Lead Stories

When a charity or other organization sues its auditors for producing false financial statements, the auditor can often avoid liability if the officers of the organization provided false information for the audit.  The auditors can be protected by the in pari delicto defense, which provides that in the case of mutual or equal fault, the case of the defender is stronger.

The efforts of the unsecured creditors of the Allegheny Health Education and Research Foundation, which in 1998 filed the largest nonprofit bankruptcy up to that time, took on new life recently when the Pennsylvania Supreme Court disagreed with a federal District Court decision that had denied them the right to sue AHERF’s auditors for false financial statements. The Supreme Court has held that the in pari delicto defense will not apply when the auditors have conspired with the officers to produce the false statements.

An appellate court in Texas has upheld the action of a nonprofit homeowners’ association whose members removed a director for “cause” after she complained about the approval of a building variance and had her lawyer ask the board to have the Association’s lawyer to review the matter.  (Matzel v. Stonecrest Ranch Property Owners’ Association, Ct. of App., TX, Fourteenth Dist, Houston, No. 14-08-00326, 1/29/10.)

A member of the Association distributed to the rest of the Association’s members a copy of the director’s letter saying she was “prepared to seek all remedies” if the board did not change its way of operation. The members petitioned for a special meeting to consider her removal.  After both sides had an opportunity to address the membership, the director was removed by a vote of 45-9.

May a 501(c)(3) organization devoted to strengthening African-American communities fire its executive director after she has endorsed a white Jew for mayor without violating antidiscrimination laws?

That’s the question facing a trial court in New York City in a suit brought by Joyce Johnson, the CEO of Black Equity Alliance, who was fired after she endorsed Mayor Michael Bloomberg for a third term as mayor. She sued both the organization and its individual directors for damages.

A trial court in New York has ruled that voting privileges of members of a nonprofit corporation cannot be suspended automatically for failure to pay required dues, despite a bylaw provision it interpreted as providing suspension without notice.  It said the state’s Not-for-Profit Corporation Law required “reasonable notice” to enforce collection efforts.  (Abraham v. Diamond Dealers Club, Supreme Court of NY, NY County, No. 10263/2009, 3/1/10.)

When Katherine Hagan wrote a will in 1994, she provided two specific bequests for friends and left the “residue” of her estate to a trust for the benefit of 13 charities.  She listed specific gifts to each in separate dollar amounts totaling $40,000 and provided that if any of the organizations should not be in existence, the applicable bequest should go to the others equally.  At the time she wrote the will, her residue was expected to be about $40,000.

In 2001, however, a relative passed away and left her a bequest of approximately $830,000.  Because Hagan was not mentally competent to modify her will or execute a new one, she died in 2005 with the same will in effect.  Her residuary estate was then valued at $1.48 million.

A federal District Court in Texas has stricken major portions of a new state law that sought to require for-profit companies that collect clothing and household goods in the name of charities to disclose the amounts actually paid to the charitable organizations they say benefit from the program.  The Court said it was constitutional to require the companies to disclose their for-profit status, but was unconstitutional to require them to disclose how they paid the charities.  (National Federation of the Blind of Texas v. Abbott, N.D. TX, Dallas Div., No. 3:09-CV-1567, 2/1/10.)