You are here

Illegal behavior by foundation president, does it give rise to legal action?

Your Legal Questions Answered

Illegal behavior by foundation president, does it give rise to legal action?

I was a Board member of a $5 million Educational Foundation of which my husband became President. When our marriage dissolved, he dissolved the existing Board on the basis of 14-year-old information and elected a new Board. His comment was: "You don't think I'd leave people who hate my guts stay on the Board, do you?" I know of an instance where he "borrowed" $50,000 from the Foundation when his personal business had a cash crunch. It was borrowed without knowledge or approval from the Board and repaid without interest. Is this behavior legal? Do I have any recourse considering I'm no longer with the Foundation?

It isn’t clear how your former husband alone dissolved the old board and elected a new one, but since you did not ask about that I will ignore it. Borrowing from a charity for personal benefit without interest and without knowledge or approval of the Board is clearly improper. Some state nonprofit corporation laws expressly prohibit any loans to officers or directors. But even where a loan is permitted, taking a loan without knowledge of the Board would be a breach of fiduciary duty by the borrower.
If the Foundation is a private foundation, any loan to an officer or director is self-dealing for which a federal excise tax would be due. (See Ready Reference Page: “Private Foundations Must Avoid Self-Dealing.”) If the Foundation is a public charity and the borrowing was done after the passage of the excess benefit transaction rules, it would be an excess benefit on which a tax is due. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions.”) A private foundation is required to report self-dealing transactions on its Form 990-PF and a public charity must report excess benefit transactions on its Form 990 tax information return.
I doubt that you have direct recourse since you are no longer on the Board, and you may not want to create problems for the Foundation (or for yourself if you were married at the time and knew of the transaction). But if you wish to pursue it, you may want to talk with others now on the Board and suggest they investigate. If that fails and your educational foundation is operated in conjunction with a school district or an individual school, the officers of the beneficiary may be interested. If that, too, fails, there is always the Attorney General.
Sunday, August 14, 2011

Add new comment

Sign-up for our weekly Q&A; get a free report on electioneering