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Law Firms Respond to Russia’s Invasion of Ukraine: How the Legal Industry & the Public Can Help

On February 21, 2022, Russian President Vladimir Putin ordered ground troops into the eastern Ukrainian provinces of Donetsk and Luhansk. Invading under the guise of establishing independence for the region on February 24, Russia started bombing key points of interest around the country, including the capital city of Kyiv. At the time of writing, the skirmishes remain ongoing, with Russia expanding its invasion force as the days go on.

The ramifications of Russia’s war are widespread. In Ukraine, infrastructural damage is considerable, an estimated 2 million civilians are evacuating or have been driven from their homes. The death toll remains uncertain at this time, but the Ukrainian health ministry estimates that hundreds of citizens have been killed as a result of the violence. Globally, financial markets are in a state of rapid flux, seeing huge rises in inflation, a strained supply chain and plummeting stock prices.

Law firms in the United States and abroad have responded to the conflict by offering pro bono services in anticipation of resultant legal complications and organized means by which money can be donated to Ukrainian humanitarian efforts.

How Have Law Firms Responded to Russia’s Invasion of Ukraine?

In some instances, firms have also closed offices in Ukraine to protect workers, and severed ties with Russian businesses. Law firms that have closed offices in Ukraine include Dentons, CMS and Baker McKenzie, which have closed offices in Kyiv.

“Dentons has established a taskforce to monitor and manage the crisis situation, with a primary focus on protecting our people,” Tomasz Dąbrowski, CEO of Dentons Europe, told the National Law Review. “We are in regular contact with our team in Kyiv and are providing our colleagues and their families with any possible assistance, including transport, relocation and accommodation assistance in the neighboring countries. Furthermore, we have seen a wave of kindness and generosity from our people across Europe, who have volunteered to provide accommodation in their homes for Ukrainian colleagues. Furthermore, in addition to the financial support our Firm is providing to our Ukrainian colleagues, we have also received financial donations from around the world to help them resettle.”

Many law firms have announced they are closing offices in Russia, including Squire Patton Boggs, Latham & Watkins Freshfields Bruckhaus Deringer, Akin Gump Strauss Hauer & Feld and Morgan Lewis & Bockius, among others. Norton Rose Fulbright announced March 7 that they are winding down their operations in Russia and will be closing their Moscow office as soon as they can, calling Russia’s invasion of Ukraine “increasingly brutal.”

“The wellbeing of our staff in the region is a priority. We thank our 50 colleagues in Moscow for their loyal service and will support them through this transition.”

Norton Rose Fulbright said they “stand unequivocally with the people of Ukraine,” and are taking steps to respond to the invasion.

“Some immediate actions are possible and we are taking them. We are not accepting any further instructions from businesses, entities or individuals connected with the current Russian regime, irrespective of whether they are sanctioned or not. In addition, we continue to review exiting from existing work for them where our professional obligations as lawyers allow. Where we cannot exit from current matters, we will donate the profits from that work to appropriate humanitarian and charitable causes,” the statement read. “We are working with our charitable partners in every region to raise funds to help the people of Ukraine, as well as providing pro bono support to those Ukrainians and others who are being forced to relocate.”

Law firms have also stepped forward to offer pro bono assistance to those affected by the Russian invasion of Ukraine.

**Law Firms Offering Pro Bono Assistance to Ukraine**

Akin Gump Partner and Pro Bono Practice leader Steven Schulman explained how the legal industry is collaborating and working to provide assistance:

“So what we often do in these crises, we will self organize, [and] say who’s a point person who knows what’s going on, and then we will share information so that again, we’re lightening the load on the legal aid organizations.”

Another law firm offering assistance to Ukraine is Covington & Burling, which the country hired to help pursue its claim against Russia at the International Court of Justice (ICJ). Specifically, Ukraine asked the court to order Russia to halt its invasion. Covington filed a claim on behalf of Ukraine to the ICJ.

