In re: Independent Fire Co. No. 1 a non profit corp. ~ Appeal of: Com. of PA

IN THE COMMONWEALTH COURT OF PENNSYLVANIA
In re: :
:
Independent Fire Co. No. 1 :
a non profit corporation : No. 1489 C.D. 2018
:
Appeal of: Commonwealth of : Argued: September 17, 2019
Pennsylvania :
BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge
HONORABLE P. KEVIN BROBSON, Judge
HONORABLE PATRICIA A. McCULLOUGH, Judge
OPINION NOT REPORTED
MEMORANDUM OPINION
BY JUDGE McCULLOUGH FILED: February 5, 2020
The Commonwealth of Pennsylvania, Office of Attorney General,
Charitable Trusts and Organizations Section (Commonwealth), appeals from the
October 4, 2018 order of the Court of Common Pleas of Lycoming County (trial
court) denying its petition seeking a rule to show cause why Independent Fire
Company No. 1 (Independent) should not be involuntarily dissolved and its assets
distributed pursuant to the cy pres doctrine. We affirm on a rationale that differs
from that of the trial court.
This appeal involves the interplay between two statutes—the
Pennsylvania Nonprofit Corporation Law of 1988 (Nonprofit Law)1 and the Uniform
1
15 Pa.C.S. §§5101-6146.
Trust Act (Trust Act).2 The predominate legal question in this case emerges in the
context where the trial court found that it has become “impracticable” for a nonprofit
to pursue the charitable purpose enunciated in its articles of incorporation, but the
Commonwealth did not prove that any of the nonprofit’s assets have been received,
placed, or otherwise held in “trust” by the nonprofit. In these circumstances, the
issue presented is whether the Commonwealth, without obtaining an order of
involuntary dissolution under the Nonprofit Law, may acquire and transfer all the
general assets of an operating, non-defunct charitable nonprofit corporation to
another nonprofit pursuant to the cy pres doctrine as codified in the Trust Act. We
conclude that the Commonwealth lacks such authority.
Background
The facts of this case, as recounted by the trial court, are as follows:
Until May 1, 2016, Independent was one of three fire
companies certified to fight fires in South Williamsport
Borough [Borough]. The South Williamsport Fire
Department (SWFD) was formed through a merger of the
two other fire companies constructed by the Borough. As a
result of not joining the merged SWFD, Independent was
decertified when the Borough instituted Ordinance No.
2016-01 officially recognizing only SWFD as the Fire
Department of the Borough. Following this, the Borough
contacted the [Commonwealth] notifying [it] Independent
was decertified and could no longer perform [its] charitable
purpose, which is “[f]or the suppression of fires of property
and buildings in the Borough of South Williamsport,
Pennsylvania.” Independent still functions as a 501(c)(3)[3]
nonprofit, but has not responded to any fires since
2
20 Pa.C.S. §§7701-7799.3.
3
Section 501(c)(3) of the Internal Revenue Code of 1986, 26 U.S.C. §501(c)(3).
2
decertification, although some members have chosen to join
other companies to continue their own firefighting activity.
The [Commonwealth] originally called for the involuntary
dissolution of Independent . . . . This claim was not
founded in support put forward by the Commonwealth and
additionally was directly contradicted by testimony put
forward by Independent . . . . [T]he Commonwealth [then]
stated [its] intention that Independent may go on existing,
but [its] monies and property should go to SWFD. Prior to
decertification Independent took fire calls throughout the
County of Lycoming and outside the county. Independent
hosted multiple charitable events and festivals and
responded to multiple emergency calls that were not fire[-
]related. Since decertification, Independent has reached out
to local neighboring townships in an attempt to continue
[its] firefighting mission . . . . Independent still functions as
an operating corporation [and] is in good standing with [its]
accounting . . . .
(Trial court op. at 2-3, 6-7) (citations to the record omitted).
Following a two-day hearing, the trial court, by opinion and order dated
October 4, 2018, denied the Commonwealth’s petition. In doing so, the trial court
initially outlined the gist of the dispute. More specifically, the trial court found that
“Independent’s charitable purpose has certainly become ‘impractical,’ since [it] may
no longer fight fires in South Williamsport” and explained that, for this reason, the
Commonwealth asserted that “the [d]octrine of [c]y [p]res is applicable and SWFD
should receive [Independent’s] assets and properties.” Id. at 7.
In addressing this issue, the trial court noted that the doctrine of
administrative deviation, currently codified in Section 7740.3(c) of the Trust Act,
vested it with the authority “to modify an administrative provision of a charitable
trust to the extent necessary to preserve the trust.” 20 Pa.C.S. §7740.3(c).
