Zampogna v. Law Enforcement Health Benefits, Inc. , 81 A.3d 1043 ( 2013 )

OPINION BY

Judge COVEY.¹

Frank Zampogna (Zampogna) appeals from the Philadelphia County Common Pleas Court’s (trial court) January 24, 2012 order dismissing Zampogna’s Declaratory Judgment Action seeking a permanent injunction against Law Enforcement Health Benefits, Inc. (Health Benefits).² The sole issue before the Court is whether the trial court erred in not granting a permanent injunction and declaratory relief against Health Benefits.

The key facts are not in dispute. The Fraternal Order of Police, Lodge 5 (Union), a nonprofit corporation, represents Philadelphia police officers concerning the Union members’ wages, hours and terms and conditions of employment with the City of Philadelphia (City). The Union’s Collective Bargaining Agreement (CBA) with the City provides active and retired Union members and their families (collectively Members) medical, dental, vision and prescription drug coverage. It also establishes a “Joint Trust Board” (Joint Trust), the Union President appoints 80 percent of the Joint Trust’s members, and the City appoints 20 percent of the members, to supervise and manage the delivery of healthcare benefits. Reproduced Record (R.R.) at A-74; Appel-lee’s Br. at 2. In turn, the Joint Trust “determine[s] who would be in charge of administering the health benefits for the police officers.... ” R.R. at A-75. The Joint Trust selected Health Benefits to administer the Members’ healthcare benefits. Health Benefits’ paid Administrator/Chief Executive Officer, Thomas Lamb (Lamb), testified that “[Health Benefits’] existence is dependent upon the advocacy of the FOP [President.” Id. at A-75. He further acknowledged that because the Union President influences the composition of the Joint Trust, Health Benefits “exists at the pleasure of the Joint Trust Board.” Id. at A-79. Lamb also testified that “[t]he Joint Trust has the capability of closing [Health Benefits]....” Id. at A-54.

Health Benefits is a nonprofit corporation which exists for the purpose of administering the Members’ contractual health insurance benefits. Health Benefits is governed by a paid Board of Directors (Board). R.R. at A-170.

[Health Benefits] is funded solely by funds required to be made by the [City] pursuant to the terms of a [CBA] between the City and [the Union]. The monies are then forwarded by the [Joint Trust] that receives contractual contributions from the City or are reimbursed to Health Benefits by the City as a result of the former’s incursion of healthcare expenses on behalf of covered law enforcement personnel.[³]

R.R. at A-154 (emphasis added), see also A-3B-A-34, A-176.

During the 2010 Union President election in which Zampogna was a candidate, Health Benefits’ Board was concerned about statements Zampogna had made which it believed were misleading and false. In response, the Board approved the decision to respond to Zampog-na’s statements through the expenditure of monies it received from the Joint Trust by publishing and mailing Union election materials against Zampogna and in support of and expressly endorsing the current Union President who subsequently won the election.⁴ Zampogna filed a declaratory judgment action against Health Benefits requesting a permanent injunction to prevent Health Benefits from using public monies to engage in partisan activities. The trial court held a bench trial and, on January 24, 2012, denied the injunction and dismissed Zampogna’s declaratory judgment action. Zampogna filed post-trial motions which the trial court denied on February 29, 2012. Zampogna appealed to this Court.⁵,⁶

Zampogna argues that the trial court erred in finding that a nonprofit corporation funded by taxpayer money dedicated solely to the administration of healthcare benefits for active and retired Union police officers and their families could use those public funds to advocate, support, and circulate mailings to endorse a specific candidate for Union President. Zampogna further contends that the trial court erred as a matter of law in concluding that Health Benefits’ endorsement and expenditure of public monies for one Union presidential candidate over another candidate was not a violation of Health Benefits’ Articles of Incorporation, Bylaws, and the Pennsylvania Nonprofit Corporation Law of 1988 (Law).⁷

Health Benefits asserts that Zampogna, while running for Union President, was making misleading, material misrepresentations regarding Health Benefits’ administration of the healthcare benefits. The Board, in an effort to protect Health Benefits from Zampogna causing detrimental harm, made an informed decision to have Health Benefits endorse the incumbent Union President and expend monies to prepare and have mailings sent notifying its members of Zampogna’s misrepresentations about Health Benefits, and to endorse the current Union President.⁸,⁹ The cost of the mailings was $3,840.00. Appel-lee’s Br. at 8. Health Benefits also included the same message in its newsletter at no additional expense.

