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April 20, 2011

The Statist Attempt to Control Charities

Along with our sister organization, the Downsize DC Foundation signed a letter, as part of the Free Speech coalition, opposing the so-called “Protection of Charitable Assets Act.” (links to PDF document)

As noted on the blog,

Charities and other non-profit organizations already spend huge chunks of their donors’ contributions on accountants and attorneys to file IRS Form 990’s. They ALSO have to register and annually file forms to comply with the state charitable solicitation laws. And yet, a group call the Uniform Law Commission is crafting a piece of model legislation called, “The Protection of Charitable Assets Act” (“PCAA”) that will be introduced in all 50 state legislatures. It will regulate non-profits even more.

It is an unnecessary and terrible bill that will threaten the survival of many small non-profits. That’s why joined with 62 other organizations to tell the Commission to drop the bill, or at least drop the registration and reporting requirements.

You can see the letter here (PDF).

In addition, this letter was sent to the Uniform Law Commission by Mark J. Fiztgibbons of American Target Advertising, Inc.:

Mr. John A. Sebert
Executive Director
Uniform Law Commission
111 N. Wabash Ave
Suite 1010
Chicago, IL  60602

Re:  The Protection of Charitable Assets Act

Dear Mr. Sebert:

After reviewing the Uniform Law Commission’s (ULC) record about the Protection of Charitable Assets Act (PCAA), I submit these objections and comments that I request be added to the record.

PCAA is presented as a codification of a common law authority of state attorneys general over charities.  While not expressly stated in the PCAA committee’s record, that common law doctrine is called “visitation.”  It is the authority to correct internal mismanagement or breaches of duties of corporations, including eleemosynary and ecclesiastical ones.

As the committee now knows, visitation is a private right of the founders of a charity or of the hierarchy of a church.  PCAA, however, would give unilateral visitation authority to state charity regulators.  That is a broader category of state officials than just state attorneys general. 

The nonbinding committee comments to PCAA state that charitable assets are private property; however, I see no adequate provisions or safeguards in PCAA itself that actually afford that private property status, with its protections at law and under due process, to charitable or church assets.  PCAA also fails to proscribe or create procedural protections against visitation that target assets used to engage in the exercise of First Amendment rights, and therefore acts to invite visitation as a pretext to suppress the exercise of those rights. 

Indeed, PCAA would alter the relationship between states and the private property and rights of private institutions in ways that have historically been proscribed in the Anglo-American legal tradition.

The record does not expressly identify the case law in the 50 states as to whether each state has recognized the common law doctrine of visitation, and if so, in what contexts and who may exercise it.  It seems, however, that states recognizing visitation power do not all apply it the same way.  That certainly may be grounds for a model or uniform law, although I do not see from the record that question as settled, in which direction ULC should resolve that issue given its options, nor what constitutional considerations may modify the common law.

In other words, the record is not sufficiently clear to support PCAA as a general matter.  It lacks a proper, verifiable legal foundation.  These objections and comments focus on the general aspects of PCAA, but there are many more specific issues these comments do not address.

I believe that the PCAA committee has a foundational obligation to identify expressly: (1) what states have (and have not) recognized the common law doctrine of visitation, (2) what conflicts exist among the states as to the application of that doctrine, and (3) presuming conflicts exist, what applications are appropriate for a uniform or model law.

For example, Tennessee has recognized a private right of visitation (State ex rel. College of Bishops of M.E. Church, South v. Board of Trustees of Vanderbilt University, 164 S.W. 1151 (Tenn. 1914), where the state acted only on relation of the College of Bishops of the Methodist Episcopal Church, but visitorial power was denied the bishops in favor of the trustees).  Washington has held that the attorney general has visitorial authority, but investigations and visitation may only be initiated through judicial process so as to prevent the attorney general’s overreaching (State v. Taylor, 362 P.2d 247 (Wash. 1961)).

PCAA would override both private and judicially supervised visitation that were the cornerstones of the doctrine at common law, and the committee has not addressed the more stringent First and Fourth Amendment standards supplanting common law.

What is also troubling is that the PCAA committee is considering extending unilateral state visitation to churches, or leaving PCAA ambiguous enough for the states to do so.  (The Reporter’s Memo for the November 2010 Meeting (10/18/10) quotes “Trost” of Tennessee that he “would like the chance to include [churches or other houses of worship] in his state, as part of the Act.”).  The church-state separation issue with regard to visitation at common law was obliterated by England’s taking over the Church.  That, of course, is not the case in the United States.

My next set of concerns involves how the PCAA committee was heavily weighted in favor of state regulators and against, or at least not adequately representing, the regulated. 

If the common law of visitation were an authority of an attorney general now recognized under American law, why would the ULC extend that authority to state regulators who are not attorneys general (a unique officious capacity) or even attorneys?  PCAA expressly extends its powers to state charity regulators such as secretaries of state, departments of business regulation, departments of agriculture and consumer protection, etc.  These officials do not have what are recognized as the unique powers and obligations of an attorney general, and may not even be trained or licensed in the law.

The record seems absent of any justification for this extension of an authority that is otherwise claimed to be uniquely situated in the states’ chief legal officer.

I have provided the committee with authority indicating that where government has been deemed to have visitation authority, it could be exercised only through the courts. 

At common law, an “information” was filed as a condition to begin investigations and visitation under judicial supervision.  An information under English law was the predecessor to the more stringent probable cause under oath and affirmation required by the Fourth Amendment to the U.S. Constitution, which language is mirrored in state constitutions (albeit, I don’t know if in all 50 – but that is yet another issue the PCAA committee has not addressed in its record). 