Nonetheless, the trial court concluded that, based upon prevailing precedent, it could
not alter or amend the stated charitable purpose in Independent’s articles of
3
incorporation because the phrase “in the Borough of South Williamsport” was
“dispositive” and “substantive in nature,” as opposed to “administrative in nature.”
(Trial court op. at 6.)4 The trial court then opined that, “[h]owever, this is not a
typical situation that screams for the application of cy pres.” Id. at 7. The trial court
stated: “Typical examples of when the [d]octrine is applied by courts are when a
charitable gift is left through will or trust to a no[-]longer existent charity or when a
charitable nonprofit voluntarily dissolves and the court must determine where the
charitable property should go.” Id.
Next, questioning the underlying legal basis for the Commonwealth’s
civil action, the trial court stated that it was unable to locate case law “where the
Commonwealth attempt[ed] . . . an acquisition of assets, absent board members self-
dealing, tremendous financial troubles, or unauthorized selling or transferring of
charitable assets.” Id. Following this observation, the trial court proceeded to delve
into a general discussion of its equitable powers when resolving matters in the
orphans’ court division and, after noting that “Independent has historically [helped]
others throughout the county, not just South Williamsport residents,” specifically
determined that “the [d]octrine of [c]y [p]res should not be applied.” Id. at 8. In so
concluding, the trial court found that “giving all [of Independent’s] assets to a
similarly situated company would not result in an equitable remedy”; to the contrary,
the trial court commented that such a transfer “would be a perversion of the
[d]octrine,” namely one “that would amount to an asset grab.” Id. at 9. Based on this
reasoning, and embodying the notion that it possessed broad, common law equitable
4
See In re Estate of Girard, 132 A.3d 623, 632-332 (Pa. Cmwlth. 2016) (discussing the
distinction between “administrative” and “dispositive” for purposes of the doctrine of administrative
deviation).
4
powers, the trial court found it necessary “to slightly modify [the] terms” of
Independent’s articles of incorporation in order for it to continue its charitable
purpose, id., and held as follows:
[T]he most equitable way to continue to fulfill
Independent’s original charitable purpose is to allow [it] to
act outside the narrow constriction of only engaging in
services within South Williamsport. Since the Borough is
only 1.89 square miles this does not amount to abandoning
the community, as the charitable impact of Independent’s
services will still be felt close to home . . . .
In promoting strong public policy and equity the [c]ourt is
required to allow Independent to seek reasonable
alternatives in nearby townships and communities to most
closely fulfill its charitable purpose. In other words, the
[c]ourt finds that despite its location physically within the
Borough of South Williamsport, Independent shall be free
to affiliate with another borough or township to continue
operating as a firefighting agency.
Id. at 9-10.
On these grounds, the trial court denied the Commonwealth’s petition.
Subsequently, the Commonwealth filed a timely notice of appeal with this Court, and
both the trial court and the Commonwealth have complied with the strictures of
Pa.R.A.P. 1925.
Discussion
On appeal,5 the Commonwealth argues that, given the undisputed facts
of record, the trial court erred in failing to apply the doctrine of cy pres, stating that
5
“This Court’s standard of review is limited to considering whether the trial court, sitting as
a chancellor in equity, committed an error of law or abused its discretion.” Williams Township
Board of Supervisors v. Williams Township Emergency Company, Inc., 986 A.2d 914, 920 n.4 (Pa.
Cmwlth. 2009).
5
charitable nonprofit corporations, like Independent, “are treated as charitable trusts by
our law, with the general public as beneficiary.” (Commonwealth’s Br. at 13.)
Relying predominately, if not exclusively, on the Comment to Section 7740.3 of the
Trust Act and Section 5547(a) of the Nonprofit Law, the Commonwealth maintains
that all of the assets of Independent are held in trust to further its charitable purpose,
as stated in the articles of incorporation, and posits that once Independent ceased
fighting fires in South Williamsport, its charitable purpose was extinguished.
Emphasizing the trial court’s express finding that Independent’s “charitable purpose
has certainly become impracticable,” the Commonwealth asserts that Section
7740.3(a) of the Trust Act mandated, without exception, that the trial court apply cy
pres and designate SWFD as a substituted beneficiary to receive all of the assets and
property of Independent.6
In response, Independent stresses that it is a volunteer fire company and
that the Borough is not responsible for its debts or liabilities and does not exercise
any financial control over it. Independent argues that, despite its decertification, it
was and is not defunct or obsolete; rather, it has over $700,000.00 in assets and
continues to remain a functioning nonprofit corporation that retains members, holds
meetings, maintains minutes, pays bills, files taxes, maintains its real estate and
equipment, enters into contracts, engages in charitable community activities, and
responds to multiple emergency calls. According to Independent, the Commonwealth
cannot circumvent the process for involuntary dissolution in the Nonprofit Law and
6
Because the Borough failed to file a brief in compliance with our previous order, this
Court, by per curiam order dated May 14, 2019, precluded the Borough from filing a brief in this
matter and participating in oral argument. Also, in correspondence dated December 10, 2018,
SWFD informed this Court that it will not be participating in this appeal because is was not a party
in the underlying action.
