Zampogna, F. v. Law Enforcement Health, Aplt. , 637 Pa. 576 ( 2016 )

[J-132-2016]
IN THE SUPREME COURT OF PENNSYLVANIA
EASTERN DISTRICT
SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.
FRANK ZAMPOGNA, : No. 40 EAP 2014
:
Appellee : Appeal from the Order of
: Commonwealth Court entered on
: 11/27/2013 at No. 1322 CD 2012,
v. : vacating and remanding the Order
: entered on 01/24/2012 in the Court of
: Common Pleas, Civil Division,
LAW ENFORCEMENT HEALTH : Philadelphia County at No. 03927
BENEFITS, INC., : September Term, 2010.
:
Appellant : ARGUED: March 10, 2015
: REARGUED: March 8, 2016
: RESUBMITTED: October 20, 2016
OPINION
JUSTICE BAER DECIDED: November 22, 2016
In this discretionary appeal, we are asked to determine the narrow issue of
whether Law Enforcement Health Benefits, Inc. (“LEHB”), a nonprofit corporation that
administers health and welfare benefits to Philadelphia police officers as part of the
union’s collective bargaining agreement, is authorized under the Pennsylvania Nonprofit
Corporation Law (“NCL”), 15 Pa.C.S. §§ 5101-6162, as well as its Articles of
Incorporation, to expend its corporate funds to pay for a postcard sent to its members
endorsing a candidate in a union election. For the reasons that follow, we find that
nothing in the NCL nor the corporation’s Articles prohibited the action at issue and that
LEHB’s action was sufficiently related to its corporate purpose to be permissible.
Accordingly, we reverse the decision of the Commonwealth Court and reinstate the trial
court’s order dismissing the declaratory judgment action against LEHB.
The facts of this case are not in dispute. The Fraternal Order of Police, Lodge
No. 5 (“FOP”) is a union which represents the interests of Philadelphia police officers in
negotiating the terms and conditions of the officers’ employment with the City of
Philadelphia (“City”). Relevant to the instant matter, the FOP secured a collective
bargaining agreement with the City, which provides health and welfare benefits to active
and retired FOP members and their families. The agreement, inter alia, created a Joint
Trust and established a Joint Trust Board, which is comprised of five individuals — four
appointed by the FOP president and one appointed by the City — who supervise and
manage the delivery of the FOP’s benefits. As a result of the negotiations between the
FOP and the City, the City is required to pay a specified amount per police officer per
year to the Joint Trust for benefits, and the Joint Trust Board selects the entity to
administer such benefits. At all relevant times, the Joint Trust Board selected LEHB to
administer the benefits. LEHB is a nonprofit corporation specifically incorporated for the
purpose of administering the benefits for the City’s police officers and is controlled by a
Board of Directors (“the Board”).
As LEHB is a nonprofit corporation, it is governed by the NCL. The NCL requires
nonprofit corporations to be incorporated for a purpose, specified in its articles,
“including, but not limited to, any one or more of the following or similar purposes” listed
in Section 5301(a).1 15 Pa.C.S. § 5301(a); see also id. § 5306(a)(3) (providing that a
1
Specifically, Section 5301(a) provides:
(…continued)
[J-132-2016] - 2
nonprofit corporation’s articles of incorporation must contain “[a] brief statement of the
purpose or purposes for which the corporation is incorporated”). Consistent with that
mandate, LEHB’s Articles of Incorporation provide, in pertinent part, as follows:
4. The purpose of the Corporation is:
(a) to receive, hold, invest, administer, and distribute funds
to provide health and welfare benefits for, and on behalf of,
the Corporation’s members (and such members’ eligible
spouses and dependents), who are the members of the
Fraternal Order of Police, Lodge No. 5 (a Pennsylvania
nonprofit corporation) who are eligible to participate in the
Blue Cross/Blue Shield health insurance plan (or such other
health insurance plan) that is to be maintained by the
Corporation for the benefit of such members;
(b) to engage in such other proper purposes incidental to the
foregoing;
(c) to engage in all other proper operations for which
corporations may be formed and operated under the
Pennsylvania Not-for-Profit Code.
Addendum to Articles of Incorporation at 1 (Reproduced Record “R.R.” at 232a)
(“Articles”).