Nongovernmental organizations (NGOs) are providing emergency aid in Ukraine, as well as in neighboring countries, such as Poland, Hungary, Slovakia and Romania to help people displaced by the war as they come across the border, Mr.Dąbrowski said. These organizations are providing food, water, hygiene supplies and other necessities, and urgent psychological counseling. Specific NGOs on the ground in Ukraine include Mercy Corps, Fight for Right, Project HOPE, Hungarian Helsinki Committee, and Fundacja Ocalenie, among others.

However, NGOs need cash donations in order to keep providing aid. Mr.Dąbrowski detailed what pro bono work Dentons is doing, and how the firm is supporting NGOs:

“Our Positive Impact team is in touch with numerous NGOs and lawyers from our firm to identify opportunities for pro bono legal advice, mainly in the countries which share a border with Ukraine. We are already working with NGOs in Poland and Hungary which are helping Ukrainian refugees displaced by the war. We are assisting with issues related to employment law, contracts, establishment of charitable foundations, etc… We are also in discussions with an international relief agency which is looking to set up operations within Ukraine.

While men between the ages of 18 and 60 are currently prohibited from leaving Ukraine, as of March 10, 2022, the conflict has created one of the largest refugee crises within the last few decades.

“We have activated our registered charitable foundation to collect donations from our people around the world to support Ukrainian families – and particularly children – displaced by the war, including some of our own people from Kyiv. So far, our colleagues from around the world have donated or pledged close to €300,000,” Mr.Dąbrowski said. “We have already distributed €60,000 of that to eight NGOs in Poland, Hungary and Romania, which are providing emergency aid, food and water, hygiene supplies, transportation, medical and psychological care, shelter and schooling to Ukrainian civilians fleeing from the war”

Concerns with immigration and refugee asylum is the next expected complication. In the short-term, the Department of Homeland Security is prioritizing Temporary Protected Status (TPS) designations for those already in the U.S.

For the public, there are a number of actions to take to support Ukrainians. However, those wishing to help should make sure to do their research before making any donations in order to ensure the funds end up in the right hands.

How Can Members of the Public Help Ukraine?

Possible scam organizations and outreach programs are common during international crises, so it’s important to know the signs of fraudulent charities. Some best practices for providing support include:

Giving directly to an organization rather than through shared donation links on social media
Being wary of crowdfunding efforts
Doing a background check on an organization and its donation claims using Charity Watch, Give.org, and Charity Navigator.

Some examples of charitable organizations focused on Ukraine relief include:

Informational resources for those affected are provided below:

Conclusion

Law firms and the public alike have stepped up to offer assistance and financial help to those most affected by the Russian invasion. Law firms cutting ties with Russian businesses and closing offices in Russia shows that the legal industry is standing behind Ukraine as the conflict continues to escalate.

In upcoming coverage, the National Law Review will be writing about how law firms are helping clients handle Russian sanctions, as well as the immigration implications of refugees displaced by the war in Ukraine.

*The quotes and input of interviewees reflect the latest information on the Russian invasion of Ukraine as of March 7, 2022. Readers can find the latest legal news from around the world on The National Law Review’s Global Law page.*

Article By Chandler Ford, Jessica Scheck, and Rachel Popa of the The National Law Review / The National Law Forum LLC

Many Companies With More Than 500 Employees Could Qualify For Stimulus Loans

As the nation scrambles to take advantage of the $2 trillion stimulus benefits in the CARES Act, numerous sources have stated that only businesses with 500 or fewer employees are eligible to apply for loans under the Act’s Paycheck Protection Program. In fact, businesses with far more than 500 could be entitled to participate in the program.

First, section 1102(a) of the Act applies to any business concern, nonprofit organization, veterans’ organization, or Tribal business having the greater of:

1) 500 employees or

2) the “size standard in number of employees established by the [Small Business] Administration for the industry” in which the business operates.

