The New York State Attorney General’s Office recently created a new procedure for expedited review of transactions of nonprofits in distress. This option for speedier handling is a sign of our difficult economic times.
As in most states, the New York Attorney General has jurisdiction over nonprofits located or active in the state. The law provides that a number of major transactions of nonprofits must be approved by the courts, with the Attorney General participating to protect the public interest. These major transactions include mergers, dissolutions, sale of substantial corporate assets, and changes of charitable purposes. Frequently, other government approvals are also required, such as approvals by the Departments of Education or Health.
There has long been a standard procedure for nonprofits to file a petition with the court, on notice to the Attorney General, to obtain approval and carry out these transactions. Typically it would take several months to prepare and file the petition and obtain all the necessary approvals. However, the Attorney General has recognized that today, some distressed nonprofits cannot afford to wait so long. These nonprofits can now apply for expedited review of their petitions. The instructions to the new application says:
“To qualify for expedited review, an organization must demonstrate to the Attorney General’s satisfaction that (1) there is an immediate threat to the financial viability of the organization or its programs, and (2) without expedited review, it is likely that the organization will:
Discontinue a charitable program that provides a substantial benefit to the public;
Default on a mortgage or other secured financial obligation;
Incur a lien, attachment or other encumbrance on its property that will impair the organization’s ability to carry out its charitable purposes;
Cease operations, dissolve or declare bankruptcy; or
Suffer other adverse consequences that are similar in nature and severity to the above.”
Expedited handling may help a nonprofit maintain operations or even survive by enabling it to more quickly sell an asset or merge with a stronger organization.
Nonprofits experiencing financial stress can take other steps short of fire sales, mergers or bankruptcy. Nonprofits can coordinate with other nonprofits to share office space and equipment and even staff. Detailed written contracts are advisable in such circumstances to avoid confusion and clearly establish the responsibilities of the parties.
Some nonprofits should consider an orderly dissolution combined with making arrangements for carrying on the corporate purposes by other means. One such option is fiscal sponsorship. This is a relationship in which an existing tax-exempt nonprofit (the “sponsor”) collects charitable contributions for, and pays the invoices of, a charitable activity or venture. The venture group is not incorporated and does not have its own tax exemption. It conducts its activities under the umbrella of the sponsor. The venture group has no need for a board of directors, bylaws, staff, offices, tax returns, etc. The sponsor usually takes a percentage of contributions as an administrative fee. Such relationships can last for years, delivering valuable services to the community in a cost-effective manner.
Another option for a dissolving nonprofit would be to donate remaining assets to a community foundation for the creation of a donor-advised fund. A community foundation is a tax exempt nonprofit that operates multiple charitable funds such as scholarships for students and endowments for other nonprofits. A fund would be created to carry out the same charitable purposes as the dissolving nonprofit. Community foundations are efficient because they can pool funds for investment purposes, engage professional investment counsel, obtain better returns, and file a single tax return that combines the results of all their funds. The community foundation in our community is The Community Foundation of Orange and Sullivan at https://www.cfoc-ny.org.
Operating a nonprofit has become increasingly costly and complicated in recent years, and is not likely to get easier. Nonprofits in distress have a number of options available to them. The best advice may be to confront the issues as soon as possible so there is time to explore the possibilities and avoid the need for expedited review of a court petition.
Gary Schuster is Senior Counsel on the Business Team. He can be reached by phone at 845-778-2121 toll free or 845-778-2121 and by email.