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If You Control A Charity From Behind The Scenes And Without A Specific Title, Do You Have A Duty Of Care Toward It?

In a case of first impression in the Commonwealth of Pennsylvania, a Court was asked to determine whether an individual that exercised “control” over a charity, but was neither an officer nor director, could be held liable for breach of fiduciary duties to that charity. In other words, if you control a charity from behind the scenes and without a specific title, do you still have a duty of care?

In Com. ex rel Corbett v. Citizens Alliance for Better Neighborhoods, Inc., 983 A.2d 1274 (Pa. Commw. Ct. 2009), Pennsylvania’s Attorney General (“Attorney General”) alleged that former senator Vincent Fumo, the founder of Citizens Alliance for Better Neighborhoods, Inc. (“Citizens”), exercised dominion and control over the non-profit corporation even though he was neither an officer nor director of that corporation.  Specifically, the Attorney General alleged that Fumo used Citizens to:

unlawfully advance his personal convenience, enrichment and political advantage through various expenditures that benefited Fumo, including providing vehicles and office space and funding political activities totaling approximately $1,900,000.  It is also alleged that he directed Citizens to invest $9,000,000 with a financial advisor causing a loss of $1,400,000.

Initially, the Court determined that the Attorney General had standing to bring suit through its parens patriae powers, i.e. the court’s duty to protect the health, comfort, and welfare of the people within its jurisdiction. In this case, it held that it was the duty of the Attorney General to protect the well-being of its populace by ensuring that the purpose of a charity remain charitable.

When deciding the main issue — whether Fumo could be held liable for breaching fiduciary duties to Citizens despite being neither an officer nor director of Citizens — the Court relied mainly upon the decisions of New York federal courts in similar cases.  The New York federal courts developed this standard to determine the duties owed by people who control a non-profit, but are not technically its directors and officers.

The cases called the de facto directors and officers “control persons” and found that they owed “exacting fiduciary duties to the controlled corporation.  Control persons are not limited to officers and directors of the corporation but, rather, are those persons who exercise de facto control of the corporation during the relevant times.”  See Banco De Desarrollo Agropecuario, S.A. v. Gibbs, 709 F. Supp. 1302, 1306 (S.D.N.Y. 1989).

The test for de facto control is if that person controls the entity’s “day-to-day financial, personnel and business operations.”  See In re Grummon Olson Indus., Inc., 329 B.R. 411, 428 (Bkrtcy. S.D.N.Y. 2005).  This requires “a strong showing that the [control person] assumed actual, participatory, total control of the [controlled corporation].  Merely taking an active part in the management of the [controlled] corporation does not automatically constitute control.”  See Nat’l Westminster Bank USA v. Century Healthcare, 885 F.Supp. 601, 603 (S.D.N.Y. 1995).

In Corbett, the Pennsylvania Commonwealth Court adopted this “control person” standard. It held that a “control person” has a fiduciary duty to a non-profit corporation if he or she dominates the affairs of the corporation.  Citizens was formed on a “non-stock, no member basis” in which all formal control was with the directors themselves.  Accordingly, the Court held

If a party other than the directors has actual, de facto control over such a corporation, that party, being a legal stranger to the corporation, would owe no fiduciary duty to the corporation under the “control person” analysis.  Because it would be anomalous to hold that a person who asserts absolute de facto control over a non-profit charitable corporation owes no fiduciary duty to the corporation just because it is organized on a non-profit, non-stock, no member basis, we extend the “control person” analysis to cover individuals that dominate the affairs of such a corporation and hold that they have a fiduciary duty to the corporation.

The Commonwealth Court also held that the Attorney General’s complaint was insufficient to show how Fumo accomplished control and domination, so it dismissed the complaint and granted the Attorney General leave to amend to plead facts sufficient to make out a cause of action that Fumo exercised control and domination over Citizens.

Comments/Questions: ljm@gdnlaw.com

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