6
effectively achieve the same result through application of the doctrine of cy pres
under the Trust Act. Independent asserts that unless or until it ceases to exist as a
nonprofit corporation, the Commonwealth lacks the statutory authorization necessary
to compel it to transfer its assets to another nonprofit. In large part, we agree with
Independent.
As a starting point, we note that in both the proceedings below and
before this Court, the Commonwealth did not attempt to portion the assets or funds of
Independent into separate categories, e.g., those that were invested, received from
donations, or garnered by obtaining an incidental profit. Nor did the Commonwealth
try to segment Independent’s assets or funds based upon the manner in which
Independent obtained them, including its physical and tangible property, e.g., real
estate, fire trucks, and the like. Instead, the Commonwealth apparently presumes that
all of Independent’s assets are owned solely by Independent itself and presses no
argument to the contrary. We must, consequently, proceed on this assumption as
well.
In Lacey Park Volunteer Fire Company No. 1 v. Board of Supervisors of
Warminster Township, 365 A.2d 880 (Pa. Cmwlth. 1976), the township’s board of
supervisors suspended the operations of the appellant volunteer fire company, a duly
registered nonprofit corporation, and ordered all of the vehicles of the appellant fire
company to be transferred to another local fire company. On appeal, this Court first
determined that the supervisors, under the pertinent section of the applicable
township code, had the power to suspend the firefighting activities of the appellant
fire company. We then decided whether the township or the appellant fire company
had legal ownership of the assets of the appellant fire company.
7
In doing so, this Court quoted, as the relevant authority, then Section
7549 of the Corporation Not-for-Profit Code (Act), formerly 15 Pa.C.S. §7549, now
Section 5547(a) of the Nonprofit Law, 15 Pa.C.S. §5547(a). This provision provided
(and continues to provide) that “[e]very nonprofit corporation incorporated for a
charitable purpose . . . may take, receive and hold such real and personal property as
may be given, devised to, or otherwise vested in such corporation, in trust, for the
purpose or purposes set forth in its articles.” 15 Pa.C.S. §5547(a); former 15 Pa.C.S.
§7549. We noted that it was undisputed that the appellant fire company was “a
corporation incorporated for charitable purposes and thus encompassed by [the] Act”
and “the real and personal property in question [were] titled in the name of the
appellant.” Id. Relying on and reproducing the words of our Supreme Court in
Bethlehem Borough v. Perserverance Fire Co., 81 Pa. 445 (1876), we reiterated the
Court’s holding that, while boroughs may have the statutory authority to make
regulations concerning the management of fires, this power
gives no right to the borough authorities to take out of the
possession of an incorporated company the fire-engines and
apparatus which [are] not owned by the borough. It is not
given to the borough authorities to decide that the company
has forfeited all its rights to the possession and custody of
the property it holds in trust, and therefore has no rights
entitled to respect. The borough may purchase and own
fire-engines or apparatus, or it may appropriate money as a
donation to a fire company to assist in their purchase. What
the borough owns herself, she may take possession of and
control or sell it. What an incorporated company owns the
borough cannot control in that manner.
Lacey Park Volunteer Fire Company No. 1, 365 A.2d at 882 (quoting Perserverance
Fire Co., 81 Pa. at 458). From this line of reasoning, we concluded in Lacey Park
Volunteer Fire Company No. 1: “The appellant nonprofit corporation owns the
equipment and the real estate and until such time as the members decide the future of
8
the corporation and the property, it is premature for the lower court to consider the
distribution of such property.” 365 A.2d at 882.
We apply the holding in Lacey Park Volunteer Fire Company No. 1
here. Therefore, although the Borough may have lawfully decertified Independent
from fighting fires within its borders, Independent nonetheless retains exclusive
ownership of the real and personal property that it possesses and, in general, has the
legal authority to decide the future of its assets and status as a charitable nonprofit
corporation, e.g., whether it desires to dissolve voluntarily or merge with another
firefighting company. In other words, the fact that the Borough enacted the
Ordinance does not result in the destruction or cessation of Independent as a
nonprofit corporation. After all, pursuant to Section 5502(a)(1) of the Nonprofit
Law, a nonprofit corporation, with certain exceptions, is bestowed with “perpetual
succession by its corporate name.” 15 Pa.C.S. §5502(a)(1).
