REVISED UNIFORM
unincorporated nonprofit association act
SECTION 1. SHORT TITLE. This
act may be cited as the Revised Uniform Unincorporated Nonprofit Association
[Act.]
SECTION 2. DEFINITIONS. In
this [act]:
(1)
“Established practices” means the practices used by an unincorporated nonprofit
association without material change during the most recent five years of its
existence, or if it has existed for less than five years, during its entire
existence.
(2)
“Governing principles” means all the agreements, whether oral, in a record, or
implied from its established practices, that govern the purpose or operation of
an unincorporated nonprofit association and the rights and obligations of its
members and managers. The term includes
any amendment or restatement of the agreements constituting the governing principles.
(3)
“Manager” means a person that is responsible, alone or in concert with others,
for the management of an unincorporated nonprofit association.
(4) “Member” means a person that, under the governing principles, may participate in
the selection of persons authorized to manage the affairs of the unincorporated
nonprofit association or in the development of the policies and activities of
the association.
(5)
“Person” means an individual, corporation, business trust, statutory entity
trust, estate, trust, partnership, limited liability company, cooperative,
association, joint venture, public corporation, government or governmental
subdivision, agency, or instrumentality, or any other legal or commercial
entity.
(6)
“Record” means information that is inscribed on a tangible medium or that is
stored in an electronic or other medium and is retrievable in perceivable
form.
(7) “State” means a state of the United States, the District
of Columbia, Puerto Rico, United States Virgin Islands, or any territory
or insular possession subject to the jurisdiction of the United States.
(8) “Unincorporated nonprofit association” means an unincorporated
organization, consisting of [two] or more members joined
by mutual consent pursuant to an agreement that is written, oral, or inferred
from conduct, for one or more common, nonprofit purposes that is not:
(A) a trust;
(B) a marriage, domestic partnership, common law relationship, or other
domestic living arrangement; (C) an organization that is formed under any other
statute that governs the organization and operation of unincorporated
associations; or (D) joint
tenancy, tenancy in common, or tenancy by the entireties even if the co-owners
share use of the property for a nonprofit purpose.
Comment
1. “Established practices” are essentially equivalent to
the commercial law concepts of course of performance and course of
dealing. See UCC §1-303. Many UNAs
operate on a very informal basis. Often
there are no written procedures or bylaws or what writings they have are very
incomplete. Nevertheless, over time they
develop and follow various practices.
These practices, if followed consistently for at least five years (or
during the entire existence of the UNA if it has been in existence less than
five years), become established practices and therefore can qualify as part of
the UNAs “governing principles.” An
example would be an unincorporated church that has no written bylaws covering
the issue of notice of meetings that for the past five years has printed notice
of the annual meeting of its members in the church bulletin for the three weeks
preceding the annual meeting. This
established practice would be part of the church’s governing principles and if
followed in the sixth and subsequent years would be determinative of whether
reasonable notice of an annual meeting had been given.
2. “Governing principles” are the equivalent of the
articles of incorporation, bylaws and other documents and established practices
that govern the internal affairs of a
UNA, sometimes referred to as an entity’s private organic rules. See Model
Entity Transactions Act (2007) §1-102 (31).
The “governing principles” of a UNA do not have to be in a written
form. This is consistent with
partnership law, the for profit equivalent of a UNA. See Uniform
Partnership Act (1997) §101(7); Uniform Limited Partnership Act (2001)
§102(13); Revised Uniform Limited Liability Act (2006) §102(13). See
also Comment 8.
3. A person is a “manager” of a UNA if the individual
fits the definition even if that person’s designation might usually be
associated with another type of organization.
Many UNAs refer to members of their governing boards as “directors” or
“trustees.” These designations do not
disqualify the organization from being a UNA even though the term “director” is
commonly associated with corporations and the term “trustee” is commonly
associated with trusts. A manager may,
but need not be, a member of the UNA (see
Section 22(a)); and may, and, in fact in most cases will be an individual, but
various types of entities can also be managers of a UNA (see Subsection (5)—definition of person).
4. The definition of “member” may
reach somewhat beyond decisions of some courts.
Either participation in the selection of the management or in the
development of policies and activities of the UNA is enough. Both are not required. This broad definition of member ensures that
the insulation from liability is provided in all cases in which the common law
might have imposed liability on a person, simply because the person was a
member.
Persons
who do not have the right to select a UNA’s manager or to approve its governing
policies are not members of the UNA for purposes of this Act even though the
UNA may call or refer to them as members.
A fund-raising device commonly used by many
nonprofit organizations is a membership drive.
In most cases the contributors are not members for purposes of this
Act. They are not authorized to
“participate in the selection of persons authorized to manage the affairs of
the nonprofit association or in the development of policies and activities of
the association.” Simply because an
association calls a person a member does not make the person a member under
this Act.
The role of a member
in the affairs of a UNA is described as “may participate in the selection”
instead of “may select or elect” the governing board and officers and “may
participate . . . in the development of policies and activities” instead of
“may determine” policies and activities.
This accommodates the Act to a great variation in practices and
organizational structures. For example,
some nonprofit associations permit the president or chair to name some members
of the governing board, such as by naming the chairs of principal committees
who are designated ex officio members of the governing board. Similarly, the role in determination of
policy is described in general terms.
“Persons authorized to manage the affairs of the association” is used in
the definition instead of president, executive director, officer, member of
governing board, and the like. Given the
wide variety of organizational structures of nonprofit associations to which
this Act applies and the informality of many of them, the more generic term is
more appropriate.
5. The definition of person in Subsection (5) is the
standard NCCUSL definition of this term.
“Person” instead of individual is used to make it
clear that associations covered by this Act may have individuals, corporations,
and other legal entities as members and managers. Unincorporated nonprofit trade associations,
for example, commonly have corporations as members. Some national and regional associations of
local government officials and agencies have governmental units or agencies as
members.
6. The definition of “record” in Subsection (6) is the
standard NCCUSL definition of this term, which makes it clear that emails and
other forms of electronic communication qualify as writings.
7. The definition of “state” in Subsection (7) is the
standard NCCUSL definition of this term.
8. “Unincorporated Nonprofit Association.” An organization cannot be a UNA if it is
organized as a corporation or is a for profit unincorporated entity, e.g., a
partnership. On the other hand, not
every form of unincorporated nonprofit organization should automatically become
a UNA and therefore be able to have limited liability and the other benefits of
this statute. That is the reason for the
language excluding trusts, domestic living arrangements including marriages and
domestic partnerships, and agreements merely to hold title to property as
co-owners. The laws governing the rights
of creditors, trustees and beneficiaries of trusts are well developed and
therefore the legal principles in this Act are unnecessary. Domestic relations law provides property
rights for adults co-habiting together after a legal marriage or in a long-term
unmarried status such as what is frequently referred to as a “common law
marriage” or the spate of recently enacted domestic partnership statutes. Living together in any of these domestic
living arrangements can probably qualify as an association having a nonprofit
purpose, but for public policy reasons these arrangements should not be able to
qualify as a UNA and therefore avoid individual liability for taxes and other
liabilities. For similar reasons, mere
co-ownership of property, even if for nonprofit purposes, should not
automatically result in the applicability of this Act. An enacting jurisdiction can choose to expand
or reduce the number of types of exclusions consistent with the concept that a
UNA is a default form of organization for unincorporated nonprofit entities.
“Agreement”
rather than “contract” is the appropriate term because the legal requirements
for an agreement are less stringent and less formal than for a contract. The agreement to form a UNA can be in
writing, or oral, or inferred from conduct (e.g., course of performance or
course of dealing). The term “writing” is
to be broadly construed to include any form that constitutes a “writing” under
the laws of the enacting jurisdiction, including electronically communicated
documents such as e-mail communications.
The agreement to form a UNA is part of the UNA’s overall “governing
principles.” Although it is always
preferable to have written agreements, most existing UNAs are quite informal
and have few, if any, writings setting forth the agreements governing the
purpose and operation of the organization.
Moreover, most UNAs are formed and operate without independent legal
advice. Imposing a statute of frauds or
similar writing requirement would, therefore, have the effect of excluding most existing UNAs from being able
to qualify under the Act. The enacting
jurisdiction’s general rules governing the proof and effect of oral agreements
and the priority of written provisions over subsequent inconsistent oral
provisions apply to UNA governing principles.
See Section 3.
Although
the agreement to form a UNA can be quite informal and sketchy, there must be
some tangible, objective data such as the use of the organization’s name in
communications to its members or third parties, or the existence of a bank
account or of a mailing (or internet) address in the name of the UNA indicating
that, in fact, there is an actual agreement.
The
members must be joined together for a common purpose. Several states provide that they be “joined
together for a stated common
purpose” (emphasis added). Because of
the informality of many ad hoc associations, it is prudent not to impose the
requirement that the common purpose be “stated.” Very probably, it is the small, informal, ad
hoc associations and those third parties affected by them that most need this
Act.
The
best reference point for what constitutes a nonprofit purpose is probably the
enacting state’s Nonprofit Corporation Act.
The nonprofit purpose requirement carries with it the implicit
understanding that the purpose is not a criminal activity and is otherwise
lawful. Each enacting jurisdiction needs
to determine whether these limitations need to be set forth explicitly in the
Act.
