Indiana Law Review


Indiana Laiv Reviei^
Volume 18 1985 Number 4

Regulation of Not-For-Profit Corporations in Indiana

John T. Baker*

I. Introduction

There were approximately twenty-five thousand nonprofit corpora-

tions incorporated in the state of Indiana as of 1984. • These corporations

ranged in size from the small family foundation with a few thousand

dollars in assets to the Lilly Endowment,^ from small health care facilities

to large metropolitan hospitals, from nursery schools to universities.

Given the extensive presence of nonprofit corporations in the state, the

activities carried on by their managers have a significant impact on the

cultural, economic, social, and intellectual lives of citizens of Indiana.

The one common element among these nonprofit corporations is
that they were formed under the Indiana Not-For-Profit Corporation

Act or its predecessors.^ Moreover, many of these nonprofits are also
exempt from state and federal taxation."^ The underlying rationale for

*Dean, Howard University Law School; B.A., Fisk University, 1962; J.D., Howard
University Law School, 1965.

'Telephone interview with Judy Webb, Filing Clerk for the Legal Department of
the Office of the Secretary of State of Indiana (June 17, 1984).

-The Lilly Endowment is one of the largest private endowments in the United
States.

'IND. Code § 23-7-1.1-1 to -66 (1982 & Supp. 1985).
^Property tax exemptions for Indiana's nonprofit corporations are provided in

Ind. Code § 6-1.1-10-16 (1982) (buildings and land used for educational, literary, sci-
entific, religious, or charitable purposes); id. § 6-1.1-10-18 (1982) (nonprofit corpora-

tions supporting fine arts); id. § 6-1.1-10-18.5 (Supp. 1985) (nonprofit corporation

property used in operation of health facility, home for the aged); id. § 6-1.1-10-21

(1982) (churches or religious societies); id. § 6-1.1-10-23 (1982) (fraternal benefit asso-

ciations); id. § 6-1.1-10-25 (Supp. 1985) (miscellaneous organizations).

Gross income tax exemptions for nonprofit corporations in Indiana are located at

Ind. Code § 6-2.1-2-20 (1982) (religious, charitable, scientific, literary, educational, or
civic organizations); id. § 6-2.1-3-21 (Supp. 1985) (fraternal or social organizations,

business leagues, contributions, fees, and receipts from the sale of intangible property

or from trade shows or exhibitions; id. § 6-2.1-3-22 (1982) (hospitals, labor unions,

religious institutions, schools, pension trusts).

Indiana nonprofit corporations are exempt from gross retail tax under Ind. Code
§ 6-2.5-5-25 (1982) (acquisitions by nonprofit organizations); id. § 6-2.5-5-26 (1982) (sales

777



778 INDIANA LAW REVIEW [Vol. 18:777

both the state and federal tax exemptions is that nonprofits constitute

a vehicle used by people to create and allocate resources that are not

created or allocated by private market sector organizations or by the

government.^

Their existence appears quite important to many people.^ Because
of the perceived importance of these organizations in a democratic society,

government has provided incentives to stimulate their growth and de-

velopment. The incentives provided by state government include the
availability of the corporate form and income, property, and sales tax

exemptions under appropriate circumstances.^ At the federal level, the

prime incentives are exemptions from federal income taxation and the

tax deduction for donors to qualified nonprofit corporations.^

Attempting to justify these governmental incentives is significantly

harder than the description of their existence. Clearly, there is a well-

estabhshed notion that nonprofits advance the public good.^ Charitable

foundations provide resources to beneficiaries which would, in many
instances, otherwise have to be provided by government. Scientific or-

ganizations, through experimentation, are often able to produce new

medical and industrial products for future mass production and distri-

bution by private industry or government. Educational institutions foster

academic achievement. Social organizations serve as mediating institutions

for individuals who daily must confront the large, impersonal institutions
of business and government. Trade associations permit entrepreneurs to

further their interests collectively. The activities of most of these or-

ganizations are carried out by nonprofit corporations. '° Yet, nothing in

the delineation of the activities pursued by nonprofit corporations explains

why the activity is carried out by a nonprofit corporation as opposed
to a for-profit corporation or governmental agency. An explanation of

by nonprofit organizations). Some nonprofit corporations are also exempt from the In-
diana intangibles tax. Id. § 6-5.1-5-1 (1982) (religious, charitable, or educational asso-

ciations). There is, additionally, an exemption from the adjusted gross income tax. Id.

§ 6-3-2-2.8 (Supp. 1985). Finally, some nonprofits are exempt from the state employ-

ment tax. Id. § 22-4-8-2(j) (1982). Federal income tax exemptions are available to non-

profit corporations under the Internal Revenue Code. See I.R.C. § 501(c) (1982).

''See generally B. Weisbrod, The Voluntary Nonprofit Sector: An Economic
Analysis (1977).

^See B. Weisbrod, Toward a Theory of the Voluntary Non-Profit Sector
IN a Three-Sector Economy (1975).

^See supra note 4.

^See I.R.C. § 170 (1982). The amount allowed for charitable contributions is

deducted in arriving at one's adjusted gross income. I.R.C. § 62 (4) (1982).

''See generally G. McConnell, The Public Value of the Private Association
IN Voluntary Associations 147-48 (1969); Karst, The Efficiency of the Charitable

Dollar: An Unfulfilled State Responsibility, 73 Harv. L. Rev. 433 (1960).
'°Hansmann, The Role of Nonprofit Enterprise, 89 Yale L.J. 835, 845 (1980).



1985] NOT-FOR-PROFIT 779

the conceptual justification for nonprofit corporations is beyond the

scope of this Article."

While a conceptual foundation is emerging, there is still very little

in the way of case law, legislation, or legal literature to describe the

extent to which social expectations for these corporations have been or

should be translated into legal rules. At the same time, there has been

a proliferation of legal literature examining various aspects of corporate

"In recent years, some scholarly attention has been devoted to this issue. In his

article on nonprofit corporations, Professor Henry Hansmann attributed the existence

of nonprofit corporations to "contract failure," a condition that exists when "con-

sumers [are] incapable of accurately evaluating the goods promised or delivered," thereby

making "ordinary contractual services inadequate to provide the purchaser of the serv-

ice with sufficient assurance that the service was in fact performed as desired." See

Hansmann, supra note 10, at 843-45. Hansmann defined "patrons" as all who transfer
money to nonprofit corporations whether they are donors or customers. Id. at 841.

Hansmann asserted that when patrons who are customers find themselves in the posi-
tion of being unable to evaluate the producer's output, "[they] might be considerably

better off if they deal with nonprofit producers rather than with for-profit producers.

The nonprofit producer, like its for-profit counterpart, has the capacity to raise prices

and cut quahty . . . without much fear of customer reprisal; however, it lacks the

incentive to do so because those in charge are barred from taking home any resulting
profits." Id. at 844. Hansmann's primary emphasis is on the Hmitations of the private

market in providing particular services.

Other theorists have approached the issue from a governmental perspective. Per-

haps the clearest theoretical explanation of the existence of nonprofit corporations be-

cause of "government failure" is provided by Professor Burton Weisbrod. See B.

Weisbrod, The Voluntary Nonprofit Sector: An Economic Analysis (1977). Weis-
brod assumed that different citizens want public goods to varying extents, or, in the

language of economics, have different demand functions for public goods. Id. at 175.

He also assumed that public goods may be provided by government, by private non-
profit organizations, and even by commercial enterprises when the demand for the public

good {e.g., clear ciir) may be satisfied by private-good substitutes {e.g., air filters). Id.

at 179. Weisbrod examined the manner by which the government decides how much
of a public good to produce. He assumed that for each level of output there is a
corresponding level of costs to be paid in taxes. In addition, Weisbrod stated that

each citizen has a different demand function; each citizen will be prepared to pay in

taxes for different amounts of the goods in question. Id. at 175. Weisbrod concluded

that government will produce to the level determined by the median voters' demand

schedules, to the point where there will be as many voters who want more of that
public good as there are voters who want less. Id. Weisbrod, of course, recognized
that this is not the way that governments really determine the level of public expend-

itures, although the bargaining process of democratic politics may come close to it. Id.
at 177. The actual level at which government sets the public expenditure on that serv-

ice is ultimately irrelevant to Weisbrod' s argument. Id. at 177, As long as the as-

sumption that different voters have different demand functions remains true, there will

always be some citizen-voters who are under-satisfied with the level of production of
the public good, and some citizen-voters who are over-taxed by that level. Id. at 178.
The over-taxed citizens do not have many options. They may be able to exert political
pressure to lower the output-tax level. But if they fail, they can only tolerate it or

emigrate from the jurisdiction. Id. at 182. The under-satisfied citizens, however, also



780 INDIANA LAW REVIE IV [Vol. 18:777

governance of the business or for-profit corporation. '^ It seems, therefore,

that some insight into the issue of governing the nonprofit corporation

may be gained from examining these legal developments and writings.
Consequently, the analysis in this Article will draw upon these sources.

This analysis first briefly describes the ways in which nonprofit cor-

porations in Indiana are regulated. Second, it examines the comparative

strengths and weaknesses of Indiana's regulatory scheme from the stand-

point of accountability. Third, the nonprofit corporation acts of New
York and California are considered. Finally, this Article suggests some

proposals for strengthening the Indiana Not-For-Profit Corporation Act.

The Appendix to this Article contains a proposal for a new statutory

scheme for Indiana nonprofit corporations.

II. The Indiana Not-For-Profit Corporation Act

Indiana adopted the present version of its Not-For-Profit Corporation

Act in 1971.'^ The Act defines a not-for-profit corporation as "any

corporation which does not engage in any activities for the profit of

its members and which is organized and conducts its affairs for purposes

other than the pecuniary gain of its members.""^ A nonprofit corporation
must have a nonprofit purpose and must not distribute its assets or

income to its members, including directors and officers.'^ An Indiana
nonprofit corporation is also prohibited from issuing stock or dividends.'^

Nonprofit corporations must have members, who may comprise one
or more classes as provided for in the certificate of incorporation.'^ All

members are immune from liability for corporate debts except to the
extent of any unpaid portion of membership dues.'^ The Act requires

a quorum of a majority of the membership to transact business at a

have the option of supplementing the public provision (which in the limiting case can

be zero) by voluntary provision which must be nonprofit because the theory is dealing

with goods that cannot be made the subject of market transactions. Thus, Weisbrod
concluded that private nonprofits will tend to supply the sorts of public goods for

which there is not yet a demand from the majority of citizens or which a majority of
citizens are only prepared to supply and pay for in taxation in what a minority con-
sider inadequate quantities. Id.

''See, e.g., Black, Shareholder Democracy and Corporate Governance, 5 Sec. Req.

L.J. 291 (1978); Hershman, Liabilities and Responsibilities of Corporate Officers and

Directors, 33 Bus. Law 263 (1977); Schwartz, Corporate Responsibility in the Age of
Aquarius, 109 Tr. & Est. 1004 (1970).

'^Act of Apr. 16, 1971, Pub. L. No. 364, §§ 1-4, 1971 Ind. Acts 1499 (codified

at Ind. Code §§ 23-7-1.1-1 to -66 (1982 & Supp. 1985)).
'^IND. Code § 23-7-1. l-2(d) (Supp. 1985).
''Id. § 23-7-1.1-1 to -66 (1982 & Supp. 1985)).
"Id. § 23-7-1.1-7.

'Ud. That Indiana nonprofit corporations must have members is implicit in the

definition of "not-for-profit." See id. § 23-7-1. l-2(d) (Supp. 1985).

''Id. § 23-7-1.1-7 (1982).



1985] NOT-FOR-PROFIT 781

meeting unless otherwise specified in the articles of incorporation or the

bylaws.'^ Proxy voting is permitted and, if provided for by the certificate

of incorporation, members may use cumulative voting.^"
The Indiana Act promotes strong boards of directors for nonprofit

corporations. The Act provides that the board of directors shall manage

the affairs of the corporation.^' It contains no express provisions for

alternative arrangements which would allow for greater membership

control. The Act does, however, permit delegation of the board's au-

thority to an executive committee consisting of at least two members

of the corporation.^^

The board of directors for a nonprofit corporation is normally not

subject to personal liability for corporate actions. ^^ However, a board

member who incurs expenses in connection with the defense of any civil
action involving the corporation may be indemnified provided she is not
found guilty of negligence or misconduct in the performance of her

duties. Conversely, directors who vote for or concur in certain proscribed
corporate actions are jointly and severally liable for all resulting damages.

Such proscribed actions include false statements in annual or special

reports, improper distributions, and improper loans. ^"^ Directors held

liable for violations may obtain contribution from other directors who
have voted for or concurred in the action. ^^

Under the Indiana Act, nonprofit corporations may not issue shares. ^^

Members may lend or advance money to the corporation. Those con-
tributions are redeemable for the total amount loaned plus a reasonable

interest.
^^

Mergers and consoHdations of nonprofit corporations are permitted

under the Act.^^ There is also a provision permitting foreign corporations

to quahfy to conduct local activities. ^^ Finally, upon dissolution of the

corporation and satisfaction of creditors' claims, the statute provides

the priority of distribution of the nonprofit corporation's assets: (1)

repayment of amounts advanced or loaned to the corporation by mem-
bers; (2) transfers of the remaining assets to another nonprofit orga-

nization having a purpose substantially similar to that of the dissolving

corporation; (3) escheat to the state of all remaining assets.
^^

'"/cf. § 23-7-1. l-9(g) (Supp. 1985).

-''Id. § 23-7-1.1-9(0.

''Id. § 23-7-1. l-lO(a).

--Id. § 23-7- 1.1- 10(h).

-'See IND. Code § 23-7- 1.1 -4(b)(9) (1982).
-'Id. § 23-7- 1.1 -64(b).

-'Id. § 23-7-1.1-62.

-''Id. § 23-7-1.1-7.

-'Id.

-'Id. § 23-7-1.1-41.

-""Id. § 23-7-1.1-48.

'''Id. § 23-7- 1.1 -33(b)(3)(E) (Supp. 1985).



782 INDIANA LAW REVIEW [Vol. 18:777

III. Accountability

When referring to organizations that hold and manage resources on
behalf of others, accountability means the ability of those on whose

behalf the resources are being managed, the constituents, to establish

and change the goals of the organization. Accountability mechanisms

are consequently necessary to measure the effectiveness of the organi-

zation's managers in their efforts to achieve the nonprofit's goals. ^' More
concretely, in the context of this Article, if one of the goals in regulating

nonprofit corporations is to impose accountability upon the managers

of those corporations, then the constituencies of nonprofits need to be

specifically identified.

The first constituency of all nonprofit corporations is the electorate.

Both federal and state governments sacrifice revenue which would otherwise

be generated through the taxing system because the income of qualified

nonprofits is exempt from federal and, in most jurisdictions, state tax-

ation. ^^ The electorate is entitled to some indication of the effectiveness

of these organizations, and should also consider the desirability of

promoting the social welfare through this type of subsidy.

Two other constituencies of nonprofit corporations also have the
capacity to effect goal changes as well as managerial and operating

changes. The nonprofit's donors may threaten to discontinue providing
support to a particular nonprofit unless that corporation modifies or

expands its goals." Likewise, the nonprofit's members may express their
disagreement with the corporation's goals by resigning. ^"^ Finally, be-

neficiaries may also have an impact upon the organization's goals. Their
failure to use the services of a nonprofit or threats to refuse services

unless the corporation's goals are changed may, under particular cir-

cumstances, prove effective. ^^ Through these constituencies, accountability

serves as a mechanism for goal change as well as a measure for the

effectiveness of goal achievement.

The types of accountability mechanisms generally associated with

corporations may be broadly classified as structural mechanisms, ad-
judicative mechanisms, and market forces. Structural accountability mech-

^'See J. Becker, Accountability: A New Form of Tease, in Accountability: A
State, A Process, or A Product (ed. W.J. Gephart) 1 (1975).

"5ee supra note 4. See also Bittker & Rahdert, The Exemption of Nonprofit Or-
ganizations from Federal Income Taxation, 85 Yale L.J. 299 (1976).

"Professor Albert Hirshman argues that stockholders, customers, or members of

organizations have three mechanisms available to them to communicate satisfaction or

dissatisfaction with the organization: exit, voice, and loyalty. See A. Hirschman, Exit,

Voice and Loyalty, 4 (1970). Clearly, discontinuing financial or voluntary labor sup-
port to the nonprofit corporation is a communication device that Hirshman would call

"exit."

''Id.

''Id.



1985] NOT-FOR-PROFIT 783

anisms include statutes, administrative regulations, and the organizations'

constitutions, articles of incorporation, and bylaws. ^^ Accountability

through adjudication means that some constituents of the organization

have a right to resolve issues of goal definition, operating procedure,

managerial authority, and other areas of organizational status by resort

to litigation. ^^ Finally, accountability through the market in the case of

nonprofits means the organization's ability to raise funds, acquire and

retain members, and, where applicable, attract customers. ^^ For com-

parative purposes, nonprofit corporation statutes from other jurisdictions

will be considered.

A. Structural Mechanisms

The primary structural mechanism for promoting the accountability

of nonprofits in Indiana is the Indiana Not-For-Profit Corporation Act.^^

This Act promotes accountability to the state, to donors, to members,

and to beneficiaries by requiring a statement of organizational purposes,'*^

periodic reports,'^^ and by granting state officials the right to inspect

corporate books and records. ^^ The Act also defines a number of stand-

ards of conduct for officers, directors, and the corporation itself.^^

1. Accountability at the Formation S^^g^.—Accountability is achieved

^^Structural accountability simply means formal rules that should govern the con-

duct of the corporation's managers. These rules may be adopted by the government,
as in the case of nonprofit corporation statutes, or they may be adopted by the mem-
bers of the organizations, as is the case with the corporation's articles of incorporation

and by-laws.

"The best example of this type of accountability for nonprofit corporations is the

member's derivative action. See, e.g., N.Y. Not-For-Profit Corp. Law § 720(b)(3)
(McKinney 1970).

^^Professor Hansmann divides nonprofits into two categories: donative nonprofits

(those that "receive most or all of their income in the form of grants or donations")

and commercial nonprofits (those that "receive the bulk of their income from prices

charged for their services"). Hansmann, supra note 10, at 840. Clearly there is, in the

traditional use of the term, a market for the goods and services of commercial non-

profits. See, e.g., E. Kaitz, Pricing Policy and Cost Behavior in the Hospital

Industry (1968); S. Law, Blue Cross: What Went Wrong? (1974); M. Mendelson,
Tender Loving Greed (1974); Newhouse, Toward a Theory of Non-Profit Institutions:

An Economic Model of a Hospital, 60 Amer. Econ. Rev. 64 (1970). There is far less
understanding of the "market" for donations to and members of donative nonprofits.

But see K. Boulding, The Economy of Love and Fear (1973); Buchanan, An Eco-
nomic Theory of Clubs, 32 Economics 1-14 (1965); Nelson, Economic Factors in the

Growth of Corporate Giving, National Bureau of Economic Research and Russell

Sage Foundation (1970).

