New Maryland Case Allows Court to Distribute Assets of Charitable Corporation

Posted on by Thomas Schetelich in Church Law.

A new decision reported by the Court of Special Appeals of Maryland has given a broad definition to what is a “charitable corporation” and also an expansive reading to the power of a court to transfer the assets of a charitable corporation that is not functioning.

The case is Sydnor v. Hathaway decided on July 27, 2016.  The dispute was between the Union Baptist Church in Baltimore and a charitable corporation that it created, known as the Union Baptist Development Corporation.  The Development Corporation had been formed by the Church in 1981 to hold title to property that the Church was developing as a coffee house and later as part of a Head Start program. Over the years, the Development Corporation had a formal existence but no real activity other than to support the work of the Church. Over the same time, the Church had acquired property throughout its neighborhood and was developing it for the benefit of the community and to advance its religious purposes.

By 2011, the respective governing boards of the Church and the Corporation were at odds. The Church sought to appoint an alternative board of directors for the Corporation and to bring the property in question under the direct control of the Church. The existing board of the Corporation opposed that action, and the matter became a legal dispute in the Circuit Court for Baltimore City.

The Court resolved the case through an expansive reading of the statute at Maryland Code Corporations & Associations Article, Section 5–209.  The statute allows that “if a charitable or religious corporation is or is about to be dissolved, or for any reason it is impracticable or inexpedient to continue the corporation’s activities, a circuit court may order the disposition of the corporate property….”

The questions for the Circuit Court, and then for the Court of Special Appeals, were (i) whether the Development Corporation was “charitable or religious”; and (ii) whether it was “impracticable or inexpedient” to continue to Corporation’s activity.

On the first point, concerning the definition of a “charitable corporation,” the Circuit Court found (and the Court of Special Appeals affirmed) that a formal filing with the Internal Revenue Service for recognition as a charitable organization is not necessary for the corporation to be “charitable” for purposes of the Maryland statute. Rather, the determination of whether a corporation is charitable “must include a careful examination of the stated purpose of the organization, the actual work performed, the extent to which the work performed benefits the community and the public welfare in general, and the support provided by donations.”

Using this definition, the Court found that the Development Corporation was indeed a “charitable corporation” even though it had never sought formal IRS recognition as such.

The Circuit Court further found (and the Court of Special Appeals affirmed) that it was “impracticable or inexpedient to continue the corporation’s activities.”   The Court noted that the corporation had little or no actual activity but served only to hold legal title for property that had effectively been used by the Church for decades in the course of its ministries.

 

This case is important in Maryland law in that it recognizes both an expanded definition of “charitable purposes” and also an expanded reading of the Court’s power under Section 5–209. Charitable and religious organizations will often not give careful attention to maintaining the details of their legal status or maintaining the activities of their ministry. In an extreme case such as was presented here, such an organization can unwittingly find itself falling within the scope of the statute, and thereby putting both its assets and its legal status at risk.