(continued…)
Except as provided in subsection (b) [pertaining to
insurance], corporations may be incorporated under this
article for any lawful purpose or purposes, including, but not
limited to, any one or more of the following or similar
purposes: athletic; any lawful business purpose to be
conducted on a not-for-profit basis; beneficial; benevolent;
cemetery; charitable; civic; control of fire; cultural;
educational; encouragement of agriculture or horticulture;
fraternal; health; literary; missionary; musical; mutual
improvement; patriotic; political; prevention of cruelty to
persons or animals; professional, commercial, industrial,
trade, service or business associations; promotion of the
arts; protection of natural resources; religious; research;
scientific and social.
15 Pa.C.S. § 5301(a).
[J-132-2016] - 3
In 2010, Appellee Frank Zampogna, a Philadelphia police officer, campaigned for
FOP President, running against the incumbent FOP President, John McNesby. Leading
up to the election, McNesby informed LEHB that Zampogna had been making
pronouncements to FOP members regarding their medical benefits and the City’s
monthly contributions.2 These pronouncements were viewed by LEHB as
misrepresentations designed to gain political advantage in the FOP election. 3 Given
this concern, a few weeks before the election, the Board unanimously voted to “respond
appropriately” if “any candidate misstates, misrepresents, or publishes misleading or
false information regarding LEHB or demeans its officers.” Active Directors Meeting
Minutes, 9/7/2010, at 1 (R.R. at 227a).
Following the Board meeting, and in response to Zampogna’s allegedly false
statements, LEHB mailed postcards to FOP members which, inter alia, endorsed
McNesby in the election, accused “[o]ne of the FOP Presidential candidates” of making
“grossly misleading and deceptive statements” regarding LEHB, and opined that that
candidate “is not competent enough and too inexperienced to lead the FOP and its
14,000 members.” Postcard (R.R. at 222a).4 The cost to mail and print the postcards
totaled $3,840 and was paid out of LEHB’s general funds. LEHB’s administrator,
Thomas Lamb, stated that McNesby was not involved in the decision to mail the
postcard, and Zampogna did not present any evidence to the contrary. See N.T.,
1/10/2012, at 57.
2
The record does not establish the specific content of these statements.
3
The truthfulness and accuracy of the statements are beyond the scope of this Opinion.
4
LEHB also included the same message in its newsletter, at no additional cost.
[J-132-2016] - 4
Six days before the election, in response to the mailing, Zampogna filed an
action seeking declaratory relief barring LEHB from further expending its funds to
endorse a candidate in an FOP election.5 In support of his position, Zampogna argued
that LEHB’s expenditure was in “direct violation” of LEHB’s Bylaws, Articles, and the
NCL. Zampogna’s Amended Complaint at 7-8 (R.R. at 214-15a). Additionally,
Zampogna claimed that LEHB’s actions were “unfair” and “an unlawful expenditure of
public funds given solely for medical benefit purposes.” Id. at 5, 8 (R.R. at 212a, 215a).
While the case was pending, Zampogna lost the election. The case
subsequently proceeded to a nonjury trial, and, ultimately, the trial court denied
Zampogna’s request for declaratory relief. The trial court began its review with LEHB’s
Bylaws, which provided the Board with the power to take any action so long as it was
not inconsistent with the Bylaws, the Articles, or the law. The trial court concluded that
neither LEHB’s Bylaws, nor its Articles, prohibited LEHB from making endorsements in
FOP elections. Moreover, the trial court examined Section 5502 of the NCL, which
enumerates the general powers of nonprofit corporations, and determined that
“[n]owhere in [the] statute does it state that corporations are prohibited from engaging in
political activity.” Tr. Ct. Op., 5/22/2012, at 2 (citing 15 Pa.C.S. § 5502). Zampogna
filed post-trial motions, which the court denied, and he appealed, asserting, inter alia,
5
Zampogna also sought injunctive relief. However, the election occurred while the case
was pending, rendering such relief moot.
[J-132-2016] - 5
that the trial court erred in finding that LEHB’s actions in endorsing a candidate in the
FOP election did not violate LEHB’s Articles, Bylaws, or the NCL.6
On appeal, a split en banc panel of the Commonwealth Court reversed.
Zampogna v. Law Enforcement Health Benefits, Inc., 81 A.3d 1043 (Pa. Cmwlth. 2013).