The
two–person requirement for forming a UNA is quite minimal, assuming the
standard broad definition of person (Subsection (5)) incorporated into the
Act. At least two persons are required
because that is the minimum number necessary to have an agreement under general
legal principles. If one person wants to
create a nonprofit organization, it is possible to do so by means of a trust, a
nonprofit corporation, or in many states, a single member limited liability company. A few states currently require more than two
members at the time of formation. New Jersey, for example,
requires seven or more.
Nonprofit
corporation statutes typically allow a nonprofit corporation to be formed by
one or more incorporators but to operate without members and therefore to be
governed by a self-perpetuating board of directors. See Model Nonprofit
Corporation Act-Third Edition (2008) §§ 2.02(4), 6.01. A UNA, however, must always have at least two
members. The definition of a UNA states
that it is an organization “consisting” of [two] or more members….”
The
Act applies to all UNAs, whether they be classified as religious, public
benefit or mutual benefit or whether they are classified as tax-exempt under
the laws of the enacting jurisdiction.
Therefore, the Act will cover unincorporated philanthropic, educational,
scientific, social and literary clubs, unions, trade associations, political
organizations, churches, hospitals, neighborhood and property owner
associations, and sports organizations such as Little League baseball
teams. If the enacting jurisdiction
decides to exempt one or more types of UNAs from the Act, it needs to draft
specific provisions listing the exemptions.
Derivation: “established practices” – Principle #2;
“governing principles” – Principle #2; “member” – Principle #3; “manager” –
Principle #4; “unincorporated nonprofit association” – Principles #1 and 5.
(a) Principles of law and equity
supplement this [act] unless displaced by a particular provision of it.
(b) A statute governing a type of
unincorporated nonprofit association prevails over an inconsistent provision in
this [act], to the extent of the inconsistency.
(c)
This [act] supplements this state’s regulatory laws that are applicable to
nonprofit associations operating in this state.
If a conflict exists, those other laws prevail.
Comment
1. Subsection
(a). Examples of other laws that
apply to UNAs are general principles of contracts, agency, fraud, estoppel, the
priority of written provisions of an agreement over prior inconsistent oral
provisions or subsequent oral amendments (and any exceptions), civil and
criminal procedural rules, and rules for enforcing judgments.
Drafting
conventions as to whether these general principles of law should be set forth
in separate provisions in an act like this one vary greatly. NCCUSL Acts, as a general rule, do not have
provisions other than what is stated in Subsection (a).
2. Subsection (b). Many
jurisdictions have existing statutes governing particular types of UNAs, e.g., churches. Subsection (b) establishes the rule that in
the event of an inconsistency between this Act and the statute governing a
specific type of UNA, the latter will control.
Under generally accepted statutory interpretation principles, there is a
strong presumption against inconsistency, i.e., the presumption is that the
provisions of the two acts are not inconsistent.
3. Subsection
(c). Most jurisdictions have statutory
provisions giving the chief legal officer of the jurisdiction oversight
supervisory powers over nonprofit organizations, including the power to enjoin
or prohibit various activities. Most
jurisdictions also have statutes that require registration, permits or advance
notice to engage in certain activities, e.g.,
fundraising from the public, and the filing of reports, e.g., assumed name
filings, tax forms, and the like. All of
these existing and future statutes, rules and regulations are applicable to
UNAs. Whether specific provisions
stating this principle need to be included in the Act depends on the enacting
jurisdiction’s statutory drafting conventions.
A
thorough review of all these other laws should be conducted to be sure they do
not need to be amended in order to continue to apply to UNAs after the Act is
effective. If amendments to these other
laws are necessary, they should be included as trailing amendments in the Bill
containing this Act.
Derivation: Subsection (a) Principle #9; Subsection (b) –
Principle #10; Subsection (c) – Principle #11.
(a) Except as otherwise provided in
subsection (b), the law of this state governs the operation in this state of
all unincorporated nonprofit associations formed or operating in this
state.
(b)
Unless the governing principles specify a different jurisdiction, the law of
the jurisdiction in which an unincorporated nonprofit association has its main
place of activities governs the internal affairs of the association.
Comment
1. This act applies to pre-existing
UNAs formed in the enacting state, as well as to all UNAs formed in the state
after the effective date of the Act.
This is a standard approach in statutes governing organizational
entities. Exempting various types of
existing organizations from the new law is not a desirable practice. Because the existing laws governing UNAs are,
for the most part, incomplete and the Act may change some of the common
understanding of what the law is, an enacting jurisdiction whose standard rule
is to have a new statute effective when signed or at the beginning of the next
fiscal year after signing may want to have a delayed effective date of 6 or 12
months to provide time to educate the affected organizations and their advisors
about the changes. See Section 36.
2. This Act’s applicability to UNAs formed in other
jurisdictions that are operating in this state is necessary because in all
other types of entities the internal affairs rules of the jurisdiction of the
entity’s formation (e.g., the governance rules and duties and responsibilities
of the owners and managers to each other and the entity) control; but it is
difficult to determine the jurisdiction of a UNA’s formation since it does not,
in most jurisdictions, file any public document upon its formation. Some mechanism for choosing the internal
affairs jurisdiction is therefore necessary.
The default rule in this Act is the jurisdiction in which the UNA
conducts the main part of its operations.
A UNA can, however, designate the internal affairs jurisdiction in its
governing principles, subject to applicable conflicts of laws substantial
contact rules. See Restatement (Second) of Conflict of
Laws §187(2) (1971).
The term “main part of its activities” is not
defined but should not be difficult to determine in most cases. The Revised Uniform Partnership Act (1997)
§106(a) uses the term “chief executive office” in the equivalent section. The Comment to §106(a) states that “chief
executive office” is also used to determine the proper place for filing a
financing statement under UCC §9-103(3)(d) and it is not defined in the UCC
either. Paragraph 5 of the Comment to
UCC §9-103(3)(d) states that the:
“Chief executive office”
. . . means the place from which in fact the debtor manages the main part of
his business operations . . . Doubt may arise as to which is the “chief
executive office” of a multi-state enterprise, but it would be rare that there
could be more than two possibilities . . . [The rule] will be simple to apply
in most cases . . . .
The term “main part of
its activities” seemed to be a more apt term for UNAs since many of them are
quite informal and probably do not have what are commonly thought of as
“executive offices.” In any case, most
UNAs conduct operations in only one state and those that have operations in
more than one state can designate the state that will govern its internal
affairs so it will be a rare case when it will be necessary to determine which
of two or more states’ laws govern a UNA’s internal affairs.
3. Since the laws governing UNAs in the enacting
jurisdiction govern UNAs formed in other jurisdictions that are conducting
activities (except for internal affairs issues in the enacting jurisdiction), a
foreign-formed UNA could not conduct activities in the enacting jurisdiction
that a UNA formed in this jurisdiction could not conduct, even if the activity
were legal in the foreign jurisdiction in which the UNA was formed or conducts
its main activities.
Derivation: Principle #6.
(a) An unincorporated nonprofit association is a legal entity distinct from its
members and managers.
(b) An
unincorporated nonprofit association has perpetual duration unless the governing
principles otherwise specify.
(c) An
unincorporated nonprofit association has the same powers as an individual to do
all things necessary or convenient to carry on its activities.
(d) An
unincorporated nonprofit association may engage in profit-making activities but
any profits from such activities must be used or set aside for the
association’s nonprofit purposes.
Comment
1. Subsection (a). The separate legal status of a UNA is a
fundamental concept that undergirds all the principles that allow a UNA to hold
and dispose of property in its own name and to sue and be sued in its own name
and that insulates the assets of the members from claims against the UNA. This is a reversal of traditional common law
principles that treat partnerships and other unincorporated entities under an
aggregate theory.
2. Subsection (b) Providing
for perpetual existence of a UNA is one of the key aspects of its separate
entity status. Under the traditional
common law aggregate theory, a UNA’s existence would end with any change in the
membership and if the UNA continued in operation it was deemed to be a new
UNA.
The
members can agree to a limited term and a UNA can, of course, terminate by
being dissolved and winding up. See Sections 28 and 29.
3. Subsection
(c) This is a standard general powers clause. See e.g.,
Revised Uniform Limited Liability Company Act §105 (2006).
4.
Subsection (d). Many existing
unincorporated nonprofit organizations engage in activities that are intended
to produce a profit, e.g., a bingo parlor operated by a church where the
profits are used to buy food for a homeless shelter. This type of profit-making endeavor should
not disqualify the organization from being a UNA if it otherwise
qualifies. A for profit activity might
endanger the tax-exempt status of the organization or may generate taxable
income, but these are separate issues and should not affect the organizational
status of a UNA or the rights and liabilities of its members and managers.
The fact that some or all of the members receive some
direct or indirect benefit from a UNA’s profit-making activities will not
disqualify an unincorporated nonprofit organization from being a UNA under this
Act so long as the benefit is in furtherance of the UNA’s nonprofit
purposes. The distribution of any
profits to the members for the members’ own use, e.g., a dividend distribution
to members, would, however, disqualify the organization from being a UNA
because the distribution is not made in furtherance of the UNA’s nonprofit
purposes. See Section 26. The
organization would be a general partnership, the default organizational form
for a for profit organization. An
unincorporated investment club that distributes its profits to its members
would be a general partnership and not a UNA even though its stated purpose is
to educate its members about investments.
Derivation: Principles #7 and 8.
(a)
An unincorporated nonprofit association may acquire, hold,
encumber, or transfer in its name an estate or interest in real or personal
property.
