April 2, 2007
Dear Sir:
On September 14, 1976, there was chartered by the Tennessee Secretary of State a nonprofit corporation by the name of Health and Education Facilities Board of The Elderly Housing
Board of the City (which I will call the “Elderly Board.”). The charter was issued under Tenn.
Code Ann., Title 48, Chapter 19. (See Article 10 of the certificate of incorporation). I have been
told, but have not confirmed, that the above board was the last of its kind created in Tennessee.
I am not sure of the exquisite details of the actual operation of the Elderly Board from
1976 until the present, but the Board’s continued existence is evidenced by the Housing
Management Agreement it entered into on May 5, 2005 with the City’s Housing Authority under
which the latter operates the former’s housing project. During its existence, the Elderly Board
has generated $800,000 in “surplus” revenues. If I correctly understand the facts, the City has put
little, if any, money into the operation of the Elderly Board, all the revenue coming into the hands
of that board having come from federal funds, grants and revenues from its operation.
This question has arisen in connection with the $800,000: If the Elderly Board goes out
of existence, does the $800,000 revert to the City’s general fund, to be spent at the pleasure of the
city’s governing body?
I have searched at length and in vain for some federal law that governs the question of
what happens to the $800,000 under federal law, including the law cited to me. I am sure that
somewhere in the bowels of the federal bureaucracy that governs federal housing grants and
funding, there can be found laws and/or rules about the disposition of surplus funds held by
Elderly Housing Board when they are dissolved, but I cannot point to any of them.
I am not even sure that the federal government would even be willing to pull the trigger on those
laws and rules. But if the facts as I understand them about the sources of funding of the Elderly
Board are correct, the general fund of the city is probably not entitled to the $800,000 even under
state law; there is a good chance that the courts would impose a constructive trust on the
$800,000, the city would hold those funds as a trustee, and the funds would be restricted for use
for elderly housing.
In 1976 when the Elderly Board was established, Tenn. Code Ann., Title 48, Chapter 19,
was entitled Health and Educational Facility Corporations. Section 48-1903 of that statute
authorized municipalities to authorize the “incorporation of health and educational facilities
corporation of such municipality....” Among the “projects” authorized by Tenn. Code. Ann. ' 8-
1901 “in the case of a hospital institution” was “congregate elderly facilities,” “elderly housing,”
and “non-profit housing for the aged....”
The Elderly Board had broad general powers to operate its projects under Tenn. Code
Ann. ' 48-1908 and 1918, and the power to issue bonds for such projects under Tenn. Code Ann.
'43-1909. The Elderly Board even had the authority to sell and otherwise dispose of projects
under Tenn. Code Ann. ' 48-1908. It appears clear under those statutes that the Elderly Board
had virtually total control over the projects it operated.
Tenn. Code Ann. ' 48-1913, provided that:
The corporation shall be a nonprofit corporation and no part of its
net earnings remaining after payment of its expenses shall inure to
the benefit of any individual, firm or corporation, except that in the
event the board of directors of such corporation shall determine
that sufficient provision has been made for the full payment of the
expenses, bonds, and other obligations of the corporation then any
net earnings of the corporation thereafter accruing shall be paid to
the municipality with respect to which the corporation was
organized....
Tenn. Code Ann. ' 48-1914, also provided that:
Whenever the board of directors of the corporation shall by
resolution determine that the purposes for which the corporation
was formed have been substantially complied with and all bonds
theretofore issued and all obligations theretofore incurred by the
corporation have been fully paid, the then embers of the board of
directors of the corporation shall thereupon execute and file for
record in the office of the secretary of state a certificate of
dissolution reciting such facts and declaring the corporation to be
dissolved...Upon the filing of such certificate of dissolution the
corporation shall stand dissolved, the title to all funds and
properties owned by it at the time of such dissolution shall vest in
the municipality, and possession of such funds and properties shall
forthwith be delivered to such municipality.
The current statutory successor to Tenn. Code Ann., Title 48, Chapter 19 is Tenn. Code
Ann., Title 48, Chapter 101, Part 3BHealth, Educational and Housing Facility Corporations.
