New York Nonprofit Revitalization Act Rollout Challenges


As the July 1, 2014 compliance date of the New York Nonprofit Revitalization Act of 2013 (the “Revitalization Act”) quickly approaches, many charities operating in New York are confronting some difficult rollout challenges. While parts of the Revitalization Act are clear and welcomed (such as new rules that broaden the use of electronic communications and eliminate the need for supermajority board approvals of routine property transactions), other new requirements are puzzling to many of these charities’ officers and directors. Indeed, as we counsel our clients, we are finding that certain new Revitalization Act rules that concern board operations are causing some charities, in particular family foundations and corporate foundations, to wonder whether operating through corporations formed in New York is desirable.

The charities that seem to be facing the hardest issues are foundations with small boards, and with directors that either directly and appropriately exert substantial influence over foundation operations (such as in a family foundation), or are employed by the businesses that have founded and fund these charities to do their good works.

We are finding that many, but not all, of the requirements causing concern are tied to vague drafting in the Revitalization Act. The good news is that we have also identified what we believe are reasonable interpretations of the law that align with workable solutions for many clients.

This client alert notes just a few of the more pressing Revitalization Act issues, as well as relevant potential solutions, as they appear to us today. We will be highlighting other aspects of the Revitalization Act rollout over the coming year. We stress that the New York State Attorney General’s Charities Bureau may issue clarifying Revitalization Act guidance, and it is also possible that follow-up legislation may address some of these issues. Importantly, it is possible that this guidance or future legislation will not support our interpretations, although we hope that it does. Stay tuned.

Three Independent Directors

The Revitalization Act will require many charities to identify at least three individuals that satisfy detailed requirements of “independence” to serve as directors and oversee specified audit and financial reporting activities. (Three are needed because that is the fewest number of directors required by New York law to perform delegated board-level functions.) For many family foundations, corporate foundations, and labor/management charities – with small boards that are typically composed of individuals tied in some way to the charity or related entities – this requirement has created concern. This concern may be heightened when membership on the board has been finely balanced to achieve acceptable approaches to shared governance.

Most important for these charities to keep in mind is that the requirement is limited to charities that raise or “solicit” funding from the general public. However, some of these charities, in their annual charities filing with the New York Attorney General, may have been filing as soliciting charities even though they do not actually solicit funding. We suggest that such charities consider amending their filing status and we urge that any change in filing status in response to the Revitalization Act be made in consultation with corporate and tax counsel, closely assessing individualized factors and risks. For example, part of the analysis may be to examine whether the charity has been filing its annual Form 990 with the Internal Revenue Service (“IRS”) as a “public charity” (based on “public support” concepts of the IRS that differ from the New York concepts of “solicitation”). While we do not believe that the New York charitable solicitation concepts match the IRS concepts, tailored assessments should be made with both New York charitable solicitation laws and U.S. federal tax laws in mind.

For those charities that do solicit within the meaning of New York law, and whose small boards are populated by individuals employed by related entities, it will be worthwhile to take a hard look, again guided by counsel, at the kind of control exerted by a charity’s affiliated corporate entities over the charity. Under the Revitalization Act, whether that employment disqualifies a director as “independent” will depend on whether the particular corporate or other entity that employs the director “controls” or is “under common control with” the charity. Notably, the Revitalization Act does not define “control.”

Conflicts Policy Quagmire

Although the Revitalization Act is clear that the requirement for independent-director oversight of auditing and financial matters is limited to “soliciting” charities, the law is less clear about whether independent director oversight also applies to the law’s requirements on conflicts policies.

Essentially, the Revitalization Act codifies the widespread practice already adopted by many charities – many motivated by the IRS Form 990 conflicts policy checkbox – to have a written conflicts policy. It also requires oversight of adoption, implementation, and compliance with the conflicts policy by the Board or the audit committee. Certain provisions of the Revitalization Act can be read as requiring these oversight functions to be handled by independent directors only. While our interpretation is not free from doubt, we believe that to the extent there is an obligation to have independent directors oversee conflicts policy administration, a close and reasonable reading of the Revitalization Act supports the interpretation that such requirement is also confined to soliciting charities. If not, many private foundations will be forced to make drastic board changes for conflicts policy oversight, while permitted to use directors that do not satisfy independence criteria for what is generally viewed as the critical audit oversight function – a seemingly absurd result.

Charities with conflicts policies based on the IRS form are probably already aware that they will need to amend those policies to satisfy Revitalization Act requirements, since the IRS form does not track all of the components of a conflicts policy required by the Revitalization Act. As these policies are drafted, special attention should be paid to the annual conflicts questionnaire required by the Revitalization Act. Many charities already distribute an IRS Form 990 annual questionnaire to directors, officers and key employees. Revitalization Act questionnaires will now be covering some, but not all, of the same territory. To avoid bombarding individuals with duplicative annual forms, consideration should be given as to whether to use a single questionnaire that reasonably covers both IRS and Revitalization Act requirements.

