Summers v. Cherokee Children & Family Serv.

• Decision Date: 26 September 2002
• Docket Number: No. M2001-00880-COA-R3-CV.,M2001-00880-COA-R3-CV.
• Citation: 112 S.W.3d 486
• Parties: Paul G. SUMMERS, et al., v. CHEROKEE CHILDREN & FAMILY SERVICES, INC., et al.
• Court: Tennessee Court of Appeals

112 S.W.3d 486

Paul G. SUMMERS, et al., v. CHEROKEE CHILDREN & FAMILY SERVICES, INC., et al.

No. M2001-00880-COA-R3-CV.

Court of Appeals of Tennessee, at Nashville.

October 9, 2001 Session.

September 26, 2002.

Permission to Appeal Denied by Supreme Court February 18, 2003.

Published Pursuant to Supreme Court Rule 4(D).

Allan J. Wade, Thomas Lang Wiseman, and Lori Hackleman Patterson, Memphis, Tennessee, for the appellants, Cherokee Children and Family Services, Inc., and Cherokee Children Nutrition, Inc.

Paul G. Summers, Attorney General and Reporter; Albert L. Partee, Senior Counsel; George S. Bell, III, Assistant Attorney General; Michael A. Meyer, Assistant Attorney General, for the appellee, the Attorney General of Tennessee.

PATRICIA J. COTTRELL, J., delivered the opinion of the court, in which BEN H. CANTRELL, P.J., M.S., and WILLIAM B. CAIN, J., joined.

OPINION

In this appeal, the Attorney General filed suit to dissolve two nonprofit public benefit corporations. Both the Attorney General and the nonprofit corporations filed motions for summary judgment. The trial court granted summary judgment for the Attorney General finding that the nonprofit corporations had abandoned their charitable purposes and devoted themselves to private purposes. The trial court ordered the appointment of a receiver to marshal and preserve the remaining assets. For the following reasons, we affirm the decision of the trial court.

This is a case of first impression in this State wherein the Attorney General sought to involuntarily dissolve Cherokee Children and Family Services, Inc. ("CCFS") and Cherokee Children Nutrition, Inc. ("CCN") via the authority granted in Tenn.Code Ann. § 48-64-301(a)(1). CCFS and CCN are two related nonprofit public benefit corporations that are tax-exempt under state and federal law. The Attorney General sought appointment of a receiver to marshal the remaining nonprofit assets, dissolve the corporations, and distribute the assets to other "legitimate" nonprofit organizations. He alleged that CCFS and CCN had repeatedly violated the Tennessee Nonprofit Corporation Act and specifically questioned numerous transactions, including: (1) rental of property owned by the executive director to the corporations; (2) hiring of the executive director's husband as accountant for the corporation; (3) investment of CCFS monies in a local start up bank; and (4) several transactions and purchases by the corporation for the benefit of the executive director, her family, and friends.

A hearing was held in Davidson County Chancery Court regarding a motion for temporary injunction and appointment of a custodian pendente lite filed by the Attorney General. The trial court entered a temporary injunction requiring CCFS and CCN to grant access to their records by the Attorney General, to protect and preserve all books and records, and to adhere to a $50,000 a month budget for six months. The trial court declined to appoint a custodian pendente lite at that time. Both parties then filed motions for summary judgment.

Six months later, the trial court heard oral argument on both motions for summary judgment. The Chancellor granted the Attorney General's motion for summary judgment and made the following findings:

1. that the Attorney General is entitled to a receiver for defendants and is entitled to proceed with dissolution;

2. that the Defendants have abandoned their public purposes and have devoted themselves to private purposes;

3. that this is not in keeping with the Tennessee Nonprofit Act;

4. that the Attorney General has the authority to take action under his statutory supervisory power over nonprofits and as a representative of the public interest; and

5. that there is an immediate need for the Attorney General to take over the assets of the defendants; . . . .

The trial court appointed a receiver and enumerated his duties and responsibilities as well as the scope of his authority under Tenn.Code Ann. § 48-64-303.¹

CCFS and CCN appeal arguing that the trial court improperly granted summary judgment in favor of the Attorney General and improperly denied their own motion for summary judgment.

