Monday, June 29, 2015
Delaware Supreme Court Rejects Effort to Extend Malicious Prosecution
In a recent decision, the Delaware Supreme Court considered and rejected a suggestion that the tort of malicious prosecution should be extended to those who, while they had a valid basis for bringing the action, continue its litigation beyond the point at which, at least from the plaintiff's perspective, they had probable cause to continue. Blue Hen Mechanical, Inc. v. Christian Brothers Risk Pooling Trust a/s/o Little Sisters of the Poor, No. 589, 2014 (June 15, 2015).
This decision not only refused to extend the tort of malicious prosecution beyond circumstances where the plaintiff, at the inception of the suit, did not have a valid basis for bringing it, but as well criticized Blue Hen for not pursuing recovery for the additional expenses it alleged to have incurred in the action before that trial court. Rather than moving on that basis, Blue Hen had filed a separate action some nine months after it prevailed on a motion for summary judgment in the original action.
Friday, June 26, 2015
It is anticipated that, either today or next Monday, the United States Supreme Court will hand down its decision as to the constitutionality (or not) of state laws and constitutional provisions defining marriage as between one man and one woman. Inter alia, the Court will decide whether forbidding same-sex marriage violates the Equal Protection clause of the federal Constitution. It is well beyond me to predict what the Court will do and, equally important, the analytic paradigm they will employ. To quote Samuel Meyer, “I never make predictions, especially about the future.”
That said, if the Supreme Court does find there to be a constitutional right to same-sex marriage, in so doing striking down laws such as that in Kentucky which by constitutional amendment define marriage is between one man and one woman, many persons, particularly on religious grounds, are going to object. I submit it is important are those with religious objections to same-sex marriage to appreciate that the question considered by the Supreme Court is the underlying constitutional issues and principles at play. These differing paradigms were considered and addressed by the late Judge Heyburn in his decision striking down Kentucky's same-sex marriage ban, namely Bourke v. Beshear, 996 F.Supp.2d 542 (W.D. Ky. 2014):
For many, a case involving these issues prompts some sincere questions and concerns. After all, recognizing same-sex marriage clashes with many accepted norms in Kentucky—both in society and faith. To the extent courts clash with what likely remains that majority opinion here, they risk some of the public’s acceptance. For these reasons, the Court feels a special obligation to answer some of those concerns.
Many Kentuckians believe in “traditional marriage.” Many believe what their ministers and scriptures tell them: that a marriage is a sacrament instituted between God and a man and a woman for society’s benefit. They may be confused—even angry—when a decision such as this one seems to call into question that view. These concerns are understandable and deserve an answer.
Our religious beliefs and societal traditions are vital to the fabric of society. Though each faith, minister, and individual can define marriage for themselves, at issue here are laws that act outside that protected sphere. Once the government defines marriage and attaches benefits to that definition, it must do so constitutionally. It cannot impose a traditional or faith-based limitation upon a public right without a sufficient justification for it. Assigning a religious or traditional rationale for a law, does not make it constitutional when that law discriminates against a class of people without other reasons.
The beauty of our Constitution is that it accommodates our individual faith’s definition of marriage while preventing the government from unlawfully treating us differently. This is hardly surprising since it was written by people who came to America to find both freedom of religion and freedom from it.
Many others may wonder about the future of marriages generally and the right of a religion or an individual church to set its own rules governing it. For instance, must Kentucky now allow same-sex couples to marry in this state? Must churches now marry same-sex couples? How will this decision change or affect my marriage?
First, the Court was not presented with the particular question whether Kentucky’s ban on same-sex marriage is constitutional. However, there is no doubt that Windsor and this Court’s analysis suggest a possible result to that question.
Second, allowing same-sex couples the state recognition, benefits, and obligations of marriage does not in any way diminish those enjoyed by opposite-sex married couples. No one has offered any evidence that recognizing same-sex marriages will harm opposite-sex marriages, individually or collectively. One’s belief to the contrary, however sincerely held, cannot alone justify denying a selected group their constitutional rights.
Third, no court can require churches or other religious institutions to marry same-sex couples or any other couple, for that matter. This is part of our constitutional guarantee of freedom of religion. That decision will always be based on religious doctrine.
