Developments in Association Law 2020-2021

Pillsbury Winthrop Shaw Pittman LLP

A review of key legal developments for nonprofit organizations at the federal and state levels in 2020 and 2021.

Antitrust

Torrey v. Infectious Diseases Society of America, No. 17-190 (E.D. Tex. Sept. 1, 2021), No. 407 & Torrey v. Infectious Diseases Society of America, No. 17-190 (E.D. Tex. Sept. 20, 2021), No. 408

Plaintiffs sued the Infectious Diseases Society of America (IDSA), seven Lyme disease expert doctors who helped write IDSA’s 2006 Lyme disease guidelines, six national and regional health plans, and Blue Cross Blue Shield Association. Plaintiffs alleged that the health plans paid large consulting fees to the doctors as part of a conspiracy to write false Lyme disease guidelines to enable health insurance plans to deny treatment and coverage for so-called chronic Lyme disease. Plaintiffs brought claims against all defendants for alleged RICO and antitrust violations. Late in the lawsuit, plaintiffs added claims against IDSA only for common-law fraudulent and negligent misrepresentation. Before completing discovery, the health plans and Blue Cross Blue Shield Association settled with plaintiffs. IDSA and the doctors, represented by Pillsbury, did not settle.

Plaintiffs’ claims had potentially damaging implications for any professional society that issues practice guidelines, as the lawsuit threatened to subject medical guidelines, written by experts in the field, to judicial review and sought to impose liability based on scientifically inaccurate claims and disagreements with the studies cited in the guidelines.

In response to the defendants’ summary judgment motion, plaintiffs dismissed the RICO claims against all defendants, admitting that they did not have evidence to support those claims, and also dismissed the antitrust claims against the individual doctors. However, plaintiffs contended that they had sufficient evidence to take their antitrust and common-law misrepresentation claims against IDSA to trial, claiming primarily that they were entitled to go to trial to seek to prove a conspiracy between IDSA and the health insurance plans based solely on the IDSA’s public statements supporting evidence-based Lyme disease treatment and the fact that health insurance plans sometimes rely on professional guidelines when deciding whether to cover certain treatments.

The court dismissed all of plaintiffs’ claims against IDSA with prejudice. The court granted IDSA’s summary judgment motion against plaintiffs’ antitrust claims, holding that plaintiffs did not set forth “any affirmative evidence... to support their allegations of a conspiracy to deny the existence of chronic Lyme disease in exchange for payment.” The court noted that “instead, they offer merely speculation, conclusory assertions and attorney argument.”

In a separate opinion, the court granted IDSA’s motion to dismiss plaintiffs’ new common-law misrepresentation claims with prejudice and without leave to amend, holding that “the statements in the IDSA Guidelines are not the type of statements that plaintiffs can recover for based on misrepresentation, as they are medical opinions, not factual representations. ... And where there is a legitimate difference of opinion on medical treatments among experts, there is no false representation of a material fact.”

Ass’n of Am. Physicians & Surgeons Inc. v. Am. Bd. of Med. Specialties, 15 F.4th 831 (7th Cir. 2021)

Plaintiff, the Association of American Physicians & Surgeons (AAPS), is a nonprofit membership organization of physicians and surgeons. Defendant, the American Board of Medical Specialties (Board), is a nonprofit provider of medical certification services and an umbrella organization for 24 member boards, each dedicated to a particular medical practice area. The Board deems physicians who meet its requirements to be “Board-certified.” To remain certified, physicians must comply with the Board’s Maintenance of Certification (MOC) program and continuing education requirements. All states permit physicians who are not Board-certified to practice medicine.

In an amended complaint AAPS claimed that the Board violated Section 1 of the Sherman Act by allegedly conspiring with hospitals and insurers nationwide to force doctors to participate in the MOC program and to impose an MOC participation requirement for in-network status. AAPS defined the relevant market as almost all medical care nationwide.

The Seventh Circuit affirmed the lower court’s decision to grant the Board’s motion to dismiss with prejudice, finding that AAPS’s amended complaint did not plead the elements required to allege a Sherman Act violation. The court found that AAPS did not plausibly allege an agreement among the Board, hospitals, and insurers. AAPS made conclusory allegations that the Board colluded with insurers and hospitals to force physicians to maintain Board certifications, and the Seventh Circuit held that the allegations that hospitals and insurers required physician participation in the MOC program established only parallel conduct, without the required factual context to suggest an agreement. The court observed that the widespread choice by hospitals and insurers to require MOC has “an alternative explanation” more plausible than an unlawful conspiracy: hospitals and insurers “independently decided MOC provides useful information.” Under the Bell Atlantic Corp. v. Twombly standard, a Sherman Act claim cannot survive a motion to dismiss where a complaint points to only “parallel conduct and a bare assertion of conspiracy.”

