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Noteworthy Developments in

Nonprofit Corporation Law

Michael W. Peregrine

Gardner, Carton & Douglas

April 25, 2003


Goals of Presentation

To review the significant series of developments in nonprofit and charitable trust law that have occurred in the last several years.

To focus on specific developments with implications for the not-for-profit corporate director.

To provide specific recommendations for addressing these issues with nonprofit charitable clients.

The Outline/Bibliography/

Other Resources

Part I

Recent Noteworthy Case

Law Developments

Health Midwest:

Kansas Litigation

Missouri Litigation

CareFirst: the opinion of the Insurance



Business Compliance Review

– “Appointment of Directors” Litigation

Note: The Implications of the

HealthSouth Controversy.

Note: Recently Released OIG/AHLA


In Re Milton Hershey School Trust

– The “Public Interest” as a Trust Beneficiary

Liberalized Preliminary Injunction Criteria

Impact on Governance

The Banner Health System Litigation

Increase in value from contributions and benefits should be retained by the community

Littauer v. Spitzer

– “Good News” for Nonprofit “M&A”?

The AHERF Settlement

Continued Focus on Application of

Restricted Gifts

– “Zone of Insolvency” Issues

The Virginia Experience

Allina Health System

Affiliate Divestiture

Waste of Charitable Assets

Impact on Management, Governance

Emerging Issues:

Parent/Subsidiary Conflicts

Charitable Solicitation Concerns

Imprudent Investment

Notable Private Actions

Chairman of the Board v. Trinity

– Smithers v. St. Luke’s-Roosevelt Hospital

Eychaner v. Roosevelt University

– In re: Terra Foundation

– The Cleveland Clinic

Art Institute of Chicago

– United Way of National Capital Area

Barnes Foundation Museum

Note: Emerging Issue Conflicts of

Interest in Integrated Parent/Subsidiary

Health Systems.

Part II

The Impact of the “Corporate

Responsibility Environment”

And Just What Is That



The National Association of State Charity Officials

Key Developments

Powers Report

NYSE Report


– NASCO Focus

IRS Announcement

“The Powers Report”

Report by the Special Investigative

Committee of the Board of Directors of

Enron Corp.

February 1, 2002

Board and Management oversight failed for many reasons.

The concept of the related party transactions was flawed.

Board-adopted controls were inadequate and not adequately implemented.

Senior management did not exercise sufficient oversight.

Senior management did not respond adequately when issues arose that required a vigorous response.

The Audit and Compliance Committee of the Board carried out its assigned review in a cursory manner.

The Board was denied important information that might have led it to take action.

The Board did not fully appreciate the significance of some of the specific information that came before it.

NYSE Corporate Accountability Report

(June 6, 2002)

Increasing Role and Authority of

Independent Directors

New Audit Committee Requirements

– Encouraging Focus on Good Corporate


New Control and Enforcement Mechanisms

Improving Board Education and Training

Sarbanes-Oxley Act (July 30)

Designed to protect the interests of investors and provide market stability.

Does not apply to nonprofits

– Oversight for public accounting industry

Rules for auditor/client relationship

– Penalties for corporate financial crimes

– Procedures for Executive and Board


Ethical obligations for corporate counsel

Financial disclosure protections for investors


Focus at state level of oversight of charitable corporations and protection of charitable assets, and the duties and obligations of officers and directors.


Modification of Form 990 Return to Include

Questions Related to the Integrity of the

Organization’s Financial Statements.

Part III

The Relevance to Nonprofits

– Need to preserve charitable assets

Preserve reliability of financial statements

• Donors’ reliance

• “Early warning systems”


– State charity officials perceive an enhanced oversight obligation over nonprofit charities following AHERF

– The “Few Bad Apples” Analogy

Part IV

Lessons Learned;

Governance Guidelines