The Attorney General and Nonprofits
The attorney general of most states has quite a bit of power over nonprofits. He is generally charged with the responsibility of supervision and oversight of charitable trusts and corporations and can bring actions against nonprofits to protect the public interest. The following are some of the specific powers attorney generals wield over nonprofits registered in their state: the power to investigate, subpoena witnesses, require the production of books and records, annul corporate existence (corporate death sentence), corporate dissolvement (ultra vires), restrain unauthorized activities, remove directors and trustees, enforce member rights, supervise indemnification awards, investigate transactions and relationships between directors, bring quo warranto actions to assure that absolute gifts are applied according to their terms, etc. The attorney general is a necessary party to litigation against nonprofits, he must receive notice when a suit is initiated by others, and nonprofits must register and file annual reports with his office. Judging by this cursory listing of attorney general powers, it would seem as if nonprofits are comprehensively overseen by the government. Yet, despite the existence of such powers, attorney general oversight remains more theoretical than deterrent. Here is why and here is the solution.
Despite the enormous range and depth of powers at the attorney general's office's hands, there is very little litigation brought against nonprofits. In an age where nonprofits have proliferated wildly, it would be surprising if untoward activities were not occurring at a greater rate, yet the statistics (as far as can be compiled) do not show an increase in prosecution. The two main culprits are staffing problems and a relative lack of interest in monitoring nonprofits. Only thirteen states have specific charity sections within the attorney general's office. Attorneys general have much power in many legal realms and they must triage their duties. Nonprofit oversight often finds itself at the bottom of the heap. In ten states, there is no general system of registering and reporting at all.
Before moving on to look for solutions, it must be said that the vast majority of nonprofits behave honorably and with good faith, their directors, members, and executives carrying out their fiduciary duties with high fidelity. Charitiable fiduciaries have generally internalized the norms of right behavior and adhere to the best practices promulgated by professional associations such as Independent Sector.
One proposed solution to the twin effects of increasing number of charitable organization and decreasing enforcement is to create a new state agency that deals specificly with nonprofits. Kenneth Karst first wrote about this idea in the 1960s, envisioning an agency that would take over the role of the attorney general in this sector and would consolidate all the nonprofit information spread across mutliple agencies. To me, this sounds like a terrible idea. It would be one more bureaucracy prone to laziness and corruption. It would merely be creating two agencies to accomplish what only one did before. If this was the desired type of solution, then why not just divert more tax dollars to the attorney general's office with the purpose of hiring more lawyers to police nonprofits?
A better and more efficient solution would be to increase the use of relators, as suggested by some, including James Fishman and Stephen Schwartz. "Relator" in this context refers to a party who may or may not have a direct interest in a transaction, but is permitted to institute an action in the name of the people when the right to sue resides solely in the attorney general. As of now, most states do not allow the general public to instigate suits against nonprofits unless they have been directly and particularly harmed or have a specific and particularized interest in the transaction. This is generally a good thing, shielding nonprofits from vexatious and unserious litigation.
Expanding the use of relators by statute would avoid the problems of broadening standing, preserving the constitutional controls that require one to have been directly hurt in some way to initiate a law suit (there are some exceptions to this basic standing rule, but that is for another post). The relator could, with the permission of the attorney general, bring the suit on behalf of the affected interests. The attorney general would retain control over the general conduct of the law suit if it wanted, but the relator would be liable for cost and damages. Relator status has been granted to bar associations in California, cemetery plot holders in Kansas, directors of other state departments in Illinois, and members of social clubs in Florida.
The biggest drawback is finding people or entities that want to bring suit knowing that the attorney general can take control at any point during the action and the entity would still be liable for damages found against the plaintiff. Regardless, there are interested parties that are willing to take that risk out of ideological or other concerns. Frivolous lawsuits would remain at a minimum because the attorney general could refuse to grant relator status. But for those cases where suits have merit, but the attorney general's office is too busy to handle them, relator statutes can serve to keep nonprofits in check without exhausting our tax dollars. What do you think? Does this seem a reasonable solution or is it enough of a social good that it is worth throwing more money at the problem?
Related posts