No trespassing: donors lack legal standing to challenge corporate acts of Florida not-for-profit Corporations.

Author:Braver, Samuel W.
Position::Young Lawyers Division

It is a well-established corporate law principle that a director of a not-for-profit corporation must serve the corporation in good faith and in a manner he or she reasonably believes to be in the best interests of the corporation. (1) Imagine, however, if each time the NFP's board of directors attempted to make and implement a corporate decision, various people claiming to have made charitable contributions to the corporation were allowed to second-guess those business decisions and challenge governance activities of the NFP's officers and directors.

Fortunately, the Florida Legislature has provided, and Florida courts have readily affirmed, a long-held principle that donors cannot journey into that area of NFP governance and decisionmaking, and have no right to seek such standing from Florida courts under any theory merely because of their donor status.

The Florida Not-for-Profit Corporation Act, F.S. Ch. 617 requires courts to apply not-for-profit corporation law principles, and not charitable trust law concepts, to questions regarding NFPs, including questions involving their governance and the authority of officers and directors to engage in corporate decisionmaking. Fundamentally, the act vests responsibility for the oversight and management of the NFP's affairs in its board of directors. (2) As donors lack the necessary standing to challenge the corporate acts of NFPs and their officers and directors, corporate decisionmaking authority is rightfully kept in the boardroom and out of the courtroom.

Under Florida law, charitable entities can take one of two forms: the charitable trust or the corporate form. Indeed, an organization's choice of form has a significant impact upon whether donors to the charitable entity will be entitled to the benefits of public supervision and fiduciary duties. Each form is governed by two distinct and diverse bodies of law which create important legal consequences for officers and directors and the charitable entities for which they serve.

Much like a private trust, a charitable trust is created through the express manifestation of the settlor's intent that the person or entity to which property is given will be held to equitable duties. Also like a private trust, a charitable trust creates a fiduciary relationship between the trustees and the beneficiaries of the trust. (3) Unlike a private trust, however, there are no definite beneficiaries under a charitable trust. The community is considered its beneficiaries, and the terms and provisions as expressed in the trust instrument may be enforced by the attorney general or other public officer. (4)

Moreover, those organizations whose founders choose to organize a charitable entity under trust law principles invoke the unyielding common law standards applicable to trusts and trustees generally. The trustees of a charitable trust are subject to strict fiduciary standards and the trustees must obey the provisions of the trust instrument. (5) Thus, a trustee may not divert a donor's funds in ways that are inconsistent with the dictates of the trust instrument, even if the donor's funds could be put to a more productive or beneficial use. (6)

In contrast, when the founders or donors of a charitable corporation give funds to an entity organized under not-for-profit corporation law, they make an outright gift to the corporation to be used in accordance with that entity's articles of incorporation or charter. (7) The directors of an NFP do not take on the strict fiduciary obligations set forth under charitable trust law principles, but are instead subject to the more yielding dictates of corporate law principles, under which they owe no fiduciary obligations to donors, but only to the corporation for which they serve.

Notwithstanding these principles, donors have continued to challenge the decisionmaking authority of directors and officers by arguing that they have standing to challenge corporate acts and by seeking to enforce certain aspects of their gifts. In the midst of such challenges and in the exercise of its management responsibilities, a board must often make important decisions about how charitable assets will be utilized by the corporation. Donors who argue, under charitable...

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