The majority acknowledged that the NCL grants a nonprofit corporation the power to
take several actions, including making “contributions and donations,” albeit “subject to
the limitations and restrictions contained in its articles.” Zampogna, 81 A.3d at 1047
(quoting 15 Pa.C.S. § 5502(a)).7 However, the majority disagreed with the trial court
that the action at issue was not restricted by LEHB’s Articles. Instead, the majority
viewed LEHB’s purpose statement as a restriction on its powers, reasoning that any
action taken by the corporation must be sufficiently related to its purpose “to receive,
hold, invest, administer, and distribute funds to provide health and welfare benefits for,
and on behalf of, the corporation’s members (and such members’ eligible spouses and
dependents).” Id. at 1048 (quoting Articles at 4(a)). In the majority’s view, endorsing
6
Initially, Zampogna appealed to the Superior Court. However, as LEHB is a nonprofit
corporation subject to the NCL, the Superior Court transferred this matter to the
Commonwealth Court because the case fell within that court’s jurisdiction pursuant to
42 Pa.C.S. § 762(a)(5) (granting the Commonwealth Court exclusive jurisdiction over
appeals involving a nonprofit corporation subject to the NCL).
7
Notably, Section 5502(a) speaks only in terms of limitations and/or restrictions
contained in the law or a corporation’s articles. See 15 Pa.C.S. § 5502(a) (providing
that a nonprofit corporation has broad powers “[s]ubject to the limitations and
restrictions imposed by statute . . . [or] contained in its articles”). However,
15 Pa.C.S. § 5503, the section immediately following Section 5502, refers to a
“limitation upon the business, purposes or powers of a nonprofit corporation, expressed
or implied in its articles or bylaws or implied by law,” indicating that a restriction on the
corporation could be contained in either the articles or the bylaws. Because there is no
purported restriction in LEHB’s Bylaws on the action taken here, and as our analysis
revolves around Section 5502 and not Section 5503, we will not discuss LEHB’s Bylaws
any further.
[J-132-2016] - 6
McNesby was not a direct administration of benefits. To the contrary, the majority
concluded, McNesby was “an individual unrelated to [LEHB’s] purpose,” and, therefore,
mailing the postcard “f[ell] outside of both the Law, and [LEHB’s] Articles of
Incorporation.” Id. at 1049.
The majority went on to address LEHB’s argument that the endorsement, while
not a direct administration of benefits, was nonetheless authorized pursuant to the
company’s incidental power. See Articles at 4(b) (providing LEHB with the power “to
engage in such other proper purposes incidental to the [administration of benefits].”). In
rejecting this argument, the majority relied on a case from 1916 which stated that a
corporation’s incidental power must be “directly and immediately appropriate to the
execution of the specific power granted, . . . not one that has merely some slight or
remote relation to it.” Id. (quoting Citizens’ Elec. Illuminating Co. v. Lackawanna &
W.V.R. Co., 99 A. 465, 467 (Pa. 1916)). Here, the majority reasoned, “campaigning for
a union presidential candidate is not directly and immediately appropriate to providing
healthcare benefits to the corporation’s Members,” and, thus, it concluded that such
activity cannot fall within the scope of LEHB’s incidental power. Id. at 1049-50.
Seemingly in contradiction to its finding that McNesby’s election had nothing to
do with LEHB’s corporate functions, the majority noted its belief that the action here was
“suspect” and “egregious” because of the relationship between the FOP president and
LEHB, as the president appoints the members of the Joint Trust Board, which ultimately
selects the company to administer benefits. Id. at 1050. The majority viewed this
construct as creating a conflict of interest for the Board and opined that approving the
[J-132-2016] - 7
endorsement constituted self-dealing, despite the fact that Zampogna’s complaint and
brief to the Commonwealth Court made no allegation of any conflict of interest.
Finally, the majority summarily concluded that LEHB “would be irreparably
harmed if the Board’s approval of expenditures of public money for partisan activity was
allowed to continue unabated.” Id. at 1051-52. However, the majority did not cite any
authority to support its proposition that LEHB’s funds were public nor did it explain how
the public character of the funds factored into the court’s analysis. Moreover, the
majority did not develop how an action taken in the context of a private, union election
constituted prohibited “partisan activity.” Nonetheless, the majority held that the trial
court erred in finding the endorsement was within the scope of the Board’s authority.
The Commonwealth Court thus vacated the trial court’s order and remanded for entry of
an order “declaring that the Board’s expenditure of public funds on partisan activity
violates the [NCL], and [LEHB’s] Articles of Incorporation.” Id. at 1052.
Judge Leavitt filed a dissent, joined by Judge Simpson, contending that the
action taken fell within the broad powers granted to LEHB by the NCL and its Articles.
Zampogna, 81 A.3d at 1052 (Leavitt, J., dissenting). The dissent opined that, contrary
to the majority’s position, “it is a restriction that must be stated in the corporation’s
charter, not the authorization to conduct a specific activity,” and observed that, here,
LEHB’s Articles do not limit LEHB’s ability to endorse candidates in a union election. Id.
at 1055. Rather, the dissent concluded that, because the management of the FOP and
the outcome of the election would directly impact LEHB, endorsing a candidate whom it
determined would best manage the FOP was a permissible use of its incidental power
under its Articles.