These “size standards” are contained in a list maintained by the Small Business Administration, organized by North American Industry Classification System (“NAICS”) code, which establishes the maximum number of employees that a particular entity operating in certain industries can have and still qualify under the Paycheck Protection Program. Depending on the applicable NAICS code, a business with significantly greater than 500 employees may still qualify. For example, petroleum refineries (with capacity of less than 200,000 barrels per calendar day) and turbine manufacturers with up to 1,500 employees could qualify, businesses in the crude petroleum extraction, natural gas extraction and coal mining industries could qualify if they have up to 1,250 employees, and entities in the electric power distribution and natural gas distribution industries may have up to 1,000 employees and still qualify. These are only a handful of examples of hundreds of industries contained on the size standards list. Given the Act’s “greater of” language referenced above, the 500 employee maximum will apply even if the SBA’s size standard table indicates a lower number for a particular industry.¹ Bear in mind that the SBA generally considers both the actual business concern, as well as all of its affiliates, in determining whether an entity qualifies as small.

Second, businesses must count “employees” as that term is defined under Title I of the CARES Act, i.e., an individual retained on a full-time, part-time, or “other basis.” While the SBA previously had not expressly defined the term “employee,” the CARES Act has adopted preexisting SBA guidance from the SBA’s HUBZone Program to provide an explicit definition. As a result, it is likely that the full SBA guidance will be used to calculate the number of employees under section 1102(a) of the CARES Act. Under that guidance, an “employee” is an individual who works a minimum of 40 hours per month, including any employees obtained through temporary employee agencies. Independent contractors may also be considered an “employee” where there is evidence of an employee-employer relationship, which is assessed under a multi-factor test. On the other hand, independent contractors who are not considered employees would not count toward the entity’s employee count for purposes of determining eligibility under the Paycheck Protection Program.

¹ The SBA’s size standard list also provides standards for certain industries expressed in annual receipts. These are not relevant under the stimulus package. If an industry’s NAICS code reflects a dollar figure, but does not include a number of employees, the 500 employee limit will apply.

ARTICLE BY David J. Ball, David A. Shargel, Joshua C. Zive, Robert J. Wagman, Jr. and Annie Allison of Bracewell LLP.

For more CARES Act analysis, see the Nationa Law Review Coronavirus News section.

What Constitutes “Reasonable” Compensation For Private Foundation Insiders?

Private foundations are created as independent legal entities for solely charitable purposes, and many are run by unpaid family members and other volunteers. But what happens when a private foundation wishes to pay officers, directors or trustees, who are also family members of the individual funding, the foundation?

Because private foundations are “private” as opposed to public charities, there are strict rules around paying family members. Specifically, Section 4941 of the Internal Revenue Code prohibits any financial transaction between a private foundation and a “disqualified person” or an “insider,”[i] – generally the donor and the donor’s family – as it may constitute “self-dealing,” which is deemed a misuse of charitable assets. Family compensation would seem to fall directly under this restriction. However, there is one notable exception to this rule: compensation paid for “personal services” to carry out foundation affairs is permissible, provided that the services rendered are “reasonable and necessary” to carry out the exempt purposes of the foundation, and the compensation is “not excessive.” What constitutes “reasonable” and “not excessive” compensation may vary widely, depending on underlying facts and circumstances.

The services provided to the foundation must be “necessary” for the foundation to carry out its tax-exempt purpose and “personal” in nature. Although the IRS has not specifically defined “personal services,” the regulations cite examples such as investment management, legal and banking services. And, they include professional and managerial services rendered by an insider in his or her capacity as an officer, director, trustee or executive director of the foundation.

The services provided to the foundation must also be “reasonable.” Public charities can more easily determine whether compensation paid to an insider is “reasonable” because there are specific IRS regulations that define unreasonable compensation for public charities called “excess benefit transactions.” Private foundations, however, do not have clear-cut guidelines but will often defer to the regulations that public charities follow. The standards set forth in the regulations require that compensation should be what “would ordinarily be paid for like services by like enterprises under like circumstances.” This depends on the individual’s job title and description, the skill or knowledge required to perform the duties, the amount of time needed to fulfill the functions required, and the salaries paid for comparable positions. In practice, many foundations compare their proposed compensation amounts to what other for-profit and non-profit companies and organizations pay to similarly qualified individuals with comparable levels of responsibility.