That said, the assets and property of Independent are not insulated from
interference by the Commonwealth. Under Section 503 of the Nonprofit Law, the
Commonwealth possesses the statutory authority to institute proceedings to revoke
the articles of incorporation of a nonprofit corporation. 15 Pa.C.S. §503; see also 15
Pa.C.S. §5502(a)(1). Specifically, upon a proper showing of impropriety, a court
may wind up the affairs of and dissolve a nonprofit corporation, thereby terminating
its existence as a legal entity and disposing of and/or conveying its property and
assets in the process.7 See 15 Pa.C.S. §503; see also Sections 5977(c), 5978(a), and
7
The “perpetual succession” of a nonprofit corporation mentioned above continues “unless
a limited period of duration is specified in its articles” and is “subject to the power of the Attorney
General under Section 503 (relating to actions to revoke corporate franchises) and to the power of
the General Assembly under the Constitution of Pennsylvania.” 15 Pa.C.S. §5502(a)(1).
9
5981 of the Nonprofit Law, 15 Pa.C.S. §§5977(c), 5978(a), 5981.8 In terms of
dissolution, “[b]ecause all of a charitable non[]profit’s assets are committed to a
charitable purpose, when a charitable nonprofit ceases business, then any remaining
funds or property must be given to a charitable nonprofit with a similar charitable
purpose.” Commonwealth by Kane v. New Foundations, Inc., 182 A.3d 1059 (Pa.
Cmwlth. 2018). However, it is important to note that “[i]nvoluntary dissolution of a
solvent corporation is a drastic measure which should be employed cautiously and
only in extreme circumstances.” Gee v. Blue Stone Heights Hunting Club, Inc., 604
A.2d 1141, 1144 (Pa. Cmwlth. 1992); see also Loveless v. Pocono Forest Sportsman
Club, Inc., 972 A.2d 572, 574-75 (Pa. Cmwlth. 2009) (discussing the process and
means by which involuntary dissolution may be achieved). Significantly, the
Commonwealth has abandoned its claim for involuntary dissolution at the trial court
level, and also on appeal, and it does not seek to pursue involuntary dissolution of
Independent as a means by which to effectuate the transfer of its property and assets
to SWFD. Instead, the Commonwealth relies, first and foremost, on application of
the cy pres doctrine under Section 7740.3 of the Trust Act, 20 Pa.C.S. §7740.3.
As such, given the nature of its claim as framed and presented on appeal,
the Commonwealth is proceeding in its traditional role as parens patriae, exercising
8
Section 5981 of the Nonprofit Law states that a trial court may entertain proceedings for
the involuntary winding up and dissolution of the corporation, when any of the following are
established: (1) the objects of the corporation have wholly failed; or are entirely abandoned, or that
their accomplishment is impracticable; (2) the acts of the directors, or those in control of the
corporation are illegal, oppressive, or fraudulent, and that it is beneficial to the interests of the
members that the corporation be wound up and dissolved; (3) the corporate assets are being
misapplied or wasted and that it is beneficial to the interests of the members that the corporation be
wound up and dissolved; or (4) the directors or other body are deadlocked in the management of the
corporate affairs and the members are unable to break the deadlock, and that irreparable injury to
the corporation is being suffered or is threatened by reason thereof. 15 Pa.C.S. §5981.
10
its responsibility to provide public supervision of charitable trusts, for “[p]roperty
given to a charity is in a measure public property, and the beneficiary of charitable
trusts is the general public to whom the social and economic benefits of the trusts
accrue.” In re Milton Hershey School Trust, 807 A.2d 324, 330 (Pa. Cmwlth. 2002)
(internal citations omitted). The authority of the Commonwealth in this regard is now
codified in Section 7735(c) of the Trust Act, which vests the Commonwealth with the
broad power “to enforce a charitable trust.” 20 Pa.C.S. §7735(c).9 As part of its
authority to oversee and enforce a charitable trust, the Commonwealth may file “a
petition requesting a court . . . to apply cy pres.” 20 Pa.C.S. §7740.3, Comment; see
Young v. Estate of Young, 138 A.3d 78, 83 (Pa. Cmwlth. 2016) (“The Attorney
General is an indispensable party in every proceeding which affects a charitable
trust.”).
Section 7740.3(e) of the Trust Act provides that a trust may be judicially
terminated and the assets awarded to the charitable organization identified in the trust
instrument or, alternatively, to a charitable organization selected by the trial court.
“[I]f a particular charitable purpose becomes unlawful, impracticable or wasteful . . .
the court shall apply cy pres to fulfill as nearly as possible the settlor’s charitable
9
A “[c]haritable trust” is defined as “[a] trust, or portion of a trust, created for a charitable
purpose described in [S]ection 7735(a).” Section 7703 of the Trust Act, 20 Pa.C.S. §7703.