[J-132-2016] - 8
Additionally, the dissent differed with both the majority’s conclusion that the
Board engaged in self-dealing, and its characterization of the funds spent by LEHB as
public funds. With respect to the former, the dissent emphasized that “any act as the
board of directors . . . shall be presumed to be in the best interests of the corporation,”
id. at 1059 (quoting 15 Pa.C.S. § 5715(d)), and noted that Zampogna failed to provide
clear and convincing evidence to rebut the presumption. The dissent also opined that a
board’s action which it deems “will serve the continued existence of the corporation”
does not create a conflict of interest, and that the NCL specifically provides that a
director’s action to retain his position does not constitute self-dealing. Id. at 1060-61
(citing 15 Pa.C.S. § 5715(e)(2)(iv)). As to the funds paid by LEHB, the dissent
suggested the funds were corporate funds rather than public funds because they had
been paid to LEHB for services rendered, became part of LEHB’s corporate account,
and, thus, had lost their public character.
Following the Commonwealth Court’s decision, LEHB filed a petition for
allowance of appeal with this Court, which we granted to review whether the
Commonwealth Court erred in determining that LEHB’s action of endorsing McNesby
was not authorized.8
8
Specifically, we granted to review the following issues:
(a) Whether Courts may disregard the vital function of
corporate self-governance by second-guessing the decisions
of corporate directors and failing to provide the required
deference to their decision simply because the court may not
agree with the decision?
(b) Whether a court may simply usurp the role of corporate
directors by negating the presumption of good-faith to the
decisions of directors required by law by simply asserting,
(…continued)
[J-132-2016] - 9
LEHB begins by contending that the Commonwealth Court invalidated a
corporate action simply because the court disagreed with the action. In LEHB’s view,
the NCL grants nonprofit corporations broad powers, including: 1) the ability to make
donations and contributions; 2) “[t]o have and exercise all of the powers and means
appropriate to effect the purpose or purposes for which the corporation is incorporated;”
and 3) to exercise all other powers vested in the corporation by law. 15 Pa.C.S. §
5502(a)(9), (18), (19). Notwithstanding these provisions, LEHB acknowledges that a
nonprofit corporation’s powers are subject to any limitation or restriction imposed by
statute or the corporation’s articles. 15 Pa.C.S. § 5502(a). Accordingly, LEHB argues
that a nonprofit corporation’s action is authorized unless it is prohibited or restricted.
However, LEHB’s argument does not end with searching for an explicit statement
within the corporation’s Articles or the law prohibiting the action at issue, which was the
view taken by the trial court here. Instead, like the Commonwealth Court majority,
LEHB views its corporate purpose as a restriction contained within its Articles that limits
its powers, conceding that any action it takes must be related to providing benefits for its
members. Notwithstanding its agreement on the relevance of its corporate purpose,
LEHB parts from the Commonwealth Court’s ultimate conclusion, contending that the
(continued…)
without requiring any proof thereof, a conflict of interest by
the directors?
(c) Whether funds, whose original source was a public entity,
retain their public character once the public entity distributes
those funds to a private corporation in satisfaction of an
obligation, and after the private corporation had retained
those funds as corporate assets, and after that corporation
utilized the corporate assets for a corporate purpose?
Zampogna v. Law Enforcement Health Benefits, Inc., 99 A.3d 531 (Pa. 2014) (order).
[J-132-2016] - 10
court failed to consider the entire context of LEHB’s action when it determined the
conduct was not related to LEHB’s corporate purpose.
To that end, LEHB argues that endorsing McNesby was related to enhancing
benefits for its members in two ways. First, LEHB asserts, the FOP President appoints
four of the five members of the Joint Trust Board, which has the capability of removing
LEHB as the selected vendor to administer benefits. Thus, when Zampogna made what
were perceived to be “intentional, material misrepresentations to members” concerning
LEHB’s administration of their benefits, LEHB directors became concerned that
Zampogna would negatively impact the organization if he were elected. LEHB’s Brief at
19. Second, and more importantly, LEHB directors believed that McNesby would be
more efficient than Zampogna in negotiating with the City, which in turn could improve
LEHB’s revenue stream and its ability to provide inexpensive benefits. For these
reasons, LEHB believes the FOP President is “a matter of direct concern” to LEHB and
concludes that its action in endorsing McNesby was “at the very least, incidental to the
function of [LEHB],” if not directly related. Id. at 20-22. Accordingly, LEHB asserts its
action was sufficiently related to its corporate purpose so as to satisfy the limitation
contained within its Articles.
