Rethinking Who Can Sue a Charity

Hospital conversions spur push to expand rights to general public

For 109 years, the Addison Gilbert Hospital in Gloucester, Mass., has been a big part of Joseph E. Garland’s family. His great-grandfather was a founder of the hospital, his grandfather its first chief of staff, and his father — a former editor of The New England Journal of Medicine — a pediatric consultant there.

When trustees voted to merge the hospital with one eight miles away, Mr. Garland was among those who worried how the deal would affect Gloucester, a fishing and high-tech town 30 miles northeast of Boston.

He and five other residents of Gloucester — including donors and a former hospital trustee — filed a class-action lawsuit alleging that the hospital’s non-profit merger partner had diverted millions of dollars in Addison Gilbert’s charitable assets for use outside the Gloucester area, against the wishes of the hospital’s founders and early trust ees.

Mr. Garland and his allies didn’t get far. A judge dismissed their claim, declaring that they had no legal right, or “standing,” to sue. In Massachusetts, the judge said, only the Attorney General can sue to correct alleged abuses in the administration of a charity unless the plaintiffs can show a special interest. In the Addison Gilbert case, the plaintiffs’ interests were no different than those of the general public, the court ruled. And the Attorney General had already reviewed the merger and seen no reason to block it.

“It’s frustrating,” says Mr. Garland, who has appealed. “As a citizen, I have been deprived of what I thought were my constitutional rights to a hearing. We’ve been shut off before a case can be made.”

Mr. Garland is not alone in his dismay. The rules on who has the right to sue a charity are under scrutiny from plaintiffs’ lawyers, consumer advocates, and academics who think the public should have a stronger say in how charities operate. Many legal observers, on the other hand, say that revising the rules on legal standing could leave charities vulnerable to an avalanche of frivolous and damaging lawsuits.

“The issue is becoming kind of a front-burner question for lawyers in the non-profit field,” says Rob Atkinson, a law professor at Florida State University who favors keeping current policies in place.

The rules on suing charities are rooted in 17th-century English common law and its notions that the attorney general, as the people’s representative, is the appropriate party to file a lawsuit when a charity abuses its fiduciary trust.

While courts and legislatures in recent decades have slowly broadened the right to sue, the rules by and large remain simple and unbending: In cases involving a breach of fiduciary duty, the general public usually does not have legal standing to bring a charity to court. At the state level, where most fiduciary issues arise, only the attorney general or some other officially sanctioned party has standing — with such rare exceptions as a case in which plaintiffs are directly affected by a charity’s action. At the federal level, lawsuits are usually initiated by the Internal Revenue Service, which oversees the tax-exempt status of non-profit organizations.

In recent months, several high-profile court decisions have reinforced the long tradition of barring private suits against charities. In January, the U.S. Supreme Court refused to review the arguments of two members of the Christian Science Church who claimed that church officials had violated their own governing documents by authorizing major investments in broadcast ventures that lost millions of dollars. A lower court had ruled that the two had no legal right to sue, saying that membership in a charity alone is not sufficient to gain standing to pursue claims of mismanagement.

And last year, in a case involving the University of Bridgeport, the Connecticut Supreme Court narrowly ruled that donors had no right to sue a charity for failing to heed conditions attached to a gift. A dissent by two judges said that the opinion allowed the “double crossing” of a donor “with impunity unless an elected attorney general does something about it.”

While the issue of legal standing has affected many kinds of charities, nowhere has the push for a broader right to sue been stronger than in health care. Sales or mergers of non-profit hospitals have accelerated dramatically in recent years, with charitable assets sometimes winding up in the pockets of for-profit medical enterprises. Many advocates believe that citizens should have increased power to challenge such deals in court, even when an attorney general refuses to do so.

“Assets of these institutions are owned by the community, so the community as owners should have a right to protect their interests,” says Natalie Seto, a lawyer at Community Catalyst, an advocacy organization in Boston that works on health-care issues with state and local groups.

But many experts say that expanding the right to sue is a dicey proposition, one that has as many drawbacks as benefits.

The most compelling argument against expanding the right to sue is that it would leave charities open to a flood of litigation, much of it frivolous, and drive away donors and directors.

“It would give rise to nuisance suits, which, even if not successful, are demoralizing, expensive, and damaging to the organization,” says James J. Fishman, a law professor at Pace University, in weighing the pros and cons of expanded standing. What’s more, he says, “the publicity is devastating.”

John Simon, a Yale University law professor and authority on charities, questions who, exactly, should have standing to sue. “Can anybody who gives $5 to a charity be able to raise a ruckus?” he says.

Others argue that broadening the right to sue could force a charity to look more at the narrow interests of plaintiffs than at the organization’s broader philanthropic mission.

In the 1960s, New Jersey courts expanded the power to sue by loosening the requirement that beneficiaries have a special interest in a charity in order to sue under a legal doctrine called cy pres. That doctrine gives courts freedom to interpret the terms of a will or gift if literal enforcement would be impractical or illegal. Mark Herr, director of New Jersey’s Division of Consumer Affairs, which regulates charities, says the expanded standing policy remains in New Jersey and that there “has not been a surge of frivolous litigation” related to the cy pres doctrine.

But there may be a practical reason for that. As Henry B. Hansmann, a Yale University law professor, notes, unless courts grant legal fees to plaintiffs in a suit against a charity, few private citizens will be willing to bear the heavy costs of a lawsuit. Any money recovered from the suit would probably go to the charity itself, or some other non-profit organization, not to the plaintiffs or their lawyer. In the Addison Gilbert case, the plaintiffs’ lawyer, Robert S. Wolfe, a Gloucester resident, is not charging for his legal services.