Corporations established under that statutory scheme have the same broad powers under Tenn.
Code Ann. ' 48-3-308 and 48-101-318, and the power to issue bonds 48-101-310 as they did
under the old laws above. In addition, as to the disposal of the money of the corporation upon its
dissolution, Tenn. Code Ann. '' 48-1913 and 48-1914 are tracked exactly by Tenn. Code Ann.
'' 48-101-314 and 315.
Finally, Tenn. Code Ann. ' 48-1912 exempted municipalities from liability for the
actions of corporations organized under Title 48, Chapter 19, and Tenn.Code Ann. ' 48-101-313
does exactly the same thing.
The case of LaFollette Medical Center v. City of LaFollette, 115 S.W.3d 500 (Tenn. Ct.
App. 2003) (permission to appeal to Tennessee Supreme Court denied 7, 2003), supports the
proposition that if the South Pittsburg Elderly Board is dissolved, the city would not be allowed
to put the $800,000 at issue in the city’s general fund. In that case the City of LaFollette sold the
city hospital, from which it received over $9,000,000. I recall that case well; the city anticipated
it could use those funds at its discretion. Indeed, the city did receive the funds, but the Tennessee
Supreme Court upheld the trial court’s decision to impose a constructive trust on the funds,
requiring that they be used for the purposes for which the hospital was built: indigent medical
care.
The court reasoned that, among other things,
We conclude that given the fact that no city funds were used in the
construction of the Hospital and no funds were received by the
hospital that would otherwise have gone to the City, it would be
“unconscionable conduct” for the City to insist that the proceeds of
the sale be used for any general purpose the city might choose.
In summary, it would appear the City is attempting to reap where it
has not sown. [At 505.]
That appears to be precisely the situation the City would find itself upon the dissolution
of the Elderly Board. In fact, as I pointed out above, not only has the city spent little, if any,
funds in support of the Elderly Board, Tenn. Code Ann. ' 48-101-313 [formerly 48-1912.]
expressly relieves the city from liability for the activities of the Elderly Board.
Apparently the City of LaFollette, in support of its argument that a constructive trust
should not be imposed on the proceeds of the sale of the hospital, argued that the hospital was
not a corporation. The Court did not care under what organizational form the hospital was
established for the purpose of the question of whether a constructive trust should be imposed
upon the proceeds of the sale of the hospital. In any event, it is clear from the Elderly Board’s
Corporate Charter that the Board is a non-profit corporation.
One thing does trouble me about the question of whether a court could impose a
constructive trust upon the $800,000 in question held by the Elderly Board. One of the maxims
of equity is that “Equity follows the law.” [Fletcher’s Gin, Inc. v.Crihfield, 423 F.2d 1066 (6th
Cir. 1970); Pewitt v. Pewitt, 240 S.W.2d 521 (Tenn. 1951).] . Tenn. Code Ann. '' 48-101-314
and 315 expressly provide that upon the dissolution of corporations formed under Tenn.Code
Ann. ' 48-101-301 et seq., the excess funds of the corporation are to be delivered to the
municipality that authorized its creation. Do those laws intercept the equitable imposition of a
constructive trust on the money?
The City of LaFollette was the entity to which the funds of the sale of the hospital in
LaFollette Medical Center v. City of LaFollette, above, were delivered. Your City is the entity
statutorily entitled to the $800,000 upon the dissolution of the Elderly Board. But there is
nothing in the state laws governing the Elderly Board, or any other state laws that I can find, that
either authorizes the City to treat the money as general fund revenue, or that otherwise prescribes
or dictates how it can be spent. For that reason, it appears that the statutes directing the surplus
revenues to be paid to the city upon the dissolution of the Elderly Board would be satisfied by the
accomplishment of that act, but that nothing in law or equity would block a court from imposing
a constructive trust on the money. Presumably such a constructive trust would require the money
to be spent for the same purpose for which the Elderly Board was established and has operated
for many years.
Note how broad standing to sue was found to be in the LaFollette Medical Center case.
Sincerely,
Sidney D. Hemsley
Senior Law Consultant
SDH/