Turning to the Commonwealth Court’s discussion regarding the alleged conflict of
interest, LEHB asserts the Commonwealth Court majority erred because it “simply
averr[ed] a conflict of interest” existed “absent any evidence whatsoever” to support
such an averment. Id. at 26. LEHB contends that, pursuant to the NCL, the acts of a
director are “presumed to be in the best interests of the corporation,” and a challenge to
such requires clear and convincing evidence to rebut the presumption. Id. at 27
[J-132-2016] - 11
(quoting 15 Pa.C.S. § 5715(d)). LEHB contends that Zampogna “presented no
evidence . . ., let alone clear and convincing evidence” that a conflict of interest existed.
Id. at 27 (quoting Zampogna, 81 A.3d at 1059 (Leavitt, J., dissenting)). Indeed, as
noted previously, Zampogna did not assert a conflict of interest in his pleadings.
Lastly, LEHB argues the Commonwealth Court majority erred by labeling the
assets used to print and mail the postcards at issue as “public funds.” While LEHB
acknowledges that the funds paid by the City to LEHB originally were public in nature, it
suggests that the funds lost their public character once the City transferred them to the
Joint Trust pursuant to the collective bargaining agreement. Specifically, LEHB opines
that, once the funds leave the City’s possession, the City has met its contractual
obligation of contributing a specified amount of money per FOP member. LEHB notes
that, thereafter, the funds are either received by the Joint Trust, which forwards the
money to LEHB to administer benefits, or the City may pay LEHB directly to reimburse it
for expenses which have already been incurred on behalf of an eligible member. LEHB
emphasizes that, once the funds are placed in the Joint Trust or forwarded directly to
LEHB, they become the private assets of the corporation and, thus, cease to retain their
public character.
By contrast, Zampogna contends LEHB was not authorized to endorse a
candidate in the FOP election. Zampogna argues LEHB’s Articles do not authorize it to
endorse a candidate as they make clear that LEHB’s sole purpose is to administer
benefits for FOP members and their families. While the Articles also give LEHB
incidental power, Zampogna maintains that endorsing a candidate in the FOP
presidential election is not incidental to effectuating the payment of benefits.
[J-132-2016] - 12
For the first time before this Court, Zampogna claims that LEHB’s action was a
conflict of interest because the candidate it endorsed was the then-current FOP
president, who appointed four members of the Joint Trust Board, and, thus, in his view,
the individual in control of the monies going to LEHB which ultimately funded the mailing
endorsing him. Notably, Zampogna does not cite to any evidence of record to support
the assertion that LEHB’s board acted under a conflict of interest, such as testimony
suggesting that McNesby requested LEHB to endorse him. Instead, taking his lead
from the Commonwealth Court’s majority opinion, Zampogna infers a conflict of interest
based on the FOP President’s ability to appoint members of the Joint Trust Board. To
Zampogna, the conflict of interest “is obvious,” and thus he dispenses with the need to
support it. Id. at 36.
Lastly, Zampogna repeatedly notes his belief that LEHB’s action was a misuse of
public funds. In this vein, Zampogna argues LEHB’s funds have a “publicly designated
purpose” — namely, the payment of benefits for FOP members and their families. Id. at
40. Consistent with his argument that LEHB’s actions here did not relate to its
corporate purpose, Zampogna also contends that LEHB improperly used public funds
for a non-public purpose. Again, however, Zampogna cites to no relevant corporate law
to support his position that the use of originally “public” funds somehow alters or
heightens our review of whether a nonprofit corporation’s action is authorized.9
9
The Pennsylvania Public Utilities Commission filed an amicus curiae brief in this
matter, without indicating support for either party. Therein, it described that it is involved
in monitoring ratepayer funds which it deems to be “public funds” and which have been
deposited into four sustainable energy funds in order to ensure that such funds are
being used to promote: “(1) the development and use of renewable energy and clean
energy technologies; (2) energy conservation and efficiency; and (3) renewable
(…continued)
[J-132-2016] - 13
In this case, we are asked to determine whether a nonprofit corporation’s action
was permitted under the NCL, which is a question of law, for which our standard of
review is de novo and our scope of review is plenary. A.S. v. I.S., 130 A.3d 763, 768
(Pa. 2015). Before analyzing the specific action in question, it is worth reviewing a brief
history of Pennsylvania corporate law. In the early years of our Commonwealth,
corporations were required to be incorporated for a specific purpose and were limited to
take only those actions that furthered the corporation’s purpose. Malone v. Lancaster
Gas Light & Fuel Co., 37 A. 932, 933 (Pa. 1897). Because of this narrow limitation on
early corporations’ powers, if a corporation’s action was not “fairly considered incidental
or auxiliary to” its corporate purpose, a court could deem the action unauthorized as
beyond the scope of the corporation’s authority (i.e., ultra vires). Id.
