Dateline: January 2, 2007, Chicago
“We don’t like what you did so we are going to sue you” seems to be the cry of almost everyone in our litigious society. People, including the courts, sometimes forget that only certain parties have standing (the right) to bring a lawsuit. The willingness of some courts to grant standing to just about anyone can pose a real threat to charities. By their very nature, charities provide benefits to members of the public. Imagine what would happen to charities if they were faced with constant suits by those who believed that the charity had not provided the benefits that those bringing the suit believed they were entitled to. We wouldn’t have charities for very long. That is why the December 28, 2006....
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decision by the Pennsylvania Supreme Court denying standing to the Milton Hershey School Alumni Association (Alumni Association) is so important.
BACKGROUND (Largely quoted from a January 31, 2005 opinion from the Commonwealth Court of Pennsylvania). The dispute centers on the management of the Milton Hershey School, which is the largest residential childcare charity in the world, with $5.5 billion in assets as of 2003. In 1909, Milton and Catherine Hershey (the Hersheys) established the Milton Hershey School, a charitable institution funded by the Milton Hershey School Trust (Trust). The School provides residential care for dependent and at-risk children, or "orphan" children as the term was then used. The Hersheys originally contributed 12,000 acres of land to the corpus of the trust and bequeathed virtually their entire fortune for the purpose of saving orphan children.
As directed by the deed of trust, the members of the School's Board of Managers are also members of the Board of Directors of the Trust Company. The deed endows the Board of Managers and the Trust Company with decision-making responsibility for all aspects of running the School and for management and administration of Trust assets. Together, they are charged with making all decisions about the use of trust funds, land development and sales, admissions and education under the standards set forth in the deed of trust.
At the direction of Milton Hershey, the Alumni Association was created 75 years ago and is comprised entirely of orphan graduates of the School. It is a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code, 26 U.S.C. § 501(c)(3), incorporated under the laws of Pennsylvania. One of its functions is to directly serve orphan beneficiaries and to continue the bonds that form in orphanhood while under the care of the School.
The Alumni Association is not a division of the School or of the Trust Company. It was not named in the deed of trust and is not an intended beneficiary of the Trust. As the deed states, "all children shall leave the institution and cease to be the recipients of its benefits upon the completion of the full course of secondary education being offered at the School."
Beginning in 1990, the Alumni Association began observing what it believed were Trust activities that diverted from the Trust's charitable intent to help orphan children. As alleged in its petition before the trial court, the Alumni Association noticed that School enrollment policies were altered to disfavor or turn away children requiring year-round residential care. In addition, it observed that education, housing and other policies were similarly altered to reflect the differing needs of the enrolled children who increasingly did not require substantially year-round residential care.
The Alumni Association became actively involved in efforts to quell what it believed were gross deviations from the charitable intent of the Trust. For instance, the Alumni Association reacted to an attempt by the Trust to end entirely the vocational education program mandated by the deed of trust, a program that targets non-college bound students. The Alumni Association's efforts resulted in an agreement signed by the OAG and the Trust compelling the Trust to preserve some form of vocational education at the School.
With the Alumni Association's concerns elevating, it alerted the Attorney General to what the Alumni Association believed were serious improprieties associated with the administration of the Trust. The Alumni Association alleged that conflicts of interest among the Trust Managers mired their ability to properly administer the Trust to carry out its charitable intent of saving orphan children. It also alleged that there were improper enrollment policies, improper and unsafe residential policies, and improper utilization of Trust assets to serve only orphan children and as many of them as possible. The Alumni Association believed that these actions taken as a whole constituted a perversion of the Trust's charitable intent.
Responding to the concerns raised by the Alumni Association, the Attorney General initiated and conducted an exhaustive 12-month investigation into the administration of the Trust. On December 5, 2001, the Attorney General determined that the Trust Company was diverting from the Trust's charitable intent and called for broad reforms. The Attorney General made clear that conflicts of interest burdened the Trust Company's decisions and emphasized that personnel changes would be inadequate to address the failures of the Trust, requiring instead structural reforms to obtain lasting improvements to Trust administration. The Attorney General threatened legal action if necessary to obtain the reforms. As a result, the parties (the Attorney General, the School and the Trust Company) participated in negotiations. The Alumni Association participated in an advisory role and invested millions of dollars to the process. Though it was not a party to the ultimate agreement, the Alumni Association acted to protect its own central purpose of preserving bonds formed in orphanhood and furthering the child-saving mission of the Trust.
On July 31, 2002, the parties reached an agreement (July 2002 Reform Agreement) outlining the reforms that the parties negotiated. The Reform Agreement purported to (1) end all conflicts of interests; (2) ensure the admission of needy children; (3) mandate a foster care program; (4) restrict land transfers and land uses that focused on anything but childcare; (5) reform academic standards for admissions and expulsions; and (6) require biannual status reports to the Attorney General. On June 27, 2003, the Attorney General, the School and the Trust executed an agreement (June 2003 Agreement) modifying the July 2002 Reform Agreement. The background statement included within that agreement indicated that because personnel changes in the Trust Company resulting from the attempted sale of HFC obviated the need for the reforms as they were presented in the original July 2002 Reform Agreement, the parties needed to modify that agreement. By comparison, the June 2003 Agreement (1) modified the provisions relating to conflicts of interest; (2) deleted the income and poverty level guidelines set forth in the July 2002 Agreement aimed at assuring the admission of truly needy children; (3) deleted the foster care program; (4) modified the restriction on land transfers to "sales" and exempting the notice requirement for the sale of land that is already commercially used; (5) modified the academic standards; and (6) changed the status report requirement from biannual, face-to-face meetings to annual written reports.