Health Benefits maintains that Section 5502(a)(9) of the Law, 15 Pa.C.S. § 5502(a)(9), provides that nonprofit corporations have the power to make contributions and donations. In addition, it contends that Health Benefits’ Articles of Incorporation permit expenditures for the purpose of engaging in “such other proper purposes incidental to” providing health benefits to its members. R.R. at A-165. Moreover, it avers that Health Benefits’ Bylaws vest the powers of Health Benefits in its Board not the court, to manage the corporation.¹⁰

Initially, we recognize that Section 5502 of the Law specifically provides: “(a) General rule. — Subject to the limitations and restrictions imposed by statute and, ... subject to the limitations and restrictions contained in its articles[¹¹,¹²] every nonprofit corporation shall have power: ... (9) To make contributions and donations.” 15 Pa.C.S. § 5502 (emphasis added). Black’s Law Dictionary, 526 (9th ed. 2009) defines a donation as “[a] gift, esp. to a charity.”¹³

Here, Health Benefits’ Articles of Incorporation Addendum states, in pertinent part:

A. 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.

R.R. at A-165 (emphasis added). Article III, Section 1 of Health Benefits’ Bylaws establishes that:

The governing powers of the Corporation shall be vested in the Board of Directors who shall have charge, control and management of the property, affairs and funds of the Corporation, and who shall have the power and authority to do and perform all acts and functions not inconsistent with these Bylaws, the Corporation’s Articles of Incorporation, or law.

R.R. at A-169 (emphasis added). Converse to the Dissent’s assertion that “the corporation’s charter and bylaws are broad enough ... to encompass the board’s decision[,]” the Corporation’s purpose and bylaws, as stated above, are specific and must be followed. Dissenting Op. at 1052-53. Health Benefits’ governing documents do not, in any manner of liberal construction, permit Health Benefits “to endorse a presumably friendly candidate for union office” with “revenue ... received from a union trust fund to administer health insurance benefits for a city’s police officers[.]” Dissenting Op. at 1052.

While the Law permits nonprofit corporations to make donations and contributions, said Law expressly provides that the donations and contributions are limited by the corporation’s Articles of Incorporation. Health Benefits’ Articles of Incorporation specifically state that the Corporation receives funds, holds funds, invests funds, administers funds and distributes funds for its Members’ health insurance. The alleged donation or contribution in this case is a postcard mailing to Health Benefits’ Members which specifically states, in pertinent part:

[Health Benefits] has an obligation to take any necessary action to protect you and your family’s medical benefits. We feel [Zampogna] is not competent enough and too inexperienced to lead the FOP and its 14,000 members.... [Health Benefits] is endorsing John McNesby and his team[.] Efficient— Steady — Experienced Leadership^]

R.R. at A-178 (emphasis added). A copy of this postcard was included in Health Benefits’ September 2010 newsletter as well. R.R. at A-179. Health Benefits’ Board approved the expenditure of the monies it received from the Joint Trust, pursuant to the City’s CBA obligation, to prepare and mail said postcard.

According to Health Benefits’ Articles of Incorporation, its purpose is to provide health and welfare benefits for its Members. Notwithstanding that Health Benefits has an additional function “to engage in other proper purposes incidental to” providing health and welfare benefits, campaigning for a union presidential candidate does not appear, even remotely, within Health Benefits’ Articles of Incorporation.¹⁴ R.R. at A-165. In addition, although “to endorse” a candidate through mailings may be considered a donation or contribution, said donation or contribution here is to the endorsed candidate’s campaign. As the candidate is an individual unrelated to Health Benefits’ purpose “to receive, hold, invest, administer and distribute funds to provide health and welfare benefits” or “incidental to the foregoing,” a donation or contribution to his campaign clearly falls outside of both the Law, and Health Benefits’ Articles of Incorporation. R.R. at A-165. Thus, the Board exceeded its authority and Health Benefits’ expenditure of City funds for the Union President campaign mailing was clearly “inconsistent with [its] Bylaws, [Health Benefits’] Articles of Incorporation, [and] law.” Health Benefits’ Bylaws, R.R. at A-169.