Approval of Director, Officer, and Key Employee Compensation

The Revitalization Act imposes significant new requirements concerning related-party transactions. Among other things, the Revitalization Act imposes a new requirement to “contemporaneously document in writing the basis for the board or authorized committee’s approval” of a related party transaction, “including its consideration of any alternative transactions.” The Revitalization Act also provides the Attorney General with enhanced enforcement authority to void, rescind, seek restitution, and remove directors in connection with a transaction that is not properly approved or that was not reasonable or in the best interests of the corporation at the time the transaction was approved.

Because the Revitalization Act broadly defines a “related party transaction” as “any transaction, agreement, or any other arrangement in which a related party [including a director, officer or key employee] of the corporation has a financial interest and in which the corporation or any affiliate of the corporation is a participant,” there is some question as to whether compensation arrangements with directors, officers, and key employees are related party transactions. While the matter is not free from doubt, we believe that there is a reasonable basis for considering these compensation arrangements to be regulated in a manner distinct from related party transactions under the Revitalization Act. Clarification on this issue, however, would be helpful.

In addition, the Revitalization Act appears to define all directors as “related parties,” and prohibit all related parties from participating in deliberations and voting pertaining to related party transactions, without specifically distinguishing between directors who have an interest in the particular transaction and those who do not. Guidance clarifying that the Revitalization Act will not be construed or enforced in such an impracticable manner would be helpful.

Also, certain ambiguous language in the Revitalization Act can be read as expressly prohibiting any director from being present at or participating in any board deliberations or vote concerning director compensation, while apparently requiring director approval of the compensation. While we believe that such a reading of the Revitalization Act would be unreasonable and contrary to principles of statutory construction, clarifying guidance would help avoid uncertainty on an important governance issue. In the interim, boards may wish to approve director compensation arrangements prior to July 1.

Extraterritorial Application of Revitalization Act

Finally, some commentators have raised concerns that certain provisions of the Revitalization Act relating to board composition and operation may be applicable to charitable organizations formed outside of New York, such as Delaware non-stock corporations. We have not found this to be a reasonable interpretation of the Revitalization Act. Again, however, clarifying guidance would be welcome.

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A Continued Examination of Charitable Patient Assistance Programs Part Seven in a Series: Charitable PAPs: Donations and Transparency 2013-09-03

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In today’s challenging health care environment, Charitable Patient Assistance Programs (Charitable PAPs) have emerged to meet the needs of the nearly 30 million Americans that are underinsured and have difficulty paying out-of-pocket medical costs. As potential donors make strategic decisions to invest in Charitable PAPs, there are many elements that must be considered to ensure compliance with all applicable laws and regulations. For the previous alerts in the series, please refer here.

As Charitable PAPs are entrusted with donations to help patients, it is important that the organization is accountable to its donors and is in compliance with all relevant audit requirements. When considering a donation to a Charitable PAP, it is important to evaluate the organization’s commitment to regular and thorough independent, third-party reviews to verify program and financial transparency and to validate operations:

  • Does the organization undergo regular, independent financial audits? In most cases, non-profit 990s are prepared by an accredited and industry-recognized financial auditing firm typically named on the 990. Researching the firms can provide insight into the thoroughness of the audit.
  • Does the Charitable PAP agree to operate in a certain manner with its donors? Is compliance audited? It is possible to request copies of compliance audits to make sure the organization is adhering to applicable requirements and restrictions as outlined to donors.

Poor Help: Audit Says Legal Aid Boss Charged Taxpayers for Club, Car

From the featured guest bloggers from the Center for Public Integrity. John Solomon and Laurel Adams share some insight on how federal tax dollars meant for legal aid for the poor took a detour down in the Bayou State. 

The head of a Louisiana legal aid group funded by the federal government routinely dined at a private club and drove a leased vehicle for personal use at taxpayers’ expense, according to an audit that exposes significant fringe benefits inside a profession dedicated to helping the poor.

The Legal Services Corp. (LSC) inspector general, the chief watchdog for federal funds given to local legal aid groups nationwide, challenged $318,768 in expenditures by the Capital Area Legal Services Baton Rouge, La., that were charged to taxpayers.

The group provides legal aid to poor residents in a dozen Louisiana parishes and received $1.5 million from Legal Services Corp. in 2009.

Many of the questioned expenditures involved the legal aid group’s executive director, James A. Wayne, Sr., who routinely submitted meals for reimbursement as “business expenses” even when he dined alone and on weekends.

The watchdog report, released earlier this month, concluded Wayne charged his legal aid group $33,150 for meals he claimed were business-related from Jan. 1, 2005 to May 31, 2009.