Some factors to be considered:

(i) the size of the organization;

(ii) the employment history of the candidate and any special qualifications (e.g., licenses and certifications);

(iii) the geographic location of the foundation (some regional markets pay more than others);

(iv) the specific job responsibilities and duties;

(v) the time commitment; and

(vi) the total value of the compensation package, including benefits.

It is highly recommended that the compensation of foundation insiders meet the following requirements:

(i) the compensation is approved in advance by an authorized body of disinterested individuals such as the independent board members;

(ii) the authorized body obtains appropriate comparable data prior to making its determination as to reasonableness; and

(iii) the authorized body concurrently makes its determination and adequately documents the basis for that determination, all without the participation of the individuals whose compensation is being set.

Conflicts of interest frequently arise when setting compensation or benefits for officers, directors or trustees of private foundations. As such, the IRS requires that private foundations adopt a conflict of interest policy to help ensure that when actual or potential conflicts of interest arise, the organization has a process in place to resolve the conflict and assure that the affected individual will advise the governing body about all of the relevant facts concerning the situation. A conflict of interest policy is also intended to establish procedures under which individuals who have a conflict will be excused from voting on such matters.

States also have rules around conflicts of interest. In New York, a conflict of interest policy for private foundations became mandatory after the passage of the New York Non-Profit Revitalization Act of 2013.[ii]

A private foundation’s conflict of interest policy, among other things, must include the following:

(i) a definition of the circumstances that constitute a conflict of interest;

(ii) procedures for disclosing a conflict to the board;

(iii) a requirement that the person with the conflict not be present to vote on matters giving rise to such conflict;

(iv) a requirement that existence and resolution of a conflict be properly documented;

(v) procedures for disclosing, addressing and documenting related party transaction; and

(vi) a requirement that each officer, director and key employee submit to the secretary of the foundation prior to initial election of the board, and annually thereafter, a written statement identifying possible conflicts of interest.

The penalties for disregarding the compensation rules are severe. If foundation insiders fail to meet the “personal services” and “reasonable and necessary” requirements, the foundation will be subject to substantial fines. The foundation is assessed a penalty equal to 20% of the portion of compensation that is considered unreasonable. And each foundation manager who agrees to pay the unreasonable compensation could be personally liable for a penalty equal to 5% of the unreasonable compensation. On top of these penalties, the violation must be corrected, which could require returning the portion of the compensation deemed unreasonable to the foundation, along with interest. If all of this is not corrected in a timely manner, the IRS may impose additional taxes on the foundation, currently 100% of the amount of the unreasonable compensation. Similarly, an additional tax of 50% may be imposed on any foundation manager who refuses to correct the violation.

The good news is that a private foundation may pay its insiders for their foundation work as long as it follows the rules and takes all necessary steps to remain in compliance.

[i] A “disqualified person” or “insider” is any of the following: (1) foundation managers (officers, directors, trustees or persons with similar powers); (2) substantial contributors and individuals or entities with a 20% or greater interest in an entity that is a substantial contributor; (3) the family members of all such individuals; (4) certain entities partially or wholly owned, directly or indirectly, by disqualified persons; and (5) certain government officials.

[ii] The Non-Profit Revitalization Act of 2013 was signed into law by Governor Andrew M. Cuomo on December 18, 2013, and became effective on July 1, 2014.

ARTICLE BY Beth A. Scharpf of Wiggin and Dana LLP.

For more information, see the National Law Review Financial Law section.