PharmacyChecker.com LLC v. Nat’l Ass’n of Bds. of Pharmacy, 530 F. Supp. 3d 301 (S.D.N.Y. 2021)

Plaintiff, PharmacyChecker.com, an LLC that offers an accreditation program for pharmacies worldwide and provides drug price comparison information, brought an action against competitors and related entities, including the National Association of Boards of Pharmacy (NABP), alleging that the defendants conspired to restrain trade in violation of Section 1 of the Sherman Act. The plaintiff further alleged that NABP falsely advertised or promoted products and/or services in violation of Section 43(a) of the Lanham Act. The defendants moved to dismiss.

In December 2018, NABP added plaintiff’s website and blog to its “Not Recommended Sites” list. Another defendant, the Center for Safe Internet Pharmacies Ltd. (CSIP), similarly ran targeted online advertisements against the plaintiff. On July 21, 2019, users of the Bing search engine “began seeing a red caution shield and warning box when clicking on search results for pages from plaintiff’s website and blog,” driven by CSIP’s “Principles of Participation,” under which its members agreed to use data-sharing tools “to detect and target suspected illegitimate pharmacy websites.” The defendants also jointly created the “pharmacy” domain to serve a gatekeeping function. Plaintiffs alleged that these efforts drastically reduced plaintiff’s site traffic, and collectively were a group boycott which attempted to prevent plaintiff from competing in the global markets for online pharmacy verification and comparative drug price information.

The court concluded that the plaintiff’s complaint sufficiently alleged injury resulting from a competition reducing aspect or effect of defendant’s behavior. The court found that the plaintiff’s complaint did not allege direct evidence of conspiracy, but did allege circumstantial evidence of a conspiracy. To plausibly allege circumstantial evidence, the plaintiff had to allege “parallel action,” and that the parallel action “must be placed in a context that raised a suggestion of a proceeding agreement, not merely parallel conduct that could just as well be independent action.” The court held that the plaintiff adequately alleged parallel action and the court denied the joint motion to dismiss.

Liability

St. Bernard’s Cmty. Hosp. Corp. v. Cheney, 2021 Ark. App. 236 (2021)

Appellee filed negligence and medical negligence claims against a hospital incorporated under the Arkansas Non-Profit Act after his wife died in the care of the hospital. The hospital moved for summary judgment, raising the defense of charitable immunity, under which organizations such as agencies and trusts created and maintained exclusively for charity may not have their assets diminished by execution in favor of one injured by acts of persons charged with duties under the agency or trust. The trial court denied the motion, finding that there were material issues of disputed facts as to whether the doctrine of charitable immunity applied, and the hospital appealed.

The factors to determine whether an organization is entitled to charitable immunity are (1) whether the organization’s charter limits it to charitable or eleemosynary purposes; (2) whether the organization’s charter contains a “not-for-profit” limitation; (3) whether the organization’s goal is to break even; (4) whether the organization earned a profit; (5) whether any profit or surplus must be used for charitable or eleemosynary purposes; (6) whether the organization depends on contributions and donations for its existence; (7) whether the organization provides its services free of charge to those unable to pay; and (8) whether the directors and officers receive compensation.

In reviewing and applying these factors, the Arkansas Court of Appeals reiterated that although disputed fact issues concerning an organization’s charitable status may be presented to a jury, the ultimate question of charitable immunity is a matter for the court. Thus, at the summary judgment phase, the trial court must discern between disputed material facts and undisputed facts with differing interpretations. The court concluded that the facts themselves were undisputed with “merely different interpretations.” The court therefore held that the trial court erred in finding that there were material issues of disputed fact, and reversed and remanded for the trial court to decide whether the hospital was entitled to charitable immunity on the undisputed facts.