Health Benefits contends that the Board was permitted to approve the mailing because Health Benefits’ Articles of Incorporation authorized the Board to engage in any other incidental purposes, and its Bylaws vest the powers of Health Benefits in its Board. Specifically, Health Benefits maintains that courts are not permitted to substitute their judgment for the judgment of the Board. Anderson v. Colonial Country Club, 739 A.2d 1118 (Pa.Cmwlth.1999).

However, a corporation’s incidental power must be “directly and immediately appropriate to the execution of the specific power granted, and not one that has merely some slight or remote relation to it.” Citizens’ Electric Illuminating Co. v. Lackawanna & W.V.R. Co., 255 Pa. 176, 183, 99 A. 465, 467 (1916). Undertaking a “field of activity’ totally separate from the corporation’s “main purpose” will be found ultra vires. In re Chosen Friends Castle No. 33, 342 Pa. 60, 70, 20 A.2d 237, 241 (1941).¹⁵ Consequently, campaigning for a union presidential candidate is not directly and immediately appropriate to providing healthcare benefits to the corporation’s Members.¹⁶ This action is not about Health Benefits supporting the Union; this case is about Health Benefits using taxpayer dollars to support one candidate over another candidate running for office. Here, the unrelated expenditure is even more egregious because “[Health Benefits’] existence is dependent upon the advocacy of the [Union] [President.” ¹⁷ R.R. at A-75.

The relationship between Health Benefits and the Union makes Health Benefits’ endorsement of the Union presidential candidate even more suspect. The United States Tax Code defines “self-dealing,” in pertinent part, as: “any direct or indirect — ... transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation^]” 26 U.S.C. § 4941(d). “[T]he term ‘disqualified person’ means, with respect to a private foundation, a person who is — ... a foundation manager ...[.]” 26 U.S.C. § 4946(a)(1)(B). The above prohibited transaction is analogous to Health Benefits which is managed by its paid Board whose positions are directly dependent upon the Union President, using health insurance funds to benefit the Union’s President by contributing to his reelection campaign through endorsement propaganda. As such, the requirement that we defer to the Board’s judgment is negated by the Board’s self-dealing, which is clearly a conflict of interest.

Moreover, in addition to Lamb testifying that “[Health Benefits’] existence is dependent upon the advocacy of the FOP [President,” he further acknowledged that because the Union President influences the composition of the Joint Trust, Health Benefits “exists at the pleasure of the Joint Trust Board.” R.R. at A-75, A-79. Lamb also attested that “[t]he Joint Trust has the capability of closing [Health Benefits] .... ” Id. at A-54. Consequently, this testimony further demonstrates the Board’s conflict of interest, thereby, negating the requirement that we defer to the Board’s judgment.¹⁸

Furthermore, the Pennsylvania Supreme Court, while reviewing the actions of a school district’s board of directors, expressly held:

The power of the court, in the abstract, is not challenged. Appellants say that the court may not substitute its judgment for that of the board; we all agree with that. But when it clearly appears, as it does in this case, that the directors were not exercising judgment but were engaged in arbitrarily and, with knowledge, deliberately voting away the taxpayers’ money in the respects indicated and corrected by the decree, the court must restrain them. The restraint of an unlawful expenditure is not a substitution of judgment, but a required declaration that the directors have failed to perform their public duty.

McLaughlin v. Sch. Dist. of Borough of Lansford, 335 Pa. 17, 23, 6 A.2d 291, 294 (1939) (emphasis added).¹⁹ As the expenditure of City funds to endorse a Union presidential candidate is not within the purview of Health Benefits’ Bylaws or its Articles of Incorporation, the trial court restraining such action is not a substitution of judgment, but a required action.