What this opinion does, however, is make real the promise of equal protection under the law. It will profoundly affect validly married same-sex couples’ experience of living in the Commonwealth and elevate their marriage to an equal status in the eyes of state law.
Many people might assume that the citizens of a state by their own state constitution can establish the basic principles of governing their civil life. How can a single judge interfere with that right?
It is true that the citizens have wide latitude to codify their traditional and moral values into law. In fact, until after the Civil War, states had almost complete power to do so, unless they encroached on a specific federal power. See Barron v. City of Baltimore, 32 U.S. 243, 250–51, 7 Pet. 243, 8 L.Ed. 672 (1833). However, in 1868 our country adopted the Fourteenth Amendment, which prohibited state governments from infringing upon our individual rights. Over the years, the Supreme Court has said time and time again that this Amendment makes the vast majority of the original Bill of Rights and other fundamental rights applicable to state governments.
In fact, the first justice to articulate this view was one of Kentucky’s most famous sons, Justice John Marshall Harlan. See Hurtado v. California, 110 U.S. 516, 558, 4 S.Ct. 111, 28 L.Ed. 232 (1884) (Harlan, J., dissenting). He wrote that the Fourteenth Amendment “added greatly to the dignity and glory of American citizenship, and to the security of personal liberty, by declaring that ... ‘no state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty or property without due process of law, nor deny to any person within its jurisdiction the equal protection of the laws.’ ” Plessy v. Ferguson, 163 U.S. 537, 555, 16 S.Ct. 1138, 41 L.Ed. 256 (1896) (Harlan, J., dissenting) (quoting U.S. CONST. amend. XIV).
 So now, the Constitution, including its equal protection and due process clauses, protects all of us from government action at any level, whether in the form of an act by a high official, a state employee, a legislature, or a vote of the people adopting a constitutional amendment. As Chief *556 Justice John Marshall said, “[i]t is emphatically the province and duty of the judicial department to say what the law is.” Marbury v. Madison, 1 Cranch 137, 5 U.S. 137, 177, 2 L.Ed. 60 (1803). Initially that decision typically rests with one judge; ultimately, other judges, including the justices of the Supreme Court, have the final say. That is the way of our Constitution.
For many others, this decision could raise basic questions about our Constitution. For instance, are courts creating new rights? Are judges changing the meaning of the Fourteenth Amendment or our Constitution? Why is all this happening so suddenly?
The answer is that the right to equal protection of the laws is not new. History has already shown us that, while the Constitution itself does not change, our understanding of the meaning of its protections and structure evolves. If this were not so, many practices that we now abhor would still exist.
Contrary to how it may seem, there is nothing sudden about this result. The body of constitutional jurisprudence that serves as its foundation has evolved gradually over the past forty-seven years. The Supreme Court took its first step on this journey in 1967 when it decided the landmark case Loving v. Virginia, which declared that Virginia’s refusal to marry mixed-race couples violated equal protection. The Court affirmed that even areas such as marriage, traditionally reserved to the states, are subject to constitutional scrutiny and “must respect the constitutional rights of persons.” Windsor, 133 S.Ct. at 2691 (citing Loving ).
Years later, in 1996, Justice Kennedy first emerged as the Court’s swing vote and leading explicator of these issues in Romer v. Evans. Romer, 517 U.S. at 635, 116 S.Ct. 1620 (holding that Colorado’s constitutional amendment prohibiting all legislative, executive, or judicial action designed to protect homosexual persons violated the Equal Protection Clause). He explained that if the “ ‘constitutional conception of ‘equal protection of the laws’ means anything, it must at the very least mean that a bare ... desire to harm a politically unpopular group cannot constitute a legitimate governmental interest.’ ” Id. at 634–35, 116 S.Ct. 1620 (emphasis in original) (quoting Dep’t of Agric. v. Moreno, 413 U.S. 528, 534, 93 S.Ct. 2821, 37 L.Ed.2d 782 (1973)). These two cases were the virtual roadmaps for the cases to come next.
