Avoiding regulatory pitfalls: Lessons learned from litigation

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Special to Philanthropy Journal

Hugh P. Quinn, Esq. and Jack L. White, Esq.

Far too often, well-intentioned and well-managed nonprofit organizations find themselves under intense scrutiny and unnecessary litigation brought on by various regulatory authorities. While these organizations often have experienced advisors, learned counsel and competent accountants, there are certain guidelines that are useful in their endeavors to avoid needless legal hassles.

Help Hospitalized Veterans (HHV) is a charitable organization that for more than 42 years has helped in the recovery of wounded, sick and disabled American veterans. Through a settlement permitting HHV to continue helping veterans reclaim their lives, this veterans service organization and its board of directors prevailed in a lawsuit brought by the California attorney general. Based on the experience of HHV’s counsel from Fluet Huber + Hoang PLLC during this investigation and litigation, the following lessons learned will assist charitable organizations in remaining focused on their mission – not needless litigation.

Lesson #1: Regulatory agencies – not former employees, competitive nonprofits or disgruntled donors – present the greatest risk to your continued viability as a nonprofit organization. Charitable organizations face a wealth of challenges along the path to fulfilling their core purposes. Yet the threat posed by regulatory authorities and their ability to derail progress toward charitable objectives can be quite formidable, indeed life-threatening. Each charitable organization must be deliberate in the actions it takes to avoid excessive scrutiny from regulatory agencies.

Lesson #2: A charitable organization’s leadership will be held responsible for the information the charity presents to the public, whether on tax information returns, solicitation materials, public pronouncements or otherwise. A charitable organization’s donor base benefits from a mosaic of regulations and accounting principles that ensure accuracy in information provided. Take measures to ensure that all information presented publicly on behalf of the organization is accurate and not reasonably subject to ambiguity.

Lesson #3: Relying on information presented to the board by officers and consultants of the organization can present risk for violation of your duties as a director, regardless of your volunteer status. Directors of nonprofits often serve on a voluntary basis and rely heavily (and appropriately) on information provided by officers and other advisors in reaching significant decisions regarding a charity’s conduct. Most state statutes recognize this reality of nonprofit governance; however, this recognition does not absolve nonprofit directors of their fiduciary obligations. While the ordinary nonprofit director should not be required to understand the intricacies of sophisticated accounting pronouncements, regulatory authorities will indeed require them to perform their fiduciary duties. Trust but verify the information presented to you by accountants, attorneys, officers and consultants; perform your due diligence.

Lesson #4: Drafting detailed meeting minutes of board meetings might seem like a good idea, but it can present issues when closely examined for evidence of breach of duties as a board. Opinions differ as to the level of precision that should be included in meeting minutes. Insufficient detail may sacrifice the benefit of specificity with respect to deliberation and the rationale for various collaborative actions. Excessive detail sacrifices the benefit of collective resolve, providing a trail of breadcrumbs leading inadvertently to points of contention that might have been resolved during deliberations. While neither approach provides absolute cover from litigation, it is our opinion that less is more with respect to meeting minutes. Keep your board meeting minutes focused, with only the essentials included.

Lesson #5: You can get in trouble for failing to follow protocol found in applicable statutes and your organization’s governing documents. Most states have statutes that define nonprofit directors’ fiduciary duties with reasonable clarity. Most charitable organizations intentionally draft their respective articles of incorporation, bylaws and other internal regulatory documents in a manner that sets forth organizational and individual responsibilities with adequate precision. Knowing what the organization can and cannot do and what the organization’s leaders can and cannot do is an excellent center of gravity for any charitable nonprofit. Where guidelines or proscriptions require adjustment, make the appropriate adjustments. But, follow the rules. Read, understand and follow applicable statues and your governing documents.

Lesson #6: Sometimes it’s not what you did but rather what you didn’t do as a board member that can present risk for a violation. Many charitable enterprises benefit from leadership comprised of like-minded individuals who share a common philanthropic agenda. Over time, this unity of purpose can inadvertently be transformed into an unwelcome sense of complacency that permits unwelcome acquiescence to practices that belie an organization’s ultimate objectives. Among any charity’s leadership, a willingness to gracefully identify and address potentially problematic practices should be embraced. And leadership should not be afraid to do so. If something doesn’t feel right, take the initiative, and address it.

As our clients, volunteer directors for HHV, frequently lamented, “No good deed goes unpunished when dealing with state regulators.” Charitable organizations engage in some of the most honorable enterprises imaginable. The honorable nature of philanthropic service, however, does not obviate the need for vigilance in your organization’s governance and regulatory compliance.

Hugh P. Quinn, Esq. is a partner, and Jack L. White, Esq. is counsel at Fluet Huber + Hoang PLLC, a values-based law firm that serves as advocate, counsel and champion for clients worldwide.