Non Profit Report - December 2014

Date: December 19, 2014

A Brief Overview of Maryland's New Law, "Charitable Enforcement & Protection of Charitable Assets"
By: Jonathan Z. May, Esq.

In 2014, Title 6.5, entitled “Protection of Charitable Assets,” was added to the Business Regulation Article of the Annotated Code of Maryland.  This new law went into effect on June 1, 2014. 

The new title relates to “charitable assets” that are given, received or held for a “charitable purpose,” and both terms are defined broadly.  The statute provides that the Maryland Attorney General represents the public with regard to the protection of charitable assets.  

In addition to investigation and subpoena powers, it provides that the Maryland Attorney General has enforcement powers in the event a “misapplication, diversion or waste” of a “charitable asset” or a “breach of fiduciary or other legal duty in the governance, management, or administration” of a “charitable asset” is determined to have occurred.  

Enforcement may include actions to prevent or remedy the problem, or to recover damages.  Actions can apply to any person (e.g. an entity or individual) and can include remedies such as restraining orders, payments of replacement value by the responsible party, or transfers of assets to another charitable organization.  In addition, in the event the Maryland Attorney General and Secretary of State determine that there are reasonable grounds to believe that a violation has occurred, the matter may be resolved by entering into a settlement agreement with the responsible parties that would remedy the alleged violation.  

It is important to note that Title 6.5 contains a section providing that enforcement actions and remedies under the Title are subject to immunity and limitations on liability that are otherwise available under State and Federal law, or at common law.  Further, the statute contains a three year statute of limitations on enforcement actions (i.e., actions must be brought within three years after the alleged violation occurred).  

Finally, the Act that added Title 6.5 to the Business Regulations Article (known as Chapter 654) also provides for the creation and funding of a “Charitable Enforcement Fund” to support the actions of the Maryland Attorney General and Secretary of State to administer and enforce the provisions of Title 6.5.

Ex-Officio Directors Get Voting Rights in California
By: Eileen Morgan Johnson, Esq.

Take-away: Beginning January 1, 2015, a nonprofit organization that was incorporated in California will no longer be able to have ex officio directors who do not have voting rights.  

Background: There is a popular misconception that ex officio means “without a vote”.  A literal translation from the Latin is “from the office.”  An ex officio director is someone who is a member of the board of directors of a corporation because of the office that person holds.  In the association community, it is not unusual for an executive director or CEO to be named as an ex officio director in the association’s bylaws. Well drafted bylaws that provide for one or more ex officio directors will also indicate whether the ex officio director position is with or without a vote. 

Analysis: Why the change? A director of a nonprofit corporation has certain fiduciary duties and is responsible, along with all of the other directors, for the oversight and the ultimate success or failure of the corporation.  The California legislature decided that a person cannot be a member of the board of directors, with all of the responsibilities of that position, without the right to vote.  So, effective January 1, all ex officio directors of California nonprofit corporations will have the right to vote. 

What if the bylaws state that the ex officio director may not vote?  In that case, the person who is named as an ex officio director may not vote.  But that person is not a director of the corporation under California law.  The amended statute says:  “A person who does not have authority to vote as a member of the governing body of the corporation, is not a director as that term is used in this division regardless of title.” (CA Corp. Code Sec. 5047.) 

This can lead to another governance change for California corporations.  If the Executive Director or CEO is not a director under California law, then the governing documents should provide for indemnification of employees in addition to officers and directors. 

The new California law does not affect your organization if it was incorporated in another state.  However, California is often the leader in governance changes.  While this change might not spread across the country in 2015, it is possible that other states will follow California’s lead and ban nonvoting directors. 

Eileen Johnson is a member of the State Bar of California.