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Are charity’s assets available for founder’s divorce settlement?

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Are charity’s assets available for founder’s divorce settlement?

Our 501(c)(3) organization's founder and president is getting a divorce. His wife's attorney is asking for the organization's records and saying his wife is entitled to assets of the organization.  The president went to mediation and although he told his own lawyer that he did not own the organization because it is a charity, his lawyer told him he was wrong and that he had to turn over our records.  So he signed an agreement, as the husband, not as the organization's president, saying he would give them our records.  Is the organization correct in standing its ground that we are not a party to this divorce? 

The fact that you are not a party to the proceeding does not protect you from having to turn over these records to the wife’s attorney.  The fact that the organization’s assets are not the property of the president, however, should protect you.  Your records are irrelevant to the divorce proceedings because the assets are committed to charitable purposes and are not available to the wife in the divorce proceeding.  You may need to go to court to obtain a protective order so you don’t have to produce the records but you ought to prevail.  (Check your insurance to see if you have coverage for this litigation.)

Having said that, there are occasional cases in which a court will question whether the founder has used the charity as his or her “alter ego” so that there is no legal difference between the founder and the organization.  (See Nonprofit Issues®, 11/1/07.)  If the court is able to “pierce the corporate veil” and treat the organization and the individual as one, it could award some of the assets to the wife.  But if the organization is actually functioning as a separate entity, following all of the organizational formalities and conducting a real charitable program, it would be improper to do so. 

If you need help in making your point, you may be able to enlist the assistance of your state’s Attorney General.  AGs are typically eager to preserve charitable assets for charitable purposes and can be particularly persuasive when asking a court to do so.

Tuesday, April 10, 2018

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