Phyllis Schlafly Revocable Tr. v. Cori, 512 F. Supp. 3d 916 (E.D. Mo. 2021)

A trust, associated trust fund, and licensee of certain intellectual and intangible property from the trust and fund brought action against an Illinois nonprofit organization and its president, alleging violation of the federal Defend Trade Secrets Act, trademark infringement, misappropriation of trade secrets in violation of the Missouri Uniform Trade Secrets Act, violation of publicity rights, and tortious interference with contract or business expectancy. Defendants moved to dismiss for failure to state a claim. The District Court for the Eastern District of Missouri held, in part, that the president was not immune from liability under the Illinois Not for Profit Corporation Act, and thus was not immune from claims arising from the nonprofit’s acquisition and use of the trust’s and fund’s private information and trademarks.

The Illinois Not for Profit Corporation Act provides that a qualified director or officer of a nonprofit corporation shall not be liable for “damages resulting from the exercise of judgment or discretion” in relation to the duties of the role unless the act or omission involves “willful or wanton conduct.” To sufficiently plead willful and wanton misconduct, a plaintiff must allege either a deliberate intention to harm or an “utter indifference to” or “conscious disregard for” the welfare of the plaintiff. Here, the court found that plaintiffs cited “numerous allegations” that could rise to the level of willful and wanton, including conspiring to use plaintiffs’ assets “to further their own personal and political agendas,” diverting plaintiffs’ mail to the defendants’ new office location, and using plaintiffs’ trade secrets without consent for defendants’ own financial gain. The court therefore concluded that the plaintiffs sufficiently alleged that defendant engaged in willful and wanton conduct, and thus Illinois volunteer protection law did not require dismissal of the complaint against the nonprofit’s president.

Fiduciary Duty

In re WonderWork Inc., 626 B.R. 94, 2020 WL 7502293 (Bankr. S.N.D.Y. December 19, 2020)

The plaintiff, as Litigation Trustee of the WW Litigation Trust created under the nonprofit corporation WonderWork Inc.’s (Debtor) confirmed plan, commenced this adversary proceeding against the Debtor’s former officers and directors alleging breach of fiduciary duty and bankruptcy avoidance claims. Defendants filed a motion to dismiss, which was granted in part and denied in part.

The court found that the plaintiff adequately alleged that by awarding bonuses to the CEO, specified directors acted with gross negligence and breached their fiduciary duties. Moreover, the plaintiff adequately alleged that specified directors breached their duty of loyalty by permitting Debtor to engage in a “limbo pay” scheme whereby the CEO’s taxable income was underreported in apparent violation of federal law. The plaintiff also properly stated a claim for breach of fiduciary duty by specified directors regarding payment of the CEO’s personal legal fees, expenses, and settlement in lawsuits brought against him by his former employer. Additionally, the plaintiff stated a claim again specified directors in connection with a series of “impact loans” entered into by the CEO. Finally, the court found that the plaintiff stated a claim against the CFO for breach of her fiduciary duty of care in failing to segregate or properly account for and use restricted donations. The court therefore denied the motion to dismiss those claims.

However, the court held that the plaintiff failed to sufficiently allege a claim against specified directors based on an alleged failure to monitor and oversee the CFO’s travel-and-entertainment reimbursement, because the plaintiff did not allege facts identifying “any red flags warning them that that the CEO was abusing the Travel Policy.” The plaintiff also failed to state a claim against the CEO for breach of fiduciary duty in connection with the misuse of or improper accounting for restricted funds.

Dell’Aquila v. LaPierre, 491 F. Supp. 3d 320 (M.D. Tenn. 2020)

Plaintiffs, members of the nonprofit National Rifle Association (NRA), filed suit against the association, its foundation, and its chief executive officer, claiming fraud and violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). Specifically, plaintiffs alleged that the defendants fraudulently solicited membership and donations by claiming that the profits would go towards advancing the “mission of the [association],” and that, instead, the association used a significant portion of the funds for purposes unrelated to that mission.

On their motion to dismiss all claims, defendants argued that the state statute limits those who can challenge nonprofit corporation action to the state attorney general and certain individuals filing suit on behalf of the corporation, and thus the plaintiffs lacked standing. The trial court concluded that Tennessee common law, rather than the Tennessee statute governing the operation of nonprofit corporations, applied to the plaintiffs’ claim of fraud. The court’s reasoning turned on the fact that the plaintiffs were not “challenging the administration of funds” as required by the statute. Instead, the claims asserted in this case were that the plaintiffs’ donations and membership dues were acquired using fraudulent misrepresentations, and thus the plaintiffs were “personally defrauded.”