(b)
An unincorporated nonprofit association may be a legatee,
a devisee, or a beneficiary of a trust or contract.
Comment
1. Subsection (a) is based on Section 3-102(8), Uniform
Common Interest Ownership Act. It
reverses the common law rule. Inasmuch
as an unincorporated nonprofit association was not a legal entity at common
law, it could not acquire, hold, or convey real or personal property. Harold J. Ford, Unincorporated Non-Profit
Associations, 1-45 (Oxford
Univ. Press (1959); 15
A.L.R. 2d 1451 (1951); Warburton, The Holding of Property by Unincorporated
Associations, Conveyancer 318 (September-October 1985).
2. This strict common law rule has been modified in
various ways in most jurisdictions by courts and statutes. For example, courts have held that a gift by
will or inter vivos transfer of real property to a nonprofit association is not
effective to vest title in the nonprofit association but is effective to vest title
in the officers of the association to hold as trustees for the members of the
association. Matter of Anderson’s
Estate, 571 P. 2d 880 (Okla. App. 1977).
A
New York statute specifies that a grant by will of real or personal property to
an unincorporated association is effective if within three years after probate
of the will the association incorporates.
McKinney’s N.Y. Estates, Powers, & Trust Law, Section 3-1.3 (1981).
As
is the case with many of the problems created by the view that an unincorporated
association is not an entity, the statutory solutions are often partial –
limited to special circumstances and associations. Subsection (a) solves this problem for all
nonprofit associations, for all kinds of transactions, and for both real and personal
property.
3. Subsection (b) is a necessary corollary of subsection
(a) and, thus, it may be unnecessary.
However, several states currently have statutes which expressly provide
that an unincorporated, nonprofit association may be a legatee, devisee, or
beneficiary. See, for example, Md. Estates & Trusts Code Ann. Section 4-301
(1991). Therefore, it is desirable to
continue this as an express rule.
Subsection (b) applies to both trusts and contracts. Not all existing state statutes apply expressly
to both.
Derivation:
Subsection (a) – Principles #5, 7 and 12. Subsection (b) – Principle #8
Principle #12.
(a)
In this section, “statement of authority” means a statement authorizing a
person to transfer an estate or interest in real property in the name of
an unincorporated nonprofit association.
(b)
An estate or interest in real property in the name of an unincorporated
nonprofit association may be transferred by a person so authorized in a
statement of authority [filed] [recorded] by the association in the office in
the [county] in which a transfer of the property would be
[filed] [recorded].
(c) A
statement of authority must set forth:
(1)
the name of the unincorporated nonprofit association;
(2) the address in this state, including the street
address, if any, of the association, or, if the association does not have an
address in this state, its out-of-state address;
(3)
that the association is an unincorporated nonprofit association; and
(4)
the name, title, or capacity of a person
authorized to transfer an estate or interest in real property held in the name
of the association.
(d) A
statement of authority must be executed in the same manner as [a deed] [an
affidavit] by a person other than the person authorized in the statement to
transfer the estate or interest.
(e) A
filing officer may collect a fee for [filing] [recording] a statement of
authority in the amount authorized for [filing] [recording] a transfer of real
property.
(f) A
document amending, revoking, or canceling a statement of authority or stating
that the statement is unauthorized or erroneous must meet the requirements for
execution and [filing] [recording] of an original statement.
(g) Unless canceled
earlier, a [filed] [recorded] statement of authority and its most recent
amendment are canceled by operation of law [five] years after the date of the
most recent [filing] [recording].
(h)
If the record title to real property is in the name of an unincorporated
nonprofit association and the statement of authority is [filed] [recorded] in
the office of the [county] in which a transfer of real property would be
[filed] [recorded], the authority of the person named in the statement to
transfer is conclusive in favor of a person that gives value without notice
that the person lacks authority.
Comment
1. This section is based on Uniform Partnership Act
(1997) §303.
2. A statement of
authority need not be filed to conclude an acquisition of or to hold real
property. It is concerned only with the
sale, lease, encumbrance, and other transfer of an estate or interest in real
property. For this, it should, but need
not, be filed. The filing provides
important documentation. As a general
rule a statement of authority will only be filed at the time of a conveyance of
an interest in real estate as a means of establishing in the title records who
has authority to execute a deed or other instrument conveying an interest in
real estate.
3. Inasmuch
as the statement relates to the authority of a person to act for the
association in transferring real property, subsection (b) requires that the
statement be filed or recorded in the office where a transfer of the real
property would be filed or recorded.
This is usually the county in which the real estate is situated. This is where a title search concerning the
real estate would be conducted. Uniform
Partnership Act (1997) §303 provides for central filing, such as with the
Secretary of State, but its statement of partnership authority concerns
authority of partners generally, not just with respect to real estate.
4. “Filed” and “recorded” are
bracketed to direct an enacting state to choose. In most jurisdictions “recorded” will be the
appropriate choice.
5. Subsection
(c)(2) may present a problem for small, ad-hoc nonprofit associations. They may have no fixed office address. They may meet in the homes of their leaders. However, if they distribute literature or
file petitions they are likely to have a mailing address of some kind, e.g.,
the mailing address of a member or manager.
6. Subsection (c)(3) informs those
relying on the statement of the precise character of the organization. Knowing that the organization is an
unincorporated nonprofit association may cause the person dealing with the
organization to act differently.
7. Subsection (c)(4) permits the
statement to identify as the person who can act for the association someone who
holds a particular office, such as president.
This designation relieves the association from the need to make
additional filings on each change of officers.
Under local title standards and practices the transferee and filing or
recording office are likely to require a certificate of incumbency if the statement
designates the holder of an office.
8. Subsection (d) is designed to
reduce the risk of fraud and to reflect law and practice applicable to other
organizations. It requires someone other
than the person authorized to deal with the real property to execute the
statement of authority on behalf of the nonprofit association. Whether the formalities of execution must
conform to those of a deed or an affidavit is left for each state to determine.
9. Subsection (g) makes a
statement inoperative five years after its most recent recording or
filing. A new statement of authority can
be filed before or after the expiration of the five year limitation.
10. Subsection (h) is based on
Uniform Partnership Act (1997) §303(h).
Its obvious purpose is to protect good faith purchasers for value
without notice who rely on the statement, including those who acquire a
security interest in the real property.
If the required signatures on the statement, deed, or both are
forgeries, the effect of them is not governed by Section 7(h). Instead, Section 3 applies and would invoke
the other law of the State. In many
states the deed would be a nullity. See Boyer, Hovenkamp, and Kurtz, THE LAW OF PROPERTY, An Introductory
Survey (West Pub. Co. 4th ed. 1991).
Note: This section has no corresponding
Principle.
(a) A debt,
obligation, or other liability of an unincorporated nonprofit association,
whether arising in contract, tort, or otherwise:
(1)
is solely the debt, obligation, or other liability of the association; and
(2)
does not become a debt, obligation, or other liability of a member or manager
solely because of the member acts as a member or the manager acts as a manager.
(b) A person’s status as a member or
a manager of an unincorporated nonprofit association does not prevent or
restrict law other than this [act] from imposing liability on the person or the
association because of the person’s conduct.
Comment
1. The
effect of Section 8 is to provide members and managers of a UNA
with the same protection against vicarious liability for the debts and
obligations of the UNA and tort liability imposed on the UNA as the members and
managers of a nonprofit corporation would have under the enacting
jurisdiction’s laws. These principles,
taken together, constitute what is known as the limited liability doctrine
under which a member or manager is personally liable for his or her own
tortious conduct under all circumstances and is personally liable for contract
liabilities incurred on behalf of the UNA if the member or manager guarantees
or otherwise assumes personal liability for the contract or fails to disclose
that he or she is acting as the agent for the UNA. A member or manager is not otherwise
personally liable for the tort or contract liabilities imposed upon the
UNA. A creditor with a judgment against
the UNA must seek to satisfy the judgment out of the UNA’s assets but cannot
levy execution against the assets of a member or manager.
The one exception is the alter ego
doctrine (also known as the veil piercing doctrine). Courts have pierced the corporate veil of
nonprofit corporations. See Comment,
Piercing the Nonprofit Corporate Veil, 66 Marq. L. Rev. 134 (1984); Macaluso v. Jenkins, 95 Ill.App.3d 461,
420 N.E.2d 251 (1981)(President of nonprofit corporation who commingled funds
of the nonprofit corporation with funds of a corporation he controlled held
personally liable for unpaid debts of the nonprofit corporation under the veil
piercing doctrine). The fact that
members of nonprofit corporations for the most part do not have an expectation
of financial gain, as compared to shareholders of a for profit corporation,
should mean that there will be fewer types of cases than those involving for
profit corporations where the veil piecing doctrine will be held to be
applicable to nonprofit corporations.
The same criteria that are applied to pierce the veil of nonprofit
corporations should be applied in UNA veil piercing cases.
If the alter ego doctrine is found
to be applicable , the separate entity status of a UNA would be disregarded and
the assets of the UNA and its members and managers would be aggregated and
subject to a UNA creditor’s claims in the same manner that a judgment creditor
of a general partnership collects a judgment against the assets of a general
partner in a partnership.
2.