Malone involved the Lancaster Gas Company, chartered for the specific purpose
of “manufacturing and supplying illuminating and heating gas.” Id. When the company
sought to sell gas-consuming appliances, one of the company’s stockholders
challenged the action as outside the company’s authority. This Court determined that
the action was authorized, holding that a corporation may take any action that is not
within the literal terms of the corporate grant so long as it is “at least very convenient” to
the corporation’s purpose. Id. at 933. Because selling gas-consuming appliances
would increase the demand for Lancaster’s gas supply, this Court concluded that the
action was sufficiently related to the corporation’s chartered purpose of selling gas.
(continued…)
business initiatives and projects that improve the environment in the companies’ electric
service territories.” Amicus brief at 5-6. Amicus urges this Court not to issue a decision
which would adversely affect its continued audit authority over the funds and its ability to
compel compliance with the foregoing public purposes.
[J-132-2016] - 14
Compare with Citizens’ Electric Illuminating Co. v. Lackawanna & W.V.R. Co., 99 A.
465, 467 (Pa. 1916) (holding that a railroad company was unauthorized to sell excess
electricity the company generated because such action was not “directly and
immediately appropriate” to functioning as a railroad).
However, around the end of the 19th century and the beginning of the 20th
century, states began to “replace the restrictive set-pattern acts of the 1880s with the
liberal and flexible ‘enabling’ corporation statutes that characterized the twentieth
century.” Harwell Wells, The Modernization of Corporation Law, 1920-1940, 11 U. Pa.
J. Bus. L. 573, 585 (2009). As part of this movement, Pennsylvania enacted its more
liberal Business Corporation Law in 1933. See Act of May 5, 1933 (P.L. 364, No. 106)
(known as the Business Corporation Law of 1933).10 The current language of the BCL,
as amended in 1988, provides that a “business corporation shall have the legal capacity
of natural persons to act,” 15 Pa.C.S. § 1501, and sets forth a broad, non-exhaustive list
of permissible corporate powers. 15 Pa.C.S. § 1502(a) (granting a business corporation
broad corporate powers “[s]ubject to the limitations and restrictions imposed by statute
or contained in its articles”); 15 Pa.C.S. § 1502 Committee Comment--1988 (“The
provisions of subsection (a) are intended to be broad enabling provisions.”).
10
Our overview begins with the BCL, which in its current form governs only for-profit
corporations. However, at the time of its original enactment in 1933, there was no
separate statute governing nonprofit corporations. It was not until 1972 that
Pennsylvania enacted the NCL, which provides specific provisions for nonprofit
corporations. Accordingly, we find the history underlying the BCL is relevant to framing
our discussion of the NCL. More importantly, the section of the NCL governing
nonprofit corporate powers indicates it was patterned after the BCL, as discussed in
more detail infra. See 15 Pa.C.S. § 5502, Source Note--1990 (“Patterned after 15
Pa.C.S. § 1502,” which grants statutory powers to for-profit corporations).
[J-132-2016] - 15
One of the effects of Pennsylvania’s modernized corporate statute is to remove
the requirement that for-profit corporations be incorporated for a specific, limited
purpose; in fact, a business corporation today need not include any purpose statement
in its articles of incorporation. 15 Pa.C.S. § 1301, Committee Comment--1988 (“Under
this section if the articles of a business corporation contain no purpose clause, the
corporation has in effect an all-purpose charter.”). Instead, corporations are permitted
to be incorporated for “any lawful purpose,” id., and, accordingly, can take any type of
corporate action, regardless of its relationship to a corporation’s purpose. 15 Pa.C.S. §
1502, Committee Comment--1988 (“It is intended . . . that the corporate purposes of the
[for-profit] corporation shall be irrelevant.”).
