New York AG Takes Proactive Approach to Regulation of Nonprofits

by Ballard Spahr LLP

Signaling increased oversight of nonprofit organizations, the New York Attorney General’s Office recently began to scrutinize the management and operation of New York nonprofits in an effort to head off potential crises before they threaten an institution’s viability.

In an example of its strategy to “stress test” nonprofit organizations with potential management problems before larger scandals break, Attorney General Eric Schneiderman’s office has launched an investigation into Cooper Union for the Advancement of Science and Art. The privately funded college in Manhattan was founded in 1859 as a purely merit-based academic institution. Admission was free for all students until last year when, facing severe financial constraints, Cooper Union began charging tuition for the first time.

The Attorney General’s investigation appears from published reports to center on financial decisions made by Cooper Union’s Board of Trustees leading up to the tuition change and concerning management of the school’s endowment including: the board’s handling of land Cooper Union owns beneath the Chrysler Building, which comprises the vast majority of the value of the school’s endowment; the terms of a lease agreement with Tishman Speyer, which owns and manages the Chrysler Building; the circumstances surrounding a $175 million loan from MetLife, for which the school put up the Chrysler site as collateral; and other issues concerning the school’s financial reporting and bonus payments to past executives.

In another example of the broader campaign regarding nonprofits, the Attorney General’s Office announced on April 9, 2015, that it has filed a lawsuit against the board of directors of two Brooklyn-based nonprofit organizations – Brooklyn Child & Family Services, Inc. and Project Teen Aid Housing Development Fund Corp. The suit, filed in the Brooklyn Supreme Court, concerns efforts by the board of directors of the two organizations to sell two townhouses owned by the organizations – The Rose F. Kennedy Family Center and The Rosa Parks Apartments – which had been used as housing for at-need pregnant women, young mothers, and their children. According to the suit, the board of directors approved eviction of the residents and then pursued a private sale of both buildings for a combined $5.7 million. Both attempted sales were pursued without approval from a state court or the Attorney General’s Charities Bureau as required under state law, the lawsuit alleges.

In addition, the suit alleges numerous improprieties by the board of directors and officers, including misappropriation of charitable assets; questionable circumstances surrounding a high-fee $600,000 loan secured by the Rose F. Kennedy Family Center; failure to pay employee wages; and failure to make corporate filings, including tax returns.

Through the Cooper Union investigation and Brooklyn lawsuit, the New York Attorney General has shown that New York not-for-profit organizations are operating under the vigilant and active law enforcement supervision. New York not-for-profits should, in turn, be scrupulous in their operations and aware of their rights and obligations should they find themselves subject to the Attorney General’s attention.

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.

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