“The Executive Director frequently dined (breakfast, lunch, and dinner) at a private business club and restaurants in Baton Rouge,” Inspector General Jeffrey Schanz said in his report. “Many of the meals were lunches and dinners where the Executive Director dined alone, and some meals took place on weekends.”

Wayne acknowledged that he routinely dined at the Camelot Club, an exclusive dining club in Baton Rouge where an annual membership runs close to $2,000, but he disputed the audit report’s portrayal of the spending as inappropriate.

Utility giant Entergy Corp., a donor to Wayne’s nonprofit legal aid group, paid for his Camelot Club membership and meals, he said. That meant Wayne only charged taxpayers for the meal of his guests. The arrangement, he said, may have left the auditors with a false impression he was dining alone.

“I’m a very visible nonprofit director, so my meal is paid for,” Wayne told the Center in a telephone interview. “The other person wasn’t.”

The Camelot Club, located atop a downtown office building, describes itself as one of Baton Rouge’s “most prestigious clubs” with panoramic views of the Mississippi River, the state capitol building, and Louisiana State University. The club overlooks a city where about 24 percent of residents live in poverty, according to U.S. Census Bureau data.

When asked by the Center about the private club membership, New Orleans-based Entergy said it has temporarily suspended funding for the Baton Rouge group.

“We provided funding to the organization for low-income advocacy issues. We are aware of a pending investigation against the organization and have suspended any funding until it is resolved,” Entergy said in a statement to the Center. “We have no knowledge or control over how the donations were spent by the organization once they were received.

Wayne said he did not believe the inspector general’s criticisms were warranted. “None of it has any merit. We’ve been through this before,” he said.


The audit concluded that $11,462 of Wayne’s meal reimbursements paid by federal tax dollars lacked proper documentation to show they were justified by business purposes.

In fact, the inspector general concluded that Wayne sometimes charged his legal aid group and taxpayers for personal meals under a loose reimbursement system that often sought to justify expenses after the fact. In some cases, Wayne added the names of guests or the business purpose of a meal to receipts more than a month later.

“Personal expenses are being inappropriately charged to the grantee and decisions on allowability of the charges are being made after the fact rather than on contemporaneous supporting documentation,” the inspector general concluded.

The Capital Area Legal Services Corp. is promising to revise its internal financial controls in response to the watchdog report, but disputes the assertion that there was anything wrong with Wayne’s meal reimbursements.

“CALSC maintains that it has provided evidence that the expenditures reviewed by the OIG meet the criteria set out in” federal regulations, the legal aid group said in a written response that was attached to the watchdog’s report.

A lawyer for the group, Vicki Crochet, told the Center in an e-mail that while certain expenses were questioned, CALSC “looks forward to the opportunity to show that it has properly accounted” for all Legal Services Corp. funding received. The expenses challenged by the inspector general are being submitted to the Legal Services Corp. for a final decision.

A Legal Services Corp spokesman told the Center that if it confirmed that funds were misspent, the federal agency could ask for the money to be repaid or could attach conditions to any future federal funding for Capital Area Legal Services Corp. “We take the inspector general’s reports very seriously and the Office of Compliance and Enforcement will give this a lot of attention,” Legal Services Corp spokesman Steve Barr said.

The inspector general also suggested the legal group’s problems might also extend to the Internal Revenue Service and state tax authorities.

“CALSC appears to have also improperly recorded transactions dealing with fringe benefits …, membership dues, lease payments, subscriptions, and client trust fund interest [and] may be liable for additional payments to the Internal Revenue Service and may be subject to sanctions from the State of Louisiana,” the inspector general warned.


Among those transactions, the watchdog questioned why Wayne charged taxpayers more than $78,555 over more than four years for a leased vehicle that he used both for business and personal transportation, and warned it might have violated tax laws.

Wayne said the leased vehicle was a Toyota Camry, and that he got a new model each year. “They change the cars out every year,” he said.

The inspector general challenged the need for a taxpayer-funded car.

“The Executive Director used the vehicle for both business and personal use without prior approval from LSC and without adequate documentation identifying when the vehicle was used for business and when the vehicle was used for personal reasons. Also, the Executive Director did not maintain and provide CALSC any records to document the use of the vehicle as required by the Internal Revenue Service,” the watchdog report concluded.

“Lacking adequate records, CALSC did not report to IRS as required the value of all use of the vehicle by the Executive Director as wages.”

Wayne said the car was leased for his business travel but that he began taking it home after the vehicle was vandalized in the legal aid group’s parking lot. The IRS recently gave him permission, Wayne said, to start reimbursing his nonprofit group $100 a month for personal use of the car.