Note To Chicago Employers: Expansive New Work Scheduling Rules Take Effect July 2020

The Chicago City Council passed the Chicago Fair Workweek Ordinance on July 23, regarding advance scheduling notice for certain employees in certain industries, including healthcare, hotels, restaurants, and retail, among others. Chicago Mayor Lori Lightfoot has already indicated that she will sign the new ordinance in short order, describing it as the most expansive worker scheduling policy in the country, including the first in the country to cover healthcare employers.

The ordinance, which goes into effect in July 2020, imposes significant administrative requirements relative to the employer/employee relationship. Chicago employers should consider familiarizing themselves with them now in order to avoid penalties in 2020.

Details and Penalties of the New Ordinance

The ordinance will require covered employers operating in the City of Chicago to provide employees with 10 days advance notice of scheduled work, generally beginning on July 1, 2020. After June 30, 2022, the period of required advance notice of the work schedule will increase to 14 days. The work schedule must be posted in a conspicuous location at the workplace, or must be emailed upon the request of the employee.

In addition, the ordinance provides a carve-out for smaller employers, only applies to employees who earn less than $50,000 annually or $26.00 per hour or less, and does not apply to independent contractors or day and seasonal laborers.

Employers generally covered by the law are those who have 100 or more employees (in total, not just in Chicago), or 250 or more employees in the case of nonprofit entities. Restaurants covered by the ordinance are those with more than 30 locations and at least 250 total employees (and franchisees with four or more locations). Of the total employee count, for the employer to be governed by the law, at least 50 of their employees must be “covered” employees.

If employers make changes inconsistent with the requirements of the ordinance, the employees must receive compensation. The amount of compensation will depend on the nature of the scheduling change.

Right to Decline Work Scheduled

Employees under the ordinance have the right to decline any work scheduled that does not comply with the required advance notice period. Further, if an employer alters an employee’s schedule after the deadline, depending on the particular circumstances, the employer may be required to pay the employee an additional hour for each altered shift. The ordinance also prohibits retaliation against the employee for exercising rights conferred by the scheduling ordinance.

A number of exceptions do apply. For example, schedule changes caused by power outages, blizzards, a mutually agreed-upon shift trade, or a schedule change that is mutually agreed upon by the employer and employee and confirmed in writing.

The Chicago Department of Business Affairs and Consumer Protection has been tasked with enforcing this new ordinance. Employers who violate this law will be subject to a fine of between $300 and $500 for each offense. The law also establishes a process by which an employee may initiate a civil action under the law, beginning with a written complaint to the department.

This article was written by David B. Ritter, Norma W. Zeitler, Peter J. Wozniak, Gray I. Mateo-Harris and Mark Wallin of Barnes & Thornburg LLP.

For more employment ordinances nation-wide, please see the Labor & Employment law page on the National Law Review.

Tackling Evictions: BYU And UA Law Schools Partner On Legal Research Project

The nationwide trends of stagnating wages and increasing housing costs has led to an increased risk of evictions for renters across the country. According to Matthew Desmond’s 2017 book Evicted, “Today, the majority of poor renting families in America spend more than half of their income on housing, and at least one in four dedicates more than 70% to paying the rent and keeping the lights on.”

Most evictions happen informally, and even formal evictions are rarely contested in court. Less than 20 percent of tenants served with an eviction notice come to court, and so viable legal defenses often go unheard. A new initiative is trying to help tenants facing eviction find appropriate legal assistance.

Legal Innovation: LawX & Innovation for Justice

The J. Reuben Clark Law School (BYU Law) at Brigham Young University and the James E. Rogers College of Law at the University of Arizona have joined forces to create a program focused on tackling the legal complexities of eviction law. BYU’s LawX legal design lab, and UA’s Innovation for Justice (I4J) program are working together to reduce the number of evictions in and help tenants find quality legal representation.

“Given the sheer volume of evictions in America, we believe this is the right issue for LawX to tackle in its second year, and we welcome collaboration with the University of Arizona Law School,” said Gordon Smith, Dean of BYU Law School. “This past year, our LawX students uncovered some sobering statistics on hurdles in the legal system that make it extremely difficult for a non-lawyer to respond to lawsuits, particularly in the areas of debt collection, evictions and divorce.”