In recent years all states have enacted laws providing unpaid officers, board
members and other volunteers some protection from liability for their own
negligence (but generally not for conduct that is determined to constitute
gross negligence or willful or reckless misconduct). The statutes vary greatly as to who is
covered, for what conduct protection is given, and the conditions imposed for
the freedom from liability. Some apply
only to nonprofit corporations. State Liability Laws for Charitable
Organizations and Volunteers (Nonprofit Risk Management & Insurance
Institute, 1990); Developments, Nonprofit
Corporations, 105 Harv. L. Rev. 1578, 1685-1696 (1992). This means that members and volunteers
involved with unincorporated nonprofit associations do not obtain protection
under those state statutes. Others may
cover the managers of UNAs but only if the UNA qualifies as a tax-exempt entity
under federal or state law. See N.Y.
Not For Profit Corporation Law §§720-a and 721 (federal income tax); Minn.
Stat. Ann. 317A.257 (state income tax).
Some states have statutes that premise the insulation of liability upon
the organizations having specified amounts of liability insurance.
In 1997 Congress enacted the
Volunteer Protection Act, 42 U.S.C.A. §§ 14501-14505. This statute, which preempts state laws to
the extent of any inconsistency with the Volunteer Protection Act except to the
extent the state law provides additional protections from liability, insulates
directors, officers, trustees and direct service volunteers of nonprofit
organizations who receive no compensation (other than reasonable reimbursement
of expenses) from liability for harm that “was not caused by willful or
criminal misconduct, gross negligence, reckless misconduct, or a conscious or
flagrant indifference to the rights or safety of the individual harmed by the
volunteer.” 42 U.S.C.A. §14503(a)(3). Damages caused by operation of “a motor
vehicle, vessel, aircraft, or other vehicle” for which a license or insurance
is required to be maintained, are not covered.
42 U.S.C.A. §14503(4).
The interplay between the Federal
Volunteer Protection Act and the existing state statutes that provide liability
protection to volunteers of UNAs is a complex matter and must be determined on
a state-by-state basis. See Subsection (b).
Finally, the liability of the
managers of a UNA for breach of the duties of due care, good faith and loyalty
to the UNA and the ability of the governing principles of a UNA to limit or
eliminate this liability as far as monetary damages are concerned is a separate
subject which is dealt with in Section 23.
3. “Solely” as used
in Section 8 is intended to make it clear that a member or manager is not
vicariously liable for the liabilities of the UNA or the liabilities of another
member or manager merely because of that person’s status as a member or
manager. A member or manager may,
however, have personal liability as a result of his or her own actions. A member or manager will be personally
liable, for example, for his or her own tortious acts, or for breach of a
contract binding on the UNA which the member or manager is a party to or has guaranteed. This personal liability is imposed by other
law (see Subsection (b) of Section 8
and Section 3(a)) and not because of his or her status as a member or
manager.
Derivation: Principles #s 18-19; and 25.
SECTION 9. ASSERTION AND DEFENSE OF CLAIMS.
(a)
An unincorporated
nonprofit association may sue or be sued in its own name.
(b) A member or manager may assert a claim the member or
manager has against the unincorporated nonprofit association. An association may assert a claim it has
against a member or manager.
Comment
1. Under traditional common law doctrine, a UNA was
considered to be an aggregate of members and therefore it could not sue or be
sued in its own name. Only the members
could sue or be sued and some state court cases held that all of the members had
to be named plaintiffs in a suit brought on behalf of the UNA and that all the
members had to be named, and served with the Summons and Complaint in a suit
against a UNA. Most states have enacted
statutes in recent years granting a UNA entity status for the purpose of suits
by and against the UNA. Section 10
follows the modern rule and is consistent with the concept built into this act
that a UNA is a separate entity for many more purposes than existed under traditional
common law principles.
2. This section is intended to apply to all types of
judicial, administrative and governmental proceedings and all types of
alternative dispute resolution proceedings such as arbitration and
mediation. An enacting state may want to
modify this section to make it clear that this is the case if that is not clear
under its current civil procedure law.
3. The enacting state’s general civil procedure law will
be applicable to UNAs. See Section 3(a). These statutes and court rules will deal with
issues such as standing of a UNA to sue on behalf of its members, joinder,
counterclaims and the like. Most will
also cover issues such as pleadings and service of pleadings and venue. That is why Sections 12 and 14 are bracketed
and should not be enacted in a state if the existing statutes and court rules
are sufficient. Sections 10, 11, 12 and
14 should be enacted as part of this act, however, because there is a body of
inconsistent case law or gaps in the existing statutes or rules on the issues
dealt with in these sections.
4. Subsection (b) is another aspect of a UNA
under the Act being a separate legal entity.
Under the common law aggregate theory, since a UNA was not an entity
separate from its members, a member could not assert a claim against the UNA
since there is technically no legal entity, and the member would be both a
claimant and the defendant and personally liable for any judgment obtained in
the action. For the same reason, a UNA
could not assert a claim against a member (e.g., for unpaid dues) because the
UNA technically does not exist. This
subsection only allows a member to assert that member’s claim against the
UNA. It does not authorize a member to
file a derivative action. The enacting
jurisdiction’s civil procedure law may, however, authorize derivative
actions.
Derivation: Principle #13.
SECTION 10. EFFECT OF JUDGMENT OR ORDER. A
judgment or order against an unincorporated nonprofit association by itself is
not a judgment or order against a member or manager.
Comment
1. This section is consistent with
Restatement (Second) of Judgments, §61(2), which provides: “If under applicable
law an unincorporated association is treated as a jural entity distinct from
its members, a judgment for or against the association has the same effects with
respect to the association and its members as a judgment for or against a
corporation . . . .”
2. Section 10 applies not only to
judgments but also to orders, such as an award rendered in arbitration or an
injunction.
3. This section reverses the common
law rule. Under the common law’s
aggregate view of an unincorporated association, members, as co-principals,
were individually liable for obligations of the association.
4. That a
judgment against a UNA is not also a judgment against one authorized to manage
the affairs of the association recognizes fully the entity status of a
nonprofit association. An
obvious corollary of this section is that a judgment against a nonprofit
association may not be satisfied against a member unless there is also a
judgment against the member. The one
exception to this rule would be an injunction issued against a UNA. Federal Rules of Civil Procedure 65(d)
provides that every injunction and restraining order is binding not only on the
named parties but also on “the parties’ officers, agents, servants, employees,
and attorneys . . . who receive actual notice of it by personal notice or
otherwise.”
Derivation: Principles #s 16 and 19.
(a) An unincorporated nonprofit association may file in
the office of the [Secretary of State] a statement appointing an agent
authorized to receive service of process.
(b) A
statement appointing an agent must set forth:
(1)
the name of the unincorporated nonprofit association; and
(2)
the name of the person in this state authorized to receive service of process
and the person’s address, including the street address, in this state.
(c) A
statement appointing an agent must be signed and [acknowledged] [sworn to] by a
person authorized to manage the affairs of the unincorporated nonprofit
association. The statement must also be
signed and acknowledged by the person appointed agent, that thereby accepts the
appointment. The appointed agent may
resign by filing a resignation in the office of the [Secretary of State] and
giving notice to the association.
(d) The [Secretary of State] may collect a fee for filing a statement
appointing an agent to receive service of process, an amendment, a cancellation,
or a resignation in the amount charged for filing similar documents.
(e) An
amendment to or cancellation of a statement appointing an agent to receive
service of process must meet the requirements for execution of an original
statement.
Comment
1. This section authorizes but does
not require, a nonprofit association to file a statement authorizing an agent
to receive service of process. It is, of
course, not the equivalent of filing articles of incorporation. However, some nonprofit associations may find
it prudent to file. Filing may assure
that the nonprofit association’s management gets prompt notice of any lawsuit
filed against it. Also, depending upon
the jurisdiction’s other laws, filing gives some public notice of the nonprofit
association’s existence and its address.
2. Central filing with a state
official is provided. This is where
interested parties will seek information of this kind and where such
appointments are commonly publicly filed.
3. The format of this section is very
much like Section 7, which concerns a statement of authority with respect to
property. Because one requires local and
other central filing they are not combined.
Note: This section has no corresponding
Principle.
[SECTION 12. SERVICE OF PROCESS. In an
action or proceeding against an unincorporated nonprofit association, a summons
and complaint or other process may be served on an agent authorized by
appointment to receive service of process or a manager of the association or in
any other manner authorized by the law of this state.]
Comment
1. Some
states have expressly addressed service of process on a nonprofit association
in court rules or by statute. Those
states may wish to continue their rules and so should not adopt this section. For this reason this section is
bracketed.
2. By rule or statute all
jurisdictions have extensive law on service of process. The real question for nonprofit associations
is which set of these rules should apply.
This Act treats a nonprofit unincorporated association as a legal
entity. Thus, the rules applicable to
another legal entity, a corporation, seem most appropriate.
Derivation: Principle #17.
SECTION 13. ACTION OR
PROCEEDING NOT ABATED BY CHANGE. An action or proceeding against an unincorporated nonprofit
association does not abate merely because of a change in its members or managers.
Comment
This
provision reverses the common law rule of partnerships, which courts often
extended to unincorporated nonprofit associations. Uniform Partnership Act (1914) §§29 and
31(4). This Act’s entity approach
requires this change to the old common law rule. See
Uniform Partnership Act (1997) §§603(a) 701, and 801.
Derivation: Principle #14.
[SECTION 14. VENUE. Unless
otherwise provided by law other than this [act], venue of an action against an
unincorporated nonprofit association brought in this state is determined under
the statutes applicable to an action brought in this state against a
corporation.]