I. Background

WillieAnn Madison² incorporated CCFS as a nonprofit public benefit corporation in December of 1989 under the auspices of the Tennessee Nonprofit Corporation Act, Tenn.Code Ann. §§ 48-51-101 et seq. According to a charter amendment made April 19, 1990, the purposes of the corporation were:³

. . . to provide transitional child care services for children of low-income families referred by the Department of Human Services. Funds for this project are provided by Federal and State block grants which are used for tuition payments and administrative expenses.

The services provided by CCFS include listing and classification of child care providers, referrals of qualified families to appropriate child care centers, and the monitoring and supervision of each placement under guidelines provided by DHS. Upon the dissolution of CCFS, all remaining assets will be returned to the Federal and State offices which supplied the original grants.⁴

CCFS had no members. According to the charter, as amended, CCFS was intended to operate as a charitable organization within the meaning of section 501(c)(3) of the Internal Revenue Code of 1986. In fact, the amended charter included the following in its statement of purposes:

. . . exclusively religious, charitable, scientific, literary, and educational within the meaning of section 501(c)(3) of the Internal Revenue Code of 1986 or the corresponding provision of any future United States Internal Revenue law.

Notwithstanding any other provision of these articles, this organization shall not carry on any activities not permitted to be carried on by an organization exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1986 or the corresponding provision of any future United States Internal Revenue law.

On or about June 18, 1990, CCFS filed an application for exemption under 501(c)(3) of the Internal Revenue Code. The IRS approved the application for tax exempt status. In the application, CCFS represented that neither Mrs. Madison, William Davis (Mrs. Madison's father) nor any other individual listed as an officer or director⁵ were disqualified persons⁶ with respect to the organization. CCFS represented that its facilities or operations would not be managed by another organization or individual under a contractual agreement and that the organization was not a party to leases. CCFS asserts that these statements were true at the time they were made, but could have changed thereafter.

CCFS entered into a contract with the Tennessee Department of Human Services ("DHS") to provide childcare brokerage services to low income families in Shelby County in 1990. CCFS also contracted with DHS to provide meal and related administrative services under the Child and Adult Care Food Program ("CACFP") and certain other services for underprivileged children. CCFS began providing registration and transportation services under contracts with DHS in 1998. CCFS continued to work pursuant to contracts with DHS until the contracts were terminated in 2000.

On November 2, 1998, CCN was incorporated as a public benefit corporation. CCN was organized to handle certain portions of the food program for which CCFS was responsible in accordance with contracts between CCFS and DHS. On the initial corporate paperwork filed with the Secretary of State, WillieAnn Madison was listed as the incorporator.⁷ The Charter filed with the Secretary of State was a fill-in-the-blank form and did not indicate the purpose. However, in its application for tax exempt status, CCN attached the following, entitled, Charter, Part III Activities and Operational Information:

The Cherokee Children Nutrition (CCN) will be chartered by the State of Tennessee. Its mission is to serve minority children, infants to age seventeen, in ways that are educational, nutritional, healthful, and with social [sic] social services. The target area is the City of Memphis, Tennessee within the County of Shelby.

A. CCN will provide brokering services to all know [sic] area child care providers. CCN will work with clients to enable them to identify accessible, safe and sanitary child care placements.

B. CCN will provide and set up before and after school programs for the school-aged child up to nine (9) years old.

C. CCN will oversee basic and specialty health and nutritional services.

D. CCN will serve as a resource to child care providers in training, physical improvements, and other components.

E. CCN proposes to provide personal and social counseling to AFDC families at the earliest possible date.

F. Funding Sources: Federal grants, federal/state funds and grants, USDA Food Program, fund-raisers, and donations.

SUMMARY: The plight of minority children deserves urgent attention and action for care, enrichment, education and general services. Cherokee Children Nutrition (CCN) is formed to respond positively and culturally to these needs of a growing population who will become our leaders, parents, and professionals.

The Charter of CCN was amended in 1999 to reflect a new address. CCN also had no members. CCN also filed an application with the IRS for exemption under 501(c)(3) of the Internal Revenue Code. In CCN's IRS exemption application, Mrs. Madison, Mr. Davis, John Madison Sr.,⁸ and Ida Porter were listed as the Executive Director, Secretary, Treasurer, and Chairperson of the Board of Directors, respectively. The application stated that Mrs. Madison was the only person that received compensation from the corporation and that the amount of that compensation was $50,000.⁹ CCN represented that none of the officers were disqualified persons with respect to the organization and that the corporation was not controlled by any other organization. CCN failed to answer the question of whether it was the...