The trial court opined: “Since there is no legal mechanism which prohibits Health Benefits!’] political activity, this Court declined to issue an injunction prohibiting that conduct.” R.R. at A-25. The trial court concluded that “without specific Bylaws, Articles of Incorporation, or laws prohibiting the use of public money in such a way, this Court cannot grant an injunction barring same.” R.R. at A-25. However,- contrary to the trial court’s ruling, there is no legal mechanism which permits Health Benefits’ partisan activity. A corporation exists and only has such authority as that contained in and consistent with its Articles of Incorporation or Bylaws. This holding does not “limit[ ] the discretion of boards of directors operating under [the Law]” as stated by the Dissent. Dissenting Op. at 1052. Rather, it recognizes and upholds current Pennsylvania law. Because Health Benefits’ powers are derived from its Articles of Incorporation and Bylaws, and such conduct alleged here does not in any manner fulfill Health Benefits’ stated purpose of administering healthcare benefits to its Members, the trial court should have declared the action outside the Board’s scope of authority.

The trial court also stated:

[W]hile [Health Benefits] does have the right to refute any derogatory remarks mentioned by a candidate either in a public or private election, in a situation where public money is expended to fund [Health Benefits], it may wish to consider the propriety of using the money on behalf of a particular candidate in either a public or private election.

R.R. at A-25. Here, Health Benefits did not use public money to refute derogatory remarks made by a candidate,²⁰ it specifically used public money to endorse a candidate.

We agree with Zampogna that Health Benefits would be irreparably harmed if the Board’s approval of expenditures of public money for partisan activity was allowed to continue unabated.²¹ However, as the election giving rise to this action has already passed, we cannot reverse the trial court’s denial of the request for injunctive relief. Zampogna asserts that, absent the Board’s strict adherence to its Articles of Incorporation, the potential for another occurrence remains. The harm identified is that which may flow from the Board’s failure to adhere to Health Benefits’ express purpose as stated in its Articles of Incorporation. Therefore, we hold that the appropriate relief is the entry of a prospective declaratory judgment in favor of Zampogna declaring that the Board’s expenditure of public funds on partisan activity violates the Law, and Health Benefits’ Articles of Incorporation and Bylaws. See Common Cause of Pennsylvania v. Commonwealth, 668 A.2d 190 (Pa.Cmwlth.1995), aff'd, 544 Pa. 512, 677 A.2d 1206 (1996). Accordingly, for all of the above reasons, the trial court’s order is vacated, and we remand this matter to the trial court and direct the trial court to enter a prospective declaratory judgment in accordance with this holding.

ORDER

AND NOW, this 27th day of November, 2013, the Philadelphia County Common Pleas Court’s January 24, 2012 order is vacated and the matter is remanded to the trial court to enter a declaratory judgment in accordance with this opinion.

Jurisdiction relinquished.

1 . This opinion was reassigned to the Authoring Judge on September 10, 2013.

2 . This order was reduced to judgment when Zampogna's post-trial motions were denied.

3 . This undisputed fact is contrary to the Dissent’s characterization that "[t]he majority reaches its result on the basis of the mistaken assumption” that "Health Benefits has spent 'public funds' or 'City funds.’ ” Dissenting op. at 1052, 1061. The above quote is a direct admission excerpted from Health Benefits’ answer to Zampogna’s amended complaint, as well as an averment in Lamb's affidavit, and establishes that the Dissent’s Staples analogy is inapposite. Moreover, this admitted undisputed fact is contrary to the inaccurate descriptions posed by the Dissent, i.e., “[h]ere, a private vendor used some of its corporate revenue, which it received from a union trust fund to administer health insur-anee benefits for a city's police officers, to endorse a presumably friendly candidate for union office.” Dissenting Op. at 1052.

4 . Only FOP members could vote in the Union President election; therefore, not all of Health Benefits’ Members were eligible to participate in the Union President election. R.R. at A-55.

