Baylor Law School Nonprofit Organizations Spring 2004 Course Class Four: Attorney General Oversight; Private Association Issues Prepared By: Darren B. Moore Bourland, Wall & Wenzel, A Professional Corporation Attorneys and Counselors City Center Tower II 301 Commerce Street, Suite 1500 Fort Worth, Texas (817) (817) (facsimilie) ©Bourland, Wall & Wenzel, P.C.

Authority of the AG as to Nonprofits Common Law Authority Constitutional Authority Statutory Authority

Common Law Authority of the AG Representative of the public interest in charity (standing) Duty to ensure charity assets used for appropriate charitable purposes Broad authority to carry out duty Power and Duty derived from Statute of Charitable Uses (cf. Tex. Civ. Prac. & Rem. Code s 5.001)

Constitutional Authority of the AG AG shall “perform such other duties as may be required by law.” “[The AG] shall represent the state in all suits and pleas in the Supreme Court of the State in which the State may be a party, and shall especially inquire into the charter rights of all private corporations and from time to time, in the name of the State, take such action as may be proper and necessary to prevent any private corporation from exercising any power... Not authorized by law.” –Article IV, Section 22 Texas Constitution

Statutory Authority of the AG Chapter 123 of the Texas Property Code –Defines charitable trusts to include virtually all charitable entities –AG is a proper (although not necessary party) to proceedings involving charitable trusts (must receive notice and have right to intervene on behalf of public) –Doesn’t provide any substantive rights (builds on common law authority)

Statutory Enforcement Authority Bingo Enabling Act Charitable Raffle Enabling Act Solicitation in the name of veterans’ organization Solicitation for Public Safety Organizations Telephone Solicitations by Charitable Organizations Duties of Nonprofit Hospitals

Statutory Investigative Authority Texas Miscellaneous Corporation Laws Act (Tex. Rev. Civ. Stat. Ann. Art et seq.) Texas Nonprofit Corporation Act (Tex. Rev. Civ. Stat. Ann. Art et seq.) Texas Uniform Unincorporated Nonprofit Association Act (Tex. Rev. Civ. Stat. Ann. Art et seq.)

Texas Miscellaneous Corporation Laws Act Applies to for profit and nonprofit corporations Provides AG authority to present a written request to examine the operations of the corporation (without notice) Failure to comply with the AG can result in forfeiture of right to do business in Texas and fines for the corporation’s officers

Texas Non-Profit Corporation Act Provides AG various powers and investigative authority over nonprofits (cf. TUUNAA) Many powers implied from provisions of the Act which require corporate compliance (eg keeping accurate books and records) Authority to apply for involuntary dissolution (and liquidation) Authority to apply for appointment of a receiver

AG Authority Under the DTPA False, misleading, or deceptive acts or practices in the conduct of any trade or commerce (Note: AG Charitable Trusts Section is part of the Consumer Protection Division) Applies to nonprofits even if they don’t charge Applies to fraudulent solicitations regardless of whether goods or services are offered as part of the solicitation Authorizes pre-suit investigations Authorizes suits for enforcement Imposes penalties for noncompliance –Enhanced penalty in the event AG determines act or practice seeking to acquire or deprive money from a consumer 65 or older

Common Causes of Action by AG 1.Constructive trust (really a remedy) 2.Breach of fiduciary duty (venue in Travis County) 3.Violations of various statutes (see above) 4.Fraud 5.Other

Remedies Commonly Sought by the AG Removal of trustees or board members Money damages Appointment of a receiver Injunctive relief TRO’s, asset freezes, orders of attachment Attorneys’ Fees and court costs

Charitable Solicitation One of the most significant problems on the state level for AG’s (dealing with abuses) Many states have some form of charitable solicitation laws requiring pre-registration and filing annual reports Laws vary from state to state (making internet solicitation challenging) Texas does not have generally applicable laws (but does have specific statutes such as telephone solicitation by law enforcement organizations)

Intermission

Problems of Private Membership Associations

Judicial Intervention into Private Association Affairs Traditionally not disposed to interfere with internal management of voluntary association Private association has the right to make and enforce its own rules (generally) Rationale: by becoming a member, you have subjected yourself to the organization’s power Constitutional Issues

Exceptions to Policy of Noninterference Where member’s civil or property rights are involved, courts will look at whether organization followed its own rules Where fraud, arbitrariness, oppression or bad faith were involved

Judicial Intervention into Medical Nonprofit Association Affairs Perhaps even more limited than standard private associations (lack of expertise to second-guess medical judgments) Limited to review of whether a member received procedural due process (i.e. look to see whether the medical tribunal’s decision is a substantial departure from accepted medical norms so as to show no professional judgment actually exercised) As long as procedural due process demanded by the situation is provided, courts are unlikely to question the decision of a peer review board to expel a member

Judicial Intervention into Church Disputes Constitutional implications Absolute prohibition unless some showing a violation of contract or property rights (Is membership a property right?) Can only employ neutral principles of law (and still can’t get involved in religious controversy) Some distinction based on issue court is facing (i.e. pastor dismissal vs. ownership of church property)

“Texas Due Process” Common law procedural limitations to exercise of discretion by private associations (based on contractual concepts) Requires fundamental fairness with respect to procedural due process (i.e. notice, opportunity to be heard, etc.) Viability of this doctrine somewhat questionable Less likely to be applied to membership rejection

Constitutional Issues Private associations entitled to right of expressive association under First Amendment “Forced inclusion of an unwanted person in a group infringes the group’s freedom of expressive association if the presence of that person affects in a significant way the group’s ability to advocate public or private viewpoints.” (Boy Scouts v. Dale (2000)) –Freedom of association plainly presupposes a freedom not to associate

Next Week Midterm Exam!