Article Archives >> Lead Stories >> December 16, 2005-January 15, 2006

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Trustees Can’t Oust Directors
And Cut Support for Program
Trustees are not helped by Volunteer Protection Act
when they have acted beyond the scope of their authority

Trustees of the Washington City Orphan Society may not unilaterally stop funding the program or remove the nonprofit’s Board of Directors, the District of Columbia Court of Appeals has ruled. And the individual trustees are not protected from personal liability by the federal Volunteer Protection Act because they acted beyond the scope of their authority.

The case has had a lengthy and twisted history since the Board of Trustees unilaterally repealed the organization’s Constitution, eliminated the role of the Board of Directors and sought to end funding for the program. The trial court originally dismissed the Directors’ effort to stop the actions, finding that the Directors had no standing to protest and that the statute of 1828 incorporating the agency allowed the changes. The Court of Appeals reversed, saying the Directors had a direct interest that gave them standing to sue, and asking the trial court to ascertain the legislative intent behind the “ambiguous” statute of incorporation.

On remand, the trial court ruled, and the Court of Appeals has now affirmed, that the Trustees could not take the unilateral action they sought. (Owen v. Board of Directors of the Washington City Orphan Asylum, District of Columbia Court of Appeals, No. 04—CV-908, 12/22/05.)

When the organization was first formed by First Lady Dolly Madison and other prominent women in 1815, married women were not permitted to hold or manage property or enter into contracts in their own name. The women operated as an unincorporated entity for 13 years until a statute was passed by Congress in 1828 incorporating the Washington City Orphan Asylum. The statute called for a Board of Trustees of five men to manage the property and a Board of Directors of a first and second female directress and 15 additional female managers.

The organization ran an orphanage until the 1950s and phased out all residential programs and has concentrated on counseling programs for children under the namae Hillcrest Children’s Center since the 1970s.

“From 1828 until 2000, the two boards appeared to function cooperatively in facilitating the charitable endeavors” of the organization, the Court of Appeals said. The Trustees invested the endowment and managed the property while the Directors managed the programs. The trustees remained all male, while the directors were all female until1958, when the Constitution was revised to provide for 17 women and 13 men.

In reviewing the legislative history, the Court said that the women had considered incorporating in 1816, with Congress intending to name the men as incorporators “to circumvent the law of coverture” which denied married women the right to contract. But the effort failed “because some Senators objected to forming ‘a body politic composed of married women’.” A comparison of the 1816 draft bill and the 1828 final bill, the Court said, “supports the conclusion that Congress did not intend to strip the Lady Managers [predecessors of the Directors] of control over the asylum’s affairs.”

The Court also found that the course of conduct confirmed the grant of dual-board authority, both in the conduct of the operations and in several amendments to the Constitution over the years.

In addition, it found that the District of Columbia Nonprofit Corporation Law, which is currently applicable to the organization, did not prohibit the dual power structure. The unilateral actions of the Trustees were invalid, it said.

The trial court had ordered the Trustees to repay the organization for legal fees incurred during the litigation. The Trustees said they were protected from personal liability by the federal Volunteer Protection Act, which generally protects volunteers for charities except in cases of gross negligence or willful misconduct. (See Ready Reference Page: “Federal Law Protects Nonprofit Volunteers.”)

But the Act “affords immunity to those ‘acting within the scope of [their] responsibilities in the nonprofit organization’,” the Court said. “The Trustees’ decision to discontinue funding [the program] and oust the Board of Directors is inconsistent with the language of the WCOA Charter; that is, the decision to cease funding fell outside the scope of the volunteers’ responsibilities…. Even assuming that the immunity afforded by the [Act] extended to actions in equity, the Trustees’ conduct of ousting the Directors and ceasing all funding to [the program] renders the statute inapplicable.”

YOU NEED TO KNOW

Although the corporate structure of this organization was significantly older and more convoluted than most, many nonprofits are still operating under governance documents passed by legislatures before it became easy to incorporate by merely filing with a Department of State. In many cases, the language and intent of the original documents are significantly out of date and, as here, confusing if ever litigated. This was a long time to live without clarifying the basic question: whose organization is it? (See Ready Reference Page: “The Key Question: Whose Organization Is It?”) It may be charming to trace your history back to some ancient time, but it usually makes sense for such organizations to modernize their documents to assure the structure they want and can currently agree upon.

The Court’s ruling on the Volunteer Protection Act will come as a surprise to many who thought they would be protected in suits against them when they have acted in good faith in making Board decisions. It is not clear that other courts will follow this line of reasoning. Directors may be protected, however, under specific state director liability laws which often provide that they will not be personally liable except in certain cases such as self-dealing, recklessness or willful misconduct.

Article Archives >> Lead Stories >> December 16, 2005-January 15, 2006