In evaluating the sufficiency of the plaintiffs’ pleadings, the court concluded that the fraudulent solicitation claims against the defendant foundation were “completely devoid of detail,” and, though it explained a fraudulent scheme, lacked any specificity in “time, place, and content” of the alleged misrepresentations. The court dismissed the claim for fraud against defendant CEO, noting that general allegations of “solicitation” without reference to specific communications do not meet the pleading requirements for fraud. The court also dismissed the RICO claims against the association. Finally, the court concluded that plaintiffs failed to adequately plead fraudulent misrepresentation with regard to the “racketeering activity” claim, and dismissed plaintiffs’ RICO claims against the CEO and foundation.

The sole claim that the court did not dismiss was the plaintiffs’ fraud claim against the NRA based on the allegation that the association used donated funds for purposes unrelated to its core mission. While the Court acknowledged that “many of the statements cited by plaintiffs [did] not make any representations regarding the use of donor funds,” it was sufficient that some of them did, and that plaintiffs alleged the remaining requisite elements of the claim. The court explained that “[it] was not necessary that the NRA know at the time what the extraneous expenditures would be, only that they knew that money would be spent outside the mission…. Given the extent of the alleged misspent funds—in both duration and volume—the Court finds Plaintiffs’ allegation that the NRA knew donated funds would not be used to advance the mission of the NRA sufficiently plausible to state a claim.”

Communications

Massaro v. Beyond Meat Inc., 2021 WL 948805 (S.D. Cal. 2021)

This case involved a putative class action under the Telephone Consumer Protection Act (TCPA) against People for the Ethical Treatment of Animals Inc. (PETA), a nonprofit animal rights organization. The plaintiff had also sued (and later voluntarily dismissed claims against) Beyond Meat, a publicly traded company that develops and sells plant-based alternatives to animal food products. The complaint alleged that Beyond Meat entered a corporate partnership with PETA, which agreed to promote and provide marketing benefits to Beyond Meat in exchange for monetary contributions from Beyond Meat. On or about January 17, 2020, pursuant to the partnership with Beyond Meat, PETA sent marketing messages to plaintiff’s cellular telephone number touting the availability of Beyond Meat products at local restaurants. Plaintiff’s core allegation is that PETA sent her a text message via an automatic telephone dialing system (ATDS) without sufficient prior express written consent in violation of the TCPA. Plaintiff sought to represent a nationwide class of all individuals who received a similar message and sought statutory penalties of $500 per message received for each putative class member of her alleged nationwide class.

Defendant, PETA, filed a motion to dismiss for lack of subject matter jurisdiction, and, alternatively, for failure to state a claim, a motion to dismiss or strike plaintiff’s nationwide class claims; and a motion to stay the case pending the FCC’s definition of an ATDS. First, the court denied the motion to dismiss for lack of subject matter jurisdiction, holding that, even by receipt of a single, allegedly unauthorized, text message, the plaintiff had alleged sufficient injury to confer subject matter jurisdiction on the court. Second, the court denied PETA’s motion to dismiss or strike the nationwide class claims on the basis that the unnamed class members are not full parties to the case for many purposes. The court also denied PETA’s motion to dismiss for a failure to state a claim. PETA argued that the FCC has exempted nonprofits from the TCPA’s requirement of prior express written consent for receipt of marketing texts if the text is sent based on “the prior express consent of the called party when the call is made by or on behalf of a tax-exempt nonprofit organization.” The court held that it could not at this juncture decide whether PETA’s texts were made on its own behalf or on behalf of Beyond Meat and thus whether PETA was shielded from liability. The court granted, however, PETA’s motion to stay pending the Supreme Court’s decision in Facebook Inc. v. Duguid was granted because the Court was likely to issue an opinion on the question of whether the definition of ATDS in the TCPA encompasses “any device that can ‘store’ and ‘automatically dial’ telephone numbers, even if the device does not ‘us[e] a random or sequential number generator.’”

McEwen v. Nat’l Rifle Ass’n of Am., 2021 WL 1313273 (D. Me. 2021)

Plaintiff McEwen commenced this civil action in May 2020 by filing a class action complaint against the National Rifle Association of America (NRA) and InfoCision Inc. The plaintiff alleged that the defendants together created and sustained a telemarketing campaign aimed at selling membership and soliciting contributions to the NRA. As part of the campaign, the defendants used an automatic telephone dialing system (ATDS) to make autodialed calls to consumers without the consumers’ consent, including consumers who have listed their numbers on the National Do Not Call Registry. Plaintiff alleged that the defendants violated the Telephone Consumer Protection Act (TCPA). The defendants sought dismissal through motions for failure to state a claim, and the court granted them, stating that the plaintiff had not alleged he received a call that violated the TCPA.

