Policing Charitable Organizations: Whose Responsibility Is It?

• Author: Maxwell B. Kallenberger
• Position: J.D./D.C.L., 2016, Paul M. Hebert Law Center, Louisiana State University.
• Pages: 661-689

Policing Charitable Organizations: Whose

Responsibility Is It?

TABLE OF CONTENTS

Introduction .................................................................................. 662

I. The Charitable Landscape of Louisiana ....................................... 663

A. The Charitable Distinction ..................................................... 663

B. How is a Charity Formed? ..................................................... 664

C. Distinguishing For-Profits from Charities ............................. 665

D. Roles of Charitable Officers and Directors ............................ 666

E. Fiduciary Obligations of Charity Directors ............................ 666

1. The Duty of Care ............................................................. 667

2. The Duty of Loyalty ........................................................ 668

II. Overview and Analysis of the Current Charitable

Enforcement Model ...................................................................... 669

A. The Need for Proper Oversight in the Charitable Sector ....... 669

B. Director and Organization Accountability in Different

Business Sectors ..................................................................... 670

C. Charitable Enforcement through the State

Attorney General .................................................................... 672

D. Regulation of Charities through the IRS ................................ 673

E. Watchdog Oversight of the Charitable Sector........................ 675

F. Charitable Enforcement in Louisiana ..................................... 675

G. Limitations and Restrictions on the State Attorney

General’s Oversight in the Charitable Sector ......................... 676

H. Standing to Sue in the Charitable Arena ................................ 678

III. Scholarly Proposals for Improvement to Oversight ..................... 679

A. New State Agency .................................................................. 679

B. State Charity Commission Working in Conjunction

with the State Attorney General ............................................. 680

C. Federal Regulatory Commission ............................................ 681

D. Exclusive Regulation by the IRS ........................................... 682

E. Expanding Standing in Charitable Director Suits .................. 683

F. Self-Regulatory Organization ................................................ 684

IV. Proposal for a State Self-Regulatory Nonprofit Organization ..... 685

A. The LCRO’s Structure, Responsibilities, and Model

for Enforcement ..................................................................... 685

B. The Necessity of a Self-Funded Model .................................. 686

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C. The Benefits of a New System of Oversight .......................... 687

D. LCRO Problems to Consider ................................................. 687

Conclusion .................................................................................... 689

INTRODUCTION

The director of a small charity faces a tough predicament. He needs

money for growing medical expenses. He knows he can quietly dip into

his charity’s funds to meet these mounting obligations. However, the

question he is most concerned about is: Will anyone notice if funds are

missing?

Traditionally, the state attorney general’s office has been responsible

for overseeing a state’s charitable sector and ensuring directors’

compliance with fiduciary standards.1 Scholars have long criticized the

current charitable oversight system.2 Louisiana is no exception. In

Louisiana, no decisions have been reported of the attorney general

bringing suit against a charitable director for violating good governance

standards. In fact, even when parties other than the attorney general

challenge a charitable organization’s operations, courts have passed on the

opportunity to decide cases using laws relating to nonprofit organizations,

choosing instead to decide the cases using contract law.3

Despite many calls for change in the enforcement model for charitable

oversight,4 states have left the authority to police charities with the

respective state attorney general’s office.5 Many commentators believe

that state attorney general offices are understaffed and underfinanced, and

this lack of resources prevents them from holding directors accountable

for violating their fiduciary responsibilities.6 Given the challenges facing

the current system of enforcement, these same scholars have suggested a

Copyright 2015, by MAXWELL B. KALLENBERGER.

1. Thomas Lee Hazen & Lisa Love Hazen, Punctilios and Nonprofit

Corporate Governance—A Comprehensive Look at Nonprofit Directors’

Fiduciary Duties, 14 U. PA. J. BUS. L. 347, 403 (2012).

2. See infra Part III.

3. See, e.g., New Orleans Opera Ass’n, Inc. v. S. Reg’l Opera Endowment

Fund, 993 So. 2d 791, 799 (La. Ct. App. 2008) (deciding the case on contract law

rather than nonprofit law when a charitable trust was accused of misappropriating

assets).

4. See infra Part III.

5. See, e.g., CAL. CORP. CODE §§ 5142(a)(5), 5250, 6511 (West 2014); N.Y.

NOT-FOR-PROFIT CORP. LAW § 112 (Mckinney 2014); REVISED MODEL

NONPROFIT CORP. ACT §§ 1.70, 3.04(b)–(c), 8.10 (a), 14.03–.04 (3d ed. 2008).

6. James J. Fishman, Improving Charitable Accountability, 62 MD. L. REV.

218, 262–63 (2003).