12/07/2009 05:47:46 PM EST
Health Alliance of Greater Cincinnati v. Christ Hospital: How the Law is Grappling with Nonprofits and the Potential Conflicts Arising from Dualities of Interest
Nonprofits increasingly use complex corporate structures to affiliate with each other, and the legal profession is just beginning to understand the implications and potential perils arising from dualities of interest. The courts decision in Alliance Health represents an early signpost on what is likely to be a rocky road to the promulgation of standards as we see more disputes involving non-traditional corporate structures and affiliations.
The author writes: The court's ruling in Health Alliance of Greater Cincinnati v. Christ Hospital, 2008 Ohio App. LEXIS 4191, (1st District No. C-070426, September 30, 2008), provides an opportunity to examine how the law is grappling with the potential conflicts arising from dualities of interest.
Nonprofit organizations increasingly utilize complex corporate structures to affiliate with each other. These structures can include parent-subsidiary relationships or sole memberships (where the "subsidiary" is a nonstick corporation), contractual affiliations, operating agreements, and joint ventures with both nonprofit and for-profit entities. Lawyers familiar with federal tax law are well aware of the tax issues that these arrangements can raise, but until recently, even experienced lawyers didn't focus on the conflicts resulting from the dualities of interest.
A duality of interest exists when one person or entity has multiple duties or loyalties that can conflict with each other. In a sense, all conflicts are rooted in dualities of interest, but when commentators speak of dualities of interest, they are referring to conflicts that arise through relationships and positions rather than conflicts arising out of concerns whether fair value was received. A classic example of the latter type of conflict involves a nonprofit that acquires goods or services from a director.
An example of the former involves one entity that controls another entity through a single membership interest; even though the controlled entity does not issue stock, for convenience, it has become common to use the terms "parent" and "subsidiary" to refer to the sole member and the controlled corporation. The parent's membership interest gives the parent the right to appoint the subsidiary's board of directors, and therefore control of the subsidiary. Those who are appointed to serve as directors of the subsidiary can find themselves facing a dilemma: To which entity do they owe a fiduciary duty? If the appointee serves as both a director and officer of the parent, the answer is clear, but unsatisfactory: The appointee owes fiduciary duties to both entities.