Several officers and directors of a failed nonprofit nursing home in Illinois have been removed from their positions upon suit by the state Attorney General, and the executive director has been ordered to return $2 million paid to her after sale of the home as a purported repayment of loans. The Appellate Court of Illinois has affirmed a series of summary judgment rulings sought in long-standing litigation brought against the corporation and its leaders by the state Attorney General. (People v. Maxwell Manor, App. Ct. IL, First Dist., Third Div., No. 1-11-3132, 12/31/13.)
A for-profit partnership in which JoeAnn McClandon held a 50% interest owned real estate in Chicago that it rented prior to 1990 to a for-profit nursing home. In 1989, the state Department of Public Health forced the operator out of business and replaced it with a new operator. But that operator abandoned the business in 1990, with an outstanding loan to the state and unpaid wages and unpaid vendors. McClandon’s partnership formed Maxwell Manor, a nonprofit corporation, to operate the facility and pay down the back obligations. Maxwell Manor registered with the state and filed annual reports as required by the state’s Charitable Trust Act.
In 1998, Maxwell Manor and the partnership (which apparently still owned the real estate) sold the total operation to another entity, one that formerly employed McClandon, for a purchase price of $13.5 million. Maxwell Manor did not report the sale to the Attorney General. In 2001, Maxwell Manor had to sue the purchaser for $1.3 million of sale proceeds still held in escrow.
The Attorney General sued for an accounting and in 2004 filed an amended complaint seeking termination of the corporation, removal of McClandon, who also served as president of the corporation, and two other directors for breach of fiduciary duty, willful failure to comply with statutory requirements, unfitness to serve as charitable trustees, an accounting, and, as to McClandon, return of the $2 million paid to her after the sale. The AG asked for payment of the $2 million into the AG fund to be redistributed for other charitable purposes pursuant to the principles of cy pres. The trial court granted summary judgment and the Court of Appeals has affirmed.
The corporation admitted that it had not filed the registration reports and financial information with the Attorney General as required by the Illinois Charitable Trust Act. Since the corporation had filed such reports early in its life, the Court held that such failure was “willful” and not based on a lack of knowledge of the requirement. Such willful action was sufficient to justify the termination of the corporation and removal of its officers and directors. It agreed that the individual directors had breached their fiduciary duty by not requiring the corporation to meet its filing obligations.
Summary judgment on the $2 million payment to McClandon was a more difficult issue. McClandon had provided an affidavit that she had made many loans to the corporation to keep it going, and the check on which the repayment was made had the word “loan” on the memo line. She argued that her affidavit and the face of the check raised a material issue of fact that could not be decided on summary judgment and could be resolved only by trial. After the trial court issued its decision, she filed additional affidavit evidence from a former chair of the board testifying to the existence of her loans.
On appeal, the Court said it could look only at the evidence in the record at the time the trial court made its initial decision and would not disturb the discretion of the trial court in not considering the subsequent information. It said that McClandon’s affidavit and the check were “self-serving and conclusory” and not sufficient to raise a genuine issue of material fact. It also apparently agreed with the Attorney General’s argument that she had the opportunity to document the loans during discovery and had failed to do so.
The Court also found a basis for requiring repayment of the money in Section 17 of the Charitable Trust Act which provides penalties for any trustee who intentionally and in breach of fiduciary duty causes funds in excess of $1000 to be disbursed for his or her personal benefit. The Court said that “the undisputed facts established that McClandon intentionally disbursed or caused charitable trust funds to be used for her personal benefit or personal use with malice and without lawful authority.” It noted that it had not imposed punitive damages as provided in Section 17.
YOU NEED TO KNOW
This case illustrates not only the risks of failing to comply with ministerial filing requirements, but more importantly the risks to charitable trustees of mixing their personal economic interests with those of the organization. At the very least, “loans” from the individual officer should have been adequately and extensively documented. In many states, the sale of substantially all of the assets of a charitable organization requires up front approval by the Attorney General. Even in those states where it is not required, it may be prudent to get an OK from the Attorney General, especially in cases involving personal financial interests. Some AGs may not be willing to give the OK or may not have the interest to get involved, but the good faith effort to get approval in advance may reduce the likelihood that the AG will come after you with vengeance after the fact.