Comment
1. This section is bracketed because
many states have already satisfactorily solved this issue. A criterion used by all states for fixing
venue is the county of residence of the defendant. If an aggregate view of a nonprofit
association were taken, the association is resident in any county in which a
member resides. See Wright, Miller, & Cooper, 15 Federal Procedure & Practice 3812 (1986). Conforming to the entity view of an
association, Section 15 rejects the common law view. States have by statute modified the common law
rule. Illinois, for example, provides
that “a voluntary unincorporated association sued in its own name is a resident
of any county in which it has an office or if on due inquiry no office can be
found, in which any officer resides.”
Ill. Code Civ. Prac. Section 2-102(c).
In many cases, however, a UNA will not have an officer or an officer in
the state.
2. Most states specify as many as
eight additional grounds for venue, including the county in which the real
estate that is the subject of the suit is situated and the county in which the
act causing, in whole or in part, the personal injury or other tort
occurred. None of these additional
criteria present a special problem with respect to an unincorporated nonprofit
association.
Derivation: Principle #17.
SECTION 15. MEMBER NOT AN AGENT. A member of an unincorporated nonprofit association is not
an agent of the association solely by reason of being a member.
Comment
1. The
purpose of this section is to make it clear that a person’s status as a member
does not by itself make that person an agent of the UNA. This is contrary to partnership law where the
general partners are considered to be general agents of the partnership and can
bind the partnership for acts in the ordinary course of business. Agency and the power to bind in a UNA are
determined under the enacting state’s agency law. See
Section 3(a). Under agency law the
managers of a UNA would in most cases be considered as having apparent
authority to bind the UNA for acts in the ordinary course of the UNA’s
business. Therefore a member who is also
a manager would be considered to be an agent of the UNA but this is because
that person is a manager as well as a member of the UNA, and therefore the
agency authority is not “solely by reason of being a member.” Under agency law, a member might have actual
authority to bind the UNA or might have apparent authority to bind the UNA
because of the member’s established course of dealing with third parties or
under an estoppel theory. Again, the
member’s agency authority to bind is not solely because of the member’s status
as a member.
2. A UNA might be directly or vicariously liable for
actions of a member under general law other than agency law. For example, under the doctrine of respondeat
superior, a UNA might be liable for the tortious conduct of a member who is
found to be acting as a servant of the UNA at the time of the tortious conduct
or for negligently supervising a member who is acting on behalf of the UNA. See
Section 8.
Derivation: Principle #27 and ULLCA (2006) §301.
SECTION 16. APPROVAL BY MEMBERS. Except as
otherwise provided in the governing principles, an unincorporated nonprofit
association must have the approval of its members to:
(1) admit, suspend, dismiss, or
expel a member;
(2) select and dismiss a manager;
(3) adopt, amend, or repeal the
governing principles;
(4) sell, lease, exchange, or
otherwise dispose of all, or substantially all, of the association’s property,
with or without the association’s goodwill, outside the ordinary course of its
activities;
(5) dissolve under Section 28 or
merge under Section
30;
(6) undertake any other act outside
the ordinary course of the association’s activities;
(7) determine the policy and
purposes of the association; or
(8) do any other act or exercise a
right requiring action by members permitted by the governing principles.
Comment
1. Sections 16-26 deal with governance issues and are
often referred to as internal affairs rules.
They establish the default rules governing the relation of the members
and managers to each other and to the UNA.
Liability to third parties is covered by other provisions of this
act. See
Section 8. The internal affairs rules in
Sections 17-27 apply to UNAs formed in the enacting state. The internal rules of UNAs formed in other
jurisdictions are determined under Section 4(b).
Derivation: Principle #26.
(a) Unless the governing principles otherwise provide:
(1) approval of a matter by members of an
unincorporated nonprofit association requires an affirmative majority of the
votes cast at a properly called member meeting; and
(2) each member is entitled to one vote on
each matter that must be approved by members.
(b) Notice and quorum requirements for meetings and
members of an unincorporated nonprofit association are determined by the
governing principles.
Comment
1. The principles
set forth in Section 17—members vote on a per capita basis, notice of meetings
and majority vote for approval actions—are all default rules. They apply unless there are different rules
in the UNA’s governing principles. Thus,
if a UNA’s bylaws specified that only some members have voting rights, then
only those so designated would have voting rights. Similarly, if the bylaws specified that all
members are entitled to vote on specific actions (e.g., election of a board of directors), but a subset of members is
the approving authority for all other matters the bylaws would trump the
default rules. In addition, bylaw
provisions that provided for a higher (or lower) voting percentage rather than
the majority vote required by the statutory default rule would control.
2. An enacting state
may decide to require supermajority voting (e.g.,
two-thirds majority) for transactions that are not in the ordinary course of
business such as dissolution, merger, or amendment of the UNA’s governing
principles. The default voting
requirements for similar transactions under the enacting jurisdiction’s
nonprofit corporation law might be an appropriate model for structuring the
voting requirements for a UNA. Because
it is often quite difficult to locate and to get a majority of all members
together for voting purposes in a UNA, the requirement of a supermajority
voting for any issue may not be appropriate.
3. There is one
limitation on the authority to modify member approval rights. A UNA must always have at least two members. See Section
2(8). Therefore, the governing
principles cannot specify that a UNA have one or no members.
4. A UNA will
undoubtedly have some kind of notice and quorum requirements in its governing
principles which include its established practices. If it does not have any such requirements (e.g.,
it is newly formed and is holding its initial meeting), it can create them at
that meeting and these requirements, even if oral, become over time the UNA’s
established practices and therefore part of the UNA’s governing principles.
Derivation: Principle #26.
(a) A member
does not have a fiduciary duty to an unincorporated nonprofit association or to
another member of the association solely by being a member.
(b) A member
shall discharge the duties to the unincorporated nonprofit association and the
other members under this [act] and exercise any rights consistently with the
obligations of good faith and fair
dealing.
Comment
1.
Members of a UNA, like members of a limited liability
company in a manager managed LLC (see Revised Uniform Limited Liability Company
Act (2006) §409(g)(5) and limited partners in a limited partnership (see
Revised Uniform Limited Partnership Act (2001) §305(a)), do not have fiduciary
duties (generally defined as a duty of loyalty and good faith) to the UNA or
the other members by virtue of their status as members. A member who undertakes managerial duties,
however, would have the fiduciary duties of a manager (see Section 23).
2.
While they have no fiduciary duties, members do have
the obligation to discharge any duties and any rights they exercise pursuant to
this Act or pursuant to the UNA’s governing principles consistent with the
obligation of good faith and fair dealing. See Revised Uniform Limited Liability
Company Act (2006) §409(d); Revised Uniform Limited Partnership Act (2001)
§305(b). A member cannot, for example,
disclose confidential information obtained from the UNA to third parties. The obligation of good faith and fair dealing
is not strictly speaking a fiduciary duty but rather is a duty that is derived
from the consensual or contract nature of a UNA. See Restatement (Second) of
Contracts (1981) §205.
Derivation:
Principle #31.
(a) A person becomes a member of an
unincorporated nonprofit association and may be suspended, dismissed, or
expelled in accordance with the association’s governing principles. If there are no applicable governing
principles, a person may become a member or be suspended, dismissed, or
expelled from an association by a vote of its members. A person may not be admitted as a member
without the person’s consent.
(b) Unless the governing principles
otherwise provide, the suspension, dismissal, or expulsion of a member of an
unincorporated nonprofit association does not relieve the member from any
unpaid capital contribution, dues, assessments, fees, or other obligation
incurred or commitment made by the member before the suspension, dismissal, or
expulsion.
Comment
1. The
default rule for admission, suspension, dismissal, or expulsion of members is a
majority vote of members. See Section 17. If the UNA’s governing principles provide
otherwise, the governing principles would be applicable.
2. Subsection (b) makes it clear that suspension,
dismissal, or expulsion do not relieve a member of any obligations it owes the
UNA.
Derivation: Principle #35.
(a) A member may resign from
membership in an unincorporated nonprofit association in accordance with the
governing principles. In the absence of
applicable governing principles, a member may resign at any time.
(b) Unless the governing principles
otherwise provide, resignation of a member of an unincorporated nonprofit
association does not relieve the member from any unpaid capital contribution,
dues, assessments, fees, or other obligation incurred or commitment made by the
member before resignation.
Comment
Preventing a member from voluntarily
withdrawing from a UNA would be unconstitutional and void on public policy
grounds. A UNA should, however, be able
to impose reasonable restrictions on withdrawal, for example, requiring 30
days’ advance notice. Moreover, as
Subsection (b) states, a member who resigns remains liable for obligations and
commitments made before the resignation.
Derivation: Principle #36.
SECTION 21. MEMBERSHIP INTEREST NOT TRANSFERABLE. Except as
otherwise provided in the governing principles, a member’s interest or any
right under the governing principles is not transferable.
Comment
This is a basic common sense
rule. A member of a church that is a
UNA, for example, should not be able to transfer his or her membership to a
third party. There may be situations
where a UNA might be willing to allow transfers. In those situations, the transfer could be
made in accordance with the UNA’s governing principles. Condominium homeowners association bylaws,
for example, frequently authorize automatic transfer of membership in the
association upon transfer of title in the condominium.
Derivation: Principle #37.