Pursuant to Section 7735(a) of the Trust Act, “[a] charitable trust may be created for the relief of
poverty, the advancement of education or religion, the promotion of health, governmental[,] or
municipal purposes or other purposes the achievement of which is beneficial to the community.” 20
Pa.C.S. §7735(a). Sections 7731 and 7732 of the Trust Act outline the requirements for creating a
valid trust in Pennsylvania. 20 Pa.C.S. §§7731, 7732.
11
intention.” 20 Pa.C.S. §7740.3.10 In describing the doctrine of cy pres, our Superior
Court has explained:
If property is given in trust to be applied to a particular
charitable purpose, and it is or becomes impossible or
impracticable or illegal to carry out the particular purpose,
10
We note that although the legal concept of cy pres may be applied when it becomes
“impracticable” to carry out a “particular charitable purpose,” and involuntary dissolution may
occur when “the objects of the corporation have wholly failed” or “that their accomplishment is
impracticable,” see supra note 7, the notion of “impracticable” appears to be much narrower (or
more easily established) with respect to the former than with the latter. Compare Restatement
(Second) Trusts, §399, cmt. q. (Am. Law Inst. 1959) (“The doctrine of cy pres is applicable even
though it is possible to carry out the particular purpose of the settlor, if to carry it out would fail to
accomplish the general charitable intention of the settlor. In such a case it is ‘impracticable’ to
carry out the particular purpose, in the sense in which that word is used in this Section.”), with
Zampogna v. Law Enforcement Health Benefits, Inc., 151 A.3d 1003, 1013 (Pa. 2016) (“[W]e hold
that the interplay between a nonprofit corporation’s corporate purpose and that corporation’s
authority to take corporate action must be construed in the least restrictive way possible, limiting
the amount of court interference and second-guessing, which is reflective of both modern for-profit
and not-for-profit corporations, and the modern corporate business laws that govern them. Thus, we
find that a nonprofit corporation’s action is authorized when: 1) the action is not prohibited by the
[Nonprofit Law] or the corporation’s articles; and 2) the action is not clearly unrelated to the
corporation’s stated purpose.”).
We, however, need not discuss this issue further because the Commonwealth, as explained
above, has abandoned any claim of involuntary dissolution. Nonetheless, this Court notes that the
Commonwealth, in stating its “intention that Independent may go on existing,” (Trial court op. at 3),
has seemingly conceded that Independent has not completely failed in the accomplishment of its
corporate objects. Further, we note that a brief examination of Pennsylvania statutes and case law
suggests that the duties of volunteer firefighters encompasses more than the mere act of
“firefighting” and appear to include activities such as responding to various types of emergencies.
See generally Section 7435 of the Emergency Management Services Code, 35 Pa.C.S. §7435;
Section 601 of the Workers’ Compensation Act, Act of June 2, 1915, P.L. 736, as amended, added
by Section 15 of the Act of December 5, 1974, P.L. 782, 77 P.S. §1031; International Association
of Fire Fighters, Local 22, AFL-CIO v. Pennsylvania Labor Relations Board, 35 A.3d 833, 835-36
(Pa. Cmwlth. 2012); North Lebanon Township v. Workers’ Compensation Appeal Board
(Harbaugh), 829 A.2d 394, 398-99 (Pa. Cmwlth. 2003); Harmony Volunteer Fire Co. and Relief
Association v. Pennsylvania Human Relations Commission, 459 A.2d 439, 442-43 (Pa. Cmwlth
1983).
12
and if the settlor manifested a more general intention to
devote the property to charitable purposes, the trust will not
fail but the court will direct the application of the property
to some charitable purpose which falls within the general
charitable intention of the settlor.
In re Estate of Elkins, 32 A.3d 768, 777 (Pa. Super. 2011) (citation omitted). In
addition, the Comment to Section 7740.3 states that “[t]he doctrine of cy pres is
applied not only to trusts, but also to other types of charitable dispositions, including
those to charitable corporations.” 20 Pa.C.S. §7740.3, Comment.