In 2003, Justice Kennedy, again writing for the majority, addressed another facet of the same issue in Lawrence v. Texas, explaining that sexual relations are “but one element in a personal bond that is more enduring” and holding that a Texas statute criminalizing certain sexual conduct between persons of the same sex violated the Constitution. 539 U.S. at 567, 123 S.Ct. 2472. Ten years later came Windsor. And, sometime in the next few years at least one other Supreme Court opinion will likely complete this judicial journey.
So, as one can readily see, judicial thinking on this issue has evolved ever so slowly. That is because courts usually answer only the questions that come before it. Judge Oliver Wendell Holmes aptly described this process: “[J]udges do and must legislate, but they can do so only interstitially; they are confined from molar to molecular motions.” S. Pac. Co. v. Jensen, 244 U.S. 205, 221, 37 S.Ct. 524, 61 L.Ed. 1086 (1917) (Holmes, J., dissenting). In Romer, Lawrence, and finally, Windsor, the Supreme Court has moved interstitially, as Holmes said it should, establishing the framework of cases from which district judges now draw wisdom and inspiration. Each of these small steps has led to this place and this time, where the right of same-sex spouses to the state-conferred benefits of marriage is virtually compelled.
Tuesday, June 23, 2015
Court of Appeals Reverses Summary Judgment in Favor of Employee Seeking to Avoid Noncompetition Agreement
Court of Appeals Reverses Summary Judgment in Favor of Employee Seeking to Avoid Noncompetition Agreement
In a March, 2015 decision, the Court of Appeals reversed the summary judgment granted an employee who sought to avoid the noncompetition obligations set forth in her employment agreement. Mountain Comprehensive Health Corporation v. Gibson, No. 2013-CA-000373-MR (Ky. App. March 13, 2015). This opinion is designated as “not to be published.”
Crystal Gibson was a nurse practitioner working at Mountain Comprehensive Health. In the course thereof, her work was supervised by Dr. Baker. She performed her services pursuant to a series of written employment agreements. As part thereof, it was agreed that:
The Physician Assistant further expressly covenants and agrees (unless waived in writing by the Corporation) that, for a period of one (1) year following the termination of his/her employment with the Corporation, he/she will not, directly or indirectly, for himself/herself or as an agent, on behalf of, or in conjunction with, and [sic- any] person, firm, association or corporation engage [sic- engaged] in the practice of medicine within a fifty (50) air miles radius from any clinic now operated by the Corporation or that may be operated by the Corporation in the future.
After leaving her employment with Mountain Comprehensive, Gibson joined the Whitesburg Women’s Clinic, the facility where to which Dr. Baker had moved his practice. Whitesburg Women’s Clinic and Mount Comprehensive are approximately 1 mile from one another. Coincident with joining Whitesburg Women’s Clinic, Gibson sought a declaration of rights to the effect that the noncompetition provision of her employment agreement was unenforceable on the basis of force majeure as well as an unreasonable geographic restriction. The trial court agreed, holding in part:
In addition, the trial court found the Agreement was unenforceable pursuant to a force majeure clause. Finding Dr. Bakers’ decision to leave Mountain Comprehensive a factor outside Gibson’s control, the trial court determined that Gibson would not have been able to perform as an OB/GYN position’s assistant because Mountain Comprehensive would no longer have an OB/GYN at the Whitesburg Clinic. The trial court further determined the restrictive covenant was void for a variety of public policy reasons, in that it contained an unreasonable geographic restriction, served no legitimate business purpose, and would create issues of continuity of care for numerous patients. The trial court also found Mountain Comprehensive waived its rights to enforce the restrictive covenant based on a previous pattern of non-enforcement of covenants with other employees. Slip op. at 4.
As alluded to above, the Court of Appeals would reverse the trial court.
With respect to the trial court’s determination that the employment agreement ended by its terms on April 2, 2012, thereby precluding the enforcement of the noncompetition agreement, the Court of Appeals would agree that this reading failed to construe the contract as a whole and give effect to all of its parts. Rather, while the agreement to render services may have by its term ended, the restriction against competition provided for rights and obligations applicable after the agreement’s otherwise termination.
The Court of Appeals would likewise reverse the force majeure reasoning. Under the employment agreement at issue, a party to the agreement could be excused from performance of an obligation thereunder “where they are prevented from so performing by any cause not within the control of the party whose performance is interfered with, and which by the exercise of reasonable diligence, the party is unable to prevent.