SECTION 22. SELECTION OF MANAGERS; MANAGEMENT RIGHTS OF
MANAGERS. Except as otherwise provided in this [act] or the
governing principles:
(1) the members of an association
may select the manager, or managers;
(2) a manager may be a member of the
association;
(3) if no manager is selected, all
members are managers;
(4) each manager has equal rights in
the management and conduct of the association’s activities;
(5) all matters relating to the
association’s activities are decided by its managers except for those matters
reserved for approval by members in Section 16; and
(6) a difference among managers is
decided by a majority of the managers.
Comment
1.
“Manager” is a defined term. See Section 2(3).
2. The default rule is all members are managers. In UNAs such as churches with large numbers
of members, this default rule will rarely be applicable because the governing
principles will in most situations provide a selection process for
managers.
3. Subsections (b)(each manager has equal management
rights), (c)(managers manage the UNA’s activities), and (d)(differences between
the managers are resolved by majority vote) are consistent with the rights of
general partners in a partnership and the managers of a limited liability
company. See Uniform Partnership Act (1997) §401; Revised Uniform Limited
Liability Company Act (2006) §407.
4. The rules in this Section are default rules that can
be varied by a UNA’s governing principles.
The intent is to allow maximum flexibility. The UNA’s governing principles can provide
for any type of managerial structure the UNA wants to have. Choices range from a traditional board of
directors or board of trustees, to third parties who manage the UNA under a
contract. The managerial
responsibilities can be split between the various managers (e.g., one manager in charge of finances,
another in charge of programs). Members
who are also managers will have a dual status and their duties and liabilities
will be based on the capacity in which they are acting at the time an action
(or omission) takes place.
Derivation: Principles #s 28 and 29.
(a) A manager owes to the
unincorporated nonprofit association and to its members the duties of loyalty,
care, and good faith.
(b) A manager shall manage the
unincorporated nonprofit association in good faith, in a manner the manager
reasonably believes to be in the best interests of the association, and with
such care, including reasonable inquiry, as a prudent person would reasonably
exercise in a similar position and under similar circumstances. A manager may rely in good faith upon any
opinion, report, statement, or other information provided by another person
that the manager reasonably believes is a competent and reliable source for the
information.
(c) After full disclosure of all
material facts, a specific act or transaction that would otherwise violate the
duty of loyalty by a manager may be authorized or ratified by approval of the
majority of the members of the unincorporated nonprofit association that are
not interested directly or indirectly in the act or transaction.
(d) A manager
who makes a business judgment in good faith satisfies the duties specified in
subsection (a) if the manager:
(1) is not interested,
directly or indirectly, in the subject of the business judgment and is
otherwise able to exercise independent judgment;
(2) is informed with
respect to the subject of the business judgment to the extent the manager
reasonably believes to be appropriate under the circumstances; and
(3) believes that the
business judgment is in the best interests of the unincorporated nonprofit
association in accordance with its stated purposes.
(e) The governing principles in a
record may limit or eliminate the liability of a manager to the unincorporated
nonprofit association or its members for damages for any action taken, or for
failure to take any action, as a manager except liability for:
(1)
the amount of financial benefit improperly received by a manager;
(2)
an intentional infliction of harm on the association or its members;
(3)
an intentional violation of criminal law;
(4)
breach of the duty of loyalty; or
(5)
improper distributions.
Comment
1. This
Section deals with what are generally referred to as fiduciary duties. Only individuals exercising managerial
authority in a UNA have fiduciary duties.
This is consistent with U.S. business entity laws. See,
e.g., Uniform Limited Liability Company Act (2006) §409; Revised Model
Business Corporation Act §§8.30 and 8.31.
Thus, members of a UNA do not have any fiduciary duties to the other
members or to the managers or to the UNA, unless the member is also a manager. See
Section 18. In this event that member,
in his or her capacity as a manager, would have the fiduciary duties that the
other managers of the UNA have.
2. The two fundamental fiduciary duties are due care and
loyalty. Good faith is sometimes
characterized as a fiduciary duty but with respect to unincorporated business
entities is designated as a contract based obligation. See, e.g., Uniform Limited Liability Company
Act (2006) §409(d).
3. Subsection
(b) describes how a manager exercises due care and good faith in making decisions. Subsection (d) describes what is known as the
business judgment rule, which in effect is a defense to a breach of duty
claim.
4. Under
Subsection (c) a potential breach of loyalty claim (e.g., conflict of interest transaction or appropriation of something
that falls within what is commonly called the “corporate opportunity” or
“enterprise opportunity” doctrine or engaging in competing activities) can be
avoided by advance approval or ratification after full disclosure of the facts. Note also that under Subsection (d)(1) having
a conflict of interest precludes the application of the business judgment
rule.
5. Subsection (e) states that the governing principles of
a UNA can limit or eliminate the monetary liability of a manager who is found
to have breached a fiduciary duty except for the five exceptions listed in the
subsection. Even if the manager is
exempt from monetary damages, he or she could still be bound by an injunction
or other equitable remedy granted by a court.
This limitation, unlike most governing principles, must be in a record,
which means that it must be in some kind of writing.
6. This Section only deals with the liability of a UNA
manager to the UNA and its members.
Liability of a manager to third parties is dealt with in other sections
of this Act. See Section 8 and Comment 2 to Section 8 dealing with limitations
on liability to third parties under state and federal volunteer protection
acts.
Derivation: Principles #s 31 and 33.
SECTION 24. NOTICE AND QUORUM REQUIREMENTS FOR MANAGER MEETING. Notice and quorum requirements for meetings of managers
are determined by the governing principles.
Comment
1. A UNA
will undoubtedly have some kind of notice and quorum requirements in its
governing principles which include its established practices. If a UNA does not have any such requirements
(e.g., it is newly formed and is
holding its initial meeting), it can create them at that meeting and those
requirements, even if oral, become the established practices and therefore part
of the UNA’s governing principles.
2. The use of proxies in manager meetings will be
determined by other applicable law. See Section 3(a). As a general rule, directors or other persons
performing managerial responsibilities may, consistent with a UNA’s governing
principles, delegate one or more duties to another person, but they are not
authorized to give another person a proxy to vote on a matter.
Derivation: Principle #30.
SECTION 25.
RIGHT OF A MEMBER OR MANAGER TO INFORMATION.
(a) On reasonable notice, a member or
manager of an unincorporated nonprofit association may inspect and copy during
the association’s regular operating hours, at a reasonable location specified
by the association, any record maintained by the association regarding its
activities, financial condition, and other circumstances, to the extent the
information is material to the member’s or manager’s rights and duties under
the governing principles or this [act].
(b) An unincorporated nonprofit
association may impose reasonable restrictions on access to and use of
information to be furnished under this section, including designating the
information confidential and imposing nondisclosure and safeguarding
obligations on the recipient.
(c) An unincorporated nonprofit association may charge a
person that makes a demand under this section reasonable copying costs, limited
to the costs of labor and materials.
(d) A former member or manager may have access to
information to which the member or manager was entitled while a member or
manager if the information pertains to the period during which the person was a
member or manager, the former member or manager seeks the information in good
faith, and the former member or manager satisfies subsections (a) through (c).
Comment
The act does not require a UNA to
keep any books and records, but if it does have them, they must be made
available to the members and managers pursuant to this Section. The term books and records is intended to cover
all types and forms of data, including electronic data. An enacting jurisdiction may want to include
a definition of books and records in the act if there is any uncertainty about
what is included in this term in the state’s existing laws.
Derivation: Principle #32 and ULLCA (2006) Section 410.
(a) Except as otherwise provided in
subsection (b), an unincorporated nonprofit association may not pay dividends
or distribute any part of its income or profits to a member or manager.
(b) An unincorporated nonprofit
association may:
(1) pay reasonable
compensation or reimburse reasonable expenses to a member or manager for
services rendered;
(2) confer benefits on a
member or manager in conformity with its nonprofit purposes;
(3) repurchase a
membership and repay a capital contribution made by a member to the extent
authorized by its governing principles; or
(4) make distributions
of property to members upon winding up and termination to the extent permitted
by Section 29.
Comment
1. A
distribution by a UNA to members in violation of this Section would disqualify
it from continuing to be a UNA. See Section 2(8) and Comment 8 to
Section 2.
2. The permitted distributions authorized by Subsection
(b) are derived from Sections 6.40 and 6.41 of the Proposed Model Nonprofit
Corporation Act-Third Edition (2008).
Derivation: Principle #5.
(a) Except as otherwise provided in
the governing principles, an unincorporated nonprofit association shall
reimburse a member or manager for authorized expenses reasonably incurred on
behalf of the association.
(b) An
unincorporated nonprofit association may indemnify a member or manager for any
debt, obligation, or other liability incurred in the course of the member’s or
manager’s activities on behalf of the association. To be eligible for indemnification, the
person seeking indemnification must have complied with the duties stated in
Section 23. Governing principles in a record may broaden
or limit the right of indemnification.
(c) If a person is made or
threatened to be made a party in an action or based on that person’s conduct of
the affairs of an unincorporated nonprofit association, the person must make a
request in a record to the association, and on approval in a record by a
disinterested majority of the managers, may receive payment of or reimbursement
by the association, of reasonable expenses, including attorney’s fees and costs,
incurred by the person before the final disposition of the proceeding. To be entitled to an advance payment or
reimbursement, the person must state in a record that the person has a good
faith belief that the criteria for indemnification in subsection (b) have been
satisfied and that the person will repay the amounts advanced or reimbursed if
the criteria for payment have not been satisfied.