^^ND. Code § 23-7-1.1-1 to -66 (1982 & Supp. 1985).
^°M § 23-7-1.1-18 (Supp. 1985).

''Id. § 23-7-1.1-36.

''Id.

''See id. §§ 23-7-1.1-13, -11, -15, -36, and -61.



784 INDIANA LAW REVIEW [Vol. 18:777

in part through an incorporation process that forces the original members

of the corporation to disclose the corporation's purposes and the pro-

cedures under which it will operate/"* This information is available to

officials of the state, potential members, donors, and beneficiaries. The

corporate purpose must be included in the proposed articles of incor-

poration, along with a corporate name, the duration of the corporation's

existence, its post office address, and its principal office. In addition,

the articles of incorporation disclose the name and address of the non-
profit's resident agent, the number of corporate directors, the names

and addresses of the initial board of directors and the incorporators, a

statement of membership rights, and a statement concerning the property

that will be owned by the corporation when it begins business.
Approval of the proposed articles of incorporation in Indiana appears

to be largely a formality. Indiana Code section 23-7-1.1-19 requires the

secretary of state to approve the proposed articles of incorporation if

he finds that they "conform to law.'"*^ If this langauge means that the

articles of incorporation must conform to the express formal requirements

of the statute, it would appear that the secretary has no discretion to

withhold approval once all statutory requirements are met.

Indiana Code section 23-7-1.1-63, however, contains significantly
different language: "When any corporation . . . offers for filing articles
of incorporation, ... it shall be the duty of the secretary of state to

ascertain whether the corporation is a bona fide not-for-profit corpo-

ration.'"^ This language may mean that the secretary of state has dis-
cretion to conclude that the proposed corporation's purposes are

inconsistent with one or more public policies of Indiana; that the proposed

corporation has insufficient assets to accomplish its mission; or even

that the individuals who will serve as managers of the corporation are,
for some reason, unqualified. Unfortunately, the language of Indiana

Code section 23-7-1.1-63 is ambiguous as to what the "bona fide" test
is, as well as with respect to which corporations might be subject to

the test.^^ On its face, Indiana Code section 23-7-1.1-63 appHes only to
incorporation by an existing corporation. Thus, the section could be

read as making the "bona fide" test applicable only to nonprofits seeking
to reincorporate or to nonprofits acting as incorporators of new non-
profits. "**

Such an interpretation, however, appears to be contrary to that given

^^iND. Code § 23-7-1.1-18 (Supp. 1985).
''Id. § 23-7-1.1-19 (1982).

'"Id. § 23-7-1.1-63.

"^Ind. Code § 23-7-1. l-2(a) defines the term "corporation" as "any corporation
formed under this chapter." Ind. Code § 23-7-1. l-2(a) (Supp. 1985) (emphasis added).

"•Corporations are specifically authorized to act as incorporators of a nonprofit

corporation. Ind. Code § 23-7-1.1-16 (1982).



1985] NOT-FOR-PROFIT 785

in Lemmons & Co. v. Indiana Cooperative Hauling Association ^"^ In
that case, the petitioner appealed from the PubHc Service Commission's
dismissal of a complaint alleging that the respondents were operating

as motor carriers in violation of the Commission's regulations. The
respondent filed a motion to dismiss based upon a statutory exemption
for nonprofit corporations from regulation under the Indiana Motor
Carrier Act.^° The respondent's motion was granted after the Commission
determined the respondent's nonprofit status was based solely upon the
fact of its incorporation under the Indiana Not-For-Profit Corporation

Act. The court of appeals affirmed the dismissal and stated that the
Commission had the right to rely upon the determination of nonprofit
status by the secretary of state as evidenced by the respondent's certificates

of incorporation.^' In so holding, the court relied upon Indiana Code
section 23-7-1.1-63: "Only after the secretary of state has determined
that an organization is a bona fide nonprofit organization can that

organization be incorporated under the Not-For-Profit Corporation Act.""

The Lemmons court's reading of the section is questionable with respect
to which corporations might be subject to the "bona fide" test, especially
in light of the actual statutory language. This case does suggest, however,

that courts may be willing to allow the secretary of state greater discretion
in rejecting proposed articles of incorporation than the literal language

of sections 23-7-1.1-19 and 23-7-1.1-63 would permit. Paradoxically, while

the Lemmons case may indicate that the secretary can take a more discre-
tionary role in determining whether or not an organization may properly
incorporate as a nonprofit, the case also appears to limit severely the

avenues of accountability once the nonprofit is formed. It appears to

exclude from the accountability process challenges from outsiders whose

own interests might be affected.
Indiana's statutory requirements for incorporation are fairly typical."

Like most state nonprofit corporation acts, the Indiana Act establishes

one unitary standard for incorporation regardless of the activity to be

undertaken. The Act provides for one method of incorporation by
organizations as diverse as charities, churches, and fraternities. All of
its provisions apply with equal force to all of these organizations. It is

not at all clear that this is the best way to assure accountability to the
constituents of these diverse organizations. Clearly, some of the statutory
provisions needed for some types of nonprofits are of little use for

^^75 Ind. App. 654, 373 N.E.2d 891 (1978).
^oJnd. Code § 8-2-7-3(g) (1982).
5' 175 Ind. App. 654, 657, 373 N.E.2d 891, 892.

'Ud. at 656, 373 N.E.2d at 892 (emphasis added).

''See, e.g., 15 Pa. Cons. Stat. Ann. § 7319 (Purdon Supp. 1984); Vt. Stat.
Ann. tit. 11, § 2402 (1984).



786 INDIANA LAW REVIEW [Vol. 18:777

Others. ^"^ Because of this, it is doubtful that the Indiana Act enforces

a consistently high level of accountability for managers of all the non-

profits organized thereunder.

2. Accountability at the Operating Stage.—While accountability at
the formative stage of a nonprofit is important, accountability at the

operating stage is crucial. To satisfy this need, the Indiana Act requires
periodic reports relating to the corporation's financial and managerial

affairs be filed with the secretary of state." Additionally, the Act requires

that corporations maintain accurate books and records, and keep them

available for inspection by statutorily-authorized persons. ^^

a. Periodic reports.—Under the Indiana Not-For-Profit Corporation
Act, the mandatory annual report is the primary device for disclosure

of the corporation's activities. ^^ The information disclosed in the annual

report includes:

(a) The name of the corporation.
(b) The location and post office address of its principal

office in this state and the name and address of the resident
agent or of some designated person residing in this state upon
whom service of process may be served.

(c) The date of incorporation.

(d) The law under which it was incorporated.

(e) The names and residence addresses of officers and di-
rectors and the number of existing members.

(f) The purposes of the corporation.

(g) A totalled itemized account of all outstanding debts,
including the names of persons or corporations to whom sums
are owing, the original amount of the debt incurred, the method
of making payment, and from what funds the debt is to be

paid. If any member, any relative of a member, or any person

having a contract or agreement concerning the subject matter

of the debt has any interest or opportunity to profit from the

transaction, an explanation must be filed together with copies

of any written agreements connected with the subject matter of

the indebtedness.

(h) A list of all property, real and personal, owned by the
corporation, itemized to the extent required by the secretary of

state, and its current market value set opposite each respective

item, provided that the list of all real property also includes the

price paid for it by the corporation, a legal description, the

-*See, e.g., infra text accompanying notes 148-49.

^See infra notes 57-62 and accompanying text.

^""See infra notes 63-66 and accompanying text.

"IND. Code § 23-7-1.1-36 (1982).



1985] NOT-FOR-PROFIT 787

acreage or size of each tract or lot, and the assessed value of

each tract or lot.

(i) The nature and kind of activities in which the corporation

has been engaged during the year covered by the report.

(j) What, if any, distribution of funds has been made to
any members during the year covered by the report.

(k) A statement of the aggregate amount of any loans,
advances, overdrafts or withdrawals and repayments made to or
by any officers, directors or members.

(1) A verified itemized statement of revenue received by the
corporation from all sources during the preceding calendar year,

clearly stating the source of the revenue in each instance, together

with a general statement showing total disbursements and all

cash and assets. No trust fund shall be included as an asset of
the corporation, but must be separately hsted and identified. ^^

Because of the importance of the annual report, the statute confers

broad reviewing powers upon the secretary of state:

If, upon receipt of such report, the secretary of state, after
reviewing it, determines or has reason to believe that the cor-

poration filing the report is not disclosing its true financial

condition or is violating any of the provisions of this chapter

or the not-for-profit corporation law in general, he may require
the corporation to disclose all material facts by submitting a

duly verified audit bearing the certificate under oath of a qualified

public accountant recognized by the secretary of state, replying

to interrogatories and/or reporting under oath on any matters

requested by the secretary of state. ^^

Several features of the Act's annual report requirements are significant.

The first and most striking is that the Act does not require a detailed

account of corporate distributions. It requires a statement of "[t]he

nature and kind of activities in which the corporation has been engaged

during the year"^° and "[a] verified itemized statement of revenue . . .

together with a general statement showing total disbursements."^' Thus,

nonprofit corporations in Indiana are not required to account to any

of their various constituencies for specific corporate disbursements. A
literal reading of the Act would permit, for example, a charitable non-
profit to report that it had disbursed $100,000 to two beneficiaries in

fulfillment of its charitable purposes. The corporation would not be

^id.

'Id.

''Id.

'Id. (emphasis added).



788 INDIANA LAW REVIEW [Vol. 18:777

required by the Act to disclose that it made a grant of $5,000 to one
beneficiary and $95,000 to the second. The pattern of distribution and

the identity of beneficiaries could be important to past and future donors.

Yet, the Act does not mandate the corporation to disclose this type of

information.

Second, while most of the emphasis of Indiana Code section 23-7-

1.1-36 is on quantitative information, it also requires a statement of

"[t]he nature and kind of activities in which the corporation has been

engaged during the year covered by the report. "^^ Nevertheless, the Act

does not require management to send copies of the annual report to

members of the corporation or to others.

b. Corporate books and records.—The next structural accountability
mechanism at the state level is the statutory requirement that all non-

profits maintain accurate books and records and permit representatives

of the state and members of the corporation, under proper circumstances,

to inspect them. The Indiana Not-For-Profit Corporation Act provides

that '*[a]ll books and records of any nature whatsoever . . . shall be

open for inspection by any member, for proper purposes at any reasonable

time."^^ Thus, on its face, the statute limits access to those falling within

the statutory definition of "member, "^"^ and having a proper purpose.

The term "proper purpose" is not defined in the statute or in any

judicial opinions. The term has been defined, however, in the context

of a for-profit corporation shareholder's right of inspection. A "proper
purpose" is one which is germane to an individual's interest in his

^"Id. Only 14 jurisdictions that have separate nonprofit corporations statutes have

a similar provision. Alaska Stat. § 10.20.625 (1983); Ariz. Rev. Stat. Ann. § 10-

1081 (1983); Colo. Rev. Stat. § 7-28-101 (1973 & Supp. 1982); Ga. Code Ann. §
22-3301 (1981); Idaho Code § 30-1-125 (1980 & Supp. 1983); III. Ann. Stat. ch. 32
§ 163a 62 (Smith-Hurd 1983); Iowa Code Ann. § 496.1 (West 1949 & Supp. 1983-
84); Mont. Code Ann. § 35-1-1101 (1983); Neb. Rev. Stat. § 21-1981 (1943 & Supp.
1983); N.M. Stat. Ann. § 53-8-82 (1978 & Supp. 1983); Or. Rev. Stat. § 61.805
(1981); S.D. Codified Laws Ann. § 47-24-6 (1983); Tex. Rev. Civ. Stat. Ann. art.
1396-9-.01 (Vernon 1979) W. Va. Code § 31-l-55a (1982).

^Tnd. Code § 23-7-1.1-13 (1982).
""Member" is defined by statute as:
one who has signified his intention of being a member of a corporation or-
ganized or reorganized under this chapter and who, has met the requirements
of the corporation for membership, and who has been accepted as a member
by the corporation. The term includes trustees or directors or incorporators
of a corporation organized or reorganized under this chapter, and for pur-

poses of this chapter the corporation may organize or reorganize although it
has no membership apart from its trustees, directors, and incorporators. If

in any case membership in the corporation is coextensive with the trustees,

directors or incorporators of the corporation, for the purposes of this chap-

ter the trustees, directors, or incorporators shall also constitute members within

the meaning of this chapter.

IND. Code § 23-7-l.l-(2)(g) (Supp. 1985).



1985] NOT-FOR-PROFIT 789

capacity as a shareholder.^^ In the case of the nonprofit member, one

could argue that a similar standard should be applicable and should

allow inspection for the purpose of assessing the performance of man-

agement.

In addition to a member's right of inspection, it is clear that the

secretary of state is also empowered, under certain circumstances, to

require the corporation to permit inspection of its books and records. ^^

The Act empowers the secretary of state to require a nonprofit to submit

to an audit upon the secretary's determination that the corporation failed

to disclose its true financial condition in its annual report. ^^

c. Standards of conduct of officers and directors.—/. Transactions
between the nonprofit and its officers and directors.—Under Indiana
law, transactions are possible in which a director or officer of a nonprofit

corporation has a financial interest, either directly or indirectly, with

another entity that is a party to the transaction with the nonprofit. The

fact of the relationship or interest must, however, be disclosed to the

nonprofit's board of directors or to its members entitled to vote.^^ Yet,

no disclosure need be made if the transaction is ''fair and reasonable
to the corporation."^^

Two observations are relevant. First, the information required to be
disclosed is minimal. Only the ''fact of the relationship or interest"

need be disclosed. ^° With no Indiana case law on point and no relevant

legislative history, the literal language of the statute seems to suggest

that the interested director can choose to disclose either her relationship

with the party contracting with the nonprofit or the nature of her interest

in the transaction. If the director chooses to disclose the relationship

rather than the interest, it may be difficult to determine whether or not
she stands to make an unusually large gain from the transaction.^' Second,
assuming fairness of the transaction to the nonprofit, members cannot

adequately assess the motivations and general performance of the in-

"^See Charles Hegewald Co. v. State, 196 Ind. 600, 149 N.E. 170 (1925).
^^IND. Code § 23-7-1.1-36 (1982).
''Id.

''''Id. § 23-7-1.1-61. Note that the statute does not, on its face, apply to trans-

actions with interested officers. Id.

"''Id. § 23-7- 1.1 -6 1(c).

'''Id. § 23-7- 1.1 -6 1(a), (b).

^'The question of directors' loyalty to the nonprofit is not necessarily the same

as the question of whether a transaction is fair and reasonable to the corporation.

Even where the transaction is fair, an interested director may be able to make sub-
stantial profits through commercial dealings with the nonprofit to the exclusion of other

potential competitors. Under these circumstances two serious issues arise: First, is the
director dealing with the nonprofit with a view to the corporation's best interest? Sec-

ond, is the interested director using her position in the nonprofit to advance her own
private pecuniary interests?



790 INDIANA LAW REVIEW [Vol. 18:777

terested director based upon the information provided in the corporate

books and records. Other jurisdictions provide more rigorous conflict

of interest provisions. ^^

//. General standard of care and loyalty.—The Indiana Act does not
contain provisions defining general standards of care and loyalty for

directors and officers of nonprofit corporations. This is significant be-

cause of the express exemption of charitable, educational, and cultural

organizations from the standards of conduct imposed on trustees by the

Indiana Trust Code.^^ Moreover, the Indiana General Corporation Act,

which regulates for-profit corporations, provides that "[a] director shall

perform his duties ... in good faith, in a manner he reasonably believes

to be in the best interests of the corporation, and with such care as an

ordinarily prudent person in a like position would use under similar

circumstances."^^ One might infer that the absence of a statutory pro-
vision regarding nonprofit directors may be some indication of a leg-
islative intent to hold nonprofit directors to a lower standard of conduct

than for-profit directors.

Some language in the Act indicates, however, that there is a minimal
acceptable standard of conduct for directors of nonprofit corporations.

Indiana Code section 23-7- 1.1 -4(b)(9) authorizes a nonprofit to indemnify

any director "against expenses actually and reasonably incurred by him

in connection with the defense of any civil action" to which he is made

a party by reason of his status as a director. ^^ Indemnification is not

available "in relation to matters as to which he is adjudged ... to be

liable for negligence or misconduct in the performance of duty to the

corporation."^^ Since these provisions speak either in terms of knowing

and willful violations or liability for the failure to perform some act,

regardless of negligence, they suggest that Hability may attach for neg-
ligent conduct and that the source of standards against which to measure

such conduct is the common law.^^ Thus, the issue of general standards

'-See infra note 187 and accompanying text.

''Ind. Code § 30-4-1 -1(c) (1982) provides that the rules of law contained in the
Indiana Trust Code do not apply to religious, educational, and cultural institutions or

to charitable nonprofit foundations, corporations, or associations, except that these or-

ganizations are required to comply with those provisions of the trust code which spe-

cifically relate to the maintenance of federal income tax privileges. See, e.g., Ind. Code

§§ 30-4-5-18 to -24 (1982).

^Mnd. Code § 23-1-2-1 1(a)(2) (Supp. 1985).
^^IND. Code § 23-7-1.1 -4(b)(9) (1982).
''Id. (emphasis added).

''Id. § 23-7-1.1-36 (annual report requirement). Although not directly applicable

to the issue of directors' standards of conduct, this section provides some support for

the proposition that common law doctrines existing apart from the nonprofit statute
also serve to regulate nonprofit conduct. This section specifically provides that the sec-

retary of state may order a nonprofit to submit to a verified audit after reviewing the
nonprofit's annual report if he "determines . . . that the corporation filing the report



1985] NOT-FOR-PROFIT 791

of care and loyalty would appear to be open for definition by the courts

as the common law of nonprofit corporations develops in Indiana.
Hi. Provisions for director liability.—The express prohibitions on

director conduct in the Indiana Act are aimed primarily at activities

which might financially injure corporate creditors, nonprofit members,

and the general public. These prohibitions are written so that no personal

Hability will be imposed on a director unless she was a knowing and

willing participant in the proscribed conduct. ^^

Indiana Code section 23-7-1.1-62 describes the basic prohibitions on
director conduct relating to corporate debts and contracts, and prescribes

the penalties to which directors are subject when the prohibitions are
violated:

The directors of a not-for-profit corporation shall jointly and
severally be hable for the debts and contracts of the not-for-

profit corporation in the following cases:

(1) For knowingly and wilfully declaring or assenting to
the repayment of any advance or loan made by a member . . .
if the . . . corporation is, or is thereby rendered insolvent . . .

in an amount equal to the repayment ....

(2) For knowingly and wilfully making or assenting to make
a loan to an officer or director, to the extent of the debts

contracted between the time of making or assenting to make
the loan and the time of repaying it, in an amount equal to
the loan.

(3) For voting or assenting to any distribution of corporate

assets to its members or otherwise during . . . Uquidation . . .
without payment and discharge of or making adequate provision
for, all known debts, obligations and liabilities .... for the
value of those assets which are distributed, to the extent that

the . . . [corporate] liabilities ... are not paid and discharged

thereafter.