To support its assertion that the trial court erred in failing to apply the cy
pres doctrine, the Commonwealth, beside from relying on Section 7740.3 of the Trust
Act and its accompanying Comment, also cites and places great weight on Section
5547(a) of the Nonprofit Law. As noted above, Section 5547(a) authorizes a
nonprofit corporation to “take, receive and hold such real and personal property as
may be given, devised to, or otherwise vested in such corporation, in trust, for the
purpose or purposes set forth in its articles.” 15 Pa.C.S. §5547(a). In pertinent part,
Section 5547(b) of the Nonprofit Law states that “property cannot be diverted from
the objects to which it was donated, granted or devised, unless and until the board of
directors or other body obtains from the court an order under 20 Pa.C.S. Ch. 77
(relating to trusts) specifying the disposition of the property.” 15 Pa.C.S. §5547(b).11
11
In its entirety, Section 5547 of the Nonprofit Law, titled “Authority to take and hold trust
property,” states:
(a) General rule.--Every nonprofit corporation incorporated for a
charitable purpose or purposes may take, receive and hold such real
and personal property as may be given, devised to, or otherwise
vested in such corporation, in trust, for the purpose or purposes set
forth in its articles. The board of directors or other body of the
corporation shall, as trustees of such property, be held to the same
degree of responsibility and accountability as if not incorporated,
unless a less degree or a particular degree of responsibility and
(Footnote continued on next page…)
13
The Commonwealth contends that, pursuant to Section 5547(a) of the
Nonprofit Law, all the assets and property that Independent owns are unconditionally
placed in a charitable “trust” by operation of law.12 From this premise, the
Commonwealth reasons that since the trial court found that it was “impracticable” for
Independent to utilize its assets and property for the purpose stated in its articles of
incorporation (firefighting in the Borough), the trial court had no choice in the matter
and Section 7740.3 of the Trust Act obligated it (“shall”) to apply the doctrine of cy
pres.
We disagree. While the doctrine of cy pres presupposes (above all else)
the existence of a “trust,” the Commonwealth’s argument rests on the faulty premise
that all of the assets and property that Independent owns are, per se, placed into a
“trust.” In New Foundations, Inc., a case that is not cited by either of the parties or
(continued…)
accountability is prescribed in the trust instrument, or unless the board
of directors or such other body remain under the control of the
members of the corporation or third persons who retain the right to
direct, and do direct, the actions of the board or other body as to the
use of the trust property from time to time.
(b) Nondiversion of certain property.--Property committed to
charitable purposes shall not, by any proceeding under Chapter 59
(relating to fundamental changes) or otherwise, be diverted from the
objects to which it was donated, granted or devised, unless and until
the board of directors or other body obtains from the court an order
under 20 Pa.C.S. Ch. 77 (relating to trusts) specifying the disposition
of the property.
15 Pa.C.S. §5547.
As recently observed by this Court, “[t]here are very few provisions in the [Nonprofit]
12
Law that deal specifically with nonprofits that are created for a charitable purpose.” New
Foundations, Inc., 182 A.3d at 1070.
14
the trial court below, this Court concluded as much. In that decision, we analyzed
Section 5547(a) of the Nonprofit Law to determine whether the board of directors of
nonprofits were acting as trustees with respect to trust property or as a corporate
fiduciary concerning property that was not held in trust. We observed that resolution
of this issue necessitated an examination of what assets were held in trust by the
nonprofits in order to decide the applicable standard to be imposed upon the board
and whether trust principles or corporate law principles controlled the board’s
decision-making. See 182 A.3d at 1070-71.
In New Foundations, Inc., the Commonwealth argued that Section
5547(a) of the Nonprofit Law “means that all assets of the [nonprofits], whether they
be in cash or other personalty or realty, are imbued with the corporations’ charitable
purposes and, as such, are held in trust for the benefit of the public at large.” New
Foundations, Inc., 182 A.3d at 1072. The Commonwealth further maintained that
Section 5547(a) “encompasses all the assets of a nonprofit corporation formed for
charitable purposes, not only assets that have been expressly donated.” New
Foundations, Inc., 182 A.3d at 1072. This Court, however, rejected the
Commonwealth’s assertions. In doing so, we explained as follows:
[W]hether [Section] 5547(a) makes all the assets of a
charitable nonprofit held “in trust” . . . depends on a textual
analysis of how the phrase “may take, receive and hold such
real and personal property as may be given, devised to, or
otherwise vested in such corporation” is interpreted. If it is
interpreted to not include revenues and excess revenues
generated by a charity that are in or reflected in cash or
property, then charitable nonprofit directors do not have a
trustee duty of care but, rather, the same duty of care of all
directors of nonprofits. However, if this provision is
interpreted to include revenues and excess revenues — i.e.,
all assets—then charitable nonprofit directors are the
equivalent of trustees.
15
In [Section] 5547(a), the “may take, receive and hold real
and personal property” part of the phrase indicates that
something is being given to the nonprofit and not something
generated from internal operations. Similarly, the part of
the phrase that the trustee principles apply to property “as
may be given, devised to, or otherwise vested in such
corporation” deals with gifts, bequests and other property
that is vested in the corporation for a charitable purpose.