Other practices at Capital Area Legal Services Corp. were questioned, including travel reimbursements for Wayne, LSC-funded payments of $144,646 to a fundraising consultant, and rent charged to the Legal Services Corp. even though the Baton Rouge group owned the building where its offices were located.

The rent payments appeared to charge taxpayers to help cover the group’s building mortgage, the inspector general said. “It is not reasonable and necessary for a single entity to pay itself rent in order to occupy a building that it already owns,” it concluded.

Wayne told the Center that the Legal Services Corp. approved the purchase of the building and was aware of the billing situation. He also asserts that the going rate for the rent was $900 per month, and Capital Area Legal Services Corp. only charged $750 per month, the same amount as its previous rent.

The Louisiana audit is the latest example of trouble inside the Legal Services Corp., the federally chartered corporation funded by Congress to provide legal assistance to the poor so they can access the civil courts. LSC provides tax dollars to local groups to do the work.

Members of Congress, including Republican Sen. Charles Grassley of Iowa and GOP Rep. Darrell Issa of California, and Democratic Sen. Barbara Mikulski of Maryland, are questioning whether LSC is doing enough to monitor the way groups spend the federal money to ensure it really helps the poor.

The Center reported in July that LSC has been struck by a rash of fraud cases in which tax dollars aimed at the poor were diverted to personal uses, including a Baltimore legal aid group executive accused of stealing more than $1 million, spending much of it, investigators said, on prostitutes and gambling.

Reprinted by Permission © 2010, The Center for Public Integrity®. All Rights Reserved.

Cy Pres Class Action Defense Cases–In re American Tower: Massachusetts Federal Court Rejects Request To Distribute Class Action Settlement Cy Pres Funds To Non-Profit Organization

First of a series of daily guest blog spots from the National Law Review’s featured blogger Michael J. Hassen of  Jeffer, Mangels, Butler & Mitchell LLPMichael Hassan authors  JMBM’s Class Action Defense Blog.

Distribution of Unclaimed Class Action Settlement Funds to Non-Profit Organization Unconnected to Harm Suffered by Class Members Inappropriate Massachusetts Federal Court Holds

Plaintiff filed a putative class action against American Tower Corp. alleging violations of federal securities laws and purported to be brought on behalf of “members of the public who were harmed by the securities fraud.” In re American Tower Corp. Securities Litig., 648 F.Supp.2d 223, 224-25 (D.Mass. 2010). Eventually, the parties negotiated a settlement of the class action which provided for the distribution of unclaimed funds through a cy pres fund. Id., at 224. Lead Plaintiff moved the district court for authorization to distribute the cy pres funds “to The Peggy Browning Fund, a private, nonsectarian, not-for-profit organization with 501(c)(3) tax-deductible status.” Id. The federal court denied the motion because plaintiff sought “to disburse settlement funds to a non-profit organization with little connection to the harms class members suffered,” id. Because the author has received numerous inquiries from defense and plaintiff counsel concerning the proper scope of a cy pres fund, we include this article on the district court’s ruling.

The district court noted that the proper inquiry was to “determine whether the Peggy Browning Fund is an appropriate recipient of any residual settlement funds” of the class action settlement. In re American Tower Corp., at 224. The court explained that the purpose of the use of a cy pres fund is effect a distribution of class action settlement funds “to a ‘next-best’ recipient” when it is impractical to distribute the settlement funds to the class members. Id., at 224-25 (citing In re Airline Ticket Commission Antitrust Litig., 268 F.3d 619, 626 (8th Cir.2001)). “‘In such cases, the court, guided by the parties’ original purpose, directs that the unclaimed funds be distributed for the prospective benefit of the class.’” Id. (citation omitted). The federal court easily concluded, then, that the Peggy Browning Fund was “an inappropriate recipient of any unclaimed class funds.” Id. “Disbursement of unclaimed funds must have some relationship to the harm suffered by class members…. However, the Peggy Browning Fund focuses on labor issues…. Therefore, it does not appear that funds donated to the Peggy Browning Fund would benefit the class or address the harms suffered by class members.Id. (italics added). The district court therefore denied the motion, without prejudice to Lead Plaintiff renewing the request and noting that Lead Plaintiff “should, if possible, propose a national organization whose work relates to the harm suffered by class members in this case.” Id.

NOTE: The author notes that trial courts are far too willing to authorize the distribution of cy pres funds to practically any organization. In such cases, the courts appear to be more interested in punishing the defendant than in effecting a distribution of funds to the “next-best” recipient.

© 2010 Jeffer Mangels Butler & Mitchell LLP. All rights reserved.

About the Author:

Michael J. Hassen is a Litigation Partner at Jeffer Mangels Butler & Mitchell LLP with more than 23 years experience in general business and commercial litigation, including class action defense and matters involving intellectual property, securities and unfair competition.  415-984-9666 /