Because for-profit corporations are no longer limited to taking actions related to
their corporate purposes, the ultra vires doctrine is, in effect, no longer viable to
challenge a for-profit corporate action. See Kent Greenfield, Ultra Vires Lives! A
Stakeholder Analysis of Corporate Illegality (with Notes on How Corporate Law Could
Reinforce International Law Norms), 87 Va. L. Rev. 1279, 1280 (2001) (explaining that,
today, “the doctrine of ‘ultra vires,’ which limited corporations to certain purposes and
powers, is dead or at least deathly ill”). Rather, a challenge to a corporate action
proceeds in modern jurisprudence under what is known as the business judgment rule,
which embodies the “policy of judicial noninterference with business decisions of
corporate managers,” and insulates corporate directors from “second-guessing or
liability for their business decisions in the absence of fraud or self-dealing or other
misconduct or malfeasance.” Cuker v. Mikalauskas, 692 A.2d 1042, 1046 (Pa. 1997);
see also 15 Pa.C.S. § 1502 Committee Comment--1988 (“Regulation of the exercise of
[J-132-2016] - 16
the powers granted is accordingly intended to come through application of the business
judgment rule under 15 Pa.C.S. § 1721 rather than through the doctrine of ultra vires.
Cf. 15 Pa.C.S. § 1503.”)11
With these principles of corporate law in mind, we turn to the NCL, as LEHB is a
nonprofit corporation. Just as the BCL grants to for-profit corporations, the NCL
provides nonprofit corporations with “the legal capacity of natural persons to act.” 15
Pa.C.S. § 5501. Similarly, the NCL gives nonprofit corporations the same general
powers as the BCL gives for-profit corporations, using nearly identical language. See
15 Pa.C.S. § 5502, Source Note--1990 (“Patterned after 15 Pa.C.S. § 1502,” which
grants statutory powers to for-profit corporations).12 For example, nonprofit corporations
have the authority to “exercise all of the powers and means appropriate to effect the
purpose or purposes for which the corporation is incorporated.” 15 Pa.C.S. §
5502(a)(18). This language is expansive, not restrictive. Additionally, the NCL gives a
nonprofit corporation broad powers, such as the powers “[t]o conduct its business, carry
on its operations,” and “[t]o have and exercise all other powers” otherwise vested in the
corporation by law, “[s]ubject to the limitations and restrictions imposed by statute . . .
[or] contained in its articles.” 15 Pa.C.S. § 5502(a)(15), (19). Accordingly, the NCL
authorizes all nonprofit corporate actions that are not prohibited by the NCL or the
corporation’s articles.
11
Whether the business judgment rule would apply in this case is irrelevant to our
holding, as we ultimately conclude that the action here was sufficiently related without
giving deference to the Board’s decision. Thus, we discuss this rule merely to establish
generally the level of appropriate court involvement in corporate decisions, which
informs our view of how the NCL should be interpreted.
12
The only difference is that for-profit corporations have an additional power relating to
acquisitions and take-overs, which are not relevant to nonprofits.
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Although the NCL is similar to the BCL in many ways, notably, nonprofit
corporations are required by the NCL and its regulations to be incorporated for a
specified purpose, as opposed to for-profit corporations, which may be incorporated for
“any lawful purpose.” Compare 19 Pa. Code § 41.4(b) (providing that “[t]he stated
purposes of a nonprofit corporation may not consist of solely a statement to the effect
that its corporate purpose is to engage in all lawful business”), with 15 Pa.C.S. § 1502,
Committee Comment--1988 (“It is intended further that the corporate purposes of the
[for-profit] corporation shall be irrelevant.”). Accordingly, we find that a nonprofit
corporation’s actions must be related to its corporate purpose. To hold otherwise would
render the requirement that a nonprofit corporation state a corporate purpose other than
“any lawful purpose” meaningless.
However, the fact that nonprofit corporations have an additional requirement
compared to for-profit corporations does not necessarily mean that we must construe
this requirement narrowly. In other words, we do not view this requirement as
relegating nonprofit corporations back to the early twentieth century, when every
corporation was limited to taking actions which were directly in furtherance of its
corporate purpose, which, as set forth above, is a limitation that has since been
abandoned. Wells, supra at 585. Instead, we find that this limitation should be broadly
interpreted considering the legal principles expounded above. Additionally, the NCL
itself indicates that this purpose requirement is not meant to be overly restrictive, as it
requires nonprofit corporations to include only a “brief” statement of purpose in their
articles of incorporation. 15 Pa.C.S. § 5306(a)(3). The applicable statutory and
regulatory provisions contain a non-exhaustive list of broad permissible purposes such
[J-132-2016] - 18
as “athletic,” “charitable,” and “educational.” See 15 Pa.C.S. § 5301(a); 19 Pa. Code §
41.4(a). Moreover, we are guided by the fact that the NCL is patterned after the BCL,
and nothing in the NCL or its regulations place an emphasis on the corporate purpose
distinction between nonprofit and for-profit corporations. Accordingly, we determine that
the purpose statement requirement was not intended to create a marked difference in
how nonprofit corporations are to be governed, as opposed to for-profit corporations.
