Com. of Pa. v. New Foundations, Inc., 36 M.D. 2014

• Decision Date: 01 March 2018
• Docket Number: No. 36 M.D. 2014,36 M.D. 2014
• Citation: Com. of Pa. v. New Foundations, Inc., 182 A.3d 1059 (Pa. Commw. Ct. 2018)
• Parties: COMMONWEALTH of Pennsylvania, BY Kathleen KANE, Attorney General, Plaintiff v. NEW FOUNDATIONS, INC., a Nonprofit Corporation; Firetree, Ltd., a Nonprofit Corporation; Orange Stones Co., a Nonprofit Corporation; Individually; Catherine Ertel, Individually; Edward Ertel, Individually; Amy Ertel, Individually; William C. Brown, and Catherine K. Ertel as executrix of the Estate of Allen E. Ertel, Individually; Defendants
• Court: Pennsylvania Commonwealth Court

182 A.3d 1059

COMMONWEALTH of Pennsylvania, BY Kathleen KANE, Attorney General, Plaintiff
v.
NEW FOUNDATIONS, INC., a Nonprofit Corporation; Firetree, Ltd., a Nonprofit Corporation; Orange Stones Co., a Nonprofit Corporation; Individually; Catherine Ertel, Individually; Edward Ertel, Individually; Amy Ertel, Individually; William C. Brown, and Catherine K. Ertel as executrix of the Estate of Allen E. Ertel, Individually; Defendants

No. 36 M.D. 2014

Commonwealth Court of Pennsylvania.

Argued: October 4, 2017
Decided: March 1, 2018
Reconsideration Denied March 27, 2018
Publication Ordered April 30, 2018

Mark A. Pacella, Chief Deputy Attorney General, and Heather J. Vance–Rittman, Senior Deputy Attorney General, Harrisburg, for plaintiff.

John C. Eustice, Washington, DC, for defendants New Foundations, Inc., Firetree, Ltd., and Orange Stones, Co.

Corey J. Mowrey, Williamsport, for defendants Catherine Ertel, Edward Ertel, Amy Ertel, Allen E. Ertel, Estate of Allen E. Ertel, and William C. Brown.

BEFORE: HONORABLE DAN PELLEGRINI, Senior Judge

OPINION BY SENIOR JUDGE PELLEGRINI

182 A.3d 1063

The Commonwealth, through its Attorney General, brought an action as parens patriae against New Foundations, Inc. (New Foundations), Firetree, Ltd. (Firetree), and Orange Stones Company (Orange Stone) (collectively, Charities). Each was created as a charitable nonprofit with different but related charitable purposes. New Foundations was incorporated to provide services to families and children, with special emphasis on providing services to fragile infants and children. Firetree was incorporated to provide food and shelter to disadvantaged people. Orange Stone was incorporated to provide housing, care and treatment to halfway house residents. Each provides those services pursuant to contracts with federal, state and local government agencies.

Also named were Allen Ertel, Catherine Ertel, Amy Ertel, Edward Ertel and William Brown (collectively, Individual Defendants) who currently serve or have served as officers and directors of the Charities. The Commonwealth contends that the Individual Defendants breached their fiduciary duties to the Charities by engaging in a pattern of improper related-party transactions with the Charities benefiting themselves or for-profit entities that they control at the expense of the Charities and the public. Those improper-related transactions alleged are improper payments, co-mingling assets, diverting resources, and usurping business and investment opportunities for their personal benefit or for-profit entities, including, but not limited to, Treefire, Alcat Brown, BANCA and/or Park Place, which they control.

The Commonwealth sought restoration, return and repayment of all diverted assets by the Individual Defendants whether those assets were diverted to them or one of their for-profit entities. It also asks for the immediate transfer of all assets, in whatever form, held by or in the names of Individual Defendants' for-profit entities, and to impose fines on Individual Defendants for violating the Solicitation of Funds for Charitable Purposes Act (Act).¹ Regarding the Charities, the Commonwealth seeks an accounting and removal of the Charities' Board of Directors and the appointment of a new Board of Directors.

The Commonwealth has filed a Motion for Summary Judgment which is primarily based on its claim of illegal self-dealing by the Individual Defendants with the Charities. It contends that because of that self-dealing, the Individual Defendants should be surcharged and held jointly and severally liable for a total of $25,530,742 based on approximately 26 transactions, which they contend were illegal self-dealing.

