11/04/2009 02:23:51 PM EST
Siegel on Tackney v. U.S. Naval Academy Alumni Assn, 408 Md. 700 (2009)
In Tackney v. United States Naval Acad. Alumni Ass'n, 408 Md. 700 (Md. 2009), the Maryland High Court affirmed the dismissal of a complaint, which alleged that a nonprofit corporation’s board acted arbitrarily in interpreting the entity’s bylaws. In this Emerging Issues Analysis, Jack B. Siegel analyzes the court’s reluctance to intervene in a nonprofit’s internal governance and provides best practices and lessons for advising nonprofit organizations. He writes:
Background. The United States Naval Academy Alumni Association ("Alumni Association") is a Section 501(c)(3) organization that is organized as a non-stock, membership corporation under Maryland law. It is governed by a board of trustees and has approximately 52,000 members.
In November 2007, two Alumni Association members filed suit in the circuit court of Anne Arundel County, Maryland asserting that the board of trustees had violated provisions of the bylaws imposing term limits on trustees. The bylaws provided that a trustee's tenure was limited to two consecutive three-year terms. The plaintiffs in the lawsuit argued that the existing leadership had interpreted the bylaws so as to permit a trustee to serve more than two consecutive terms. The trustee in question was elected board chair in 1997. He served a second three-year term as board chair beginning in 2000. In 2003, this trustee was appointed to the position of Immediate Predecessor to Chair, which the plaintiffs claimed violated Section 4.9 of the Alumni Association's bylaws, the provision limiting one trustee to two consecutive terms.
The appointment to the position of Immediate Predecessor to Chair was made pursuant to Section 4.7 of the bylaws, which provided that the immediate predecessor to the chair automatically assumed a position as trustee upon completing his or her term as elected chair. The question was whether Section 4.7 was limited by Section 4.9 or operated independently of it. Mr. Tackney told a local newspaper that the lawsuit was not about money, but "simply a matter of principle." While Mr. Tackney may have honestly believed that to be the case, the fact remains that a large amount of money was lurking in the background. The Alumni Association had a sister organization, the U.S. Naval Academy Foundation (Foundation). According to a newspaper report, the Foundation raised over $250 million between 2000 and 2005 from over 36,000 individuals, corporations, and foundations. The 2006 Form 990 for the Foundation referred to the Alumni Association as a supported organization and the 2006 Form 990 for the Alumni Association referred to the Foundation as a "related party."
The plaintiffs indicated that they took action because they received e-mails from Alumni Association members "complaining that the Alumni Association ignores rank-and-file members while catering to high-ranking career officers."
Holding. The Maryland Court of Appeals (the state's highest court) upheld the lower court's decision to dismiss the plaintiff's lawsuit for failure to state a cause of action. Although the high court acknowledged well-settled law that a corporation's bylaws are to be construed under the principles governing contract interpretation, the court devoted little time attempting to construe what it acknowledged were ambiguous provisions. The court instead focused on the doctrine that the courts will not interfere in the internal affairs of a corporation unless there is evidence of fraud, irregularity, or arbitrary action, particularly when the board's interpretation of an ambiguous bylaw provision is a reasonable one.
. . . .
Nonprofit Organizers Should Think Twice Before Adopting the Membership Form Under State Nonprofit Corporation Statutes. When organizers of nonprofit corporations file articles of incorporation, they generally must specify whether the organization will be a membership organization. This decision should turn on non-legal considerations. Organizers often elect a membership structure if the organization will rely on a homogeneous group of individuals for funds or will serve as an advocacy organization for like-minded individuals. Alumni associations often are organized as membership organizations, as are groups interested in the environment, racial equality, and other social issues.
Many charitable organizations eschew the membership structure. The organizers often believe that the board of directors is sufficient for governing the organization and that funds can be raised through grants, charitable contributions, fees for services, and other sources.
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