While it could be argued that the term “otherwise vested”
includes all property that the charitable nonprofit holds, in
the context of the overall phrase, it refers to that which is
placed in its possession for charitable purposes. For
example, . . . money cy pres’d to [a nonprofit] was properly
vested in that charitable nonprofit to which trust principles
would apply.
New Foundations, Inc., 182 A.3d at 1073-74 (emphasis added).
To buttress our conclusion, we pointed out that in Section 5547(b) of the
Nonprofit Law, the General Assembly specifically stated that the doctrine of cy pres
applies where a nonprofit “diverts” any of its assets, whether it be in the event of
voluntary dissolution, involuntary liquidation and dissolution, or a general asset
transfer. See New Foundations, Inc., 182 A.3d at 1072-73 & n.8; see also Williams
Township Board of Supervisors v. Williams Township Emergency Company, Inc., 986
A.2d 914, 920 (Pa. Cmwlth. 2009) (“[I]f an entity operating a nonprofit corporation
would attempt to ‘divert’ the nonprofit corporation’s assets away from the ‘object’ to
which donors intended their contributions to be applied, this provision requires the
entity to first obtain court approval of such ‘diversion’ under [the Trust Law].”).
However, as explained by this Court, the General Assembly omitted the doctrine
from Section 5547(a). See New Foundations, Inc., 182 A.3d at 1072-73 & n.8.
Accordingly, this Court, drawing a distinction between assets that a nonprofit
receives from a third party and assets that a nonprofit seeks to transfer to a third
party, concluded that “if the General Assembly wanted trust principles to apply to all
16
assets committed to the charitable purpose, it would have said so, just like it said so
with regard to diversion of charitable assets.” 182 A.3d at 1074.
Pursuant to New Foundations Inc., Section 5547(a) denotes that a
nonprofit holds in “trust” only those assets or property that were “given, devised to,
or . . . vested” in it from an outside source. 15 Pa.C.S. §5547(a). Or, phrased
differently, a nonprofit holds assets or property in “trust” when the outside source
“donated[,] granted, or devised” the assets or property to the nonprofit, 15 Pa.C.S.
§5547(a), including when the outside source commits assets pursuant to an express
trust.13 The Comment to Section 7740.3 of the Trust Act is a replication of these
principles, by referring to and including “charitable dispositions,” such as gifts or
donations, from an outside source to “charitable organizations” within the scope of its
reach. 20 Pa.C.S. §7740.3, Comment. Ultimately, it is these types of assets, or, more
precisely, the manner in which these assets are transferred and/or otherwise devoted
to a nonprofit, that potentially renders them subject to the doctrine of cy pres.14
13
See Section 5548(a), (d) of the Nonprofit Law, 15 Pa.C.S. §§5548(a) (“Unless otherwise
specifically directed in the trust instrument, the board of directors or other body of a nonprofit
corporation incorporated for charitable purposes shall have power to invest any assets vested in the
corporation by such instrument,” (emphasis added)), 5548(d) (“This section shall apply to assets
hereafter received pursuant to section 5547 (relating to authority to take and hold trust property),
to assets heretofore so received and held at the time when this article takes effect,” (emphasis
added)); see also Section 5549(a) of the Nonprofit Law, 15 Pa.C.S. §5549(a) (“Any nonprofit
corporation holding or receiving assets under section 5547 (relating to authority to take and hold
trust property) may, by appropriate action of its board of directors or other body, transfer, which
transfer may be either revocable or irrevocable, any such assets to a corporate trustee, which shall
be a bank and trust company or a trust company incorporated under the laws of this Commonwealth
or a national banking association,” (emphasis added)). Section 5548 is entitled, “Investment of trust
funds” while Section 5549 is entitled, “Transfer of trust or other assets to institutional trustee.”
14
This conclusion is further bolstered by Section 5550 of the Nonprofit Law, which requires
the approval of an orphans’ court under the Trust Law when a “devise, bequest or gift . . . in trust or
otherwise, to or for a nonprofit corporation” effectively fails or is rendered inoperative for an
(Footnote continued on next page…)
17
However, all other assets owned by a nonprofit, which do not fall within this general
category, cannot be effectively seized and transferred to another nonprofit pursuant to
the legal concept of cy pres, unless the nonprofit itself has taken its assets and created
its own charitable trust for those assets,15 or the Commonwealth secures involuntary
dissolution of the nonprofit. Succinctly put, and contrary to the overall thrust of the
Commonwealth’s argument, a charitable nonprofit corporation is not synonymous
with a charitable trust and the two are not one and the same.