Constitutional

Pasadena Republican Club v. Western Justice Center, 985 F.3d 1161 (9th Cir. 2021), cert denied, 142 S. Ct. 337 (2021)

Western Justice Center (WJC), a private nonprofit organization, agreed to rent space in WJC’s building for a speaking event. Shortly before the event, however, WJC learned about the plaintiff’s speaker’s association with a politically active group that WJC explained, held “positions on same-sex marriage, gay adoption, and transgender rights [that] are antithetical to [WJC’s] values.” WJC then rescinded the rental agreement. In response, the plaintiff filed a lawsuit alleging that its First Amendment rights had been violated. Plaintiff claimed that WJC’s leasing arrangement with the City of Pasadena (the City) constituted sufficient grounds to bring constitutional claims against WJC, a private 501(c)(3) nonprofit organization dedicated to civic improvement. The plaintiff filed claims against the City, WJC, and WJC’s Executive Director in a civil action for deprivation of rights under 42 U.S.C. § 1983. The court rejected the plaintiff’s claims, holding that WJC is not a state actor for purposes of the plaintiff’s constitutional claims. Neither the circumstances under which WJC rehabilitated the building and acquired the lease, nor the terms of the lease itself, convert WJC into a state actor. Similarly, the government does not, without more evidence that the defendant was acting under the color of state law, become vicariously liable for the discretionary decisions of its lessee.

Americans for Prosperity Foundation v. Bonta, 141 S.Ct. 2373 (2021)

The petitioners are two tax-exempt charities that solicit contributions in California. Charities soliciting funds in California generally must register with the California Attorney General’s Office and renew their registrations annually, and as part of their registration, must disclose the identities of their major donors. Since 2001, each petitioner has renewed its registration, and has filed a copy of its Form 990 with the Attorney General, as required; but to preserve their donors’ anonymity, they declined to file unredacted Schedule Bs, which disclose the names and addresses of their major donors. They had faced no consequences for this noncompliance until the Attorney General threatened enforcement action in 2013. The petitioners filed suit in federal court, alleging that the compelled disclosure of Schedule Bs violated their and their donors’ First Amendment rights. After many interim steps, including injunctions, appeals, and remands, the matter was appealed to the U.S. Supreme Court, which granted certiorari. The Court held in favor of petitioners, ruling that California’s disclosure requirement was facially unconstitutional because it “creates an unnecessary risk of chilling” associational rights in violation of the First Amendment, even if there is no disclosure to the general public, by “indiscriminately sweeping up the information of every major donor with reason to remain anonymous.” The Court considered the gravity of the privacy concerns in the context of the hundreds of organizations that filed amici curiae in support of the plaintiffs, which spanned ideological perspectives. The Court found that the deterrent effect feared by these organizations was real and pervasive, even if their concerns are not shared by every charity operating or raising funds in California.

Finally, the Court found that California’s demand for Schedule Bs could not be saved by the fact that donor information is already disclosed to the IRS as a condition of federal tax-exempt status, as each governmental demand for disclosure brings with it “an additional risk of chill.” Revenue collection efforts and conferral of tax-exempt status may raise issues not presented by California’s disclosure requirement, which could prevent charities from operating in the State altogether. The Court held that the Attorney General’s disclosure requirement imposed a widespread burden on donors’ associational rights, that could not be justified on the ground that the regime is narrowly tailored to investigating charitable wrongdoing, or that the State’s interest in administrative convenience was sufficiently important. The Court therefore held that the up-front collection of Schedule Bs was facially unconstitutional, because it failed in exacting scrutiny in “a substantial number of its applications ... judged in relation to [its] plainly legitimate sweep.”

Crowe v. Oregon State Bar, 989 F.3d 714 (9th Cir. 2021)

To practice in Oregon, every lawyer must join and pay annual membership fees to the Oregon State Bar. The plaintiffs objected when the Oregon State Bar released statements in the bar’s bulletin condemning white nationalism and stating that President Donald Trump “has himself catered to this white nationalist movement.” Plaintiffs claimed that the compulsory membership in the Oregon State Bar violated their freedoms of speech and association as guaranteed by the First Amendment, made applicable to the states by the Due Process Clause of the Fourteenth Amendment. Defendant moved to dismiss.

