When attorneys general exceed authority under nonprofit law.

Nonprofit managers who feel unfairly treated by some state attorneys general and other charitable solicitation officers might find some hope in a recent New York State Supreme Court Appellate Division decision, Spitzer v. Grasso et al., 2007 NY Slip Op 03990, May 8, 2007.

State charitable solicitation officers, often attorneys general, are part of the executive branch, which enforces the law. The legislative branch, of course, creates the law. The third branch, the judiciary, is a referee of disputes among litigants.

The constitutional principle of separation of powers is intended to ensure that the branches of government stick to their respective areas of authority and not intrude into the authorities of the other branches.

State attorneys general, unfortunately, sometimes try to enforce charitable solicitation laws beyond their authority under governing statutes. Given that attorneys general are not only the enforcers of the law through prosecution of violations, but often are the licensing officers, they already walk a fine line of potentially conflicting powers and authorities.

Often, state attorneys general are given quasi-legislative powers to make regulations with the force of law. Many also have been given quasi-adjudication authority to conduct administrative hearings in which one office is prosecutor, witness and judge.

Then-attorney general, now-Governor Elliot Spitzer brought suit against Richard Grasso, the former CEO of the nonprofit New York Stock Exchange (NYSE), involving numerous causes of action alleging excessive compensation upon Grasso's leaving the NYSE. Spitzer's lawsuit involved six causes of action that referred to and relied on New York's Not-for-Profit-Corporation Law (NPCL).

Four of the causes of action were described by Grasso as a "hybrid" of common law and the NPCL. The appellate court concluded that Spitzer lacked the legal authority to bring those four causes of action.

The appellate court distinguished the four causes of action from the two that the statute authorized expressly. The two authorized by the NPCL were both consistent with the core provisions of the legislative scheme governing the duties of nonprofit officers and directors, and required a showing of fault.

In striking four causes of action that the court said were alleged without regard to fault-based requirements of the legislative scheme, the court relied on the sound principle that the executive branch may not go beyond stated legislative policy. The court said," [I]n seeking to impose liability on Grasso without regard to ... fault-based requirements of the legislative scheme, the complaint brings into sharp focus the fundamental problem with the Attorney General's position: its inconsistency with the principle of separation of power."

This, the court notes, does not mean that attorneys general or other elected representatives of the executive branch are not entitled to deference from the judiciary in their exercise of powers. But it is the legislature that makes policy, not the executive, and enforcement may not exceed statutory limitations, nor be done in a way that creates new policy.

The high-profile case of Spitzer v. Grasso might not be pertinent to all nonprofits that feel unfairly bullied by state charitable solicitation officials. It does, however, show that just because a state official says it is so, doesn't necessarily mean it is so.

The lesson is nonprofits and others that are subject to state charitable solicitation and other laws should request that state officials cite with specificity to the laws that are used for official actions. Nonprofits and others should consult (or have their lawyers consult) the language of the laws to determine whether enforcement claims have merit.

Most nonprofits or agencies try hard and spend precious resources to comply with the law. Most do not have legal counsel on staff. Not all demands from state attorneys general, though, are lawful. When they act beyond the authority given them under the law, they are not only failing their obligations to citizens of their respective states, but they may be violating the rights of those who are subject to laws governing nonprofits and fundraising.

Mark Fitzgibbons is president of corporate and legal affairs at American Target Advertising, Inc., which first pioneered cause-related direct mail fundraising in the 1960's.