(4) For voting or assenting to the distribution of [corporate]

assets . . . contrary to the provisions of this chapter or . . . any

restrictions contained in the articles of incorporation; for the

. . . value [of assets distributed].

(5) For voting or assenting to make a loan to an officer
or director of the corporation; for the amount of the loan until
its repayment.

* * *

A director shall not be liable under subparagraphs (1), (3)

. . . is violating any provision of this chapter [23-7-1.1-1 to -66] or the not-for-profit

corporation law in general.'" Id. (emphasis added).

'^See IND. Code §§ 23-7-1.1-62, -64 (1982).



792 INDIANA LAW REVfEW [Vol. 18:777

or (4) ... if he relied and acted in good faith on financial

statements of the corporation, represented to him to be correct

by the president or the officer . . . having charge of its account

books. . . . Nor shall he be liable if, in good faith in determining

the amount available for any distribution, he considered the

assets to be at their book value.^^

This section is designed to prevent directors from making improper

distributions to members, directors, or officers that may have the effect
of injuring the corporation's creditors. While creditors are given some

measure of protection against improper self-dealing within the corpo-

ration, this protection is less than complete. Under this provision, di-

rectors are relieved from liability for assenting to improper distributions

made in good faith reliance upon the presentation of those on whom
the directors are entitled to rely.^° No duty of inquiry into the accuracy
of such representations is required.

A second, and possibly more serious, defect in Indiana Code section
23-7-1.1-62 is that many types of misconduct by directors which might
result in a substantial depletion of the corporation's assets do not result

in director liability. For example, a director would not be liable under

this section for corporate debts, even though he had assented to highly

speculative investments which resulted in substantial depletion of cor-

porate assets. The Indiana Not-for-Profit Corporations Act does, how-

ever, prohibit director conduct which might generally be characterized

as fraud on members and the public.^'

'""Id. § 23-7-1.1-62 (emphasis added).

'"Id.

"The Act provides:
* * *

(b) An officer or director of a not-for-profit corporation who:

(1) knowingly gives out or publishes, or files with the secretary of state,

any written report, certificate, or statement of the condition or business

of the not-for-profit corporation that is false in any material particular,

statement or representation; or

(2) knowingly issues, or consents to the acceptance of, any advances or

loans to members in violation of this chapter; or

(3) knowingly signs or issues a certificate for advances or loans by

members containing any false statement;

commits a Class D felony.
(c) An officer or director of a not-for-profit corporation who, being charged
with the duty of doing so, fails to make, file, produce, and keep open, prior

to and during an election of directors, a list of members of the not-for-

profit corporation entitled to vote at the election, commits a Class B infrac-

tion.

(d) All officers or directors of a not-for-profit corporation who violate sub-

section (b) or (c) of this section are jointly and severally liable for all dam-

ages which may arise therefrom.
Id. § 23-7-1.1-64 (emphasis added).



1985] NOT-FOR-PROFIT 793

Indiana Code section 23-7-1.1-64 serves three separate accountability
functions. First, it strengthens the '^accountability through disclosure"

mechanisms provided by the statutory reporting requirements by sub-

jecting directors to criminal and civil liability for false statements in

those reports. ^^ Second, it helps to assure that the nonprofit form will

not be used for the improper purpose of private pecuniary benefit;

directors are personally liable for knowingly issuing or consenting to

advances or loans to members in violation of the provisions of the Act.^^

A third function served by this section, and perhaps the most important
in accountability terms, is that it imposes liability upon directors who
fail to maintain and provide members with membership lists prior to

the election of directors. ^"^ Thus, the Act ensures that members will not

be denied the opportunity to change the corporation's management

through communication with other members.

/v. Legal consequences to the nonprofit corporation for defective

director performance.—The standards and the legal liabilities of directors
of nonprofit corporations form an integral part of the accountability

mechanisms for nonprofits, serving to assure proper director conduct

and, therefore, proper functioning of the nonprofit. In addition to

statutory provisions dealing with misconduct of directors, the Indiana

Act imposes significant sanctions at the corporate level for defective

director performance. Under such circumstances, the nonprofit corpo-

ration is treated as if it were synonymous with its defectively performing

directors. The statutory scheme compensates, to some extent, for the

lack of protection against the misconduct of directors by subjecting the

nonprofit to various remedial sanctions:

If, at any time, the secretary of state is of the opinion that the

corporation is not operating in good faith as a not-for-profit

corporation, is violating any of the provisions of this chapter,

is insolvent or has paid more than the fair and reasonable value
for any real or personal property acquired, has engaged in any

transaction with any person, firm or corporation which could

result in more than a fair and reasonable profit to this person,
firm or corporation, has failed to account fully for all proceeds

and revenue derived from conducting the activities of the cor-

poration, or has violated any of the laws of this state governing

activities of the corporation, or has violated any of the laws of

this state governing activities in which the corporation may be

^-Id. It is not altogether clear what type of civil damages might result from false

statements contained in official filings by the nonprofit with the state. Ind. Code §
23-7-1.1-62 appears only to contemplate damages for injury to some property interests.

"Ind. Code § 23-7- 1.1 -64(b).
''Id. § 23 -7 -1.1 -64(c).



794 INDIANA LAW REVIEW [Vol. 18:777

engaged, he shall withhold the filing of its papers and shall

notify in writing the persons or corporation of such violation

whereupon the same person or persons may correct any such
violation or appeal this decision by the secretary of state.

* * *

If the secretary of state at any time feels that any corporation

organized or reorganized under this chapter is violating any

provisions of the chapter, he shall notify the corporation, in

writing, of this violation, and if the corporation does not comply

with the provisions within fifteen (15) days thereafter, the sec-

retary of state shall certify this information to the attorney general

of Indiana, who shall immediately bring an action in the name
of the State of Indiana in the Marion County superior or circuit

court to dissolve the corporation.^^

In this provision, the statute describes those circumstances in which

the nonprofit corporation will be subject to legal sanctions for the

misconduct of its directors. Many of those circumstances do not give
rise to director liability under the director liability provisions. Directors

are not expressly liable for assenting to transactions in which persons

outside the nonprofit organization receive more than fair or reasonable

profits. It is also likely that directors would not be personally Hable for

the failure to account fully for all corporate revenues or proceeds in

the nonprofit's annual report. ^^ Finally, directors do not appear to be

liable for many other acts that might result in the corporation losing
its nonprofit status, such as the failure to do those things required under

the provisions of the Indiana Trust Code relating to the maintenance
of federal tax exemptions. ^^

Indiana Code section 23-7-1.1-63 serves primarily as a "stop gap"
through which director misconduct, not remedied through the imposition

of legal sanctions upon directors, may be corrected at the corporate
level. The remedial measure provided for by this section is the withholding
of the filing of corporate papers by the secretary of state until the

nonprofit complies by correcting any violations found by the secretary.

If this fails, involuntary dissolution proceedings could be instituted by

the state attorney general.
^^

""'Id. § 23-7-1.1-63 (emphasis added).

"^Ind. Code § 23-7- 1.1 -64(b)(1) (1982) imposes liability only for statements which
are false in any material particular.

'^^See supra note 73.

««lND. Code § 23-7-1.1-66 (1982) provides in part:
A not-for-profit corporation may be involuntarily dissolved by judgment of
the circuit court or any superior court of the county in which the principal

office of the corporation is, or was last, located in accordance with the fol-

lowing provisions:



1985] NOT-FOR-PROFIT 795

Particularly significant is a provision that allows for court inter-

vention in lieu of dissolution.^^ In that provision, the legislature has

recognized that a nonprofit corporation may be composed of individuals
and interests reaching beyond those represented by its defectively per-

forming directors. To the extent that the nonprofit has assets which are
to be used for the public interest or the interest of those not involved

in the conduct resulting in dissolution proceedings, the courts are given

broad discretion to fashion an appropriate remedy, other than dissolution,

to protect such interests. In this manner, the Indiana Act is designed

to protect the nonprofit's beneficiaries.

(a) Causes of Dissolution. Such dissolution may be adjudicated when it
is made to appear to such court that:

(1) The period for which the not-for-profit corporation was organized

has terminated; or

(2) The corporate franchise was procured through fraud practiced upon

the state; or

(3) The not-for-profit corporation has exceeded or abused authority con-

ferred upon it by law or has exercised authority not conferred upon it

by law; or

(4) The not-for-profit corporation has failed to file the annual report

required by this chapter; or

(5) The not-for-profit corporation has done or failed to do any act which

would result in a surrender or forfeiture of its corporate franchise; or

(6) The members are deadlocked in the management of the corporate

affairs and the not-for-profit corporation is suffering, or is about to

suffer, irreparable injury from this deadlock.

(b) Procedure. All proceedings for the involuntary dissolution of not-for-

profit corporations, except as otherwise provided by this chapter, shall

be governed by the laws of this state which pertain to civil procedure.

Proceedings for dissolution based upon any of the causes specified

in subparagraphs (1) through (5) inclusive of paragraph (a) of this sec-

tion shall be filed and prosecuted in the name of the state. These pro-

ceedings may be filed and prosecuted by the attorney general when he
is requested, in writing, to do so by the secretary of state. Before any

proceedings based on causes (1), (3), (4) and (5) commence, the secre-

tary of state shall notify the corporation in writing of the cause and of

the violation within fifteen (15) days thereafter, the secretary of state

shall certify this information to the attorney general who shall imme-
ditely take action to dissolve the corporation in the name of the state

of Indiana.
* * *

(g) With respect to a proceeding to dissolve any corporation under

this chapter which has, as a part of its fixed assets, an endowment,

other fund, or substantial property, which, under the purposes for which

the corporation was organized or otherwise, are to be used in the public

interest or in the interest of those not involved in the act or omissions

causing the dissolution proceedings, the court, sitting as a court of eq-

uity, in lieu of dissolving the corporation, shall have the power to make
such order as is necessary to protect the endowment fund or property

in the pubHc interest or in the interest of others.

^IND. Code § 23-7- 1.1 -66(g).



796 INDIANA LAW REVIEW [Vol. 18:777

Nevertheless, the fact that the continuation of the nonprofit is subject

to the court's discretion could operate to circumvent the rights of the

members to determine the corporation's future. This fact may reflect a
legislative determination that the members are either unwilling or in-

capable of determining a proper future course of conduct for the cor-

poration, especially when the membership originally may have been
responsible for electing and maintaining defectively performing directors

in managerial positions. In this regard, however, it should be remembered

that one possible reason for the membership's failure or inability to

exercise effective control over the nonprofit corporation's management

is the failure of the Act to provide for adequate disclosure mechanisms

through which the membership could be made aware of its directors'
conduct. Although members have access to the corporate books and

records for "proper purposes," no information concerning the affairs

of the corporation is required to be actually reported to the members

in a complete and concise manner. ^° Even where members are sufficiently

motivated to examine corporate books and records, the time required

to decipher the information necessary to ascertain whether the manage-

ment is performing adequately could be substantial. Moreover, certain

types of information, such as the identity and relationship of persons

engaging in transactions with the corporation, might not be revealed

through an examination of the corporation's records.

In summary, Indiana's statutory scheme of accountability for the

misconduct of directors of nonprofits operates on two levels. In the

case of directors' violations of express prohibitions, the Act's remedial

measures focus on the directors through the imposition of personal

liability. Where the conduct of directors would not subject them to
personal liability, however, the Act operates to impose sanctions on the

corporation. These corporate sanctions vary depending primarily upon

the nature and extent of the interests of the nonprofit's beneficiaries.

Curiously, the interest of the nonprofit's nondirector membership does

not appear to be a factor in determining the appropriate remedies for

correcting defective corporate performance caused by director misconduct.

While statutes can serve as standards for determining the levels and

types of accountability owed by corporate management to its consti-
tuencies, those statutes are not self-enforcing. Some other institution
must exist to interpret statutory provisions definitively and to resolve

conflicts between management and its constituencies. In this society,
courts have traditionally performed that function.

•^here is no requirement for distribution of annual reports to members under

the Indiana Not-For-Profit Corporation Act. Ind. Code §§ 23-7-1.1-1 to -66 (1982 &
Supp. 1985).



1985] NOT-FOR-PROFIT 797

B. Adjudicative Mechanisms

Adjudication is essential to accountability. Some mechanism should
be made available to a nonprofit's constituencies to permit them to
enforce judicially the obligations of the nonprofit's managers.^' Since

there are several constituencies of nonprofits, however, an interesting

issue is presented: Who has standing to challenge the action or inaction
of nonprofit corporation managers?

Clearly, the state has standing to protect the interest of the public

and to ensure compliance with the law.^^ jj^e authority for the state

attorney general to enforce laws relating to nonprofit corporations is

rooted in common law and statute." Because the purpose of all nonprofits
is to further the public interest in some respect, it is not surprising that

the states have delineated quite specific statutory authority for the at-

torney general to institute lawsuits against nonprofits.

Under the Indiana Act, the authority for enforcement of the nonprofit
laws rests primarily in the Office of the Secretary of State.^ The secretary

has authority to compel a nonprofit to submit to a certified public

accountant's audit when the secretary has reason to believe that the
corporation has either violated provisions of the nonprofit law or has

"The enforcement function was best summarized by Justice Harlan in Boddie v.

Connecticut:

Perhaps no characteristic of an organized and cohesive society is more fun-

damental than its erection and enforcement of a system of rules defining the

various rights and duties of its members, enabling them to govern their af-

fairs and definitively settle their differences in an orderly, predictable man-

ner. ... It is to courts . . . that we ultimately look for the implementation

of a regularized, orderly process of dispute settlement.

401 U.S. 371, 374-75 (1971).

Professor Hansmann, arguing for more liberalized standing for a not-for-profit

corporation's patrons, said:

Unfortunately, there is no reason to believe that the attorney general, or any

other agency, will become an adequate instrument of enforcement in most

states in the foreseeable future. Efforts at reform in this direction have been

underway for forty years, and there is still rather little to show for them.

Hansmann, Reforming Nonprofit Corporation Law, 129 U. Pa. L. Rev. 479, 608 (1981)

(footnote omitted).

•^^It is the duty of the secretary of state to report violations of the Indiana Not-

For-Profit Corporation Act to the attorney general. The attorney general must then

bring an action in the name of the state to dissolve the not-for-profit corporation.
IND. Code § 23-7-1.1-63 (1982).

"^^See Freemont-Smith, Foundations and Government, 194, 198 (1965). In most
states, the attorney general is designated to enforce the responsibilities of nonprofits

and their managers. See Office of the Ohio Attorney General, The Status of State
Regulation of Charitable Trusts, Foundations, and Solicitations, Commission on Private

Philanthropy and Public Needs, Research Papers 2705, 2710-25 (1977).
^'See Ind. Code § 23-7-1.1-63 (1982).



798 INDIANA LAW REVIEW [Vol. 18:777

failed to disclose its true financial condition. ^^ He may also compel the
nonprofit corporation to disclose all material facts concerning its op-

erations through interrogatories or by requiring it to report such facts

under oath. This method is available when the secretary believes that
the corporation is operating contrary to law or for the purpose of

determining whether or not it is a bona fide nonprofit corporation.^^

When the secretary discovers violations of the law, he is required to
withhold the filing of any corporate papers in order to compel compliance.

Alternatively, he may inform the attorney general of such violations. ^^

In the latter case, the attorney general is required to initiate an action

for involuntary dissolution.^^

The Indiana Act does not authorize the secretary of state or the

attorney general to enforce the rights of members, creditors, or bene-

ficiaries. Other than the right to compel a nonprofit to answer inter-

rogatories, neither the secretary nor the attorney general is given the

right to inspect corporate books and records. Finally, only one state

official in Indiana, the county prosecuting attorney, has the authority

to institute an action against a nonprofit to nullify an ultra vires act.^^

Thus, the state's regulation of nonprofits appears to be limited

primarily to determining whether or not the corporation will be permitted

to continue to exist or will be dissolved involuntarily. State officials

oversee nonprofit conduct through the enforcement of the criminal laws

dealing with specified types of misconduct. Other jurisdictions give more
authority to state officials to police the activities of nonprofits. Because

the Indiana attorney general's statutory authority is so limited, one would

rightly question whether others who have a relationship to nonprofits
in Indiana have standing to sue the corporation or its management.

The Indiana Not-For-Profit Corporation Act does not contain any
provision for derivative actions by members. Consequently, while mem-
bers can sue both the corporation and the board of directors to enforce

their own rights, members have no way to protect the rights of the
corporation through adjudication. Unfortunately, Indiana's statutory

omission of a provision for derivative rights is typical.'^ Consequently,

members of Indiana nonprofit corporations must rely on either the state
attorney general or the directors of the corporation to protect the interests

of the corporation. Even though members can protect their own interests
through adjudiciation, members are not the only constituents of non-

•"'Id. § 23-7-1.1-36.

''''Id. § 23-7-1.1-63.

''Id.

^Id.

"'Id. § 23-7-1.1-65.

'°°Only ten jurisdictions explicitly permit members of nonprofits to sue deriva-

tively: California, Delaware, Florida, Illinois, Michigan, New York, Ohio, Pennsylva-
nia, South Carolina, and Wyoming.



1985] NOT-FOR-PROFIT 799

profits. The adjudicative rights of two other constituencies are nonexistent.

The Indiana Act does not give standing to actual or potential beneficiaries

of a nonprofit to sue the corporation or its managers for mismanagement,

waste of corporate assets, or any other recognized corporate causes of

action. '°' Although the interest of beneficiaries is recognized in a provision

of the Act dealing with involuntary dissolution, it appears that protection

of such interests may be had only through actions brought in the name
of the state. '°^ Similarly, the Act does not confer standing on donors.

Obtaining accountability through adjudication in Indiana is possible.

Yet, because of restricted standing rules, the lion's share of the en-

forcement burden falls on the state attorney general.

C. Accountability and the Tax Laws

Special provisions of the state and federal tax codes relating to

nonprofits have been enacted to encourage nonprofit activities. '°^ Not

only do these provisions exempt nonprofit income from taxation, some

also permit donors to qualified nonprofits to deduct their donations

from their own income taxes.
Simply exempting the activites of certain organizations from income

and other taxes can, however, result in rather substantial abuses of the

privilege. Some flagrant examples of such abuse already exist. Donors
have created charitable foundations and then used the foundations' funds

to finance the expansion of the donors' businesses. '^"^ Trustees of char-

itable organizations have used their positions as trustees to cause the

organization to use the investment advisor or banking services of the

interested trustees' investment or commercial bank.'°^ Nonprofits have

owned and operated businesses that competed unfairly with other busi-

nesses. '^^ Nonprofits have been used to secure enough of the equity

securities of a donor's business corporation to assure the nonprofit's

control of the business corporation. '°^ Clearly, all of these situations

""There is apparently no statutory authorization for these types of actions by be-

neficiaries in any jurisdiction in the country.

