DATELINE: August 11, 2009, Chicago
About three miles up the block from us sits a large Victorian villa. Anybody who wants to pinpoint the neighborhood need only watch the opening sequence to the old Bob Newhart series. Dr. Bob’s and Emily’s high-rise apartment is close by (but the villa is not visible in the opening sequence, as we recall).
The owner of what strikes us as the lovely house sold it to a local real estate developer, who planned to tear down the house so that he could construct an eight-unit condominium. Enter the Edgewater Historical Society, a Section 501(c)(3) organization. They did what many preservationist groups do—try to stop the destruction of what they viewed as an important historical building.
Mark J. Konkol, a reporter with the Chicago Sun-Times, reports today that the owner of the house, Brigitta Riedel, thinks Edgewater and several members of its board of directors...
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went too far. The Cost of History: Woman Sues Edgewater Preservationists for Blocking Sale: “They Were Trying to Ruin Me.” We will leave it to the court system to determine who is right, but after the dust settled, the developer walked away from the deal and Riedel sold it for somewhere around $500,000 to another buyer. She wants the additional $600,000 (and then some, according to the article) that she would have received under the original sales contract with the developer. Riedel has sued Edgewater and four directors to recover it, according to Konkol’s reporting.
As we read the article in the Sun-Times article, Edgewater and its directors did what preservationists often do. They claim that they held the belief that the house qualified for landmark status. Apparently acting on that belief, they lobbied the alderwoman about opposing the sale. Reidel claims Edgewater lobbied the alderman to rezone the property. The resulting delays apparently resulted in the developer walking away from the deal when he was no longer able to obtain a construction loan.
Unfortunately for Edgewater, the house did not receive landmark status, with Reidel asserting the Edgewater and its members knew the house was not landmark worthy. Reidel’s lawyer told reporter Konkol that when the Landmarks Commission turned down the request for landmark status, Edgewater stepped up its efforts to delay the sale.
Konkol doesn’t report on the specifics of the lawsuit. We will try to obtain copies of the legal proceedings in the coming days. We assume the suit is premised on tortious interference with a contract.
What fascinates us are two statements in the article. First, the article states that the lawsuit names and then seeks damages from four directors. Under corporate law, the directors are protected from liability from the exercise of judgment or discretion in connection with their duties and responsibilities as directors or officers unless the act or omission involved willful or wanton conduct. Moreover, the four directors should be protected under federal Volunteer Protection Act, assuming they are acting as volunteers. That probably is a good working assumption because the most recent Form 990 on file with GuideStar reports that all directors serve as volunteers. That act protects volunteers (which at least one court has held include volunteer board members) when the directors are acting within the scope of their volunteer responsibilities. Preservation groups are a well-established part of the American landscape. It sounds to us like much of the activity that the Edgewood directors took is standard practice. Possibly the plaintiff is taking the position that the directors, when going beyond just making decisions, were acting in their individual capacity. Were liability to attach in this situation, it would send shockwaves through the nonprofit community, where directors often undertake some of the organization’s work on a volunteer basis. While we are sympathetic to the plaintiff, we don’t see a basis for liability in this case, at least based on what was reported in Sun-Times. If the directors are held personally liable, the decision would have potentially sweeping ramifications for nonprofits. The question would be where is the line between acting as a director and acting in one's own capacity.
The second comment in the article that we find intriguing is the assertion in the lawsuit that Edgewater violated laws prohibiting nonprofit organizations from lobbying. We concede that there may be a state or local ordinance that we don’t know about, but we would be surprised if there is one. We are willing to bet that the pleadings refer to the prohibition in Section 501(c)(3) against political interventions. If so, that aspect of the suit should be dismissed for failure to state a cause of action. The tax law draws a clear distinction between intervening in political campaigns (prohibited) and lobbying (clearly permitted). In fact the IRS has made it quite clear that lobbying within certain limitations is permissible. Anyone who doubts that need only look at Section 501(h) and the election that is designed to provide a safe harbor for lobbying activity. Moreover, the federal tax limitations (not prohibitions) on lobbying only apply to lobbying directed to or at the legislative bodies (not the executive branch) That would include the Chicago Common Council, but we suspect it would not apply to the Chicago Landmarks Commission, but we aren't sure on that point because we don't know whether the commission is independent of the legislative branch or constitutes a legislative body in its own right.
As the old saw goes, anybody can file a lawsuit. That is one reason all nonprofits should have directors’ and officers’ liability insurance in place. Unless someone has a new theory under the law or there are other facts, we suspect this lawsuit will be dismissed. Nevertheless, the fact that it made the front-page of the Chicago Sun-Times means that we will be warranted in following the suit’s progress until it comes to a conclusion.
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