(d) An
unincorporated nonprofit association may purchase insurance on behalf of a
member or manager for liability asserted against or incurred by the member or
manager in the capacity of a member or manager, whether or not the association
would have the power under this [act] to reimburse, indemnify, or advance expenses to the member or manager
against the liability.
(e) The
rights of reimbursement, indemnification, and advancement of expenses under
this Section apply to a former member or manager for an activity undertaken on
behalf of the unincorporated nonprofit association while a member or manager.
Comment
1. The
rights to reimbursement of expenses indemnification (Subsection (a)) and
advancement of litigation expenses and attorneys’ fees in business entity
statutes varies greatly from jurisdiction to jurisdiction. The rights of reimbursement of expenses and
indemnification in Subsections (a) and (b) are similar to that found in other
business entity statutes. See Uniform Limited Liability Company
Act (2006) §408; Model Nonprofit Corporation Act-Third Edition (2008)
§§8.50-8.58. The right to advancement of
litigation expenses in Subsection (c) is derived from the Minnesota Nonprofit
Corporation Act MSA § 317A.257.
Many existing state statutes only allow reimbursement of litigation
expenses after the conclusion of the litigation and a finding of nonliability. Given the fact that most members and managers
of UNAs are unpaid volunteers, the advancement of litigation expenses on a
discretionary basis authorized by Subsection (c) seems appropriate.
2. Directors
and officers insurance and errors and omissions insurance for managers of UNAs
is expensive but because of potential liability, directors and other managers
of UNAs are increasingly demanding that it be maintained on their behalf. Subsection (d) makes it clear that the
purchase of such insurance is authorized.
Derivation: Principle #34.
(a) An
unincorporated nonprofit association may be dissolved as follows:
(1) if the governing
principles provide a time or method for dissolution, at that time or by that
method;
(2) if the governing
principles do not provide a time or method for dissolution, upon approval by
the members;
(3) if no members can be
identified and the association’s operations have been discontinued for at least
three years, by the managers or, if the association has no incumbent managers,
by its last preceding incumbent managers; or
(4) by court order.
(b)
After dissolution, an unincorporated nonprofit association continues in
existence until its activities have been wound up and it is terminated pursuant
to Section 29.
Comment
1. The vote
required for dissolution under Subsection (2) would be a majority vote of the
members and under Subsection (3) by a majority of the managers, unless the
governing principles require a higher vote.
See Sections 16(5) and
22(d).
2. As a general rule, a court order
dissolving a UNA would be appropriate if (1)-(3) are inapplicable. It should also be appropriate if it is
impossible or impracticable to continue the UNA, for example because of a
deadlock or in other circumstances where the doctrine of cypres is deemed to be
applicable.
Derivation: Principle #38, Calif. Corp. Code § 18410.
SECTION 29. WINDING UP AND TERMINATION. Winding up and termination of an unincorporated nonprofit
association must proceed in accordance with the following rules:
(1) All known debts and liabilities
must be paid or adequately provided for.
(2) Any property subject to a
condition requiring return to the person designated by the donor must be
transferred to that person.
(3) Any property subject to a trust
must be distributed in accordance with the trust agreement.
(4) Any remaining property must be
distributed as follows:
(A) as required by law
other than this [act] that requires assets of an association to be distributed
to another person with similar nonprofit purposes;
(B) in accordance with
the association’s governing principles; and in the absence of applicable
governing principles, to the current members of the association per capita or
as the current members direct; or
(C) if neither
subparagraph (A) nor (B) applies, under [cite the unclaimed property law in
this state.]
Comment
This Section sets out the rules for
distribution of UNAs assets after its affairs have been wound up. It is derived from the California
Unincorporated Nonprofit Association statute.
See Calif. Corp. Code
§18410.
Derivation: Principle #39.
(a) In
this section:
(1)
“Constituent organization” means an organization that is merged with one or
more other organizations including the surviving organization.
(2)
“Disappearing organization” means a constituent organization that is not the
surviving organization.
(3)
“Organization” means an unincorporated nonprofit association, a general
partnership, including a limited liability partnership, limited partnership,
including a limited liability limited partnership, limited liability company,
business or statutory trust, corporation, or any other legal or commercial
entity having a statute governing its formation and operation. The term includes a for-profit or nonprofit
domestic or foreign organization.
(4)
“Surviving organization” means an organization into which one or more other
organizations are merged.
(b) An
unincorporated nonprofit association may merge with any organization that is
authorized by law to effect a merger with an unincorporated nonprofit
association.
(c) A
merger involving an unincorporated nonprofit association is subject to the
following rules:
(1)
Each of the constituent merging organizations shall comply with its governing
law.
(2)
Each party to the merger shall approve a plan of merger. The plan, which must be in a record, must
include the following provisions:
(A)
the name and form of each organization that is a party to the merger;
(B)
the name and form of the surviving organization and, if the surviving
organization is to be created by the merger, a statement to that effect;
(C)
if the surviving organization is to be created by the merger, the surviving
organization’s organizational documents that are proposed to be in a record;
(D)
if the surviving organization is not to be created by the merger, any
amendments to be made by the merger to the surviving organization’s organizational
documents that are, or are proposed to be, in a record; and
(E) the terms and conditions of the merger, including the manner and
basis for converting the interests in each constituent organization into any
combination of money, interests in the surviving organization, and other
consideration.
(3)
The plan of merger must be approved by the members of each unincorporated
nonprofit association that is a constituent organization in the merger. If a plan of merger would impose personal
liability for an obligation of a constituent on surviving organization on a
member of an association that is a party to the merger, the plan may not take
effect unless it is approved in a record by the member.
(4)
Subject to the contractual rights of third parties, after a plan of merger is
approved and at any time before the merger is effective, a constituent
organization may amend the plan or abandon the merger as provided in the plan,
or except as otherwise prohibited in the plan, with the same consent as was required
to approve the plan.
(5)
Following approval of the plan, a merger under this section is effective:
(A)
if a constituent organization is required to give notice to or obtain the
approval of a governmental agency or officer in order to be a party to a
merger, when the notice has been given and the approval has been obtained; and
(B)
if the surviving organization:
(i) is an unincorporated nonprofit
association, as specified in the plan of merger and upon compliance by any
constituent organization that is not an association with any requirements,
including any required filings in the [office of the Secretary of State], of
the organization’s governing statute; or
(ii) is not an unincorporated nonprofit
association, as provided by the statute governing the surviving
organization.
(d) When
a merger becomes effective:
(1)
the surviving organization continues or comes into existence;
(2)
each constituent organization that merges into the surviving organization
ceases to exist as a separate entity;
(3)
all property owned by each constituent organization that ceases to exist vests
in the surviving organization;
(4)
all debts, obligations, or other liabilities of each constituent organization
that ceases to exist continue as debts, obligations, or other liabilities of
the surviving organization;
(5)
an action or proceeding pending by or against any constituent organization that
ceases to exist may be continued as if the merger had not occurred;
(6)
except as prohibited by other law, all of the rights, privileges, immunities,
powers, and purposes of each constituent organization that ceases to exist vest
in the surviving organization;
(7)
except as otherwise provided in the plan of merger, the terms and conditions of
the plan of merger take effect;
(8)
the merger does not affect the personal liability, if any, of a member or
manager of a constituent organization for a debt, obligation, or other
liability incurred before the merger is effective;
(9)
a surviving organization that is a foreign organization is subject to the
jurisdiction of the courts of this state to enforce any debt, obligation, or
other liability owed by a constituent organization, if before the merger the
constituent organization was subject to suit in this state for the debt,
obligation, or other liability; and
(10)
the [Secretary of State] is the agent for service of process for the purposes
of enforcing a debt, obligation, or other liability under this subsection of a
surviving organization that is a foreign organization and not authorized to
transact business in this state.
(e)
Property held for a charitable purpose under the law of this state by a
domestic or foreign organization immediately before a merger under this section
becomes effective may not, as a result of the merger, be diverted from the
objects for which it was given, unless, to the extent required by or pursuant
to the law of this state concerning cy pres or other law dealing with
nondiversion of charitable assets, the organization obtains an appropriate
order of [name of court] [the attorney general] specifying the disposition of
the property.
(f) A
bequest, devise, gift, grant, or promise contained in a will or other
instrument of donation, subscription, or conveyance that is made to a
disappearing organization and that takes effect or remains payable after the
merger inures to the surviving organization.
A trust obligation that would govern property if transferred to the
disappearing organization applies to property that is transferred to the
surviving organization under this section.
Comment
1. This Section authorizes a UNA to
merge into another UNA or into another organization, assuming the law governing
the other organization authorizes a merger with a UNA; and then sets forth the
requirements for the merger—the plan of merger (Subsection (c)(2)); approval of
the merger (Subsections (c)(3) and (4)); compliance with all applicable laws
(Subsections (c)(1) and (5); and the legal effect of the merger (Subsection
(d)). The requirements in this Section
are consistent with merger provisions of other business entity laws. The Uniform Limited Liability Act (2006) Sections 1001-09
were used as a guide with the following modifications: (1) majority vs.
unanimous vote for approval, and (2) no filing required if all the entities
involved are UNAs.
2.
Subsections (e) and (f) prevent property held in trust or for charitable
purposes before the merger from being diverted from purposes as a result of the
merger.
Derivation:
Principle #40. Note: Principle #40 calls for conversion as well as
merger provisions. Conversion provisions
are not, however necessary. A UNA can
organize a new entity and merge into it, or merge another type of entity into
the UNA, thereby achieving the same result as a conversion.