'"^IND. Code § 23-7-1.1-63 (1982).
'°'See, e.g., I.R.C. § 501 (1982); Cal. Rev. «& Tax Code § 2701(d) (West 1979);

Del. Code Ann. tit. 30, § 1902 (1975); III. Rev. Stat. ch. 120, § 2-205(a) (1974);
IND. Code § 6-2.1-3-20 (1982); Mich. Comp. Laws Ann. § 206.201 (West 1967 & Supp.
1984-85); Mo. Ann. Stat. § 143.441(2)(1) (Vernon 1976); Wis. Stat. Ann. § 71-101
(West Supp. 1983-84).

^^See generally Wells, Conflicts Interest: Nonprofit Institutions 59, 64-74

(1977).

'°5M at 29-41; see also Stern v. Lucy Webb Hayes Nat'l Training School, 381 F.
Supp. 1003 (D.D.C. 1974).

'°*5ee, e.g., C.F. Meuller Co. v. Commissioner of Internal Revenue, 190 F.2d 120

(3d Cir. 1951).

'°'See Wells, supra note 104, at 61-74.



800 INDIANA LAW REVIEW [Vol. 18:777

involve an abuse of the nonprofit privilege. In some instances, they also

involve a clear breach of a fiduciary duty. Even more importantly, in

many cases where the privilege of nonprofit status is abused, money
that should be taxed escapes taxation and yet is not used to further

any public purpose.

To remedy the abusive uses of the tax laws by donors and managers
of nonprofits, the state and federal governments have enacted elaborate

laws.'°^ These statutes and the accompanying regulations place limits on

the types of activities that qualify for exemption, delineate the types of

activities that may subject the nonprofit to penalties and fines, and
indicate the types of activities that will bar an organization from becoming

tax-exempt or that will result in decertification of an exempt organization.

Enforcement of these laws by state and federal revenue agencies nec-

essarily renders nonprofit corporations and their managers more ac-

countable.

7. Federal Tax Law.—Subchapter F of the Internal Revenue Code
provides for tax-exempt status for several categories of organizations. '°^

The most liberal tax benefits are provided to organizations qualifying

under section 501(c)(3). "° There are three requirements for qualifying

under this section:

(1) the entity must be organized and operated exclusively for

one or more of the stated exempt purposes: charitable,

scientific, literary or educational, the prevention of cruelty

to children or animals, or testing consumer products for

public safety;

(2) the organization's net earnings must not inure, in whole or

in part, to the benefit of private shareholders or individuals;

and

(3) the organization must not devote a substantial part of its

activities to carrying on propaganda or otherwise attempting

to influence legislation, nor may it participate in, or in-
tervene in, any political campaign on behalf of any candidate

or public office."'

Contributions to section 501(c)(3) nonprofits are deductible from the

contributor's income tax, subject to limitations based on a percentage
of the contributor's income."^ Contributions to these organizations may
also be deducted from estate and gift taxes. "^

"«See I.R.C. §§ 501-528 (1982).

"°/f/. § 501(c)(3).

"7<^. See also P. Treusch & N. Sugarman, Tax Exempt Charitable Organi-
zations 49 (1979).

"^I.R.C. § 170 (1982).

'"See I.R.C. § 2055(a)(3) (1982).



1985] NOT-FOR-PROFIT 801

Not only does Congress distinguish section 501(c)(3) organizations

from other section 501(c) organizations, it also makes a distinction

between organizations within section 501(c)(3)"'* pursuant to the Tax

Reform Act of 1969."^ This Act classified all section 501(c)(3) orga-

nizations as either public charities or private foundations. Indeed, every

section 501(c)(3) nonprofit is presumed to be a private foundation unless

it can show

(1) that it is an educational institution, a hospital, church,

medical research organization, development foundation of

a state university; or

(2) an organization supported in substantial part by government

or by contributions from the public; or

(3) an organization that normally receives more than one third

of its support from contributions and gross receipts from

the public or from governmental units and normally receives

not more than one third of its support from gross investment

income; or

(4) an organization that is organized and operated for the

benefit of, to perform the function of, or to carry out the

purposes of, one or more specified public charities described

in (1) or (2) and is operated, supervised, or controlled by,

or in connection with, one or more such public charities
and is not controlled directly or indirectly by one or more

^'disquahfied persons"; and

(5) an organization which is organized and operated exclusively

for testing for public safety."^

Because of both documented and perceived abuses of their nonprofit

status. Congress subjected private foundations to rather strict regula-

tion."^ They are prohibited from entering into certain transactions with

''disqualified persons,""^ required to pay out to quaUfied persons or

organizations a certain percentage of their noncharitable assets,"^ pro-

hibited from making risky investments,'^^ and prohibited from owning,

together with a disqualified person, more than twenty percent of the

voting stock of a business enterprise.'^'

All of these provisions of the Tax Reform Act of 1969 were designed

to make foundation managers and members more accountable to their

'''See id. § 503(b).

"Tax Reform Act of 1969, Pub. L. No. 91-172, 83 Stat. 487 (1969).
•n.R.C. § 509(a) (1982).

'''Id.

"n.R.C. § 4946 (1982).

"^Id. § 4942.

'^°M § 4944.

'^'Id. § 4943(c)(2)(A).



802 INDIANA LAW REVIEW [Vol. 18:777

various constituencies. The prohibition of certain transactions, such as

sales or leases of property between a private foundation and a "dis-

qualified person, "'-2 is an attempt to prevent donors who create or make
substantial contributions to a private foundation from engaging in acts

of self-dealing.'^^ The provision that requires a minimum annual dis-
tribution is designed to prevent charitable organizations from retaining

funds, without sound reasons, for long periods of time.'^'^ The tax

exemption provided to private foundations is given on the assumption

that it will benefit the public welfare. When private foundations
accumulate large sums of money or securities over long periods of time,
there is no discernible benefit to the public. Likewise, the public does

not benefit from extremely risky investments made by private foundations.
The risk-reward analysis engaged in by private capitalists is simply not

appropriate for private foundations.''^ Finally, the restriction on business

holdings is obviously designed to prevent a donor who wants to gain
and maintain control of a business from using a private foundation to

facilitate this goal.'^^

The tax laws are helpful in assuring accountability for all tax exempt

organizations, not only private foundations. All nonprofits that have

acquired exempt status under section 501(c) of the Internal Revenue

Code are required to file informational reports. '^^ These reports must

set forth the organization's gross income, expenses, disbursements for

exempt purposes, accumulations, balance sheets, total contributions and

gifts received during the year, names and addresses of all substantial

contributors if the reporting entity is a private foundation, names and

amounts of compensation paid to foundation managers and highly com-

pensated employees. '^^ Certain organizations with annual gross receipts

of less than $10,000 and most church and religious organizations are

exempt from this requirement.'^^

Finally, the Supreme Court of the United States has given the Internal

Revenue Service broad powers to determine whether or not nonprofits

are complying with the law and policy of the federal government. Indeed,

in a recent ruling, the Court quite clearly acknowledged another mech-

'"M § 4941.
'"Id.

'''Id. § 4942.

'"'See, e.g., I.R.C. § 4944 (1982) (penalizing investments by private foundation in

such a manner as to jeopardize the carrying out of its exempt purposes). A jeopardiz-
ing investment is one that might have the effect of preventing the foundation from

pursuing its long and short term goals because of its financial situation. See generally

P. TREUSCH & N. SUGARMAN, TaX-ExEMPT CHARITABLE ORGANIZATIONS 288-92 (1979).
'^"I.R.C. § 4941(d)(1)(E) (1982).

'''Id. § 6033.

'^Treas. Reg. § 301.6033-1 (1967).

'^^I.R.C. § 6033(a)(2) (1982).



1985] NOT-FOR-PROFIT 803

anism to assure nonprofit accountability. In Bob Jones University v.
United States, and its companion case, Goldsboro Christian Schools,

Inc. V. United States, ^^^ the Supreme Court held that the Internal Revenue

Service had lawfully revoked the tax-exempt status of one educational

institution (Bob Jones University) and lawfully refused to grant tax-

exempt status to another (Goldsboro Christian College) because both

had racially discriminatory policies.'^' Bob Jones University denied ad-
mission to applicants engaged in an interracial marriage or dating and

also prohibited interracial dating. '^^ Goldsboro Christian College main-

tained a racially discriminatory policy based upon its interpretation of
the Bible, primarily accepting only Caucasian students.'" The Court held
that to qualify for section 501(c)(3) status, an organization must be

"charitable" within the common law meaning of ''charity," notwith-
standing that section 501(c)(3) delineates five types of activities in addition

to charitable which could serve to qualify nonprofits. The Court said:

Section 501(c)(3) therefore must be analyzed and construed within

the framework of the Internal Revenue Code and against the
background of the congressional purposes. Such an examination

reveals unmistakable evidence that, underlying all relevant parts

of the Code, is the intent that entitlement to tax exemption

depends on meeting certain common law standards of charity

—

namely, that an institution seeking tax-exempt status must serve

a public purpose and not be contrary to established public

policy.
'^"^

The Court held that "racial discrimination in education violates deeply

and widely accepted views of elementary justice. "'^^

The dissent in this case argued that while it is clear that Congress
could prevent organizations engaged in racial discrimination in education

from obtaining section 501(c)(3) status, it did not follow that the Internal

Revenue Service also has this power. The dissent stated that nothing in
the statutory language or history of section 501(c)(3) permitted this

conclusion. '^^ Nevertheless, the majority eschewed this rather mechanical

reading of the statute and upheld the agency determinations. Bob Jones
University indicates that the Court will willingly permit the Internal

Revenue Service to depart from a narrowly defined tax collection function

and exercise some policy decisions, at least to the extent that the policy

'M61 U.S. 574 (1983).

'''Id. at 595.

''^Id. at 580-81.

'"M at 583.
'''Id. at 586.

'''Id. at 592.

"''Id. at 617 (Rehnquist, J., dissenting).



804 INDIANA LAW REVIEW [Vol. 18:777

has been well-defined by Congress. Thus, the I.R.S. has some latitude

to perform a critically important accountability function when it certifies

and decertifies nonprofits for tax-exemption under the Internal Revenue

Code.

2. Indiana Tax Laws.—Indiana also provides incentives to people
who want to engage in nonprofit activites. Most of the organizations
that are qualified to receive tax exemption under section 501(c)(3) of

the Internal Revenue Code are also exempt from paying tax on their

gross incomes in Indiana, if they file for exemptions and comply with

the annual reporting requirement of the tax code.'^^ Moreover, organ-

izations operated for fraternal or social puiposes or as business leagues

or associations are exempt from gross income tax on amounts received

as contributions, tuition fees, initiation fees, membership fees, or earnings

on receipts from the sale of tangible property. '^^

An organization exempted from the gross income tax is also exempt
from the sales tax if (1) the sale is made to make money to carry on
its nonprofit purpose and sales are not made during more than thirty
days in a calendar year; or (2) the property sold is designed and intended

primarily either for the nonprofit organization's educational, cultural,

or religious purposes, or for improvement of the work skills or profes-

sional qualifications of members; the property sold is not designed or

intended primarily for use in carrying on a private or proprietary business;

and, the nonprofit is not operated predominantly for social purposes. '^^

Indiana also provides a property tax exemption, primarily to organizations

that qualify for Internal Revenue Code section 501(c)(3) and (4) ex-
emptions. "^°

The tax privileges extended to nonprofits are premised on the as-
sumption that they will aid these organizations in achieving their ob-

jectives. To assure accountability, the Indiana Tax Code requires all
organizations that receive these benefits to file an annual report with

the Indiana Department of Revenue."*'

Thus, a second agency in Indiana has an opportunity to determine

whether or not nonprofit corporations are operating in compliance with

state law, in this case, tax laws. Obviously, this source of accountability

is not as authoritative as that of the secretary of state. Unlike the

secretary of state who can initiate revocation of the nonprofit status of
a corporation, the Indiana Department of Revenue is only empowered
to disallow a claimed tax privilege.''*^ Nevertheless, the tax laws do serve

'"IND. Code §§ 6-2.1-3-20, -22 (1982).
'''Id. § 6-2.1-3-21 (Supp. 1985).

''•"Id. § 6-2.5-5-26 (1982).

'^"M §§ 6-1.1-10-16, -18.5, -21, -23, -25 (1982 & Supp. 1985).
'''Id. § 6-2.1-3-20.

•«See 45 I.A.C. 1-1-132 (1984).



1985] NOT-FOR-PROFIT 805

a type of accountability function insofar as the department of revenue

prevents those organizations that do not comply with the laws from

securing the tax advantages which it provides.

IV. Statutory Comparisons

The Indiana Not-For-Profit Corporation Act is similar to the non-

profit statutes in most jurisdictions. Most of the nonprofit statutes in

the country are unitary.''*^ Most jurisdictions require some type of in-

formation in the nonprofit corporation's annual report. '"^^ The over-

whelming majority of jurisdictions do not permit members to sue

derivatively on behalf of the corporation."*^

In addition, most states do not define a standard of care and loyalty

for the corporation's officers and directors.''*^ In at least two jurisdictions,

however, the nonprofit statutes contain many provisions that make it
possible for members and perhaps other constituents to enforce some

level of accountability from corporate management."*^

A. Structural Mechanisms

1. Accountability at the Formation Stage.—a. New York.—The New
York Not-For-Profit Corporation Law"*^ provides for four types of

nonprofits:

Type A - A not-for-profit corporation of this type may be
formed for any lawful non-business purpose or purposes in-

'"'H. Oleck, Nonprofit Corporations, Organizations and Associations § 12

(4th ed. 1980).

""See, e.g., Ariz. Rev. Stat. Ann. § 10-719 (1977); Colo. Rev. Stat. § 7-20-

105 (Supp. 1984); Ga. Code Ann. § 22-3301 (Supp. 1982); Or. Rev. Stat. § 61.805

(1983); W. Va. Code § 31-l-56a (1982).
'"'Express statutory authority for derivative actions by members exists in only two

jurisdictions, California and New York. See Cal. Corp. Code § 9142(a)(1) (West Supp.
1985); N.Y. Not-For-Profit Corp. Law § 623 (McKinney 1970 & Supp. 1984-85).

"•^Twelve jurisdictions have provisions in their nonprofit statutes which set out a

fiduciary duty of care and loyalty for directors. See Cal. Corp. Code §§ 309(a), 9002
(West 1977 & Supp. 1985); Conn. Gen. Stat. Ann. § 33-313 (West 1960 & Supp.
1985); Ga Code Ann. 22-2614 (1977 & Supp. 1982); Fla. Stat. Ann. §§ 607.11C4,
617.002 (West 1977 & Supp. 1985); Hawaii Rev. Stat. §§ 416.19, 416.91.5 (1976 &
Supp. 1984); Md. Corps & Ass'ns Code Ann. §§ 2-405.1, 5-201 (1985); Minn. Stat.
Ann. § 317.20, subd.6 (West 1969); N.Y. Not-for-Profit Corp. Law § 717 (Mc-
Kinney Supp. 1984-85); 15 Pa. Cons. Stat. Ann. § 7734 (Purdon Supp. 1985); Ohio

Rev. Code Ann. § 1702.30(B) (Page Supp. 1984).
'"Those jurisdictions are California and New York. See Cal. Corp. Code § 9142

(West Supp. 1985); N.Y. Not-for-Profit Corp. Law §§ 623, 722 (McKinney 1970 &
Supp. 1984-85).

""•N.Y. Not-For-Profit Corp. Law §§ 101-1515 (McKmney 1970 & Supp. 1984-
85).



806 INDIANA LAW REVIEW [Vol. 18:777

eluding, but not limited to, any one or more of the following

non-pecuniary purposes: civic, patriotic, political, social, frater-

nal, athletic, agricultural, horticultural, animal husbandry, and

for a professional, commercial, industrial, trade or service as-

sociation.

Type B - A not-for-profit corporation of this type may be formed
for any one or more of the following non-business purposes: charitable,

educational, religious, scientific, literary, cultural or for the prevention

of cruelty to children or animals.

Type C - A not-for-profit corporation of this type may be formed
for any lawful business purpose to achieve a lawful public or quasi-

public objective.

Type D - A not-for-profit corporation of this type may be formed
under this chapter when such formation is authorized by any business

or non-business, or pecuniary or non-pecuniary, purpose or purposes

specified by such other law, whether such purpose or purposes are also

within types A, B, C above or otherwise. ^'^^

The New York law requires the following information in a proposed
certificate of incorporation: corporate name, corporate purpose, location

of corporate office, corporate duration, principal location where corporate

activities are to be carried on, post office address for mailing legal

notice, and any approvals which might be required as prerequisite to

information. '^° Type C nonprofits are also required to state what public
or quasi-public objective will be fulfilled by each business purpose.'^'

Type B and C nonprofits are required to list the names and addresses
of the initial directors. '^^ Finally, the certificate must be filed with the

department of state for approval.'"

Governmental review of a proposed certificate may encompass a
multi-step process, depending upon the type and specific nature of the

particular nonprofit corporation. Certain nonprofits are required to ob-

tain special consents or approvals before filing a certificate of incor-

poration and getting approval from the department of state. Section 404

of the New York law provides a noninclusive list of required approvals. '^^

That provision specifically requires judicial approval of all nonprofits

seeking to incorporate as Type B or C corporations and all trade and
business associations. The section also requires notice to be sent to the

^''Id. § 201(b) (McKinney 1970).

'«'M § 402.

'"/</. § 402(a)(2).

'"/d/. § 402(a)(5).

'"M § 402(a).
"V<^. § 404. Trade and other business associations are Type A nonprofits. N.Y.

Not-For-Profit Corp. Law § 1410 (McKinney 1970 & Supp. 1984-85). Judicial ap-
proval is not required for other Type A nonprofits. See id. § 404 comment.



1985] NOT-FOR-PROFIT 807

State attorney general, for the purpose of allowing the attorney general

to show cause for denial of judicial approval. '^^

Significant limitations exist upon the authority of governmental of-

ficials to withhold approval, even if they find that the proposed non-

profit's purpose is contrary to public policy or that those who will
manage the corporation are irresponsible or ill-equipped to carry out
their duties. Broadly stated, these determinations are limited to questions

of lawfulness and thus appear not to differ from a determination that

all formal requirements for incorporation are met.

The case of In re Queens Lay Advocate Service, Inc.^^^ involved an
application for judicial approval for incorporation of a "charitable"

nonprofit. The organization, Queens Lay Advocate Service, included

among its purposes protecting and expanding the rights of public school
pupils, their parents, and the general public, and assisting pupils and

their parents in public school disciplinary proceedings. In denying ap-

proval, the court noted that the corporate name and stated purpose
implied that the nonprofit would provide legal services. Since the pro-

vision of legal services by lay persons constituted an unauthorized practice

of law, the court found that incorporation for such purposes would

violate public policy. '^^ The court also noted that those who would
operate the corporation were ill-equipped to carry out its purpose, not

only because they lacked specialized legal training but also because they

lacked legal authorization to give legal advice. '^^ In re Queens Lay
Advocate Service makes clear, therefore, that where a corporation pro-

poses to conduct activities deemed to be unlawful or where those who
would operate the nonprofit corporation would be acting unlawfully in

carrying out their duties, approval of the certificate of incorporation

may be properly denied.
On the basis of In re Queens Lay Advocate Service, one might be

tempted to generalize that lawfulness is something to be deduced from

the purposes set out in the articles. The court appeared to read into

the stated purposes an implied purpose to engage in the unauthorized

practice of law. This generalization, however, may be too hasty, as
illustrated by the case of Owles v. Lomenzo.^^^

In Owles, the secretary of state rejected a proposed certificate of

incorporation for the Gay Activist Alliance as contrary to public policy
and unlawful. Among the stated purposes of the organization were the
following:

'"/Gf. § 404(a).