The trial court had found that Dr. Baker’s departure from Mountain Comprehensive would leave Gibson without a supervising OB/GYN physician, thereby giving rise to a force majeure outside of Gibson’s control. On appeal, Mountain Comprehensive would argue that there was a question as whether the force majeure agreement applied in that Gibson was licensed as a physician’s assistant for general primary care, and not only the OB/GYN subspecialty. Therefore, even if Baker was not there rendering OB/GYN services, Gibson could have assisted other physicians. In addition, it would have been possible for Gibson to render services to another OB/GYN physician, Hadley, who would appear to join the practice after Gibson’s departure.
Turning to the public policy bases relied upon by the trial court, and noting that covenants against restriction can be “a valuable business tool in protecting a business from competition from former employees,” the Court of Appeals held there to exist a material fact question as to whether this agreement had a legitimate business basis, and for that reason summary judgment had been prematurely granted.
As to the basis of the 50 mile scope of the restriction against competition, the trial court was criticized for not utilizing it “blue pencil” powers to amend the restrictive range so as to avoid it being overly broad.
As to Gibson’s assertion that the enforcement of the noncompetition provision would create issues of continuity of care for numerous patients, the Court of Appeals noted that these concerns could have been perhaps addressed by Gibson remaining with Mountain Comprehensive. Regardless, summary judgment was improper in that the assertion raised questions of public policy that involve questions of fact not appropriate for summary judgment.
The Court of Appeals also determined that the evidence put forth in support of the summary judgment did not demonstrate that Mountain Comprehensive had previously waived the right to enforce a noncompetition agreement.
Some Guidance from Connecticut on Condominium
Associations and Fiduciary Duties
A recent different decision from the Superior Court of Connecticut offers some useful guidance with respect to claims brought in condominium associations generally as well as the pleading standards required in order to bring a claim for breach of fiduciary duty. Sires v. Linden Shores Association, 2015 WL 3798173 (Sup. Ct. Conn. May 27, 2015).
This decision was rendered in the context of a motion to strike numerous counts raised in the complaint. The factual background of the dispute is not recited in the opinion.
Apparently, counts 1 through 12 and 22 alleged, at least in part, claims against individual members of the association for “acts or omissions in connection with their membership on the Board of Directors of Linden Shores Association Inc.” On the basis of Connecticut General Statutes § 47-253(b), these counts were dismissed. Presumably, the language that is relied upon in this ruling is that “An action alleging a wrong done by the association, including an action arising out of the condition or use of the common elements, may be maintained against the association and not against any unit owner.” What is curious about this strike is whether the claims in this nature are derivative or direct is not addressed, i.e., is the claim against the individuals in their capacity as unit holders or against them in their capacity as directors.
With respect to a claim that, apparently, a fiduciary duty individually owed to unit holders had been violated, the court found that no such duty existed. Rather:
A condominium association upholds a duty of care and loyalty [to] all unit holders collectively but owes no fiduciary duty directly to any individual unit holder, such as the plaintiff.
This determination is consistent with that of the Kentucky Supreme Court in 1400 Willow Council of Co-Owners v. Ballard.
With respect to a claim of breach of fiduciary duty against the property manager, the court determined that the requirements for pleading a cause of action for breach of fiduciary duty had not been satisfied. Specifically, there had been no demonstration that there existed a fiduciary relationship between that property manager and the plaintiffs.
Kentucky Enacts the Unincorporated Nonprofit Association Act
The 2015 Kentucky General Assembly approved the adoption of the Kentucky Uniform Unincorporated Nonprofit Association Act. This new law is important in that, with this new statute, there is for the first time in Kentucky an analytic paradigm and body of default law by which such organizations may be assessed. Prior to this enactment, Kentucky has lacked such a body of law even as unincorporated nonprofit associations have been organized and operated. Further, for the first time it will be possible for the participants in an unincorporated nonprofit association organized in Kentucky to enjoy the benefits of limited liability.
The Kentucky Uniform Unincorporated Nonprofit Association Act is largely a default statute, setting forth rules as to particular matters that are applicable absent contrary agreement with respect to the topic. In light of their expected informality there are minimal requirements that the agreement be reduced to a writing.
