the hospital at which he maintained practice privileges.23 The physician-donor alleged that he, along with the citizens of the City of Clearwater and the County of Pinellas, had made various contributions to the not-for-profit corporation for the construction, maintenance, and operation of a hospital serving the community. The physician-donor argued that such contributions "not only makes him a member of the corporation but gives him some kind of a special right, or privilege" in certain aspects of the hospital's governance. Florida's Supreme Court, however, flatly rejected his argument, holding instead that the fact that "one has made contributions to that corporation gives him no special or vested right" in the corporation's governance.24 The court further held that "[t]he right of a non-profit corporation to manage its affairs by its Board of Directors or other officers specified in its charter is fixed by the statutes" and, accordingly, no other entity maintains the authority to manage the corporation's affairs.25
A number of sister jurisdictions have also denied standing to donors who attempt to bring actions against not-for-profit corporations. See, e.g., Olesky v. Sisters of Mercy of Lansing, 253 N.W. 2d 772 (Mich. Ct. App. 1977) (denying standing to "donor petitioners" seeking to enjoin sale of not-for-profit hospital to a for-profit hospital where donors alleged sale would be detrimental to the community); see also Holden Hosp. Corp. v. Southern Ill. Hosp. Corp., 174 N.E. 2d 793, 796 (Ill., 1961) (holding that donors making unrestricted contributions to charitable hospital have no standing to challenge sale of hospital to another non-profit entity); Carl J. Herzog Found., Inc. v. University of Bridgeport, 699 A.2d 995, 997 (Conn. 1997) (denying standing to donor seeking to enforce provisions of his charitable gift); Amundson v. Kletzing-McLaughlin Mem'l Found. College, 73 N.W. 2d 114, 117 (Iowa 1955) (holding that widow and heirs of donor to charitable not-for-profit corporation held no interest in, and could maintain no standing in suit involving charitable corporation); Skokie Valley Prof'l Bldg., Inc. v. Skokie Valley Comm. Hosp., 393 N.E. 2d 510 (Ill. App. Ct. 1979) (denying standing and dismissing case brought by donor alleging ultra vires acts, self dealing, and breach of fiduciary duty against a hospital and its directors).
Thus, the loud and clear message to donors attempting to invade NFP the land corporate governance and decision making processes is this: "No Trespassing." Donors lack standing before Florida courts and cannot run roughshod over the exercise of good faith corporate decision making, a territory that the Florida legislature has rightfully reserved to the directors and officers of NFPs in the exercise of their business judgment. The bottom line is that the making of a charitable donation to a charitable corporation does not reserve a donor a seat at the corporate governance table.
1 Fla. Stat. Ann. § 617.0830 (West 2000).
2 Fla. Stat. Ann. § 617.01401(2) (West 2000).
3 See Austin Wakeman Scott & William Franklin Fratcher, The Law of Trusts § 348, at 6-8 (4th ed. 1989).
4 Id.
5 Id.
6 Id.
7 See generally Persan v. Life Concepts, Inc., 738 So. 2d 1008, 1010 (Fla. 5th DCA 1999).
8 Fla. Stat. Ann. § 617.0304 (West 2000).
9 Fla. Stat. Ann. § 80.01 (West 2000).
10 Fla. Stat. Ann. § 617.2003 (West 2000).
11 See Fla. Stat. Ann. § 617.0304 (West 2000); see also Tillis v. United Parts, Inc., 395 So. 2d 618 (Fla. 5th DCA 1981); Orlando Orange Groves Co. v. Hale, 144 So. 674 (Fla. 1932); Chipola Valley Realty Co. v. Griffin, 115 So. 541 (Fla. 1927). This view is also widely held in other jurisdictions. For example, the D.C. Circuit of the United States Court of Appeals has held that "the fiduciary duties of directors of a non-profit hospital run to the hospital and not directly to the patients as beneficiaries." Christiansen v. National Sav. & Trust Co., 683 F.2d 520, 528 (D.C. Cir. 1982). The D.C. Circuit of the U.S. Court of Appeals further noted that it is the hospital corporation itself that is the beneficiary to which the directors owe their fiduciary duties, since it is the hospital corporation to which donors give, and from which patients receive, any benefits. Id. The Commonwealth Court of Pennsylvania has also held that a "director of a non-profit corporation shall stand in fiduciary relation to the corporation...." Neal v. Neumann Med. Ctr., 667 A.2d 479, 481 (Pa. Commw. Ct. 1995) (citing Pennsylvania non-profit corporation statute providing that that the "duty of the board of directors...and individual directors...is solely to the non-profit corporation"); see also Keranko v. Washington Youth Baseball, Inc., 584 A.2d 1082 (Pa. Commw. Ct. 1980) (denying petitioners standing to challenge validity of not-for-profit corporation's actions).
12 Fla. Stat. Ann. § 617.0830 (West 2000).
13 See generally Fla. Stat. Ann. §§ 617.0834 (providing that officers and directors of not-for-profit corporations cannot be individually liable); 617.0830 (stating that a director is not liable for any action taken as a director, or any failure to take any action, so long as he or she performed his or her duties in compliance with this section).
14 Lobato-Bleidt v. Lobato, 688 So. 2d 431, 434 (Fla. 5th DCA 1997) citing International Ins. Co. v. Johns, 874 F. 2d 1447 (11th Cir. 1989).
15 Persan v. Life Concepts, Inc., 738 So. 2d 1008, 1010 (Fla. 5th DCA 1999).
16 Id. at 1009.
17 Id. at 1012.
18 Id. at 1010.
19 Id. at 1009.
20 Id. at 1011.
21 Id. See also Fla. Stat. Ann. § 689.05 (West 2000).
22 Persan, 738 So. 2d at 1010.
23 West Coast Hosp. Assn. v. Hoare, 64 So. 2d 293 (Fla. 1953).
24 Id. at 296.
25 Id. citing Natale v. Sisters of Mercy of Council Bluffs, 52 N.W. 2d 701, 708 (Iowa 1952)(holding that directors and officers "had the right to make rules and regulations...and to conduct the hospital as they saw fit..."); see also Thourez, 166 So. 2d 476 and Bradshaw, 199 So. 329, for a similar analysis.
This article was published by The Florida Bar Journal, December 2001. Reprinted with permission.