Despite those drawbacks and obstacles, expanding the right to sue could lead to a number of benefits, including stronger enforcement of charity laws. As things stand now, says Mr. Fishman, the Pace University law professor, “Non-profits are essentially unregulated and unmonitored unless the press gets wind of a story.”

While that may be an exaggeration, many states do a haphazard job of enforcing charity laws, partly because regulatory resources are stretched thin.

Attorneys general in 24 states have no particular person assigned to monitor charity cases, and only 11 have two or more people dealing with such matters full time, according to the National Association of Attorneys General.

The I.R.S.’s Exempt Organizations Division also is strapped. It has only 400 revenue agents to oversee 1.3 million non-profit organizations — one agent for every 3,250 groups.

Besides strengthening enforcement of charity laws, broadening the right to sue could help depoliticize the regulatory process, observers say. Most state attorneys general are elected, making them prone to influence from groups that have a stake in how charity laws are enforced. Those who aren’t elected may be appointed by officials who themselves are subject to political influence.

“You can’t ignore the fact that this is a political arena and these are transactions where millions, sometimes billions, of dollars are at stake,” says Judith Bell, director of the West Coast regional office of Consumers Union, an advocacy group that publishes Consumer Reports magazine.

In the Addison Gilbert lawsuit, Mr. Wolfe, the lawyer for the plaintiffs, charges that Massachusetts Attorney General L. Scott Harshbarger, a gubernatorial candidate, has been “incapacitated” from doing his official duty in the case. Mr. Wolfe charges that the Attorney General received campaign money and fund-raising assistance from officials of the hospital’s merger partner, Northeast Health Systems. But Mr. Harshbarger, in a court filing, denies the allegations of conflict of interest, saying they are “based on false statements of fact and unsupported allegations.”

John Good, vice-president of Northeast, also says nothing improper occurred. What’s more, he denies that Addison Gilbert’s assets have been improperly diverted from the Gloucester area, saying that money for hospital services there has grown as a result of the merger. Mr. Good calls the plaintiffs “a radical group” that is “not working within the system.”

Many experts conclude that while the rules on suing charities aren’t perfect, there are few viable ways to improve them.

“In a utopia it would be nice if somebody could run to a court every time somebody was breaking the law, but we don’t live in utopia,” says Leonard J. Henzke, Jr., a Washington lawyer who represents tax-exempt groups. “I’m not thrilled with the present situation, but on the other hand, I’m a realist.”

Still, options do exist. One is the use of “relators,” parties who are permitted to sue in the name of the people or the attorney general. Relators are usually lawyers or other people who may or may not have a direct interest in the case they bring to court. Despite a relator’s power to sue, the attorney general typically retains full control of the suit and can stop it at any time.

California is among the states that allow relator suits, but its procedural rules are strict and such suits are “very rare,” says Jim Schwartz, a California Deputy Attorney General. “If a case is worth bringing,” he says, “it’s worth bringing ourselves.”

Indeed, many state authorities are slow to endorse relators. They say that an attorney general, when properly trained and financed, is the most impartial and best equipped to handle the complex and sensitive issues surrounding charity regulation and litigation.

“Who would you want to enjoy the expanded capability [to sue]?” asks Craig R. Mayton, chief of the Charitable Foundations Section of the Ohio Attorney General’s office. “I always hearken back to whose interests we represent: the beneficiaries of charitable trusts. We have our protective hand on the charitable community. I’m not sure another party could replicate that interest.”

Another option would be for state legislatures to carve out specific categories of issues over which interested parties could sue. Ms. Seto of Community Catalyst endorses a broad right to sue when a charity-financed medical facility is involved.

“There is a clear public interest at stake, and it’s an area where I feel it is wholly appropriate for legislatures to grant standing to an average person to bring suit,” she says. “A lot of times, attorneys general have done a good job on this issue, but some are not willing to, or they haven’t taken up the call from the public.”

Ms. Seto says that the number of hospitals is shrinking nationwide, yet only nine states have regulations that govern the termination of medical services in a community. The public “has a very critical interest in being able to raise their concerns somewhere,” she contends.

Another way to expand standing would be to allow private parties to sue if they have a sufficient financial stake in a charity’s dealings. Major donors might be an example. While critics say such a plan would give wealthy people a disproportionate amount of legal power, others argue it would be little different from shareholder derivative suits, in which stockholders can sue for-profit corporations.

And then there are ways other than lawsuits to soothe public concerns about a charity’s dealings. At least 15 states require public hearings when a charitable hospital is converted to for-profit status, according to the National Conference of State Legislatures. Ohio requires a post-sale hearing to give the public a voice in how a hospital’s charitable assets should be disposed after a for-profit company takes over.

Despite such mechanisms, many critics of the current rules on who can sue a charity believe too much legal weight is concentrated in the state attorneys general.

“It’s a concentration of responsibility, as well as a concentration of power,” says Mr. Wolfe, the lawyer for the Gloucester residents in the Addison Gilbert case.

Mr. Wolfe questions whether a single agency can effectively monitor a state’s charities. Noting that “billions and billions of dollars in charitable resources” are concentrated in Boston-area institutions alone, he says, “I do not believe the Attorney General of Massachusetts has a staff sufficiently large to preserve the integrity of those charitable funds.

“And yet,” Mr. Wolfe adds, “he seems to be the only guy with that job description.”