An important defined term used in the law of unincorporated nonprofit associations (“UNPA”) is the “governing principles.” Roughly equivalent to a partnership’s partnership agreement or an LLC’s operating agreement, and including the “established practices,” the governing principles are the agreements of the members as to the purpose and operation of the association. The governing principles may be oral, written or arise from a course of conduct. The association, the members and the managers are bound by the governing principles.
Formation, Purpose & Powers; the Certificate of Association
An unincorporated nonprofit association is a default structure; it exists if its definition is met. There is no requirement of an intent to form an unincorporated nonprofit association. In fact there is not even a requirement that the participants in the venture be consciously aware of the possibility of forming an unincorporated nonprofit association.
An unincorporated nonprofit association is considered to be an entity distinct from its members and managers, and enjoys perpetual duration while being vested with all powers of an individual necessary or convenient to carrying out its purpose. While limited forprofit activities are permitted, the proceeds thereof must be applied to the nonprofit purpose.
Name Requirements, Annual Report
The name requirements for a UNPA are set forth in the Kentucky Business Entity Filing Act, KRS. ch. 14A, and are dependent in part upon whether the UNPA has filed a certificate of association. Regardless of whether a certificate is filed, a UNPA may not include in its name any of “incorporated,” “corporation,” “Inc.,” “Corp.,” “company,” “partnership” or “cooperative.” If a certificate of association is filed, the name of the UNPA must include either “Limited” or “Ltd.” Further, that real name as set forth on the certificate of association must be distinguishable from any name of record with the Secretary of State. Absent filing a certificate of association the name distinguishability standard is not applicable, but the UNPA’s name should not include “Limited” or “Ltd.” in its name as doing so would be misleading. The assumed name statute has been revised to define the real name of a NPUA and to allow a NPUA to file an assumed name.
The application of the rules governing annual reports to UNPAs is dependent upon whether or not the particular UNPA has filed a certificate of association. If no certificate of association is filed then no annual report is required. Conversely, if a certificate of association has been filed, an annual report is required.
An UNPA, subject to distinctions based upon whether or not a particular UNPA has or has not filed a certificate of association, is subject to the Assumed Name Statute.
Liability for Association Debts & Obligations; Limited Liability
Initially, the members and other participants in an unincorporated nonprofit association are each liable for its debts and obligations. While the Uniform Act, by fiat, reversed the rule and afforded limited liability ab initio, this policy has not been carried forward in Kentucky. Rather, under the Kentucky Act limited liability is available if and only if the association makes a filing with the Secretary of State. By means of this filing, the public is put on notice that the participants in the association enjoy limited liability, and that those extending credit to it may look only to its assets for recovery.
The filing by which limited liability is elected is a certificate of association. The certificate of association must set forth:
· the name of the association;
· its mailing address;
· its registered office and agent; and
· its purpose.
The filing fee for a certificate of association is $15.00.
In accordance to the law governing other forms of business organizations, the grant of limited liability effected by the filing of a certificate of association will not protect an individual from liability for their own negligence, wrongful acts or misconduct.
In the absence of a certificate of association, in any suit brought against the association, the judgment rendered thereon will not be binding upon a member ab initio unless that member was named as a party therein. There are, however, a series of provisions pursuant to which, even in the absence of certificate of association, the members may, consequent to their personal liability for the debts and obligations of the association, be required to satisfy that judgment.
Suits By or Against an UNPA
An UNPA may sue or be sued in its own name. Suit against an UNPA that has filed a statement of association and thereby designated a registered agent may be initiated by service on the registered agent. Where no registered agent is designated, service may be completed as otherwise provided by law. The capacity to sue or be sued in its own name is a common characteristic of business organizations. This capacity extends to suits by a member or manager against the UNPA or a UNPA suit against a member or manager. If an UNPA has filed a statement of association and thereby elected limited liability for its members and other constituents, a member or manager is not a proper party to the action simply by reason of their status as a member or manager. This provision is not uniform and has no equivalent in the Uniform Unincorporated Nonprofit Association Act.