The unilateral investigative and visitation authority under PCAA seems to actually violate both the common law and American law, the latter obviously being more protective of privacy and property rights against unwarranted state intrusions. American law acknowledges the inclusion of corporations under Fourth Amendment protections, as I have cited for the committee.

This again seems to contradict the statement in PCAA’s nonbinding comments that charitable assets are private property.  The power of visitation was in many cases exercised only by private individuals, even if only in the capacity of relators where an attorney general has no authority to institute proceedings.  Therefore, PCAA expressly violates the notion that charitable assets are private property with concomitant rights.

Another concern I have is the scope of PCAA, with its potential for abuse by virtue of its opaque definitions. 

A majority of the states recognize the common law doctrine of cy pres, which is quite distinct from visitation, and with entirely different purposes and objectives.  Cy pres, of course, applies to fulfillment of charitable gifts in trust, and trusts tend to have a readily identifiable cestui que trust (category of beneficiaries).

Charitable corporations, on the other hand, may not have an identifiable cestui que trust.  PCAA uses a slippery, sometimes controversial term, the “public interest,” to essentially make the government or general public the cestui que trust for charitable corporations that were never intended to have a specific cestui.  Additionally, the “public interest” as a stand-alone term is incapable of consistent definition by virtue of ideologies, and courts have acknowledged that danger as applied to First Amendment rights.

Under PCAA, therefore, the government might deem itself to have some poorly defined “public interest” in private assets of a covered entity, but as determined by one public official per state who may have political ambitions. That, again, would be an aberration of private property rights as a result of an opaque definition in PCAA.

The PCAA committee itself seems unsure of what entities are covered, which is a sure indication that PCAA’s definitions are inadequate.  It appears, however, that PCAA would not only cover charities, but churches, other nonprofit entities and entities that may not even be tax-exempt.[1]

PCAA seems to cherry pick from inconsistent terms and doctrines at common law and its progeny, or from uniquely American law, and combine them into an expansion of power of charity regulators at the expense of private property and other rights.  That may be a regulator’s dream come true, but I do not see that as consistent with the mission of the ULC.

While the lawyers and law professors on the PCAA committee may know of case law and treatises that might delimit or explain various terms in the Act, many state charity regulators are not lawyers.  Some who are lawyers may not be as learned as the prestigious members of the committee, which I can assure you after 18 years of dealing with them in practice, not just theory.  The PCAA committee lawyers’ erudition may also be beyond the financial resources of many nonprofits to afford. 

Which is to say, PCAA may create problems where none now exist, or exacerbate problems that need simplifying, neither of which seem to be consistent with what I thought to be the mission of the ULC.

Another concern I have is that the record indicates the PCAA committee paid painfully little attention to the constitutional rights of those who would be regulated.

My article in The Chronicle of Philanthropy (“State Regulators Make a Misguided Push to Tighten Control Over Charities,” January 13, 2011) was, I’m quite certain, the first published article about PCAA.  While it came relatively late in the drafting process, the millions of charities, churches and other nonprofits in America, and the tens of millions of Americans working in or with the nonprofit and religious sectors, did not seem to be aware that PCAA was being drafted, and it may be presumed most still aren’t.

The National Association of State Charity Officials, on the other hand, has a sequestered network where it works as a combination.  I presume some of its members were involved with the drafting of PCAA from its inception or even initiated the project, and the record shows their heavy involvement throughout.  Thus, the ratio of involvement of regulators to the regulated throughout the drafting process was grossly unbalanced in favor of the regulators.

The record shows virtually no attention was given to constitutional rights of the regulated, or how charity regulators may overreach and abuse PCAA not just through engaging in unilateral investigations out-of-sight from judicial supervision and checks, but intimidating the regulated through the mere threat of costly and burdensome investigations.

The February 2011 Committee Meting Memo even includes this quote about the investigative authority under PCAA:  “We should draft assuming good faith on the part of attorneys general.” 

That, perhaps as much as any statement, demonstrates the grossly unbalanced nature of PCAA.  Our constitutional system of laws was designed with the presumption that government officials do not always act in good faith, and that rights and due process must be protected.

My previous comments to the committee explained that government investigations of charities and churches have historically been employed to abridge, suppress and intimidate the free exercise of First Amendment and other rights, and that investigations must by law be subject to procedural barriers to minimize the potential for such abuses.

Many charities, churches and other nonprofit entities that would be subject to PCAA’s reach are likely be outraged at not only the law itself, but the process by which it was drafted in disregard of their rights.

Which is all to say, respectfully to the committee, that I do not believe PCAA has received the proper level of scrutiny, is flawed in material ways to the point where it seems to codify what has for centuries been deemed unlawful, is inconsistent with American constitutional law, and is therefore unworthy of being a uniform or model law.

I urge the ULC to delay PCAA’s consideration for passage.  Given the unknown but added costs particularly to states, but to charities, churches and other nonprofits as well, and because of many flaws in PCAA not stated in these comments, I would go so far as to urge that the PCAA project be terminated.

With kind regards, I am

Very truly yours,

Mark J. Fitzgibbons
President of Corporate and Legal Affairs
American Target Advertising, Inc.

cc:  K. King Burnett, Esquire, Committee Chair



[1] The Reporter’s Memo for the November 2010 Meeting (10/18/10) quotes one state official: “[T]here are huge nonprofits that fit squarely within your definitions of ‘charitable purposes’ and ‘covered charity’ even though, in reality, they’re simply businesses organized as 501(c)(3)s.”


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