On September 4, 2003, the Alumni Association filed the petition for rule to show cause at issue in this case, seeking rescission of the June 2003 Agreement, reinstatement of the July 2002 Reform Agreement, appointment of a guardian, and appointment of a trustee ad litem. The School and the Trust Company filed preliminary objections to the petition, alleging that the Alumni Association lacked standing to challenge the rescission of the July 2002 Agreement.
The trial court denied the Alumni Association standing to bring suit. On appeal, a divided Commonwealth Court of Pennsylvania granted standing to the Alumni Association to challenge the July 2003 Agreement and reinstate the June 2002 Agreement.
THE DECISION OF THE COMMONWEALTH COURT. The Commonwealth Court began its analysis by point out that “standing to sue” is a legal concept assuring that the interest of the party who is suing is really and concretely at stake to a degree where he or she can properly bring an action before the court. The Commonwealth Court then laid out the substantial-direct-interest-immediate test. Under this test, a party must have a substantial, direct, and immediate interest in the outcome of the litigation. According to the Commonwealth Court,
A "substantial" interest is an interest in the outcome of the litigation which surpasses the common interest of all citizens in procuring obedience to the law. ... A "direct" interest requires a showing that the matter complained of caused harm to the party's interest. ... An "immediate" interest involves the nature of the causal connection between the action complained of and the injury to the party challenging it, ... and is shown where the interest the party seeks to protect is within the zone of interests sought to be protected by the statute or constitutional guarantee in question.
The Commonwealth Court noted that the attorney general has parens patriae standing. In other words, it has standing to protect the interests of the charitable beneficiaries, not just the State of Pennsylvania or the Attorney General's own interests. However, this Attorney General does take the position that it has the power to oppose that which may be in the best interests of the trust if it conflicts with the interests of the larger community.
As a general rule, standing is limited to the attorney general in order to (1) protect trustees from frequent, unreasonable and vexatious litigation by parties who have no stake in the charity at all; (2) prevent harassment; and (3) safeguard the assets of the charity from loss due to needless litigation. Those would all be good reasons for denying the Alumni Association standing. However, the Commonwealth Court wanted to grant standing. It therefore referred to five factors identified by the courts as the factors that the courts use to determine whether standing should be granted when a charity is involved. The five factors include:
(1) the extraordinary nature of the acts complained of and the remedy sought; (2) the presence of fraud or misconduct on the part of the charity or its directors; (3) the attorney general's availability or effectiveness; (4) the nature of the benefited class and its relationship to the charity; and (5) subjective, case-specific circumstances.
The problem with this list is that it is a synthesis of what factors someone believes motivates courts rather than a judicial test. Moreover, the synthesis says nothing about how the factors are to be balanced. Must all the factors be present? Is each given equal weight? Is a majority sufficient? Is there a super factor? Those questions point out the dangers of reliance on a law review article to formulate the law.
At that point, the Commonwealth Court noted that: (1) the Alumni Association was instrumental in bring the problems facing the School to the Attorney General's attention; (2) the Alumni Association raised questions about conflicts of interests; and (3) the Alumni Association has a special relationship with the benefited class. The Commonwealth Court also noted that there is little risk of vexatious and or unreasonable litigation. And with that, the Commonwealth Court granted standing to the Alumni Association. Did it rely on the five factors, the substantial-direct-interest-immediate test, policy considerations, or a combination of the three? It is hard to say because the court’s analysis is anything but crisp.
The dissent got it right, as the Pennyslvania Supreme Court confirmed. The settlors of the Hershey Trust were well aware of the Alumni Association. Milton Hershey is one who asked recommended and encouraged the formation of the Alumni Association. Yet, the Trust settlors vested management and decision-making authority for all aspects of running the School in the Board of Managers and the Trust Company.
The minority on the Commonwealth Court writes:
Further, the majority opinion continues on page 4 to state:
The Association is not a division of the School or of the Trust Company. It is not named in the deed of trust and is not an intended beneficiary of the Trust. As the deed states, "all children shall leave the institution and cease to be the recipients of its benefits upon the completion of the full course of secondary education being offered at the School." (Reproduced Record at 25a). The Managers of the Trust may, in their discretion, contribute to the higher education of a graduate of the School, in which case graduates would continue to be beneficiaries of the Trust, but generally, once orphans graduate from the School, they are no longer Trust beneficiaries.
Unfortunately, this is where this Court's inquiry must end. It is clear from the historical background of this saga that the Settlors in no way intended to give the Alumni Association standing in the administration of the Trust. The Settlor, Milton Hershey, was also the creator of the Alumni Association. To now give the Association legal rights that were expressly excluded by the Settlor of the Trust is a dangerous expansion of standing not supported by over 300 years of case law within the Commonwealth.
THE PENNSYLVANIA SUPREME COURT. The Pennsylvania Supreme Court found that the Alumni Association had no special interest sufficient to vest it with standing. Nothing in the litigation would affect the Alumni Association, according to the Pennsylvania Supreme Court. Moreover, the trust agreement specifically exlcudes the School’s graduates as beneficiaries of the trust. Given that clear statement of intent, it is hard to see why any alumni association reprsenting those graduates should have standing.
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