Legal traps can snare growing health-care nonprofits

Year after year, new projects and renovations are almost a constant priority for health-care organizations in New England. Providers are formed, merged and reshaped almost as frequently.

Most providers either are nonprofit organizations or they work extensively with nonprofits. Providers are necessarily well-versed in the federal and state regulations of the medical and financial side of their businesses, which affect their lives every day.

But the need to pay close attention to state regulation of the nonprofit “mission” is hardly intuitive and can trip up even the most obviously worthy projects. Each state has laws that, in essence, provide that nonprofits must use their money and resources for the purposes they have held out to the public, and particularly to their donors, as being the entity’s reason for obtaining and maintaining nonprofit status.

When a nonprofit grows out of a gift made by one or a few donors “once upon a time,” the state is charged with enforcing the expressed will of the founders. If a nonprofit has received support from donors for years, the state is charged with making sure the nonprofit carries out the mission for which those donors sent their checks. In any case, the organization is answerable to the state as a “charitable trust.”

Now or later

Charitable trust doctrine becomes a trap when the needs of the community change – which is, of course, a constant in health care. Even a fairly recently formed organization may find its board determining that the organization, in order to maximize its effectiveness, must change directions a little – or a lot. That is appropriate, of course, and probably required, but the last thing a nonprofit entity wants to learn (or that a for-profit entity partnering with or entering into a deal with a nonprofit wants to learn) is that the state is challenging the charitable trust validity of the actions of the nonprofit.

The trick is to recognize when an action (which may be as simple as providing a note or a guaranty to finance a project) might be seen by the state as constituting a change to the charitable trust.

This question should be addressed before the deal hits the point of awkward return.

For example, when a lawyer is requested to provide an opinion letter in support of financing or a change of legal form involving a nonprofit, the lawyer will need to look hard at whether the deal arguably involves any change in charitable trust.

If it does, the opining lawyer must be prepared to demonstrate that the change does not impede the performance of the charitable trust obligations of the nonprofit.

As state charitable trust offices prefer to ask questions before a problem arises, by far the best plan is to have the nonprofit’s lawyer contact the state as early as possible to explain the background of the charitable trust, the proposed change, and why the change is consistent with the charitable trust purpose of the nonprofit.

The state can approve the change only if it really is consistent with the ongoing charitable trust. If the state likes the proposed change but is not sure it has immediate authority to approve the change, the state will typically ask the nonprofit to obtain approval of the change from a court.

In New Hampshire, for example, that is typically pursued with the probate court for the home county of the nonprofit. The New Hampshire director of charitable trusts frequently files in support of such petitions, which are often granted in a matter of a couple of weeks without a hearing. But even if a hearing is required, that is far preferable to having the issue raised after a transaction has already been committed to.

The alternative may be a worst-case scenario. There are many cases in which deals have foundered on charitable trust objections well after the point of great discomfort. Famously, the New Hampshire charitable trust director undid the merger of Manchester’s two hospitals in 1998 —well after the merger had been accomplished in 1994. The hospitals clearly thought the merger was necessary to obtain economies of scale and to eliminate costly duplication – in short, to modernize an outdated situation.

The attorney general, however, found that “each hospital was established with a specific charitable mission … bound by a social contract to their local community and to the particular communities they have been created to serve” and undid the merger.

Uncoupling a merger is a particularly stark extreme. More typically, charitable trust questions arise if, for example, resources are being used (directly or as collateral) to support growth that is arguably not the way things have always been done, or, for another example, to support an affiliated program.

Dealing with charitable trust questions may be uncomfortable, but it easily beats finding out about them later.

Rolf Goodwin, director in the Corporate Department at the law firm of McLane, Graf, Raulerson & Middleton, can be reached at 603-628-1176 or