The program will focus on tackling the eviction crisis in Arizona and Utah, with hopes the collaboration could result in solutions applicable beyond the region. In 2016, Utah averaged 7.61 evictions per day and Pima County, Arizona, where the UA is located, averaged 22.01 evictions per day, according to Eviction Lab.

Kimball Parker, LawX director and president of Parsons Behle Product Lab, will lead the initiative at BYU, while Stacy Butler, director of I4J, will lead the project at UA. With a primary focus on technology, design and system thinking, and collaboration, both classes will focus on resolving the current status of eviction law, especially the lack of legal representation for an underserved community.

Eviction Law: A Focus On Underserved Communities

“The goals of the Innovation for Justice program are to expose students to the fact that not everyone is able to use the civil legal system as it’s designed, and to empower students to close that gap,” Butler said. “LawX’s focus on reaching people who are not engaging with the civil legal system is critical to making the system work the way it should.”

LawX will highlight the difficulties non-lawyers would have in dealing with different areas of law including divorce, debt collection, and eviction laws. One of the particular challenges is the difference in how each state–and municipality–handles evictions. Often the laws are weighted heavily in favor of the landlord. For example, in Utah, a tenant has just three days to respond to an eviction notice, so often landlords give notice on a Friday, further limiting a tenant’s options

“An eviction can be life-changing to an individual or family, and it can result in homelessness; our research determined that evictions have one of the highest rates of default among those who can’t afford an attorney,” said Parker. “I am excited to work with Stacy on this project and believe her extensive experience with expanding the reach of civil legal services to those in need will be incredibly valuable.”

A Tangible Solution For Renters

Parker says the goal is to create a tangible solution for renters, whether that is a product or some other solution, but the students will start by surveying. One of the first questions they hope to answer: why don’t more tenants seek relief in the legal system?

This collaboration project comes on the heels of LawX’s previous project to assist debtors facing debt collections lawsuits who couldn’t afford legal representation. That project resulted in creation of an award-winning software program, SoloSuit, which helps debtors respond to collections notices.

“This past year, our LawX students uncovered some sobering statistics on hurdles in the legal system that make it extremely difficult for a non-lawyer to respond to lawsuits, particularly in the areas of debt collection, evictions and divorce,” said Gordon Smith, Dean of BYU Law School. “With this legal design lab in a classroom, we are committed to identifying the best possible solutions to help close the gap for people who feel overwhelmed by the legal system.

Hands-on Legal Experience for Law Students

“Programs like Innovation for Justice and LawX offer important learning experiences for our undergraduate and graduate students. They represent a movement in legal education to adapt and to be more interdisciplinary in how we approach the world,” said UA Law Dean Marc Miller. “Students get to take a deep dive into a specific project to produce a community deliverable. They engage with the community and in doing so, begin to understand how their learning can be applied outside of the classroom.”

Using a design thinking approach, up to six LawX students and 12 Innovation for Justice students will start work on the project in the fall 2018 semester with three goals:

understand why tenants disengage with the civil legal system
identify innovative approaches to educating and engaging tenants
develop strategies for delivering possible solutions into the hands of those who need help most.

By working in a law school classroom setting, the program strives to help provide answers and solutions to under-represented communities, who find difficulties in understanding the law, or finding appropriate resources to help them tackle impending hurdles.

Findings and shared information will eventually lead to solutions which can extend beyond Utah and Arizona’s borders. Conversely, the program might lead to separate projects addressing regional barriers to help reduce eviction totals.

Article by:

Samantha Abernethy

Alessandra De Faria

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

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.

Article By:

Joseph P. Hammang, PhD

Alexander Hecht

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

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 Corp.in 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.

EXPENSES LACKED DOCUMENTATION

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.

LEASED CAMRY, BUILDING RENT QUESTIONED

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.

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 LLP. Michael 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.

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 /www.jmbm.com

Category: Not-For-Profit Law

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