5 . Zampogna appealed to the Pennsylvania Superior Court. By Order dated May 12, 2012, the Pennsylvania Superior Court transferred the matter to this Court.

6 . “Our standard of review of a non-jury trial is to determine whether the findings of the trial court are supported by competent evidence, and whether an error of law was committed.” Swift v. Dep't of Transp., 937 A.2d 1162, 1167 n. 5 (Pa.Cmwlth.2007). "Our scope of review of the ... denial of a permanent injunction is limited to determining whether the trial court committed an error of law. The standard of review for a question of law is plenary.” Bd. of Supervisors of Milford Twp. v. McGogney, 13 A.3d 569, 571 n. 5 (Pa.Cmwlth.2011) (citation omitted).

7 . 15 Pa.C.S. §§ 5101-6162.

8 . Zampogna does not claim that Health Benefits’ expenditure of funds to respond to criticisms was improper.

9 . The Dissent maintains that the "[Board] voted to respond to Zampogna’s 'grossly misleading and deceptive statements’ ”, while acknowledging that ”[t]he record does not establish whether Zampogna’s statements were meritorious or deceptive.” Dissenting Op. at 1053, 1053 n. 2. However, the Board never addressed the alleged specific “grossly misleading and deceptive statements” nor presented any factual basis to dispute alleged deceptions. Dissenting Op. at 1053.

10 . Health Benefits also argues that the United States Supreme Court's holding in Citizens United v. Federal Election Commission, 558 U.S. 310, 130 S.Ct. 876, 175 L.Ed.2d 753 (2010), permitted it to endorse a candidate in the Union election. In Citizens United, the Supreme Court held that corporations, including nonprofits, cannot be barred from making expenditures for communications relating to elections. The Citizens United Court specifically established that corporations have a protected First Amendment right to engage in political speech. Health Benefits, thus, asserts that it had a free speech right to endorse Zampogna's opponent. However, this case is not about free speech, it is about whether Health Benefits’ Board acted outside of its authority. Accordingly, Citizens United is not relevant to the instant matter. Notwithstanding, the Dissent relies upon Citizens United on pages 1055 and 1058 of its opinion.

11 . The Dissent repeatedly maintains that the Majority opinion is contrary to the law and "limits the discretion of boards of directors....” Dissenting Op. at 1052. However, contrary to the Dissent’s assertion it acknowledges the foundation of the Majority’s holding several times in its opinion: "In other words, a non-profit corporation has broad powers, subject only to a limitation or restriction set forth in a statute or in its corporate charterf;]” "the Board of Directors who shall have ... the power and authority to do and perform all acts and functions not inconsistent with these Bylaws, the Corporation's Articles of Incorporation or law [;]” and "the legislature has vested ... corporations ... with authority to do any act, unless 'restricted' or 'limited’ by statute or by the corporation's articles or bylaws.” Dissenting Op. at 1054 n. 3, 1055-56 (quoting R.R. A-169), 1058-59 n. 9 (quoting R.R. A-169), 16.

12 .The Dissent mischaracterizes the Majority’s holding by stating, "[t]he majority finds that Health Benefits lacks the power to engage in political activity because its charter does not specifically authorize such activity.” Dissenting Op. at 1055. It is impossible to include in a corporation’s articles or by-laws every conceivable power. Hence, the articles herein contain the language "to engage in such other proper purposes incidental to the foregoing.” R.R. at A-165. However, this language does not grant the corporation an infinite derth of powers. The Majority disagrees with the Dissent’s position that the corporate charter must contain a specific limitation. In the instant matter, the articles of incorporation as well as the Law do contain the express language: "subject to the limitations and restrictions contained in its articles!;.]” R.R. at A-165; 15 Pa.C.S. § 5502(a). In addition, the natural effect of the language "to engage in such other proper purposes incidental to the foregoing” is one of limitation to the grant of power. R.R. at A-165.

13 . Black's Law Dictionary does not define "contribution” other than in the context of tortfeasors.