1. $4,085,000 which passed from all three Charities to the Individual Defendants through Treefire;

2. $1,000,000 which passed from Firetree to WCB (William Brown);

3. $700,000 for an April 5, 2011 check that Allen Ertel wrote to himself from New Foundations' account

4. $300,000 for an April 5, 2011 check that Allen Ertel wrote to himself from Firetree's account;

5. $625,000 for 401(k) distributions from Firetree to the Individual Defendants;

6. $520,000 for unnecessary interest paid to Individual Defendant Allen Ertel on his "officer loan";

182 A.3d 1064

7. $163,680 for unnecessary interest paid to Individual Defendant Catherine Ertel on her "special grant";

8. $1,824,287 in write-offs due from affiliates;

9. $655,799 for the Treefire investment and write-off;

10. $403,232 for the Conewego Harrisburg write-off;

11. $90,172 for the Outer Dauphin, LLC write-off;

12. $63,367 for the BANCA write-off;

13. $19,200 for the RegScan write-off;

14. $184,551 for the underpayment of the Individual Defendants' loans from Firetree;

15. $744,199 in unpaid loans due to New Foundations from the Individual Defendants-related party for-profit entities;

16. $418,885 for the unpaid loan from Firetree to Edward Ertel;

17. $115,876 in unpaid loans due to Orange Stone from the Individual Defendants-related party for-profit entities;

18. $384,000 for airplane payments made by the Charities to Alcat Brown;

19. $4,000,000 for rental payments made by the Charities to Park Place and BANCA on properties the charities could have purchased in their own right;

20. $271,000 for rental payments made to BANCA by Firetree and Orange Stone for a property owned by Firetree;

21. $19,822 for Firetree's payment of Park Place's real estate taxes;

22. $100,587 in proceeds for the Individual Defendants' sale of Swathmore Lane which was financed by Firetree;

23. $1,000,000 for the transfer of Firetree's assets to Firetree Place;

24. $6,696,653.02 for the purported loan repayment through the transfer of stock which should be rejected and replaced with a cash payment in that amount.

25. $10,000 for violations of the Act; and

26. $1,135,432 for the Commonwealth's costs of investigation.

The Commonwealth requested that summary judgment be granted and the following order be entered:

a. The Individual Defendants failed to maintain accurate books and records in violation of 15 Pa. C.S. § 5508, 5793(a) ;

b. Individual Defendants engaged in unlawful acts of self-dealing and the diversion of charitable assets and have breached their fiduciary duties;

c. Individual Defendants should be immediately removed from their positions as officers and directors of the Charities;

d. Schedule a hearing to appoint a receiver to wrap up the affairs of the Charities;

e. Enter judgment in favor of the Commonwealth of Pennsylvania, Office of Attorney General, and against the Individual Defendants: William Brown, individually, Estate of Allen Ertel, individually; Catherine Ertel, individually; Edward Ertel, individually; and Amy Ertel, individually, in the amount of $25,520,742; and

f. Enter judgment in the amount of $10,000 against Firetree for violations of the Act.

The Charities and Individual Defendants have filed a Motion for Partial Summary Judgment contending that the evidence shows that they are upholding their mission and serving the public good in accordance with typical nonprofit practices and in compliance with Pennsylvania law. They contend that the Commonwealth has failed to identify any improper transactions engaged in by the Charities because the Individual Defendants' compensation, including

182 A.3d 1065

bonuses, retirement plan funds, health plan costs and other payments were fair and reasonable. They also contend that the lease payments made to related for-profits were also fair and reasonable. Regarding loans the Charities made to the Individual Defendants, they claim that the Commonwealth has offered no evidence of any violations of Pennsylvania law in connection with loans the Charities made to related for-profit entities and Individual Defendants. They also note that all such loans have been repaid and for the past four years, the Charities no longer permit such loans. They also contend that some of the claims for relief are out of time. As to the Commonwealth's claims for accounting violations of the Act, they allege that the Charities have already provided their books and records to the Commonwealth for inspection and they have never solicited donations.

While styled as a Motion for Partial Summary Relief, the Charities and Individual Defendants have not identified what would remain if their Motion were granted since they are asking for what seems to be all counts of the Complaint be dismissed.

At oral argument on the cross-motions, it became apparent that if the issue was whether the transactions in question were illegal and self-dealing under the Nonprofit Corporation Law (Law),² then neither summary judgment motion could be granted because they involved disputed questions of fact.³ (See II, infra. )

The Commonwealth, however, at oral argument, contended that transactions were per se illegal and self-dealing because the officers and the Board of Directors of a nonprofit charity have a fiduciary obligation—the same as a Trustee—and trust law applies. As a result, it claimed that the Individual Defendants must disgorge the gross amounts of the challenged transactions regardless of whether those transactions were fair and reasonable, even if the Charities benefited from the transaction.

The Commonwealth, however, did not brief this issue and neither party had briefed the standard...