"'^Misc. 2d 33, 335 N.Y.S.2d 583 (1972).

•"/fi?. at 35, 335 N.Y.S.2d at 585.

'^«M at 36, 335 N.Y.S.2d at 586.

'"38 A.D.2d 981, 329 N.Y.S.2d 181 (N.Y. App. Div. 1972), aff'd sub nom. 31

N.Y.2d 965, 341 N.Y.S.2d 108 (N.Y. 1973).



808 INDIANA LAW REVIEW [Vol. 18:777

(a) To safeguard the rights guaranteed homosexual individuals
by the constitutions and civil rights laws of the United States

and the several States, through peaceful petition and assembly

and non-violent protest when necessary.
(b) To speak out on public issues as a homosexual civil rights
organization, working within the framework of the laws of the

United States and the several States, but vigilant and vigorous

in fighting any discrimination based on sexual orientation of the

individual.

(c) To work for the repeal of all laws regulating sexual conduct
and practices between consenting adults.

(d) To work for the passage of laws ensuring equal treatment
under the law of all persons regardless of sexual orientation.'^

Arguably, these purposes imply that the organization would advise its

members on legal issues relating to their activities. This possibility was

not addressed in the opinion. In granting the petitioner's appeal of the

secretary's ruling, the court stated that no public policy of the state
would be violated unless the express purposes contained in the proposed

certificate were unlawful.'^' The court observed that the purposes set

forth in the proposed certificate — assembling peacefully to work for
change within the law — were not illegal.'" In requiring the secretary to
accept the certificate, the court said, *'Were it otherwise it would, in

effect, permit the Secretary of State to impose his personal opinion on

what he considers improper conduct.'""

The cases of In re Queens Lay Advocate Service and Owles dem-

onstrate that determining the lawfulness of proposed purposes is not

always clear. The inquiry raises the issue of how far a reviewing gov-
ernmental official may go in attributing implied unlawful purposes to
a proposed nonprofit corporation. This issue, as well as the issue of

how far such an official may go to withhold approval where evidence
suggests that the persons who will operate the nonprofit are irresponsible,
was decided in Lueken v. Our Lady of the Roses.

^^"^

In that case, the petitioner sought judicial approval of a certificate

to incorporate a religious nonprofit for the purpose of promoting the

'«'M. at 982, 329 N.Y.S.2d at 182.

'"'Id. at 984, 329 N.Y.S.2d at 183. This definitional rule regarding public policy

was first enunciated in Association for the Preservation of Freedom of Choice v.

Shapiro, 9 N.Y.2d 376, 214 N.Y.S.2d 388 (1961), and evolved in response to claims

of abuse in the withholding of necessary approvals prior to incorporation.

'"38 A.2d at 982, 329 N.Y.S.2d at 183. The court did not consider the impact

upon the lawfulness of the organization's purposes in light of New York's sodomy
laws.

'"'Id.

"^97 Misc. 2d 201, 410 N.Y.S.2d 793 (1978).



1985] NOT-FOR-PROFIT 809

Roman Catholic faith. Opponents of the incorporation claimed that the
petitioner was seeking to incorporate in order to circumvent a previously

issued court order enjoining her from conducting street services, an order

which had been issued after a finding that the services conducted by

the petitioner constituted a public nuisance. The court noted that its

sole reason for reviewing a proposed certificate was to determine whether

or not the purposes stated are in conformity with the law, not to determine

the social desirability of the nonprofit. '^^ The court stated that it could

not presume an unlawful purpose based upon the petitioner's prior

conduct and was limited to a consideration of information contained in

the certificate about the purposes of the corporation.'^^ The court ob-

served that the purposes claimed were not illegal. '^^ Thus, it appears

that in reviewing a proposed certificate for incorporation under New
York law, the review is strictly limited to that information contained

in the certificate. Unlawful purposes may not be implied unless the
stated purposes contain some clear indication of an intent to carry out

unlawful purposes.

b. California.—California's nonprofit corporation law'^^ classifies
nonprofits by organizational purposes and provides for three types: public

benefit nonprofits ;'^^ mutual benefit nonprofits; '^° and religious non-

profits.'^' The California Nonprofit Corporation Law is similar to the
New York law insofar as distinctions are made between various classes
of nonprofits. These distinctions determine the nature and volume of

information required to be disclosed in connection with the formation

and operation of a nonprofit as well as the extent to which a nonprofit

will be subject to governmental scrutiny.

The California statute is divided into four primary parts. Part one'^^

contains the general provisions and definitions that are applicable to

parts two through four. Parts two through four contain provisions relating

to the formation, operation, and dissolution of particular classes of

'''Id. at 202, 410 N.Y.S.2d at 794.

'^Id. at 203, 410 N.Y.S.2d at 795.

^'^Id. The court, howver, denied approval because the petitioner failed to obtain

approval from the appropriate authorities of the Roman Catholic Church as required
under New York's Religious Corporation Law. Id. Because petitioner's purposes in-
cluded promoting the Roman Catholic faith, the proposed corporation was subject to
the provisions of both the Religious Corporation Law and the Not-For-Profit Corpo-
ration Law. See N.Y. Relic. Corp. Law § 2 (McKinney 1970 & Supp. 1984-85).

">«Cal. Corp. Code §§ 5000-8 (West Supp. 1984).
'*^/£/. § 5110 (corporations formed for any public or charitable purposes).

'™/cf. § 7110 (corporations formed for any lawful purpose that does not contem-

plate the distribution of gain, profits, or dividends to members except upon dissolu-

tion).

'^7</. § 9110 (corporations established primarily or exclusively for religious pur-

poses).

''^Id. §§ 5000-5080.



810 INDIANA LAW REVIEW [Vol. 18:777
c

nonprofits: part two deals with public benefit nonprofits; '^^ part three

deals with mutual benefit nonprofits;'^'* part four deals with religious

nonprofits. '^^ Generally, public benefit nonprofits are subject to more
extensive disclosure requirements and governmental review than mutual

benefit nonprofits, which are in turn subject to more extensive regulation
than religious corporations. The separate treatment of religious corpo-
rations is based upon the constitutional policy of avoiding excessive
governmental entanglement into religious affairs. '^^

Under the California Code, less information is required in the pro-

posed articles of incorporation for a nonprofit than is required under

either the Indiana or New York statutes. The information required
includes corporate name, a statement of purpose, and the name and
address of the initial corporate agent. '^^ Public benefit nonprofits seeking

incorporation for public purposes must include, in addition to the spec-

ified general statement of purpose, some further description of purpose. '^^

In addition, certain other information is specifically authorized to be

included within the articles, including information concerning directors,

membership, and elaboration upon corporate purposes beyond the min-

imal statutory statement. '^^

The articles must be submitted to the secretary of state for approval. '^^

Section 5008 of the California Code provides that the secretary must
give approval and file the article if the content "conforms to law.'"^'

It appears that the secretary has no discretion to withhold approval

based upon a determination that the proposed lawful purposes are

contrary to public policy or that those individuals who will control the
corporation are unfit for their responsibilities. Moreover, since only a

limited amount of information is required to be in the proposed articles,
it would seem that such a determination would be virtually impossible

'''Id. §§ 5110-8910.

'''Id. §§ 7110-8910.

''^Id. §§ 9110-9610. The California law relating to religious nonprofits differs sig-

nificantly in format from the New York law. Under New York law, the Religious
Corporation Law governing religious nonprofits is separate from the Not-For-Profit
Corporation Law and is incorporated by reference to the Not-For-Profit Corporations
Law. N.Y. Relic. Corp. Law § 2-6 (McKinney Supp. 1984-85). When there is a con-
flict between the Religious Corporations Law and the Not-For-Profit Corporations Law,
the Religious Corporations Law governs. Id. § 2-b(l)(a). In contrast, the California
Law consolidates those provisions relating to religious nonprofits into a single statute.
Cal. Corp. Code §§ 9110-9610 (West Supp. 1984).

'""See Hone, California's New Nonprofit Corporation Law—An Introduction and
Conceptual Background 13 U.S.F.L. Rev. 733, 743 (1979).

'"Cal. Corp. Code §§ 5130, 7130, 9130 (West Supp. 1984).
"'Id. § 5130(b).

''"Id. §§ 5132, 7132, 9132.

''"Id. § 5008.

'"Id.



1985] NOT-FOR-PROFIT 811

to make. Although there are no Cahfornia cases deahng with the issue

of the secretary of state's discretion to withhold approval of a proposed

nonprofit's articles of incorporation, there have been decisions under

analogous provisions of the for-profit corporation statute which suggest

that the secretary's discretion is limited to determinations of lawfulness

of purpose and conformity to formal requirements.'^^

In addition to filing proposed articles with the secretary of state,

a copy must be furnished to the secretary to be forwarded to the state

attorney general in the case of public benefit corporations.'^^ The purpose

of this requirement is to facilitate public benefit corporation registration

with the attorney general as required under the Uniform Supervision of

Trustees for Charitable Purpose Act.'^"^ This nonprofit corporation law

gives the attorney general broad investigatory and enforcement powers

over corporate assets held for charitable purposes. '^^

2. Accountability at the Operating Stage.—a. Periodic reports.—The
annual report requirements of the Indiana Act are more effective, in

accountability terms, than those of New York and California. Neither
California nor New York requires nonprofits to state the kinds of
activities they have been engaged in for the year. The information required

by the annual report provisions in these two jurisdictions is primarily

financial. '^^ Indiana, as well as fourteen other jurisdictions, requires a

statement describing the activities in which the corporation has engaged

during the year.'^^ The deficiency in the statutes of most of these

jurisdictions, however, is that they do not require distribution of annual

reports to members. California does require large public benefit non-

profits to send copies of their annual report to members, '^^ and smaller

''^See, e.g., Rixford v. Vordan, 214 Cal. 547, 6 P.2d 959 (1931) (secretary has

no discretion to reject proposed articles of for-profit corporation even though he de-

termines that the proposed corporation will become an unfair competitor in trade).

'"Cal. Corp. Code § 5120(d) (West Supp. 1984).
"'"Cal. Gov't Code § 12585 (West 1977); see Abbott & Kornblum, The Jurisdic-

tion of the Attorney General Over Corporate Fiduciaries Under the New California
Nonprofit Corporation Law, 13 U.S.F.L. Rev. 753, 771 (1979).

^''See Cal. Corp. Code §§ 5250, 6510, 6511, 6611 (West Supp. 1984).
'''See Cal. Corp. Code § 6321 (West Supp. 1984); N.Y. Not-For-Profit Corp.

Law § 519 (McKinney 1970 & Supp. 1984-85).
'''See Alaska Stat. § 10.20.625 (1983); Ariz. Rev. Stat. Ann. § 10-1081 (1983)

Colo. Rev. Stat. § 7-28-101 (1973 & Supp. 1982); Ga. Code Ann. § 22-3301 (1981)
Idaho Code § 30-1-125 (1980 & Supp. 1983); III. Rev. Stat. ch. 32, § 163a62 (1983)
Ind. Code § 23-7-1.1-36 (1982); Iowa Code § 496.1 (West 1949 & Supp. 1983-84)
Mont. Code Ann. § 35-1-1101 (1983); Neb. Rev. Stat. § 21-1981 (1943 & Supp. 1983)
Or. Rev. Stat. § 61.805 (1981); S.D. Codified Laws Ann. § 47-24-6 (1983); Tex
Rev. Civ. Stat. Ann. art. 1396-9.01 (Vernon 1979); W. Va. Code § 31-l-56(a) (1982)

'^"'Cal. Corp. Code § 6321 (West Supp. 1984). For the purpose of requiring non-
profits to send annual reports to members, California distinguishes between public ben-

efit corporations that have more than 100 members or $10,000 in assets during the

fiscal year and corporations with fewer members or assets. Id.



812 INDIANA LAW REVIEW [Vol. 18:777

public benefit nonprofits are required to send copies to members upon
request.

'^^

b. Standards of Conduct of Officers and Directors.—/. Self-dealing
and conflicts of interest.—The New York Not-For-Profit Corporation
law provides that directors and officers who have a '* substantial financial
interest" in transactions with the nonprofit, either directly or indirectly

by virtue of a directorship with an entity which is a party to the

transaction, must, in good faith, disclose the material facts relating to

that interest to the board of directors or members entitled to vote.'^°
Absent disclosure, the transaction may be voidable by the nonprofit
unless the parties establish that it was fair and reasonable to the cor-

poration at the time of authorization.'^'

The California provisions relating to disclosure of transactions with

interested directors also require information concerning the nature of

the director's interests. '^^ In the case of public benefit and religious

nonprofits, where transactions exist between the nonprofit and some

other corporation for which a director of the nonprofit also serves as

a director, full disclosure as to the nonprofit director's other directorship

must be made even though that director might not have a material
financial interest in the transaction.'^^ Such disclosure is not necessary,

however, in the case of public benefit and religious corporations where

the state attorney general is notified and approves the transaction. '^"^

Finally, where disclosure is not made and approval is not given by the
attorney general, transactions in which a director of a public benefit or

religious nonprofit has a material financial interest are voidable unless

it is established that a committee authorized by the board approved the

transaction with knowledge of the director's interest, that it was not

practical to obtain full board approval prior to the transaction, and

that the board subsequently ratified the transaction after making a good

faith determination that the first two conditions were met.'^^ Thus, the

California statute provides incentive to make the required disclosure
because voidability turns not on the issue of the fairness of the transaction

but on the issue of disclosure. '^^

"«/</. § 6321(c).

'^N.Y. Not-For-Profit Corp. Law § 715 (McKinney 1970 & Supp. 1982-83).
"'/</. § 715(b).

"^Cal. Corp. Code §§ 5233, 5234, 7233, 9243, 9244 (West 1977 & Supp. 1984).
"Vc^. §§ 5234, 9244.

'^"/cf. §§ 5233(d)(1), 9243(d)(1).

'^'/o^. §§ 5233(d)(3), 9243(d)(3). These sections do not specifically state that unau-

thorized self-dealing transactions are voidable. However, they give the court broad dis-

cretion to provide a fair and equitable remedy. Presumably, this discretion includes the

authority to void unauthorized self-dealing transactions.

"^Although an unauthorized self-dealing transaction may be voidable due to the
failure to disclose, the issue of reasonableness of the transaction to the nonprofit is



1 985] NOT-FOR-PROFIT 8 1

3

//. General standard of care and loyalty. The Indiana Act does not

have a statutory provision that delineates the general standards of care

and loyalty required of directors of nonprofit corporations. New York,
California, and ten other jurisdictions have such statutory standards. '^^

A typical provision is that found in the New York statute:

(a) Directors and officers shall discharge the duties of their

respective positions in good faith and with that degree of dil-

igence, care and skill which ordinarily prudent men would exercise
under similar circumstances in like positions.

(b) In discharging their duties, directors and officers, when

acting in good faith, may rely upon financial statements of the
corporation presented to them to be correct by the president or

the officer of the corporation having charge of its books of

accounts, or stated in a written report by an independent public

or certified public accountant or firm of such accountants fairly

to reflect the financial condition of such corporation.'^^

Such a provision is beneficial because it clearly defines the general

duty of care for officers and directors. With this kind of provision in

a state's nonprofit corporation act, the general duty of care need not

await judicial definition.

B. Adjudicative Mechanisms

I. Role of the State Attorney General.—New York, in sharp contrast
to Indiana, gives various state officials a great deal of authority to

compel compliance with the nonprofit law in general. Most of this
authority is vested in the Office of the Attorney General.

Under the New York statute, the attorney general is authorized to
maintain actions to dissolve a corporation that has acted ultra vires, (2)

restrain a corporation from carrying on unauthorized activities, (3) to

dissolve a corporation that was formed improperly, (4) restrain unin-

corporated associations from exercising corporate rights in the state, (5)
remove directors for cause, (6) dissolve the corporation, (7) restrain

still relevant. Such considerations may be taken into account by the court in determin-
ing whether and to what extent interested directors will be liable to the nonprofits for
any damages arising out of the transaction. See id. §§ 5233(h), 9243(h).

'"Cal. Corp. Code § 9241 (West Supp. 1984); N.Y. Not-For-Profit Corp. Law
§ 717 (McKinney 1970); see also Conn. Gen. Stat. Ann. § 33-455 (West 1984); Fla.
Stat. Ann. § 617-26 (West 1976) (repealed); Ga. Code Ann. § 14-3-113 (1982); Ha-
waii Rev. Stat. § 416-91.5 (1968 & Supp. 1983); Idaho Code § 30-1-35 to -142 (1977);
Md. Corps. & Ass'ns § 2-405.1 (1976 & Supp. 1983); Minn. Stat. Ann. § 317.20
(West 1969); Ohio Rev. Code Ann. § 964 (1984); Pa. Stat. Ann. tit. 15, § 2851-506
(Purdon 1959 & Supp. 1983); Tenn. Code Ann. § 48-813 (1979).

""N.Y. Not-For-Profit Corp. Law § 717 (McKinney 1970 & Supp. 1984-85).



814 INDIANA LAW REVIEW [Vol. 18:777

foreign corporations from acting within the state, (8) enforce members'

rights, and (9) compel an accounting upon dissolution. In addition, the

attorney general has the right to bring actions against directors and

officers for making improper distributions, for an accounting by directors

for misconduct, and to enjoin unlawful conveyances.''^'^

As with the New York law, California gives the state attorney
general expansive power to investigate and bring actions to correct mis-

conduct. The California Code, however, gives the attorney general dif-

ferent amounts of authority depending upon the type of nonprofit
corporation involved. For example, the attorney general is given broad

powers over public benefit nonprofits. These corporations are subject

at all times to examination by the attorney general for the purpose of

determining whether or not the corporation has complied with trusts

which it has assumed and whether there has been a deviation from the

corporate purposes.^^ Moreover, the California attorney general is em-

powered to bring an action in the name of the state to correct any
deviations discovered. ^°' He is also empowered to institute suit to remedy
any breach of charitable trust by the corporation and to bring an action

to recover for the nonprofit any unlawful distribution. ^^^

The attorney general is also given the authority to take action with

respect to the composition of the board of directors and the protection

of certain membership rights, as well as the continuing existence of the

nonprofit. He has the authority to institute proceedings to remove di-
rectors for breach of the established standards of conduct, abuse of

authority or fraudulent conduct, and to intervene in actions challenging

the election of directors. ^°^ Finally, the attorney general is authorized to

bring an action for involuntary dissolution based upon certain grounds,

including the persistent fraudulent mismanagement or abusive conduct

of the nonprofit's management, the existence of serious internal disputes

which prevent the corporation from advantageously carrying on its op-

erations, and the failure of a nonprofit to carry out its purpose. ^^'^

In the case of mutual benefit corporations, the attorney general has

relatively limited power, primarily limited to situations where the non-

profit holds assets in charitable trust. ^^^ This difference in the attorney

general's authority in the case of mutual benefit corporations is a re-

flection of the enforcement role imposed by law on the attorney general

to protect the interests of the nonprofit's beneficiaries who would not

"^id. § 112.