Even where the UNPA has not filed a statement of association and thereby elected limited liability, a judgment against the association is not enforceable against a member or manager therof unless and until certain conditions have been satisfied. A creditor may include as parties to the action some or all of the members or managers, and conceivably be awarded a judgment against them coincident with the receipt of a judgment against the association. In that instance, the judgment against the member or manager may be immediately enforced and need not wait upon a determination that the association is unable to satisfy the judgment. A change in the membership or management of an UNPA will not abate a pending action by or against it.
If the UNPA has filed a certificate of association, the proper venue for an action against the association is the county in which the principal place of business is maintained or, if the principal place of business is not in Kentucky, the county in which the registered office is located. Where the UNPA has not filed a certificate of association, the rules applicable to general partnerships are adopted to determine proper venue.
Every organization must have two or more members; there is no such thing as a single member UNPA. Absent filing a certificate of association the members are personally liable for the association’s debts and obligations.
A member of a UNPA is not by reason of that status an agent of the association. Except as may be otherwise provided in the governing principles, members vote on a per-capita basis with a majority vote controlling. Unless delegated in the governing principles to the managers, there is expressly reserved to the members the right to vote on certain matters. There is left to the governing principles rules as to notice, quorum and other procedural rules for member meetings. While a member is not, consequent to that status, in a fiduciary relationship with either the UNPA or any other member thereof, each member is bound by an obligation of good faith and fair dealing.
A person becomes a member in an UNPA in accordance with its governing principles or, in the absence of governing principles as to admission of members, by a vote of a majority of the incumbent members. On those same terms a member may be suspended, dismissed or expelled from the association. None of resignation, suspension, dismissal or termination of a member will relieve that person of unsatisfied obligations to the association. A member may resign at any term unless the governing principles impose limitations upon the right to resign. Unless a contrary rule is set forth in the governing principles, a member’s interest in the association is not transferrable.
Every UNPA is required to be managed by “managers” who have the authority to make all decisions on the association’s behalf except those reserved to the members. Managers are selected by a majority of the members, and there is no requirement that a manager be a member. If the members do not elect or otherwise designate managers, then every member is as well a manager. Each manager has an equal vote, and the managers act by a majority. Each of these rules may be altered in the governing principles.
Pursuant to a non-uniform provision, rules as to notice, quorum and other procedural requirements for manager meetings shall be set by the governing principles.
Managers owe to the association fiduciary duties of care and loyalty. The statutory formula for the duties of care and loyalty owed to the association by the managers is unique as contrasted to the formulas employed in others of Kentucky’s business entity statute. For that reason it is crucial that the focus be upon the words employed; loose analogy to the laws of other organizations is not proper.
The fiduciary duty standard, which is not identified as being subject to modification in the governing principles, obligates each manager to manage in good faith, in the manner honestly believed to be in the best interest of the association, and on an informed basis. Reliance upon the opinions and information provided by others is conditionally appropriate. A related party transaction, which would otherwise violate the duty of loyalty, may be approved or ratified after full disclosure by a majority of the disinterested members. The governing principles may limit the exposure of a manager to liability for breach of the fiduciary standards provided the failure does not fall within certain prescribed conduct.
Inspection of Books and Records
Members in their capacity as members, and managers as managers, have the right to inspect association books and records. It bears noting that there is no requirement that any particular records be maintained by the association. Ergo, the right of inspection applies to what records have been maintained. The right of inspection is collared by the requirement of a proper purpose and a limitation to information “material to the member’s or manager’s rights and duties under the governing principles.” The Kentucky Act is not uniform as to the right of the association to limit access to and use of association information. Essentially, where the uniform act would defer to the association to unilaterally impose limitations on access to and use of information, the Kentucky Act looks to the governing principles for such limitations, and unless set forth in written governing principles asserted to by the member or manager seeking inspection, the association bears the burden of showing the reasonableness thereof. While former members and managers are afforded inspection rights, it is difficult how they satisfy the requirement that the books and records sought are “material to the member’s or manager’s rights and duties under the governing principles.”
Property; Statement of Authority
An UNPA may hold in its name real, personal and intangible property. With respect to real property, the UNPA may file a “statement of authority” by which there is made of public record the capacity of a person to, on its behalf, affect a transfer of the real property. Filed with the title records of the county clerk where the transfer would be recorded, a statement of authority is conclusive as to the authority of the person executing the transfer on the association’s behalf as to a grantee without notice of a limitation on the authority who gives value. A statute of authority has a maximum term of five years.