On appeal, the Ninth Circuit held that even assuming that the Oregon State Bar’s published statements were nongermane to its role in regulating the legal profession and improving the quality of legal services, plaintiffs’ free speech claim failed because courts are not required to apply exacting scrutiny. Moreover, the Bar’s refund process for dues misused for political purposes was sufficient to minimize potential infringement on members’ constitutional rights, and constituted an adequate procedural safeguard. However, the Ninth Circuit held that the district court erred in concluding that precedent required dismissal of the plaintiffs’ free association claim. The plaintiffs stated a viable claim for violation of their right to freely associate for expressive purposes. The court also held, as a matter of first impression for the Ninth Circuit, that the Oregon State Bar was not an “arm of the state” entitled to sovereign immunity. The appeals court remanded the case for reconsideration of the issue of whether the First Amendment tolerates mandatory membership itself—independent of compelled financial support—in an integrated bar that engages in nongermane political activities.

Election Law

New York ex rel. TZAC Inc. v. New Israel Fund, 520 F.Supp.3d 362 (S.D.N.Y. 2021)

Plaintiff relator brought a qui tam action in state court on behalf of the state against a tax-exempt charitable organization, alleging that defendant violated the New York False Claims Act (NYFCA) by fraudulently obtaining and maintaining its tax-exempt status despite impermissibly engaging in prohibited electioneering activities, including issue advocacy and democracy building work in Israel. Defendant removed to federal court and moved to dismiss for failure to state a claim. The court denied the defendant’s motion to dismiss as the complaint contained sufficient factual allegations to support a tax fraud theory that, if accepted as true, gave rise to NYFCA liability. The court found that it could not determine at the motion to dismiss stage whether the bar to NYFCA actions where the same allegations have been publicly disclosed in news media applied to information posted on the Internet by the defendant and third-party sources. The court also held that relator adequately pled that defendant knowingly submitted false certifications on its state tax returns.

Due Process

Bob Baffert v. The New York Racing Association Inc., Case No. 1:21-cv-03329, United States District Court of the Eastern District of New York (2021)

Defendant, the New York Racing Association (NYRA), suspended plaintiff for two years from horseracing after several failed post-race drug tests. Plaintiff was not given a post-suspension hearing, and thus brought action in the District Court for the Eastern District of New York claiming that the New York Racing Association acted unconstitutionally by failing to let him adequately respond to the drug claims. Plaintiff sought to preliminarily enjoin defendant from enforcing its suspension pending the resolution of the lawsuit.

The court granted defendant’s motion for a preliminary injunction, reasoning that the NYRA was an undisputed “state actor” because it carries out a statutorily prescribed role under New York’s Racing Law, as the franchisee to administer thoroughbred racing in the State, and that therefore “due process required that Baffert, having an undisputed property interest in his licensed right to racehorses in New York, was entitled to a pre-suspension hearing.” Nonetheless, the court confirmed the association’s authority to exclude individuals from its racetracks whose conduct is contrary to the best interests of the racing practice, provided that, in exercising its “right of exclusion,” the NYRA conforms to the requirements of due process.

Governance

High Road on Dawson v. Benevolent and Protective Order of Elks of the United States of America Inc., 608 S.W.3d 869 (Tex. App. 2020)

Plaintiff (National), a national fraternal nonprofit organization, revoked the charter of the defendant (Chapter), one of National’s separately incorporated local chapters, due to violations of Chapter’s governing documents. The Chapter initially appealed the revocation before withdrawing its appeal and voting to disassociate from National. The Chapter revised its governing documents to remove references to its affiliation with National and to change its purposes to general charitable purposes. National authorized the liquidation of the Chapter’s property, but the Chapter refused to surrender the property to National.

National brought action alleging trespass to try title, conversion, unjust enrichment, breach of contract, breach of fiduciary duty, and violations of the Texas Theft Liability Act by the Chapter. The Chapter filed counterclaims for civil conspiracy and the breach of the duty of good faith and fair dealing. The Chapter contended it owned the property because National did not hold title or have possession of the property. After a series of summary judgment motions, the trial court granted summary judgment in favor of National on its trespass to try title, violations of the Texas Theft Liability Act, and breach of contract claims, and on the Chapter’s counterclaims for breach of the duty of good faith and fair dealing and civil conspiracy, but granted summary judgment in favor of the Chapter on its breach of fiduciary duty claim. The trial court concluded that National was the legal and rightful owner of the property, and that the Chapter had no legal or equitable interest in the property. The Chapter appealed.