^"'Cal. Corp. Code § 5250 (West Supp. 1984).
^"'M

^"Vt/. § 7240.

^°'M § 5250.

^^Id. §§ 6510, 6511.

""'Id. § 7240.



1985] NOT-FOR-PROFIT 815

Otherwise be in a position to protect themselves. In the context of a

mutual benefit corporation where no charitable trust exists, the members

are the nonprofit's beneficiaries and, therefore, are in a position to

protect themselves. Thus, there is little need for protection action by

the attorney general.

Nevertheless, the attorney general is granted authority in certain

matters regarding mutual benefit nonprofits, even where no charitable

trust is involved. Upon complaint of violations of the nonprofit law by
a member, officer, or director, the state attorney general may notify
management of the nonprofit of the complaint; the corporation's failure

to respond adequately may cause the attorney general to institute pro-
ceedings seeking appropriate remedies to protect the rights of members. ^^^

Thus, the attorney general is empowered to take action where a mutual

benefit nonprofit has failed to make required filings with the secretary
of state, hold required meetings, or has violated other membership

rights.2^'

Finally, the authority of the attorney general over religious corpo-

rations is very limited. The attorney general has the power to enforce

state criminal laws; bring an action to determine judicially whether or

not the organization is properly incorporated as a religious nonprofit;

exercise any authority granted regarding required filings with the state,

proceedings winding up the corporation, disposition of residual assets

after dissolution, payment of liabilities, and criminal penalties;

compel the nonprofit to use property solicited and received from the

public for the designated purpose, where the nonprofit in making its

solicitation represented that such property would be used for specific

purposes. ^°^

In summary, the role of the state attorney general in enforcing the

nonprofit law and protecting the rights of beneficiaries, donors, and

creditors varies. The Indiana attorney general's statutory authority ap-

pears quite limited compared to the more expansive New York and
California statutes.

2. Role of the Members.—The Indiana Not-For-Profit Corporation
Act does not contain any provision for derivative actions for members.

In contrast, both New York and California nonprofit members have
standing to initiate derivative actions. In New York, at least five percent
of any class of members must join in the action. ^^ In California, however,

there is no such requirement. Any members may bring a derivative action
if they were members at the time that the complained of transaction

^'^Id. § 8216.

^««/G?. § 9230.

^"'^N.Y. Not-For-Profit Corp. Law § 623(a) (McKinney 1970 & Supp. 1984-85).



816 INDIANA LAW REVIEW [Vol. 18:777

occurred. ^'° To mitigate the potential harrassing effects of this Hberal
standing provision, the statute permits the defendants to request that

the court require the plaintiff to furnish security for expenses.^" The

most innovative aspect of the standing provision of the California statute

is the extent to which it expressly gives standing to individual members

to enforce their membership rights. Members, individually, have standing

to bring action for judicial enforcement of the duty of the board to

make and deliver any statements or reports required by law, bring action
for judicial enforcement of inspection rights, bring action for a court

order compelling the nonprofit to call or conduct meetings of members,

and bring an action challenging the validity of any election, appointment,

or removal of a director. ^'^

V. Reforming Indiana's Not-For-Profit Corporation Act

The preceding sections of this Article have analyzed the relevant

regulations that exist to monitor and discipline the activities of nonprofits

incorporated in Indiana. The major regulatory device, the Indiana Not-

for-Profit Corporation Act, compares relatively well with similar statutes

in other jurisidictions. Nevertheless, both New York and California have
shown that regulation of nonprofit corporations can be much more finely
tuned if nonprofits are classified according to their purposes.

Recognizing the different purposes served by different types of non-

profit corporations is not a radical departure for that part of the legal

system concerned with regulating organizations that hold and manage

resources for identifiable constituencies. Several states have acknowl-

edged, through legislative enactment, the distinction between closely-held

and nonclosely-held business corporations.^'^ Likewise, most jurisdictions

make a legal distinction between general and limited partnerships.^'"^
Finally, all jurisdictions acknowledge, through regulation, a distinction

between charitable and other types of trusts. ^'^ Perhaps the most sig-

nificant reason for making these statutory distinctions is that it permits

the legislature to define different fiduciary obligations for managers

according to the type and function of the organization. Thus, for example.

^'"Cal. Corp. Code § 5710 (West Supp. 1984).

''Ud. § 5617(a).

'''See, e.g., Cal. Corp. Code §§ 149, 158 (West 1977); Del. Code Ann. tit. 8,
§§ 341-356 (1974).

^'"In a limited partnership, the limited partners are shielded from unlimited liabil-

ity. To protect this privilege, the limited partner must refrain from taking an active
role in the partnership business. See. e.g., Ind. Code §§ 23-4-2-1, -7 (1982). Conversely, a
partner in a general partnership has unlimited liability to creditors and has the right

to take an active role in conducting the business of the partnership. See, e.g., Ind. Code
§§ 23-4-1-6, -15 (1982).

^'^See generally G. Bogart, Law of Trusts 200 (1973).



1985] NOT-FOR-PROFIT 817

managers of closely-held corporations, where there is virtually no market

for the firm's securities, have a much greater fiduciary obligation to
minority shareholders in transactions involving the sale or exchange of

securities than do managers of large, publicly held corporations.^*^

The danger of statutorily maintaining a single, unitary regulatory

standard for organizations that may have a "family resemblance" but
serve essentially different purposes is that the statute tends to overregulate

as well as underregulate. This kind of statute is currently in force in

Indiana. More specifically, the Indiana Act does not have a provision
setting out a fiduciary standard for directors of nonprofit corporations.

Also, the Act contains no provision for derivative suits by nonprofit

members. Additionally, the self-dealing and conflict-of-interest provi-

sions of the Act are not rigorous enough for directors of charitable

organizations. Finally, the annual report provision does not require that

the report be distributed to members and others. All of these features

are shortcomings which emanate from the Act's underregulation of

nonprofits. Moreover, one provision of the Act that overregulates is the

dissolution provision which requires all assets that cannot be distributed

according to the guidelines in the Act to escheat to the state. An analysis
of the defects in the Indiana Act is necessary before appropriate remedial

measures can be proposed.

A. General Standards of Fiduciary Care and Loyalty

Indiana, Uke most states, does not have a provision in its nonprofit

corporation statute defining the standards of fiduciary care and loyalty

owed by directors of these corporations. Consequently, in an action

against directors of a nonprofit corporation for a breach of fiduciary

duty, the court would be Hkely to apply the common law standard. Yet,
in Indiana, there are no reported cases in which the courts have clearly

set out the common law standard. Indeed, there are few cases on the
subject in the country. The leading decision is Stern v. Lucy Webb
Hayes National Training School for Deaconesses and Missionaries.^^''

This was the first widely publicized case in which the court explored

the potentially applicable fiduciary standards to be applied to directors

of nonprofit corporations. The court declined to impose a trustee standard

upon the directors as that imposed upon directors of business corpo-
rations. The court rationahzed the imposition of the corporate standard

on the basis of the broader responsibilities of directors of nonprofit

corporations who are charged with managing the affairs of an operating
corporation, while "the traditional trustee is often charged only with

^'^See, e.g.. Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505
(1975).

^'^381 F. Supp. 1003 (S.D.N. Y. 1974).



818 INDIANA LAW REVIEW [Vol. 18:777

the management of the trust funds and can therefore be expected to

devote more time and expertise to that task."^'^

The problem with the Stern case and with the statutory standard

which does exist in a few jurisdictions^'^ is that the same standard is

appHcable to directors of all nonprofit corporations even though their

functions vary enormously. For example, the directors of a corporation

whose purpose is to assist abused children are held to the same fiduciary

standard as the directors of a fraternity. A strong argument can be
made that directors of charitable corporations like the one assisting
abused children should be held to a higher fiduciary standard than the

directors of a mutually beneficial nonprofit corporation like a fraternity.

Charitable nonprofits are fundamentally different from mutual ben-

efit nonprofit corporations. Charitable or public benefit nonprofits^^° are

frequently organized to serve a large or indefinite class of beneficiaries,

such as alcoholics, abused children, or the poor.^^' Usually, beneficiaries

of these corporations do not have an economic interest in the corporation

and in some jurisdictions these corporations have no members other

than those persons who serve as directors. ^^^ Moreover, beneficiaries of
these corporations rarely sit on the boards of directors or become

members of the corporation assisting them. In short, beneficiaries are

not in a position to monitor and discipline the corporation's managers. ^^^

Furthermore, members have insufficient economic incentives to monitor

and discipline management. ^^'^

In contrast, the primary beneficiaries of mutual benefit nonprofits

are its members. The only purpose served by most mutual benefits is

to further the interests of its members. Thus, the members of these

organizations have strong incentives to monitor and discipline manage-

ment.

^'«M at 1013.

^^'^See supra note 146.

2^°See Cal. Corp. Code § 5111 (West Supp. 1984).
"'Public benefit nonprofits are distinguished from other nonprofits in roughly the

same way that organizations that qualify for tax exemption under I.R.C. § 501(c)(3)

(1982) are distinguished from other federally tax exempt organizations.

'^^See N.Y. Not-For-Profit Corp. Law § 601 (McKinney 1970 & Supp. 1984-85).
In New York, for example, some nonprofit corporations are not required to have
members. See also Model Nonprofit Corp. Act § 11 (1973).

"'As noted, beneficiaries have no standing to sue on behalf of the corporation.

See supra note 101. Moreover, unless the nonprofit corporation's articles of incorpo-

raion or by-laws specifically provide for it, beneficiaries have no right to attend board

or membership meetings or to examine the nonprofit's books and records.

"''Most members of charitable nonprofit corporations serve in a voluntary capac-

ity, primarily because they believe that the organization is furthering a public purpose

of which they approve. Nonprofit statutes in most jurisdictions prohibit these persons

from receiving any of the revenues of the nonprofit, except as reimbursement for ex-

penses incurred on behalf of the corporation. Consequently, any legal action taken by

these members would be financed totally by them. Even if the action were successful,

it would not produce any monetary return to the members.



1985] NOT-FOR-PROFIT 819

As previously noted, the Indiana Act does not have a provision

specifically delineating the standard of care or loyalty for directors of

nonprofit corporations. Additionally, charitable, educational, and cultural

organizations are expresly exempted from the standards of conduct im-

posed on trustees under the Indiana Trust Code.^^^ This omission should

be cured, and cured in such a way as to impose a higher standard of

fiduciary duty on the directors of public benefit nonprofits when com-

pared to mutual benefits. Whether the Indiana courts, in an appropriate

case, would impose a higher standard on the directors of charitable

nonprofits than on directors of mutual benefit nonprofits is an unan-

swered question. In view of the absence of statutory language and the

absence of classification of nonprofits, the courts could either apply one

unitary standard to all nonprofit fiduciaries or recognize the distinction

between directors of public and mutual benefit nonprofits. ^^^ Notwith-

standing the exemption of directors of charitable nonprofits from the

standards imposed on fiduciaries by the Indiana Trust Code, the courts

should impose a higher duty on fiduciaries of pubhc benefits, because

of the distinction between public and mutual benefit nonprofits. The
tough questions are how one delineates these two standards and how
one justifies the distinction.

In answering these questions, the law of business corporations may
be helpful. During the first half of this century, some important and

innovative changes occurred in the law of business corporations. ^^^ Never-

theless, business corporation codes in most jurisdictions make no allow-
ance for the distinction between the large publicly-held corporations and

small closely-held corporations. ^^^ These state statutes created more prob-

lems for closely-held corporations than for publicly held corporations. ^^^

^"iND. Code § 30-4-1-1 (1982).
^^^See infra note 233.

^^^One of the most significant of these developments is the judicial and statutory

recognition of close corporations. See Caller v. Caller, 32 111. 2d 16, 203 N.E.2d 577

(1965); Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505 (1975); Clark
V. Dodge, 269 N.Y. 410, 199 N.E. 641 (1936); McQuade v. Stoneham, 263 N.Y. 323,
189 N.E. 234 (1934). Examples of other significant developments include Zahn v.
Transamerica, 162 F.2d 36 (3d Cir. 1947) (judicial recognition of a fiduciary obligation

owed by majority shareholders to minority shareholders when the majority controls the
corporation); Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983); Singer v. Magna-
vox, 380 A.2d 969 (Del. 1977) (judicial recognition of the rights of minority share-

holders to be protected against self-dealing by the majority in corporate combinations);

Del. Code Ann. tit. 8, § 253 (1983) (legislation authorizing a corporation owning 90%
or more of the stock of another corporation to merge the subsidiary into the parent
without shareholder approval).

"«See, e.g., Ind. Code §§ 23-1-1-1 to 23-6-3-5 (1982); Miss. Code Ann. §§ 70-1-
1 to 70-9-27 (1972); Okla. Stat. Ann. §§ 70-1-1 to 70-9-27 (1972); Okla. Stat. Ann.
tit. 18, §§ 1.1-1.25 (West 1953).

^^'^See Deutsch, Roses in Search of Gertrude Stein: The Puzzle of the Close Cor-

poration, 9 U. ToL. L. Rev. 458 (1978) (discussing the inherent contradictions of plac-

ing the close corporation in a structure designed for the large public corporation).



820 INDIANA LAW REVIEW [Vol. 18:777

For example, the owners of closely-held corporations sometimes sought

to commit the board of directors to specific courses of action such as

the selection of officers and the establishment of their compensation. ^^^

Shareholders of closely-held corporations also attempted to establish

dividend policy through shareholder agreement. ^^' Finally, shareholders

of closely-held corporations often attempted to increase statutorily-im-

posed quorum and voting requirements. ^^^ The combination of judicial
opinions and legal articles suggesting that the distinction between closely-

held and other corporations be acknowledged through statutory reform

was eventually successful.^" Today, several jurisdictions have provisions

in their business corporation statutes that apply only to closely-held

corporations.^^'* Unfortunately, in spite of these legislative developments,

courts did not recognize a distinction between the obligations owed by
the fiduciaries of pubHcly-held corporations as opposed to those owed

by the fiduciaries of closely-held corporations.^"

Finally, in 1975, the Supreme Judicial Court of Massachusetts held

that the majority shareholders of closely-held corporations owed a higher

duty to a minority shareholder than the majority owed to the minority

in nonclosely-held corporations.
^^^

In Donahue v. Rodd Electro-
type Co.y^^^ Rodd, a former director, officer, and controlling share-

holder of a close corporation offered to sell to the corporation his

shares of its own stock. Rodd made the offer to his son who was
president and general manager of the corporation. Subsequently, the

board of directors authorized the company to purchase forty-five shares
from Rodd at $800 per share. Approximately one year later, a special
shareholders' meeting was held at which the transaction was officially

disclosed. Mrs. Donahue, a minority shareholder, voted against a res-

olution ultimately adopted by the other shareholders ratifying the stock

repurchase from Rodd. Mrs. Donahue then offered her shares for sale
to the corporation on the same terms as those given to Rodd, but the

corporation refused to buy them. She instituted suit, alleging that the

stock repurchase by Rodd Electrotype was a violation of fiduciary duties
owed to her by the defendants in their respective capacities as controlling

'""See, e.g., McQuade v. Stoneham, 263 N.Y. 323, 189 N.E. 234 (1934).
"'See, e.g., Clark v. Dodge, 269 N.Y. 410, 199 N.E. 641 (1936).

"'See, e.g., Benintendi v. Kenton Hotel, 294 N.Y. 112, 60 N.E.2d 829 (1945).

'"See, e.g., Caller v. Caller, 32 111. 2d 16, 203 N.E.2d 577 (1964); Hetherington,

Trends in Legislation for Close Corporations: A Comparison of the Wisconsin Business
Corporation Law of 1951 and the New York Business Corporation Law of 1961, 1963
Wis. L. Rev. 92.

'''See, e.g., Cal. Corp. Code § 158 (West Supp. 1984); Del. Code Ann. tit. 8,

§§ 341-356 (1983), N.Y. Bus. Corp. Code §§ 620, 630 (McKinney 1970 & Supp. 1983).
'''See Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505 (1975).
"^Id. at 590-91, 328 N.E.2d at 515-16.

"^367 Mass. 578, 328 N.E.2d 505 (1975).



1985] NOT-FOR-PROFIT 821

shareholders, officers, and directors. She sought to have the purchase

rescinded on the basis of its infringment of her personal rights as a

minority shareholder. More specifically, she urged that the controlling
shareholders had a duty to offer her, as a minority shareholder, an

equal opportunity to sell her shares to the corporation. ^^^ The Rodd
family, as defendants, denied that a right to equal opportunity existed

in corporate stock purchases for the corporate treasury. The trial court

ruled for the defendants, finding that the transaction had been carried

out in good faith and with inherent fairness. ^^^ The case was affirmed

by the intermediate appeals court.^^^^ The Supreme Judicial Court of
Massachusetts reversed, ^'^' noting that shareholders in close corporations

face a restricted market for their holdings and that the remedy of

voluntary dissolution was available primarily to majority interests. The

court held that the dissident minority shareholder was entitled to pro-

tection.^"*^ The court stated that the majority shareholders had breached

a fiduciary duty to the plaintiff and must afford her an equal opportunity

to sell her shares to the corporation.^^^ More importantly, the court
imposed a new fiduciary standard upon the majority shareholders:

Because of the fundamental resemblance of the close corporation

to the partnership, the trust and confidence which are essential

to this scale and manner of enterprise, and the inherent danger
to minority interests in the close corporation, we hold that
stockholders in the close corporation owe one another substan-
tially the same fiduciary duty in the operation of the enterprise

that partners owe to one another. . . . [W]e have defined the
standard of duty owed by partners to one another as the utmost
good faith and loyalty. Stockholders in close corporations must

discharge their management and stockholder responsibilities in
conformity with this strict good faith standard. ^"^

Two years later, the Massachusetts Supreme Judicial Court reaffirmed
this standard and imposed liability on the majority shareholders of a

nursing home incorporated as a close corporation when they engaged
in a '* freeze-out'' of a minority shareholder.^"*^

The relevance of this judicially created distinction is that it may
help to justify a similar distinction between the obligations of fiduciaries

^'^Id. at 585, 328 N.E.2d at 511.

"Vc?. at 582, 328 N.E.2d at 508.

'''Id. Sit 594, 328 N.E.2d at 521.

''Ud. at 593, 328 N.E.2d at 519.

'''Id. at 594, 328 N.E.2d at 520.

'""Id. at 590, 328 N.E.2d at 515 (footnotes omitted).

^^^Wilkes V. Springside Nursing Home, Inc. 370 Mass. 842, 353 N.E.2d 657 (1976).