(a) If,
before [the effective date of this [act]], an estate or interest in property
was by terms of a transfer purportedly transferred to an unincorporated
nonprofit association but under the law of this state the estate or interest
did not vest in the association, or in one or more persons on behalf of the
association under subsection (b), on [the effective date of this [act]] the
estate or interest vests in the association, unless the parties to the transfer
have treated the transfer as ineffective.
(b) If,
before [the effective date of this [act]], an estate or interest in property
was by terms of a transfer purportedly transferred to an unincorporated
nonprofit association but under the law the estate or interest was vested in
one or more persons to hold the estate or interest for members of the
association, on or after [the effective date of this [act]] those persons, or
their successors in interest, may transfer the estate or interest to the
association in its name, or the association may require that the estate or
interest be transferred to it in its name.]
Legislative Note:
1.
The initial common law rule was that a purported transfer of property to
an unincorporated nonprofit association totally failed as the association was
not a legal entity. If a state currently
has that rule, it should adopt Subsection (a).
If, on the other hand, its rule is that title does not pass to the
association in its name but passes instead to a fiduciary, such as its
officers, to hold the property for the benefit of the members, a state should
adopt Subsection (b).
If
a state has by statute made transfers effective to some classes of nonprofit
associations but not all, it should probably adopt both Subsections (a) and
(b). On the other hand, if a state has
made all transfers to all unincorporated nonprofit associations effective, it
does not need Section 31.
2. Section 31
brings to fruition the parties’ expectations that previous law frustrated. Inasmuch as the common law did not consider
an unincorporated nonprofit association to be a legal entity, it could not
acquire property. A gift of real or
personal property thus failed. Reference
to the transfer as “purportedly” made identifies the document of transfer as
one not effective under the law.
Subsection (a) gives effect to the gift.
However, if parties were informed about the common law they may have
treated the gift as ineffective. In that
case, the final clause of Subsection (a) provides that the gift does not become
effective when this Act takes effect.
The unless clause would apply, for example, if the residual
beneficiaries of the donor’s will, knowing that the devise of Blackacre to the
nonprofit association was ineffective under the law, continued to use Blackacre
as their summer home with the approval and acquiescence of members and
representatives of the nonprofit association.
3.
Section 31 is not a retroactive rule.
It applies to the facts existing when this Act takes effect. At that time Subsection (a) applies to a
purported transfer of property that under the law of the jurisdiction that
could not be given effect at the time it was made. The first alternative belatedly makes it
effective – effective when this Act takes effect and not when made. The practical result of this difference is
that when the purported transfer is effective, the transfer is subject to
interests in the property that came into being in the interim. The nonprofit association’s interest is
subject, for example, to a tax or judgment lien that became effective in the
interim. An intervening transfer by the
initial transferor may simply be evidence that the “parties had treated the
transfer as ineffective.” If so,
Alternative 1 by its terms does not vest ownership in the nonprofit
association.
4.
Some courts gave effect to a gift of property to an unincorporated
nonprofit association by determining that the gift lodged title in someone,
often officers of the association, to hold the property in trust for the
benefit of the association’s members.
Subsection (b) addresses this situation.
When the Act takes effect it authorizes the fiduciary to transfer the
property to the association. If the
fiduciary is unwilling or reluctant, the association may require the fiduciary
to transfer the property to the association.
In either case, the association will get a deed transferring the
property to it which, in the case of real property, the association may
record.
5. Jurisdictions that have a statute like New
York’s concerning grants of property by will have a problem that needs special
attention. The New York statute provides
that a grant by will of real or personal property to an unincorporated
association is effective only if the association incorporates within three
years after probate of the will.
McKinney’s N.Y. Estates, Powers & Trust Law Section 3-1.3
(1991). The grants by will that need
attention are those that have not become effective by incorporation of the
association and have not become ineffective by the running of the three year
period. These grants seem entitled to
the benefits of Section 31. If so, some
modification of Section 31 may be required.
SECTION 32. UNIFORMITY OF APPLICATION AND CONSTRUCTION. In applying and construing this
uniform act, consideration must be given to the need to promote uniformity of
the law with respect to its subject matter among states that enact it.
SECTION 33. RELATION TO
ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT. This [act] modifies, limits, and
supersedes the federal Electronic Signatures in Global and National Commerce
Act, 15 U.S.C. Section 7001, et seq., but does not modify, limit, or supersede
Section 101(c) of that act, 15 U.S.C. Section 7001(c), or authorize electronic
delivery of any of the notices described in Section 103(b) of that act, 15
U.S.C. Section 7003(b).
SECTION 34. SAVINGS
CLAUSE. This [act] does not affect an action or proceeding
commenced or right accrued before this [act] takes effect.
Comment
1. Section 33 is adapted from
Uniform Partnership Act (1997) §1006(c).
It continues the prior law after the effective date of this Act with
respect to a (i) “right accrued” and (ii) pending “action or proceeding.” But for this section the new law of this Act
would displace the old in some circumstances.
The power of a new act to displace the old statute with respect to
conduct occurring before the new act’s enactment is substantial. Millard H. Ruud, The Savings Clause – Some Problems in Construction and Drafting, 33
Tex. L. Rev. 285, 286-293 (1955). A
court generally applies the law that exists at the time it acts.
2. Almost
all states have general savings statutes, usually as a part of their statutory
construction acts. These are often very
broad. See, for example, Model Statutory
Construction Act, Section 53. As this
Act is remedial, the more limited savings provisions in Section 33 are more
appropriate than the broad savings provisions of the usual general savings
clause. Section 33 and not a
jurisdiction’s general savings clause applies to the Act.
3. “Right
Accrued.” It is not always clear whether
an alleged right has “accrued.” Some
courts have interpreted the phrase to mean that a “matured cause of action or
legal authority to demand redress” exists.
Estates of Hoover v. Iowa Dept. of
Social Services, 299 Iowa 702, 251 N.W.
2d 529 (1977). In Nielsen v. State of Wisconsin, 258 Wis.
1110, 141 N.W. 2d 194 (1966), a landowner brought suit after the repeal of an
act granting a landowner the right to recover from the state for damages to her
land caused by the State’s failure to install necessary culverts and the like
to prevent flooding. Before the act’s
repeal the landowner’s land had been damaged by flooding caused by the State’s
failures. The court held that the
statutory saving of “rights of action accrued” saved her cause of action. In both of these cases, conduct that gave
rise to a cause of action had occurred before the act was repealed. It is said that it is not enough that there
is an inchoate right.
Apparently, there is no “accrued
right” under a contract until there is a breach.
4.
“Action or Proceeding” Pending. The
principal question is what is an “action or proceeding” for this purpose. “Action” refers to a judicial
proceeding. “Proceeding” alone,
especially when used with “action,” is broader and so includes administrative
and other governmental proceedings. It has
been given the broader meaning. For
example, in State ex rel. Carmean v. Board
of Education of Hardin County, 170 Ohio 2d 415, 165 N.E. 2d 918 (1960) a
petition to transfer certain land from one school district to another filed
before a change in the law was a “pending proceeding” to be decided under the
old law. Similarly, a request for
permission to petition for an election to consolidate school districts was held
to be a “proceeding commenced” so that the substance and procedure of the old
law, which was materially different from the new, was preserved. Grant
v. Norris, 249 Iowa 236, 85 N.W. 2d 261 (1957).
Derivation: Principle #15.
SECTION 35.
REPEALS. The following
acts and parts of acts are repealed: _________________.
Comment
This Act is not a comprehensive
revision of the law of unincorporated nonprofit associations. It is, however, designed to apply to all
unincorporated nonprofit associations to the extent of its coverage.
Many
states have a patchwork of law relating to these associations. Some laws apply to a specific kind of
association, such as a denominational church or medical society. See, for example, California Corporations
Code, Title 3, Unincorporated Associations, Section 21200 (West 1991) (County
and Regional Medical Societies); Minn. Stat. Ann. Section 315.01 et seq. (West
1992) (religion societies). Other law
deals with a very specific subjects, such as legal protection of an
association’s insignia. Some go beyond a
subject’s treatment in this Act, such as the recently enacted charitable
immunity and liability acts that relieve individuals acting for an association
from liability for simple negligence.
In
preparing a bill for the enactment of this Act careful attention should be
given to determining the appropriate relationship of this Act to existing
statutes. It may be wise to repeal
expressly certain laws and to specify that certain others are not
repealed. While it is unusual to include
a provision that certain statutes are not repealed, doing so in this situation
will relieve courts of difficult questions of repeal by implication.
SECTION 36. EFFECTIVE DATE. This [act] takes effect _________________.
Comment
Unless
a jurisdiction’s usual effective date rule provides little time for affected
parties to learn of a new law, a delayed effective date is probably not necessary.
This
Act provides an unincorporated, nonprofit association and its members with a
legal structure that conforms to the expectations of many of them. Therefore, the need by
UNAs for additional time to revise procedures and forms to conform to a
significant change in the law is not necessary.
However, this Act materially changes the common law rules regarding
third parties, particularly creditors of nonprofit associations. Anecdotal evidence suggests that many
creditors place little reliance on their rights against members in extending
credit. If they have any reservations
about the creditworthiness of a nonprofit association they obtain guarantees
from creditworthy members or insist on cash.
To the extent that this is true, no change in credit policies is needed
and so no extra planning time is needed.