The Court of Appeals of Texas found that the Chapter’s refusal to surrender its property to National following revocation of its charter, as required under National’s internal laws and constitution, constituted a breach of contract and a violation of the Theft Liability Act, as the Chapter agreed to operate under laws of National as a chapter and National’s revocation of the Chapter’s charter vested equitable title to the Chapter’s real property in the National organization. The appeals court further held that the contract governing the Chapter’s membership in the national organization did not impose on parties a duty of good faith and fair dealing and that the Chapter failed to allege an underlying tort cause of action required to maintain a civil conspiracy cause of action.

M4 Holdings LLC v. Lake Harmony Ests. Prop. Owners’ Ass’n, 237 A.3d 1208 (Pa. Comm. Ct. 2020), appeal denied, 249 A.3d 250 (Pa. 2021)

Plaintiff was a real estate developer who brought action against a property owners’ association, seeking declaratory judgment with respect to the association’s decision to deny building applications in a planned community pursuant to a rule limiting the size of new construction.

The rule adoption process occurred through email correspondence, during which one board member opened discussion and determined an immediate vote was necessary, another member seconded the motion, and several more added their support. The board contended that these emails sufficed as adopting the minimum size rule proposal as an amendment to the bylaws. Two weeks after these exchanges, the board issued a notice to members of the association stating that it had approved this addition to the bylaws.

The trial court found for the developer, concluding that the rule at issue had no valid force because the board of directors “did not validly adopt” it. The decision was affirmed on appeal. The court considered whether the series of emails among the directors constituted a meeting of the board. In interpreting the bylaws, the court determined that email correspondence did not constitute “on-line communications equipment or other technology” that is “similar” to a “conference telephone,” because email does not allow for “simultaneous contemporaneous communication.”

Nat’l Rifle Ass’n of Am. v. North, 130 N.Y.S.3d 925 (N.Y. Sup. Ct. 2020)

Plaintiff, the National Rifle Association of America (Association), filed an internal disciplinary action against a member, director, and former officer of the Association and subsequently sought a declaration that it would not be in violation of New York’s Not-For-Profit Corporation Law on whistleblower protections if it proceeded. Plaintiff also sought to recover money damages from the defendant based on alleged breaches of fiduciary and statutory duties. Defendant moved for a stay of this action during the pendency of an action commenced by the Attorney General in the Supreme Court, New York County to dissolve the Association for alleged “widespread illegal conduct.”

The court held that, given the connection between the two actions, and the likelihood that determination of the dissolution case would impact the issues to be adjudicated, a stay was warranted to “preserve judicial resources, further the interest of justice by preventing inequitable results and promote orderly procedure by furthering the goals of comity and uniformity.” The court further found that prejudice to the defendant from being forced to defend against this action during the pendency of the dissolution case outweighed any prejudice to the plaintiff that might result from the stay. The court considered the plaintiff’s greater financial resources and stated that it is “questionable whether [defendant] would be entitled to indemnification from [plaintiff] for his legal fees and other expenses incurred in defending against this action.” The court thus granted defendant’s motion for a stay of the action pending determination of the dissolution case.

Regulatory

Melwood Horticultural Training Ctr. Inc. v. United States, 153 Fed. Cl. 723 (2021)

The protester Melwood Horticultural Training Center Inc. challenged the AbilityOne Commission’s (Commission) decision to use competitive procedures in a procurement as part of a pilot program in the AbilityOne program. Protester claimed that procurement of facility maintenance services was being conducted in a manner that contravened the requirements of the Javits-Wagner-O’Day Act (JWOD Act), a federal law requiring that all federal agencies purchase specified supplies and services from nonprofit agencies employing persons who are blind or have other significant disabilities, and the regulations that implement that law. The Court of Federal Claims thus sought to answer whether nonprofit contractors under the new program could compete with one another on price as if they were regular contracts seeking a solicitation.

The court concluded that the AbilityOne Commission Pilot Program impermissibly introduced competitive pricing into a procurement intended by Congress to support employment opportunities for those who are blind and/or severely disabled. The Commission argued that the use of competitive pilot programs did not violate any “specific provisions” of the JWOD, and that the court must give deference to agency decision-making. The court noted that, although a court’s deference to agencies is significant, it is not “unbridled.” JWOD and its implementing regulations carefully establish procurement procedures that are collaborative and “other than competitive.” Thus, the court explained, the AbilityOne program is contrary to law, and protester was entitled to injunctive relief.