There is no requirement of a statute of authority to transfer real property held in the name of an UNPA. Rather, it is an optional mechanism by which to avoid questions as to the capacity of the person signing on behalf of the UNPA. A grantee with those concerns, or a title insurer seeking to avoid those questions, may insist that a statute of authority be filed prior to the property transfer.
An unincorporated nonprofit association may not pay dividends or make other distributions to its members except to a limited degree upon dissolution. Still, without violating the limits against dividends/distributions, an unincorporated nonprofit association may pay reasonable compensation, reimburse expenses, confer benefits on its members consistent with its nonprofit purpose, or repay a capital contribution or repurchase a membership if doing so is authorized by the governing principle. In the event of an improper distribution, a member may bring a derivative action.
An UNPA has the capacity, but not the obligation, to indemnify its members and managers from debts, obligations or liabilities incurred on behalf of the association provided that the person seeking indemnification has, in the case of a member who is not a manager, acted in good faith or, in the case of a manager, discharged their fiduciary obligations. In a rare application of the statute of fraud in the statute, the right to indemnification may be broadened or limited in the governing principles, provided the broadening or limitation is in record form.
An unincorporated nonprofit association may be dissolved:
· as provided in the governing principles as to either time or method;
· when the governing principles are silent, with the approval of a majority of the members;
· if the activities of the association have been discontinued for at least three years, by its current or last managers;
· by court order; or
· under other law.
Consistent with the law governing other business organizations, an unincorporated nonprofit association continues its existence after dissolution. Upon dissolution, the debts and obligations of the association are to be satisfied, assets held subject to trust or requiring return to the donor are to be conveyed in accordance therewith with the remaining assets distributed to other persons with similar nonprofit purposes, to the members or as directed by the appropriate court.
It should be noted that, unlike most other business organization statutes, the Unincorporated Nonprofit Association Act does not afford a mechanism by which known creditors of an association may be notified of its dissolution and afforded a limited period of time in which to tender claims. Likewise, the Unincorporated Nonprofit Association Act does not provide a mechanism for, by means of publication, providing notice to unknown creditors. Consequence of these omissions, it will often be difficult to determine, on behalf of a nonprofit unincorporated association, that all creditor claims, to the extent of association assets, have been satisfied. The absence of these provisions of the uniform act is curious in that they are standard provisions in other uniform unincorporated entity laws.
The uniform act provides for mergers between UNPAs and as well with other organizational forms. These provisions have not been carried forward into the Kentucky enactment. As such, until such time as Kentucky adopts a comprehensive “junction box” act governing all organic transactions and entity forms, unincorporated nonprofit associations lack the capacity to enter into a merger.
Relationship to Other Law; Uniformity
Principles of law and equity supplement the Act. It is important to recognize that an UNPA is its own freestanding body of law. It is not directed or otherwise indicated that the law of partnerships, corporations (whether for-profit or not-for-profit), limited liability companies (whether or for-profit or not-for-profit) or any other body of organizational law shall serve as the “gap filler” when either the agreement as to a particular venture or the unincorporated nonprofit association act are silent. Rather, when the statute and the private ordering of a particular association ar silent there should be referenced general principles of law and equity.
If another statute governs a particular form of UNPA, to the extent of an inconsistency with this act, the other act will control.
It is directed that the act be construed to promote uniformity among the states that have adopted the act. Similar provisions appear in other of Kentucky’s adoption of uniform acts, it needs to be appreciated that this dictate extends only so far as the Kentucky enactment of the statute is consistent with the uniform act. Where the statutory language employed in Kentucky departs from the language employed in the uniform act, uniformity is obviously not the intended result, and cases and commentary from other states are of diminished or no value as interpretive aids.
Expressly not considered herein are questions involving federal and state income taxation of an UNPA. These issues are at minimum challenging in that, ab initio, an UNPA is not a “corporation” falling within section 501 of the Internal Revenue Code. While the Kentucky Unincorporated Nonprofit Association Act does set forth a default organizational paradigm for these often informal organizations, these tax complexities may caution against the intentional utilization of this form by persons who are not otherwise well versed in the tax consequences of this form.