14 . The Dissent maintains that "[a]n endorsement of a candidate, done apparently once by Health Benefits, is by definition an 'incidental' activity and not a new corporate undertaking.” Dissenting Op. at 1058. However, Black’s Law Dictionary, 1288 (9th ed. 2009) defines an "incident[al] power” as "[a] power that, although not expressly granted, must exist because it is necessary to the accomplishment of an express purpose.” Id. (emphasis added). Clearly, endorsing a candidate for Union President is not necessary to the administration of health insurance. The Dissent maintains that the Pennsylvania Supreme Court defined "incidental” as "any 'subordinate' activity that is ‘connected’ and 'convenient' to the prosecution of the corporation’s main purpose.” Dissenting Op. at 1056 n. 5. However, our Supreme Court in Malone v. Lancaster Gas Light & Fuel Co., 182 Pa. 309, 322, 37 A. 932, 933 (1897), expressly held: "Corporations may transact, in addition to their main undertaking, all such subordinate and connected matters as are, if not essential, at least very convenient, to the due prosecution of the former.” Id. (emphasis added). Expending monies expressly designated for health and welfare benefits to endorse a candidate for Union President is not "essential” or even "very convenient” to the prosecution of Health Benefits' main purpose of administering funds to provide health and welfare benefits.

15 . The Dissent maintains that Citizens’ Electric and Chosen Friends are distinguishable and have little relevance today; however, the propositions cited therein are current Pennsylvania law and applicable to the instant matter.

16 . Without any legal support the Dissent concludes, “[sjimply, a corporation’s endorsement of a candidate for office is an incidental activity that does not require a specific power in the corporation’s articles in order for the [BJoard to engage in this activity.” Dissenting Op. at 1058.

17 . The Dissent asserts that the Law “specifies that it is not self-dealing for a director to take action to retain 'the status or position of director’ of the corporation he serves[,J” and cites 15 Pa.C.S. § 5715(e)(2)(iv). Dissenting Op. at 1061. However, 15 Pa.C.S. § 5715(e) merely defines "[t]he term 'disinterested director’ as used in subsection (d) and for no other purpose ... [,]” and lists 8 examples including "(2) [a] person shall not be deemed to be other than a disinterested director solely by reason of ... (iv)[a]ny interest the director may have in retaining the status or position of director.” Id. The Dissent’s cited provision in no manner supports the facts herein, i.e., using public money contractually designated for health insurance to maintain the Board’s paid positions.

18 .The Dissent states that Zampogna should have filed a derivative suit against the Board and cites the business judgment rule in support of insulating board members in order to encourage individuals to become directors. Dissenting Op. at 1059 n. 11, 12. Derivative actions relate to finding directors liable for losses and the business judgment rule protects directors from liability. See In re Lemington Home for Aged, 659 F.3d 282 (3rd Cir.2011). This lawsuit is not about director liability. Rather, Zampogna filed the case seeking an injunction to prohibit the Board from expending public monies on unauthorized actions. Thus, the issue is whether the monies expended for the endorsement of a candidate for Union President violated the Law and Health Benefits’ Articles of Incorporation and Bylaws, and not whether the directors are liable for said expenditure. The Dissent maintains that Zampogna sued the wrong party. Dissenting Op. at 1059 n. 12. However, Health Benefits did not raise that issue and, therefore, it is not before this Court.

19 . The Dissent discounts this holding because it "concerned a government agency's power to act, not that of a private corporation.” Dissenting Op. at 1060. However, a nonprofit corporation is similar in that its authority to act, although not created by statute, is like a statute in that its powers are limited to its governing documents. Accordingly, the holding is on point and instructive.

20 . Neither party produced any evidence of Zampogna's alleged misleading statements about Health Benefits.

21 . The Dissent declares that Zampogna did not prove harm; however, it is undisputed that there was an expenditure of funds on partisan activity, which was to be specifically used to receive, hold, invest, administer and provide health and welfare benefits, and that expenditure is the unauthorized action Zam-pogna is seeking to prohibit.