SEC Adopts Amendments to Exempt Offering Framework, Nov 4, 2020

On November 2, 2020, the SEC adopted rule amendments to the current exemptions from registration under the Securities Act. The amendments are part of the SEC’s ongoing work to harmonize and improve registration exemptions, with the goal of simplifying and facilitating access to capital and investment while maintaining investor protections. Among the amendments is New Rule 148, which concerns “demo day” communications. “Demo days” are sponsored meetings during which issuers present business proposals to potential investors. New Rule 148 provides that, under certain conditions, an issuer will not be deemed to have engaged in general solicitation if the communications are made in connection with a seminar or meeting sponsored by an “angel investor group,” an institution of higher education, state or local government, or a nonprofit organization. To qualify for this exemption, several conditions must be met, including that if the event allows attendees to participate virtually, there must be a cap on virtual participation.

Public Records Act

Malin v. Missouri Ass’n of Cmty. Task Forces, 605 S.W.3d 419 (Mo. Ct. App. 2020)

On appeal, plaintiff argued that defendant is a quasi-public governmental body because it is “an association that directly accepts the appropriation of money from a public governmental body.” The Missouri Court of Appeals rejected this argument and concluded that ACT Missouri is not an “association” as the term is used under Missouri law on governmental bodies and records. The court reasoned that, rather than assign a broad definition to the term “association,” the term must be examined in the context of the statute. The court concluded that given the scope and limiting terms of the statute, “any association” under the statute’s definition of “quasi-public governmental body” applies only to unincorporated associations, and thus does not reach entities such as ACT Missouri, organized under Missouri’s Nonprofit Corporation Law.ACT Missouri is a nonprofit corporation organized under Missouri’s Nonprofit Corporation Law. When it received plaintiff’s request for records, it responded by explaining that because it is not a covered entity under the Missouri Sunshine Act, it was not required to give any further response. Plaintiff then filed suit in circuit court, seeking records, civil penalties, and attorney’s fees. Defendant moved for summary judgment, arguing again that it was not a “quasi-public governmental body,” and thus not subject to the Missouri Sunshine Law.

Taxation

USA Hockey Found. v. Plymouth Twp., 2021 WL 1043999 (Mich. Ct. App. Mar. 18, 2021)

Petitioners, the USA Hockey Foundation and its wholly owned, for-profit subsidiary Plymouth AC LLC, appealed the Michigan Tax Tribunal’s order ruling that petitioners were not entitled to the Michigan charitable institution exemption from ad valorem property taxation for an ice-hockey arena owned by the Foundation’s subsidiary, Plymouth AC LLC. The exemption applies to property “owned and occupied by a nonprofit charitable institution while occupied by that nonprofit charitable institution solely for the purposes for which that nonprofit charitable institution was incorporated.”

The Tribunal had applied the test for entitlement to the charitable-institution exemption, which provides that a taxpayer must establish three elements to be entitled to the exemption: (1) the real estate must be owned and occupied by the exemption claimant; (2) the exemption claimant must be a nonprofit charitable institution; and (3) the exemption exists only when the buildings and other property thereon are occupied by the claimant solely for the purposes for which it was incorporated. The Tribunal concluded that the petitioners did not satisfy the first or second element, and rejected the petitioners’ argument that property owned by the LLC was automatically exempt from ad valorem taxation under the Michigan nonprofit charitable institution exemption.

On appeal, the court concluded that the Tribunal ruled correctly on all points. The court reasoned that because the real property in this case was owned by a for-profit limited liability company, even if a wholly owned subsidiary of a nonprofit charitable institution, the petitioners were not entitled to the tax exemption. The court rejected petitioners’ argument that the Foundation “own[ed]” the real property to which its subsidiary company held legal title as “another way to express its argument that a subsidiary corporation is entitled to a tax exemption when its parent company is exempt.” Petitioners also contended that, although it was a business entity formed as a limited liability company, it should be considered a nonprofit, rather than a for-profit entity. The court noted that the petitioners cited “no authority for [this] proposition,” and concluded that this final argument was without merit. The court held that, as a matter of Michigan law, a tax-exempt parent corporation does not extend its tax-exempt status to a subsidiary organized as a for-profit LLC.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pillsbury Winthrop Shaw Pittman LLP | Attorney Advertising

Written by:

Pillsbury Winthrop Shaw Pittman LLP
Contact
more
less

Pillsbury Winthrop Shaw Pittman LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.