822 INDIANA LAW REVIEW [Vol. 18:777

of public benefit and mutual benefit nonprofit corporations. The court

in Donahue relied heavily on the trust and confidence which the law
permits partners to have in each other. ^"^^ The relationship is not one

that imposes trust standards on partners, but it is clearly one that imposes

a fiduciary obligation on them that is higher than the fiduciary obligations

of directors of corporations. ^"^^ The trust standard is inappropriate because

total reliance on one partner to conduct all of the affairs of the part-

nership for the benefit of the other partner or partners is absent. ^''^ Each

partner serves as a fiduciary for the other partners and, unlike a ben-

eficiary of a trust, each partner has the right to participate in partnership

decisionmaking. Nevertheless, partners frequently have committed most

of their capital to the partnership under circumstances that make with-
drawal from the partnership difficult without suffering severe financial

loss. Since the mere status of partnership subjects participants to the

law of agency, the partners are forced to have trust and confidence in

each other. This is the reason that partnership agreements commonly
provide partners with some type of veto power over new partners.

Many businesses that would otherwise operate as partnerships are
incorporated to avoid the personal Hability of the owners. ^^^ Nevertheless,

the owner-managers of these businesses attempt to organize them so that

they have the best of both worlds, so that they are operated as part-

nerships would be operated but have the corporate advantages of limited

liability and perpetual existence. Their solution is the formation of a

closely-held corporation. The court in Donahue said that a close cor-
poration was "typified by (1) a small number of stockholders; (2) no
ready market for the corporate stock; and (3) substantial majority stock-

holder participation in the management, direction, and operation of the

corporation. "^^° The critical distinction facing minority shareholders in
publicly-held corporations compared to minority shareholders in closely-
held corporations is that there is generally a market for the stock held

by the former. The minority shareholder in a publicly held corporation
is not locked in. The rule of equal opportunity announced in Donahue
has not been applied to transactions in shares in large, publicly-held

corporations precisely because of this "exit option" for minority share-

holders.^^' It is suggested that the distinction between fiduciaries of public

^"'•367 Mass. at 590, 328 N.E.2d at 515.

'''Id. at 590-91, 328 N.E.2d at 515-16.

^'*That is, a partner is not a trustee for the other partners. Rather, each partner

owes every other partner a fiduciary obligation to conduct the affairs of the partner-

ship for the benefit of all partners.

''''See Symposium on the Close Corporation, 52 Nw. U.L. Rev. 345, 347 (1957).
""367 Mass. at 585, 328 N.E.2d at 511.

"'The existence of the exit option does not, however, imply that the majority

shareholders or directors of publicly-held corporations can engage in transactions or

cause the corporation to take actions which injure minority shareholders.



1985] NOT-FOR-PROFIT 823

and mutual benefit nonprofits should be drawn on the same basis that

the court in Donahue drew the distinction between fiduciaries of closely-
held and publicly-held corporations. The analogy is worth examining

more closely.

The relationship between beneficiaries of, and perhaps donors to,

public benefit nonprofits and the managers of these corporations resem-

bles the fiduciary relationship between majority and minority shareholders

of close corporations. First, decisions of managers of public benefit

nonprofits are final and not subject to reversal or ratification because

there are generally few members of these corporations. In close cor-

porations, the decisions of the managers are also final because they

generally own the majority of the outstanding shares of the corporation.
Second, the beneficiaries of many public benefit nonprofits may have
few or no effective "exit" options. That is, it is not likely that a poor

person who is aided by a charity will decline benefits because he opposes
management's decisions or believes that management is breaching a

fiduciary duty. Similarly, patients in hospitals cannot easily move from
one hospital to another. In sum, the beneficiary of a public benefit

nonprofit resembles, in this respect, the minority shareholder of a close

corporation who finds "exit" difficult because of the absence of a
market for her shares.

Similarly, the shareholders of publicly-held corporations are analogous

to members of mutual benefit nonprofits. The striking characteristic of
most mutual benefit nonprofits is that they are organized to advance

the interests of their members. Of course, this does not mean that mutual
benefits do not serve a public purpose also; they do. Labor unions, for

example, serve to reduce tension among laborers and management and
to improve the workplace conditions of laborers.^" Nevertheless, in the

process of achieving these goals, labor unions also benefit their mem-
bers.^^^ Consequently, most mutual benefit nonprofits, like labor unions,

have members who are active. The members of these nonprofits have
an incentive to vote for management, to communicate their concerns to

management, and, ultimately, to resign or exit from the organization if

they become too disaffected. Members of mutual benefits share all of
these characteristics with stockholders of publicly-held corporations. For

example, there is generally a market for membership in organizations

like country clubs, social clubs, and civic organizations.^^"* In some
jurisdictions, members can sue derivatively and managers of mutual
benefit nonprofits are vulnerable to ouster at annual elections. ^^^

'''See Labor Management Relations Act § 1, 29 U.S.C. §§ 141-69 (1982).
'''Id.

''^See Buchanan, An Economic Theory of Clubs, 32 Economica 1 (1965).
'"In every jurisdiction where there is a separate nonprofit statute, the statute re-

quires an annual meeting for the purpose of electing directors. See, e.g., Ind. Code
§§ 23-7-1.1-9, -10 (Supp. 1985).



824 INDIANA LAW REVIEW [Vol. 18:777

In summary, it is recommended that a distinction be made between

the fiduciary duties of managers of public benefit nonprofits and mutual

benefit nonprofits. Directors of public benefit nonprofits should be held

to the partnership standard of utmost good faith and loyalty, while it

is appropriate to hold the directors of mutual benefit nonprofits to the

standard of care and loyalty imposed on directors of public corporations.

B. Self-Dealing and Conflicts of Interest

The self-dealing and conflict of interest provision of the Indiana
Not-For-Profit Corporation Act contains the same language as its coun-

terpart in the Indiana Business Corporations Act.^^^ It states:

No contract or other transaction between a corporation and
one or more of its directors or any other corporation, firm,

association or entity in which one or more of its directors is a
director or officer or is financially interested, shall be either

void or voidable because of this relationship or interest or because

the director or directors are present at the meeting of the board

of directors or a committee thereof which authorizes, approves

or ratifies such contract or transaction or because his or their

votes are counted for such purpose, if:

(a) The fact of this relationship or interest is disclosed or

known to the board of directors or committee which authorizes,
approves, or ratifies the contract or transaction by a vote or

consent sufficient for the purpose without counting the votes or

consents of such interested directors, or

(b) The fact of such relationship or interest is disclosed or

known to the members entitled to vote and they authorize,
approve or ratify such contract or transaction by vote or written

consent; or

(c) The contract or transaction is fair and reasonable to the

corporation.

Common or interested directors may be counted in deter-
mining the presence of a quorum at a meeting of the board of
directors or a committee thereof, which authorizes, approves or

ratifies such contract or transaction. ^^^

Although this provision may be adequate for business corporations,
it is not sufficient to protect beneficiaries of and donors to public benefit

nonprofits. To be sure, the Indiana Trust Code subjects certain Indiana

^^""Compare Ind. Code § 23-7-1.1-61 (1982) (conflict of interest in nonprofit set-

ting) with Ind. Code § 23-1-10-6 (1982) (conflict of interest in for-profit setting).

'''Id. § 23-7-1.1-61.



1985] NOT-FOR-PROFIT 825

nonprofits to a higher standard regarding self-dealing. ^^^ That standard

prohibits private foundations from engaging in certain transactions with

disqualified persons. ^^^ Foundation managers and their substantial con-

tributors are considered disqualified persons. ^^^ Therefore, a certain num-

ber of public benefit nonprofits in Indiana are already subject to a much
stricter self-dealing and conflicts of interest provision than that provided

by the Not-For-Profit Act. Nevertheless, there are some public benefit
nonprofits that are not private foundations and therefore are exempt

from the Indiana Trust Code provisions.
Beneficiaries and donors have no easy way to detect managerial self-

dealing. They are not permitted to sue on behalf of the corporation

and the disclosure provisions of the Act make it extremely unlikely that
beneficiaries, members, and donors will be able to determine whether

the managers have engaged in some form of self-dealing.

One way of reducing the potential of self-dealing by managers of
public benefit nonprofits that are not covered by the Indiana Trust Code

is flatly to prohibit any dealings between the managers of these nonprofits

and their corporations. This could be accomplished by amending the

Indiana Trust Code to include all public benefit nonprofits. This may,
however, be too stringent.

When it limited the application of the trust code standard, the
Indiana legislature probably meant to leave some flexibility for nonprofits

that were not private foundations. A sale or exchange of property between
a private foundation and a disqualified person, for example, is prohibited

by the Tax Reform Act.^^' Yet, under some circumstances it is conceivable

that the best purchase of land for a public benefit nonprofit is from

either a foundation manager or a substantial contributor. It would appear

that there are fewer risks of abuse if the Indianapolis YMCA engages
in this type of transaction than if a small, family controlled foundation

does so. Despite the recognized difference between private foundations

and other pubhc benefit nonprofits, the conflict of interest provision of

the Indiana Act should be strengthened considerably. An attractive al-
ternative to subjecting all public benefit nonprofits to the Indiana Trust

Code self-dealing provisions would be to adopt a provision similar to
the California self-dealing law.^^^

"«M § 30-4-5-21.
"'See supra notes 193-94 and accompanying text.

2«>See I.R.C. § 4946(a)(1), (2) (1982).

^""See id. § 4941(d).

^"§ 5233. Self-dealing transactions; interested director; exceptions; actions;

burden of proof; limitations; remedies

(a) Except as provided in subdivision (b), for the purpose of this section, a

self-dealing transaction means a transaction to which the corporation is a party

and in which one or more of its directors has a material financial interest and
which does not meet the requirements of paragraph (1), (2), or (3) of sub-



826 INDIANA LAW REVIEW [Vol. 18:777

This provision is superior to the current Indiana provision because

it places the burden of persuasion on the person accused of self-deaUng

and it forces the managers of the corporation to show that the transaction

authorized was the most "advantageous" under the circumstances. As

opposed to the generahzed fairness standard imposed by the Indiana

division (d). Such a director is an "interested director" for the purpose of

this section.

(b) The provisions of this section do not apply to any of the following:

(1) An action of the board fixing the compensation of a director as a direc-
tor or officer of the corporation.

(2) A transaction which is part of a public or charitable program of the
corporation if it: (i) is approved or authorized by the corporation in good

faith and without unjustified favoritism; and (ii) results in a benefit to one

or more directors or their families because they are in the class of persons

intended to be benefited by the public or charitable program.

(3) A transaction, of which the interested director or directors have no actual
knowledge, and which does not exceed the lesser of 1 percent of the gross

receipts of the corporation for the preceding fiscal year or one hundred

thousand dollars ($100,000).

(c) The Attorney General or, if the Attorney General is joined as an indis-

pensable party, any of the following may bring an action in the superior
court of the proper county for the remedies specified in subdivision (h):

(1) The corporation, or a member asserting the right in the name of the
corporation pursuant to Section 5710.

(2) A director of the corporation.
(3) An officer of the corporation.
(4) Any person granted relator status by the Attorney General.
(d) In any action brought under subdivision (c) the remedies specified in sub-

division (h) shall not be granted if:

(1) The Attorney General, or the court in an action in which the Attorney

General in [sic] an indispensable party, has approved the transaction before

or after it was consummated; or

(2) The following facts are established:

(A) The corporation entered into the transaction for its own benefit;
(B) The transaction was fair and reasonable as to the corporation at the time

the corporation entered into the transaction;

(C) Prior to consummating the transaction or any part thereof the board au-

thorized or approved the transaction in good faith by a vote of a majority

of the directors then in office without counting the vote of the interested

director or directors, and with knowledge of the material facts concerning the

transaction and the director's interest in the transaction. Except as provided

in paragraph (3) of this subdivision, action by a committee of the board

shall not satisfy this paragraph; and

(D) (i) Prior to authorizing or approving the transaction the board considered

and in good faith determined after reasonable investigation under the circum-

stances that the corporation could not have obtained a more advantageous

arrangement with reasonable effort under the circumstances or (ii) the cor-

poration in fact could not have obtained a more advantageous arrangement

with reasonable effort under the circumstances; or

(3) The following facts are established:

(A) A committee or person authorized by the board approved the transaction



1985] NOT-FOR-PROFIT 827

Act, the California Act forces the directors to show that of all the

options considered they chose the one that was most advantageous. This

eliminates the possibility of selecting one method of proceeding with a

deal and then simply characterizing that deal as fair. The managers must

be able to show that they considered several methods and then must

demonstrate that the one selected was the most advantageous.

in a manner consistent with the standards set forth in paragraph (2) of this

subdivision;

(B) It was not reasonably practicable to obtain approval of the board prior

to entering into the transaction; and

(C) The board, after determining in good faith that the conditions of sub-

paragraphs (A) and (B) of this paragraph were satisfied, ratified the trans-

action at its next meeting by a vote of the majority of the directors then in

office without counting the vote of the interested director or directors.

(e) Except as provided in subdivision (0, an action under subdivision (c) must

be filed within two years after written notice setting forth the material facts

of the transaction and the director's interest in the transaction is filed with

the Attorney General in accordance with such regulations, if any, as the At-

torney General may adopt or, if no such notice is filed, within three years
after the transaction occurred, except for the Attorney General, who shall
have 10 years after the transaction occurred within which to file an action.

(f) In any action for breach of an obligation of the corporation owed to an

interested director, where the obligation arises from a self-dealing transaction

which has not been approved as provided in subdivision (d), the court may,

by way of offset only, make any order authorized by subdivision (h), not-
withstanding the expiration of the applicable period specified in subdivision

(e).

(g) Interested directors may be counted in determining the presence of a quo-
rum at a meeting of the board which authorizes, approves or ratifies a con-
tract or transaction.

(h) If a self-dealing transaction * * * has taken place, the interested director

or directors shall do such things and pay such damages as in the discretion

of the court will provide an equitable and fair remedy to the corporation,

taking into account any benefit received by the corporation and whether the

interested director or directors acted in good faith and with intent to further

the best interest of the corporation. Without limiting the generality of the

foregoing, the court may order the director to do any or all of the follow-
ing:

(1) Account for any profits made from such transaction, and pay them to

the corporation;

(2) Pay the corporation the value of the use of any of its property used in

such transaction; and

(3) Return or replace any property lost to the corporation as a result of such

transaction, together with any income or appreciation lost to the corporation

by reason of such transaction, or account for any proceeds of sale of such

property, and pay the proceeds to the corporation together with interest at

the legal rate. The court may award prejudgment interest to the extent al-
lowed in Section 3287 or 3288 of the Civil Code. In addition, the court may,

in its discretion, grant exemplary damages for a fraudulent or malicious vi-

olation of this section.

Cal. Corp. Code § 5233 (West Supp. 1984).



828 INDIANA LAW REVIEW [Vol. 18:777

The Indiana provision on self-dealing and conflicts of interest is

satisfactory for mutual benefit nonprofits if members of these corpo-

rations are permitted to sue derivatively to protect the corporation from

managerial self-dealing. If the legislature grants this right, then members

of mutual benefit nonprofits should be able to protect themselves and

the corporation against managerial self-dealing. If, however, members of

mutual benefit nonprofits are not granted the right to sue derivatively,

the legislature should enact a law similar to the California self-dealing

provision, and it should be made applicable to both mutual benefit and
public benefit nonprofits.

C. Standing

The Indiana Act makes no provision for derivative actions by mem-
bers, donors, or beneficiaries of nonprofit corporations. Consequently,

the secretary of state and the attorney general must protect nonprofits

in Indiana if their managers refuse to do so or if the managers injure

the corporations. The attorney general may resort to litigation, if nec-
essary, to protect these corporations. Yet, it is difficult to believe that

the attorney general has the resources to monitor adequately the affairs

of more than twenty-five thousand corporations. What is needed is a
legal mechanism to permit private enforcement of the rights of Indiana

nonprofits. That there is need for private enforcement mechanisms is

only an assumption. It is unknown whether managerial abuses exist, or
how much of it exists in nonprofits incorporated in Indiana. Nor is it
known how vigilant managers of Indiana nonprofit corporations are in
seeking to enforce the rights of the corporation against third parties.

There is no claim that there is widespread managerial abuse of nonprofits

or that managers are lax in enforcing corporate claims against third

parties. Rather, the more modest proposal is that the Indiana Act be
amended to provide for derivative rights. If this proposal is considered,
the relevant question becomes: Who should have the right to sue de-
rivatively?

The law of business corporations may be helpful in answering this
question. Shareholders of business corporations are permitted by statute

in most jurisdictions to protect the corporation's interests by suing

derivatively.^" The theory of such causes of action is that shareholders

have an investment in the corporation and are entitled to seek redress

for corporate injury when that injury is inflicted by the managers of

the corporation or when the managers of the corporation refuse to take

action against a third party who has injured the corporation.^^"* The

^"See, e.g., N.Y. Bus. Corp. Law § 623 (McKinney 1970).
^"^See Stevens v. Lowder, 643 F.2d 1078 (5th Cir. 1981); Taormina v. Taormina

Corp., 32 Del. Ch. 18, 78 A.2d 473 (1951); Kavanaugh v. Kavanaugh Knitting Co.,

226 N.Y. 185, 123 N.E. 148 (1919).



1985] NOT-FOR-PROFIT 829

nature of the shareholder's investment in the business corporation is

both economic, insofar as he has made capital available to the corporation
and expects a return on this capital, and political, insofar as he holds

voting stock and expects to participate in the selection of management

and in fundamental decisions about the corporation's future. The leg-

islature should consider whether one can justify derivative actions in the

nonprofit context on this rationale.

Using this analogy, one could argue that members of nonprofits

who have an investment in the nonprofit that resembles the shareholder's
investment in the business corporation should be permitted to sue de-

rivatively. To be sure, there are members of nonprofits who have an
investment in the nonprofit that resembles the shareholder's investment

in the business corporation. Members of social clubs, labor and agri-
cultural organizations, and fraternal associations are examples. ^^^ In all

of these, the nonprofit's members have both an economic and a political
investment. Nevertheless, a rule of law limited to such a narrow segment

of the broad category of nonprofit organizations is less than optimal.

What is needed is a theoretical basis for broadening the scope of the
rule.

If attention is shifted from the individual shareholder's or member's

investment in the enterprise to society's investment in nonprofits, the

justification for permitting derivative actions by members of both public
and mutual benefit nonprofits becomes more compelling. Defining so-
ciety's stake in nonprofits is not a difficult task. The availability of the

corporate form, with its substantial advantages and various forms of

tax exemptions, gives society a sufficient basis for insisting upon as

much accountability as possible without, of course, unnecessarily re-
stricting the ability of nonprofits to produce the results most desired.

Moreover, donors, beneficiaries, and members have, at the very least,

an interest in regulation that provides appropriate accountability mech-

anisms.

At a bare minimum, it would seem that the Indiana Act should be
amended to permit derivative actions by members of nonprofits. Several

jurisdictions have already included a derivative action provision in their

nonprofit statutes. ^^^ Additionally, the notion of permitting private parties

^*'The members in these organizations are the primary beneficiaries. In most cases,

they pay membership fees or dues which are used by the organization to further the

interests of the members. The return on the "investment" of the members comes in the
form of laws or regulations which help the members conduct their private businesses
more profitably, broader social contacts, and a heightened sense of group identification

for members of fraternal organizations.

