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Wednesday, March 25, 2015

The Sweet Briar Legal Challenge

The alumnae group Saving Sweet Briar has hired the law firm of Troutman Sanders LLP to represent the group in its attempt to oust the current board and prevent the school's closure. The law firm sent a letter to the board's counsel outlining its legal position. Its first argument makes a breach-of-fiduciary-duty claim, asserting that "[a]s directors of a non-stock corporation, your clients [that is, the board members] are required to promote the College’s best interests, and your clients have good faith duties of care, loyalty, and obedience toward the College."

As I said before, however, I don't know that the Board's fiduciary duty in fact runs to the institution--I think the duty runs more broadly to the institution's mission. In good times, those duties would be congruent; in less good times, however, the two may conflict. What if, as some have posited, Sweet Briar could be saved by going co-ed? Or by lowering academic credentials? I'm not sure how well the school's mission is defined; it was explicitly founded to educate women, and perhaps less explicitly, founded to educate women from a relatively elite social class. (Perhaps not so much less explicitly--social class seems to come up often in discussions of the college's past and present, and a recent New York Times article points out that "both Mr. Jones [the interim president] and Paul Rice, the board chairman, said Sweet Briar’s rich-girl days were long gone").

Changing that mission might be a good idea, but the challenge raised by the letter isn't a question of what policy would be best--it was explicitly stated as a legal question, and I think it is an interesting one. Brad, a commenter to my prior post, pointed out that the March of Dimes changed its mission from polio eradication to the prevention of birth defects once polio was eradicated. From a legal perspective, I think that such mission changes probably fit within a reasonable cy pres distribution of charitable assets. The Sweet Briar board, like the March of Dimes, would likely have been on strong legal footing if it had modified its mission to become sustainable. But, as Brad points out, the harder question is does it have to?

It appears to me that Saving Sweet Briar is arguing that the board in fact had a duty to sustain the organization--even if doing so meant modifying the school's mission. To be fair, this is not stated explicitly in the letter, and the letter also raises other issues of financial secrecy and lack of decision-making transparency. But some of the language, I think, hints that the group thinks the Board should have considered mission-changing options like going co-ed; it mentions a failure to "consider other methods of meeting the College’s needs" and a "failure to explore all possible options." The group's FAQ page is explicit that its focus is keeping the college open:  (Q: "What are your plans to turn the college around?" A: "At this time, we are focused on halting the school’s closure and keeping the college open."). 

I'm interested to see how these arguments develop. I do fear, though, that the cost of litigating those arguments might very well consume so much of the remaining resources that there is not enough money left either to soften the transition of closure or to restore the school to sustainability.

Posted by Cassandra Burke Robertson on March 25, 2015 at 10:26 PM in Corporate, Current Affairs, Life of Law Schools | Permalink

Comments

Doing a little law-and-economics it seems to me that a board will generally be inclined to support a change of mission if that is what is required to keep their salary coming. Thus I do not think the law need to have any presumption in favor of that happening. On the contrary, it should be skeptical of such attempts.

Posted by: Jr | Mar 26, 2015 3:42:19 AM

This is a fascinating case study in nonprofit law. Here are the questions I have: First, do the alumni have standing? Usually even donors and customers lack standing to bring fiduciary challenges. They also probably can't enforce this charitable solicitation statute. I'm not sure if they have some special claim to standing under state law.

Second, What exactly is the organization's mission? Even assuming that there is an enforceable duty to obey the organization's mission (although in many states, nonprofits can change their mission by vote of the board), we have to define what this mission is and where it comes from. The law firm seems to think that the Virginia legislative charter, but I wouldn't be surprised if there have been some revisions over the year that changed the language a bit. There's no consensus on this, but I'd say look to the revised articles of incorporation or charter when defining the mission.

Third, assuming that there is a fiduciary duty to the mission that could be brought to the court, how much deference does the board get in interpreting the mission? Nearly all courts give business judgment rule to nonprofit directors, and this seems to apply to questions of interpreting the mission. Then add to this deference the First Amendment. In Boy Scouts v. Dale, the Supreme Court took the boy scout leadership at their word that their "mission" prohibited gay scout leaders. Most of us looked at their mission and couldn't figure out where that came from, but the Court said the First Amendment places that decision in the hands of nonprofit leaders, not courts, and not state government. Overlay this background principle onto that the fact we're dealing with the classic First Amendment Institution of a university, and it is not at all clear to me how rigorous the enforcement of duties should be.

Fourth, is the charitable solicitation statute a serious requirement or just lawyerly bs? I'm not sure how Virginia's law has been interpreted, but "general purposes" of a charitable organization seems pretty broad, and would definitely seem to include things like overhead, litigation, transfer to like-minded organizations, and even winding down.

Posted by: Joe Mead | Mar 26, 2015 9:30:36 AM

I have not seen this, but I understand that part of the founding of the school was too educate white women only. If that is true, it has been changed. I am not sure if anyone associated with the school: alumnae, faculty or students: wants that entered into the discussion but it would give some support to allowing men or lowering education standards or doing what might help it survive.

Posted by: William Murphy | Mar 26, 2015 3:01:42 PM

What I am really curious about is what happens when the school is closed; considering the real estate assets and the speed in which they're closing I imagine there will be significant assets left. I'm hoping they don't just end up in a non-profit Sweet Briar Foundation whose stated goal is vaguely charitable, but whose actual goal is to provide well-compensated sinecures for the same people who decided to shut the school down.

Posted by: twbb | Mar 30, 2015 12:13:13 PM

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