For these reasons, we 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 NCL or the corporation’s articles; and 2) the action is not clearly unrelated to the
corporation’s stated purpose. See 15 Pa.C.S. § 5502(a)(18) (providing that a nonprofit
corporation may “exercise all of the powers and means appropriate to effect the
purpose or purposes for which the corporation is incorporated” unless restricted by
statute or its articles); 15 Pa.C.S. § 5306(a)(3) (requiring a nonprofit corporation to list a
brief purpose statement in its articles).
Turning to the facts of the instant case, Zampogna has not pointed us to any
language in the NCL or LEHB’s Articles that prohibited LEHB’s action here. As such,
LEHB’s action is authorized so long as it is not clearly unrelated to its corporate purpose
of administering benefits to its members as set forth in its Articles. Ultimately, we agree
[J-132-2016] - 19
with LEHB that its action was sufficiently related to administering benefits to its
members and, therefore, it was authorized.
The facts of the instant case exemplify why courts should not act as super-
boards second guessing decisions of corporate directors, as courts are “ill-equipped” to
become “enmeshed in complex corporate decision-making.” Cuker, 692 A.2d at 1046.
At first blush, endorsing a candidate in a union election seems unrelated to the
administration of medical benefits. However, such a simplistic view of the action at
issue here ignores the structure of the CBA between the City and the union and the
effect the union president has over LEHB’s revenue source and its very existence.
Because the union president has a direct impact on LEHB’s ability to function
effectively, endorsing a candidate the corporation believes will better serve its members
is not unrelated to its corporate purpose of administering benefits for its members.
Accordingly, we conclude that LEHB’s action was sufficiently related to the corporate
purpose as set forth in its Articles, rendering the action authorized.
As we find that LEHB’s action here was authorized, we need not address the
Commonwealth Court’s discussion of LEHB’s alleged conflict of interest, which the court
advanced to justify further its decision to reject the LEHB Board’s action. Moreover, we
recognize that Zampogna did not present any evidence of a conflict of interest nor did
he argue one existed before the trial court or the Commonwealth Court. We agree with
LEHB that by failing to introduce any evidence of a conflict of interest, Zampogna failed
to meet his burden. Accordingly, the record does not support the Commonwealth Court
majority’s determination that the Board’s action here constituted an improper conflict of
interest or self-dealing, and we decline to discuss this issue any further.
[J-132-2016] - 20
Turning to the “public funds” issue, we note that Zampogna cites to no authority
to support the proposition that the funds at issue here were indeed public funds. To the
contrary, we conclude that the originally public funds lost their public character once the
City paid them to LEHB in fulfillment of its contractual obligation. Specifically, the City
agreed to pay a specific amount of money per police officer to the Joint Trust, not only
to pay for the ultimate healthcare benefit that each police officer receives, but also to
pay for the administration of those benefits. Once the City paid the specified amount to
the Joint Trust pursuant to the collective bargaining agreement, it had fulfilled its
healthcare benefit obligation, rendering the funds no longer within the City’s control. At
that point, the funds were converted from public funds to private moneys in the sole
control of LEHB. As such, there was no legal impediment to LEHB’s use of its own
private moneys under these circumstances.13
We note that Zampogna’s challenge to LEHB’s endorsement focused on the
mere fact of endorsement, as he did not present any evidence to suggest that the cost
of the endorsement was excessive or resulted in any diminution in benefits to LEHB’s
members. In other words, Zampogna’s complaint is not one asserting corporate waste.
Instead, Zampogna simply argued that the endorsement was unauthorized.
Accordingly, our inquiry is limited to whether the endorsement itself was authorized and
does not take into consideration the cost of such. Thus, we caution that this decision
does not stand for the proposition that LEHB could spend on endorsements unabated,
as that issue is not before us.
13
Because we conclude that the funds at issue were private, we do not speak to
whether public funds may be used to endorse candidates in a private, union election.
[J-132-2016] - 21
For the reasons set forth above, the order of the Commonwealth Court is
reversed, and the matter is remanded for reinstatement of the trial court’s order
dismissing Zampogna’s complaint.
Chief Justice Saylor and Justices Donohue, Dougherty and Mundy join the opinion.
Justices Todd and Wecht file concurring opinions.
[J-132-2016] - 22