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
662 LOUISIANA LAW REVIEW [Vol. 76
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).

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