Here, as explained above, the Commonwealth has taken an “all or
nothing” approach to the property and assets of Independent, proceeding on the legal
theory that everything that Independent owns is held in “trust,” without exception,
and as a matter of law. But our discussion above and decision in New Foundations,
Inc. demonstrate that this proposition is simply incorrect. By its very nature, a
fundamental prerequisite to application of the doctrine of cy pres is the existence of
assets that are specifically placed into a trust, so that a trial court can designate a
substituted beneficiary to receive those assets when the charitable purpose of the trust
“becomes unlawful, impracticable or wasteful.” 20 Pa.C.S. §7740.3. Without
ascertaining with absolute certainty the identity of the assets that are placed in trust, a
trial court is naturally precluded from applying the doctrine of cy pres. Cf.
(continued…)
enumerated legal reason before the nonprofit officially obtains a vested interest in the asset or
property to be devised or bequeathed. 15 Pa.C.S. §5550.
15
Notably, under Section 5501, “a nonprofit corporation shall have the legal capacity of
natural persons to act,” 15 Pa.C.S. §5501, including the power to establish “pension trusts” and
“other . . . trusts,” 15 Pa.C.S. §5502(a)(14), so long as they do not violate a statutory command or
public policy. See Borden v. Baldwin, 281 A.2d 892, 896 & n.2 (Pa. 1971).
18
Restatement (Second) Trusts, §76, cmt. a (Am. Law Inst. 1959) (Restatement) (“A
trust is not created if . . . the description of it is so indefinite that it cannot be
ascertained.”).16 In this case, the Commonwealth has not pinpointed any particular
asset or property owned by Independent and did not establish an evidentiary
connection that definitively links the source and/or financial basis through which
Independent acquired that asset or property. It was incumbent upon the
Commonwealth to do so, though, in order to obtain relief under the doctrine of cy
pres.
Therefore, we conclude that the Commonwealth failed to prove a basic
precondition for application of cy pres, i.e., identifying specific assets that were
placed in “trust.” In failing to establish this essential predicate, the Commonwealth’s
claim for cy pres was fatally flawed and meritless from the inception, and the fact that
the trial court found that Independent’s charitable purpose has become
“impracticable” is inconsequential or amounts to “negligence in the air, so to speak.”
Palsgraf v. Long Island Railraod Co., 162 N.E. 99, 99 (N.Y. 1928). This precept
remains true even though Section 7740.3(e) of the Trust Act seems to strip equitable
considerations from the legal matrix and states, in ostensibly mandatory language,
that a trial court “shall apply cy pres” when there is such a finding. 20 Pa.C.S.
§7740.3(e). In other words, for purposes of seeking to transfer the assets from one
nonprofit to another under the cy pres doctrine, it matters not that the Commonwealth
may have proved “B” (the “impracticability” of the trust’s purpose, a condition
16
Comment a to Section 76 of the Restatement provides two illustrative examples where a
trust instrument fails to properly identify the res that constitutes the trust: “A declares himself
trustee of ‘the bulk of my securities’ in trust for B. No trust is created”; “A, the owner of Blackacre,
purports to convey to B in trust for C ‘a small part’ of Blackacre. No trust is created.” Restatement,
cmt a., Illustrations 1-2.
19
subsequent) when it did not prove “A” (that there were specific assets that have been
placed in trust, a condition precedent). Having embraced the above-stated rationale
to support our conclusion and disposition, we need not address the broader and more
complicated issue of whether the Nonprofit Law and/or the Trust Law permit a trial
court to apply the doctrine of cy pres, absent a claim for involuntary dissolution or a
diversion of the nonprofit’s assets.17
Accordingly, because the Commonwealth failed to establish a right to
relief under the doctrine of cy pres, we affirm the trial court, albeit through alternative
reasoning.
________________________________
PATRICIA A. McCULLOUGH, Judge
17
In passing, we note the trial court’s observation that “[s]ince decertification, Independent
has reached out to local neighboring townships in an attempt to continue [its] firefighting mission,
which seemed to be hindered by the present litigation.” (Trial court op. at 3.) Therefore, it seems
that Independent is in the process of pursing the opportunity to engage in firefighting activities in
the future. During oral argument, the Court and parties discussed the possibility of Independent
amending its articles of incorporation. See Sections 5911-5916 of the Nonprofit Law, 15 Pa.C.S.
§§5911-5916.
20
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
In re: :
:
Independent Fire Co. No. 1 :
a non profit corporation : No. 1489 C.D. 2018
:
Appeal of: Commonwealth of :
Pennsylvania :
ORDER
AND NOW, this 5th day of February, 2020, the October 4, 2018 order
of the Court of Common Pleas of Lycoming County is hereby affirmed.
________________________________
PATRICIA A. McCULLOUGH, Judge