2<*Nine state nonprofit statutes permit members of the corporation to sue deriva-
tively. The states are California, Delaware, Florida, Idaho, New York, Oklahoma,
Pennsylvania, South Carolina, and Wyoming. See, e.g., Del. Code Ann. tit. 8, § 327

(1983); Idaho Code § 30-1-49 (1980); N.Y. Not-For-Profit Corp. Law § 623 (Mc-
Kinney 1970 & Supp. 1984-85).



830 INDIANA LAW REVIEW [Vol. 18:777

to enforce corporate governance statutes, even in the absence of specific

statutory lanaguage providing for private actions, is now generally ac-
cepted by the courts. The courts have treated these parties as "private

attorneys general.
"^^^

Whether private attorneys general are needed in the case of nonprofits

is an empirical question, one that cannot be answered in this Article.

Nevertheless, the existence of a mechanism to activate member interest
in vindicating the corporation's rights may be one way to answer that
empirical question. If there are many such suits, one may conclude that
such a mechanism was indeed needed. If there are no suits, the availability

of such a mechanism has certainly caused no harm.

Several questions must be answered before the proposed amendment

can be justified. First, while members of some mutual benefit nonprofits

may have an economic incentive to sue derivatively, what incentive would
members of public benefit nonprofits have to sue derivately? Second,

assuming that members of all nonprofits would have an incentive to
utiHze the derivative action provision, what benefits would accrue to the

constituencies of nonprofits if such a provision were adopted? Finally,

what safeguards need to be established to guard against the possibility

of nuisance and strike suits?

There is no easy answer to the first question. Members of public
benefit nonprofits generally serve in such a capacity primarily to help

the corporation attain the desired goal. They rarely have a personal

economic interest or stake in the organization. Realistically, it is highly

improbable that members of pubHc benefit nonprofits will sue either
their managers or third parties derivatively. Beyond the fact that they

are
*

'public-spirited," why people serve as members of public benefit
nonprofits is an unknown.^^^ These public-spirited members, who appear
at the annual meetings of nonprofits, spend their time engaged in vol-

untary work for the organization, and make periodic contributions to
the organization, may well institute derivative actions if the circumstances
are particularly egregious. ^^^ Certainly, suits instituted by members of

public benefit nonprofits could benefit their constituencies.

The benefit to be derived by the successful prosecution of a derivative

suit lies primarily in the fact that it will establish another level of

accountability for the corporation's managers. Perhaps the very existence

of a mechanism permitting member derivative actions may cause the

'"'See, e.g.. Mills v. Electric Auto-Lite Co., 396 U.S. 375, 396 (1970); Newman
V. Piggie Park Enterprises, Inc., 390 U.S. 400, 402 (1968); Associated Industries v.

Ickes, 134 F.2d 694, 704 (2d Cir. 1943), vacated as moot, 320 U.S. 707 (1943).

^'•*'5ee Phelps, Introduction in Altruism, Morality and Economic Theory
(1975).

'""See, e.g.. Stern v. Lucy Webb Hayes Nat'l Training School, 381 F. Supp. 1003
(D.D.C. 1974).



1985] NOT-FOR-PROFIT 831

directors to become more circumspect in their dealings with the nonprofit.

Clearly, the absence of managerial self-dealing and conflicts of interest

benefits the constituencies of these organizations. Of course, the effec-
tiveness of the proposed derivative action provision is causally related

to the extensiveness of the disclosure provisions. If members do not

have access to sufficient information about the nonprofit's operations,

it will be difficult for them to detect managerial indiscretions. Assuming

adequate disclosure, however, the proposed derivative action provision

must contain adequate procedural safeguards to prevent nuisance suits.

The New York Not-For-Profit Corporation Law has been in effect
since 1969 and provides for derivative actions by members.^^° Conse-

quently, it may help to examine the procedural devices built into this
statute to prevent nuisance suits. There, members must meet three re-

quirements before filing a derivative action: (1) at least five percent of

the members of any class must be parties to the action; (2) the plaintiff
must be a member at the time the action is brought; and, (3) the
complaint must set forth the efforts of the plaintiffs to secure the

initiation of such action by the board or the reason for not making the

request. ^^'

Clearly, the first requirement, that at least five percent of the

members of a class be parties to the action, is intended to guard against

situations in which one member becomes unhappy with the policy of
the board of directors and decides to institute a lawsuit or decides to

pursue a cause of action which other members think should not be
pursued. This requirement increases the likelihood that at least a sig-

nificant number of members believe that some injury has been committed

against the corporation and that the corpoation should be compensated.

It is important that nonprofit corporation assets not be depleted by

expenditures on groundless litigation, and one method of assuring the

substantiality of the litigation is to require that at least five percent of

the members join in a derivative action.

The second requirement, that the plaintiff must be a member at the
time the action is brought, appears to be a sensible standing requirement.

Why should one who is no longer a member of an organization or who
has not yet joined the organization be aided by a court in suing on

behalf of that organization? Since the statute grants members the right

to sue derivatively it therefore should follow that one must be a current

member to exercise the right.
Finally, the third requirement, that the complaint must set forth the

efforts of the plaintiffs to secure the initiation of the action by the

board or the reason for not making the request, is absolutely essential.

"ON.Y. Not-For-Profit Corp. Law § 623 (McKinney 1970 & Supp. 1984-85).
^-M § 623(a), (b), (c).



832 INDIANA LAW REVIEW [Vol. 18:777

The Indiana Not-For-Profit Corporation Act provides that the board of

directors shall manage the affairs of the corporation. ^^^ Initiating a lawsuit

on behalf of the corporation is a responsibility of the board of directors.

Therefore, the shareholder should show why the board has refused to
act or why it would be futile to make such a request of the board.
Courts have held that a shareholder will be excused from making a

demand upon the board when the persons being sued are members of
the board. ^^^ In situations where the directors are not named as defend-
ants, however, it is essential for the member to show why she has not
attempted to get the board to bring the action since this is normally a

board function.

Nothing in the literature on New York's law suggests that the New
York courts have been overwhelmed with nuisance suits by disgruntled

members of nonprofits. Consequently, it would seem that Indiana could
incorporate these procedural safeguards into an amended derivative action
provision. These provisions appear adequate to protect both the nonprofit

and the courts from a proliferation of nuisance lawsuits.

D. Disclosure

Disclosure improves accountability, depending on what it discloses

and to whom. There are at least four categories of information essential
to accountability: (1) information relating to contracts between officers

and the corporation and directors and the corporation; (2) information

relating to executive compensation; (3) information relating to the efforts

of managers to fulfill the stated goals of the corporations; (4) information

relating to the extent to which the board of directors has fulfilled its

duty of care.

Transactions between members, directors, and officers and the cor-

poration must be reported to permit corporation members and the
secretary of state to determine the propriety of the transactions. The
activities of the corporation for the year must be carefully delineated

to allow members and donors to determine whether or not the board
has been sufficiently productive and to help potential beneficiaries de-

termine which nonprofit is appropriate for particular requests for money,

services, or membership. A "verified*' statement of revenue and its
sources must be produced to help donors, potential beneficiaries, and

the general public determine how productive the nonprofit corporation's
managers have been with the amount of resources they had. Most 6f

^^^IND. Code § 23-7-1.1-10 (Supp. 1985).
'''See, e.g., Barr v. Wackman, 36 N.Y.2d 371, 329 N.E.2d 180 (1975). But see

In re Kauffman Mutual Fund Actions, 479 F.2d 257 (1st Cir. 1973), cert, denied, 414
U.S. 857; Aronson v. Lewis, 473 A.2d 805 (Del. 1984).



1985] NOT-FOR-PROFIT 833

this information is required by the annual reporting requirements of the
Indiana Act.^^"^

The problem arises when the second part of the question is addressed,
namely, to whom should disclosure be made?

In Indiana, annual reports of nonprofits must be submitted to the

secretary of state. ^^^ Members may examine these reports at the nonprofit
corporation's office. ^^^ Moreover, all persons, including members, may
examine these reports at the office of the secretary of state. ^^^ Never-

theless, it is questionable whether most people know that they have this
right. Furthermore, annual reports are filed at different times during

the year so that it could take several trips to the secretary of state's

office before the desired annual report is found on file. The Internal
Revenue Code presents one solution to overcome these difficulties. In
the case of annual reports filed by private foundations with the Internal

Revenue Service, the foundations are required to advertise the availability

of the report in a newspaper in the county in which their principal

office is located.^^^ The annual reports may be inspected by any citizen
at the office of the nonprofit for 180 days after the report is submitted

to the I.R.S.^^^ This is preferable to the current disclosure procedures

available in Indiana. The newspaper advertisement calls one's attention

to the fact that the annual report has actually been filed and is available

for inspection. Additionally, the report may be inspected at the office
of the nonprofit rather than at the secretary of state's office. This may
be much more convenient and could serve as incentive for constiuents
to inspect the annual report.

Finally, the question remains, whether disclosure in this form is

adequate. Although roughly the same amount of information is required
by the regulations governing nonprofit corporations as is required for

business corporations, the critical difference is that financial interme-

diaries have an incentive to acquire the information on business cor-

porations and disseminate it to shareholders and potential shareholders.

There are no such intermediaries in the case of nonprofits. This does

not imply that in some nonprofit sectors there are not commercial

organizations that disseminate information to potential consumers. For

example, there are commercial publications about colleges, day-care cen-

ters, and other nonprofits. It does suggest, however, that there may be
a greater need for mechanisms to disseminate information about non-

profits to their constituencies. At least one jurisdiction, California, has

^'*See IND. Code § 23-7-1.1-36 (1982).

^'"Id. § 23-7-1.1-13.

^''See id. § 5-14-3-3 (Supp. 1985).

^^"I.R.C. § 6104(cl) (1982).

^'"Id.



834 INDIANA LAW REVIEW [Vol. 18:777

taken a step in this direction. The Cahfornia Not-For-Profit Corporation

Act requires large nonprofits to send copies of annual reports to their

members and requires smaller nonprofits to furnish the reports on re-

quest. ^^"

Indiana should follow California's lead and require all nonprofits

with more than one hundred members and ten thousand dollars in assets

to send copies of their annual reports to their members. Additionally,

Indiana should require those nonprofits with fewer than one hundred

members and assets in excess of ten thousand dollars to send annual

reports to members on request. Moreover, in the interest of the broadest

disclosure possible, public benefit nonprofits should be required to submit

a copy of the annual report to at least one library in every county in

Indiana. In summary, the content of the annual report required by the

Indiana Act is adequate. The reports must, however, be circulated more

widely so that each of the constituencies will at least have an opportunity

to examine them.

E. Dissolution

The one clear example of overregulation in the Indiana Act is that

portion of the dissolution provision that specifies how assets must be
distributed. That provision states:

* * *

(3) Upon the authorization of the dissolution, the board of
directors shall then proceed to:

* * *

(IV) pay and discharge all the corporate debts and liabilities;

and

(V) after the expiration of a period of ten (10) days following

the publication of this notice, distribute the remaining corporate

assets and property among the members in any of the following
manners or any combination thereof:

(a) Pay any member of the corporation the amount advanced
or loaned to the corporation by him, together with simple interest

at the rate of six percent (6%) per annum, and no more; after
which any member may receive an amount equal to the amount
paid in by him as membership dues or otherwise, together with
simple interest at the rate of six percent (6%) per annum and
no more. If any assets remain after distribution in this manner,
they shall be distributed in the manner provided in the following
subsections, (b) and (c).
(b) Transfer all of its assets or, any assets remaining after

distribution in the manner provided in subsection (a), above, to

""Cal. Corp. Code § 6321 (West Supp. 1984).



1985] NOT-FOR-PROFIT 835

any other not-for-profit corporation, organized for purposes

substantially the same as those of the corporation being dissolved,

if the laws, bylaws or regulations of the dissolving corporation

so provide regardless of the state or law under which the dis-

tributee corporation was incorporated.

(c) Escheat to the state of Indiana all of its assets or any assets

remaining after distribution as provided in either subsections (a)

or (b) above. These assets shall be paid into the general treasury

of the state of Indiana through payment to the treasurer of the

state.
^^'

The problem with the provision is the requirement that assets remaining

after all steps have been complied with escheat to the state. This is a

unique requirement and exists only in Indiana. Most jurisdictions follow

the approach taken in the Model Nonprofit Corporation Act.^^^ While

the Model Act prohibits the distribution to members of assets '*held by

the corporation upon condition requiring return" and assets "subject

to limitations permitting their use only for charitable . . . purposes," it

does permit assets not subject to these limitations to be distributed to

members upon dissolution. ^^^ With this provision, the Model Act probably

^«'lND. Code § 23-7-1.1-33 (1982).
^^The Model Nonprofit Corporation Act provides:

The assets of a corporation in the process of dissolution shall be ap-

plied and distributed as follows:

(a) All liabilities and obligations of the corporation shall be paid and

discharged, or adequate provision shall be made therefor;
(b) Assets held by the corporation upon conditions requiring return,

transfer or conveyance, which condition occurs by reason of the dissolution,

shall be returned, transferred or conveyed in accordance with such require-

ments;

(c) Assets received and held by the corporation subject to limitations

permitting their use only for charitable, religious, eleemosynary, benevolent,

educational or similar purposes, but not held upon a condition requiring re-

turn, transfer or conveyance by reason of the dissolution, shall be transferred

or conveyed to one or more domestic or foreign corporations, societies or

organizations engaged in activities substantially similar to those of the dis-

solving corporation, pursuant to a plan of distribution adopted as provided

in this Act;

(d) Other assets, if any, shall be distributed in accordance with the pro-

visions of the articles of incorporation or the by-laws to the extent that the

aritcles of incorporation or by-laws determine the distributive rights of mem-
bers, or any class or classes of members, or provide for distribution to oth-

ers;

(e) Any remaining assets may be distributed to such persons, societies,
organizations or domestic or foreign corporations, whether for profit or non-

profit, as may be specified in a plan of distribution adopted as provided in
this Act.

Model Nonprofit Corp. Act § 46 (1964).
"^'Id. § 46(d), (e).



836 INDIANA LAW REVIEW [Vol. 18:777

underregulates to the same extent that the Indiana Act overregulates.^^"*

The Indiana Act's overregulation of nonprofit dissolutions is readily

apparent. Indiana permits organizations with diverse goals to incorporate

under the Indiana Not-For-Profit Corporation Act. Some of these or-
ganizations are self-serving, such as fraternities, social clubs, and labor

unions. Nevertheless, they are subject to the Act's nondistribution con-

straint while they are going concerns. The assets of these corporations

are primarily, if not exclusively, derived from contributions from members

plus proceeds from fundraising activities. Rarely, if ever, do these or-

ganizations receive donations from the public. Indeed, the public has

little or no expectation that these mutual benefit nonprofits will engage

in charitable or public service activities.

Nevertheless, Indiana will not permit these nonprofits to distribute

their assets to members on dissolution. The reasons for this prohibition
are not clear. It is one thing to prohibit distribution to members when

the nonprofit is an operating entity. In that instance, it is unfair to

permit individuals to take advantage of the privileges accorded to non-

profits and nevertheless receive dividends. This result would not be sound

public policy because it would provide an incentive for the corporation

to defraud the public. Also, in the case of nonprofits such as nursing

homes and day-care centers, the nonprofit corporation would have an

unfair advantage over its for-profit counterparts. In the final analysis,

it may be that the Indiana Act's failure to classify nonprofits has led
to this overregulating provision. It does not seem an unreasonable or

unwise public policy to force public benefit nonprofits to escheat their

assets to the state if they cannot distribute them to nonprofits engaged

in similar activities. The assets of these corporations have been contributed
primarily by nonmembers with the expectation that they will be used
to further the nonprofit's goals. It may have been that the Indiana
legislature wanted to ensure that those associated with public benefit

nonprofits had no expectation of receiving any monetary return on

dissolution and therefore enacted the escheat provision as a safeguard.

Nevertheless, since the legislation failed to classify nonprofits, the escheat

provision applies to all nonprofit corporations and not just those or-

ganized for public benefit. This presents an example of overregulation.

The Indiana Act should be amended to eliminate the harshness of
the escheat provision for mutual benefit nonprofits. Most jurisdictions

permit members of mutual benefits to receive the assets of the organ-

ization upon dissolution. This may not be completely acceptable. The
Indiana legislature should take into account the potential for abuse of

the nonprofit form if nonpublic benefit nonprofits are given unfettered
discretion to distribute assets to members on dissolution. Some com-

^^See infra text accompanying notes 285-86.



1985] NOT-FOR-PROFIT 837

mercial nonprofits may have an incentive to abuse the nonprofit form.
For example, there would be nothing to prevent the members of a

nonprofit day-care center from operating the corporation for a period

of time, charging lower rates than its for-profit counterparts in the

area,^^^ soliciting funds for the corporation, and then dissolving and

distributing the assets to themselves. In this situation, it is not clear

that the nonprofit is simply returning the members' capital to them.

The members may be receiving their capital plus accumulated dividends
plus funds contributed by the public. This would be clear abuse of the

nonprofit form.

To eliminate the potential for such abuse, Indiana should require
judicial approval of dissolution in the case of nonpublic benefit non-

profits. If the court approves the dissolution plan of the corporation

and is satisfied that there has been no abuse of the privilege of using

the nonprofit form, then members of nonpublic benefit nonprofits should

be permitted to distribute the corporation's assets to themselves. This

may also be sound pubHc policy in the case of public benefit nonprofits.
Although there should be a heavy presumption that assets committed

to public benefit nonprofits are irrevocably committed for the purpose

of helping the nonprofit achieve its objectives, it may be possible in
some instances for members to overcome this presumption.^^^

VII. Conclusion

Ultimately, the reform measure that would greatly facilitate the

implementation of the previously suggested reforms is the classification

of nonprofits according to their purposes. Indiana should revise its Not-

For-Profit Corporation Act to provide for two types of nonprofit cor-

porations: Public benefit nonprofits and general purpose nonprofits. The

California legislature recently adopted a new nonprofit corporation act

and its definitions of these two types of nonprofits would seem adequate

for Indiana's purposes. Public benefit nonprofits are defined as those

corporations that further a "public or charitable" purpose.^*^ Cahfornia

^*'It is possible for nonprofit businesses to charge lower rates because of their

lower operating costs. Nonprofit corporations do not have to pay federal or state in-

come tax. Some nonprofits are exempt from state sales taxation and local property
taxation. Consequently, nonprofits do have a competitive advantage over their for-profit

counterparts.

2860ne example of a nonprofit that could overcome such a presumption would be

a family foundation which received 100*7o of its assets from the family. The hypothet-

ical foundation's purpose was to reduce by half child-abuse in a local community. When
the directors of the foundation concluded that the foundation had accomplished its

objective, they dissolved the corporation. It would seem that on these facts the cor-

poration could overcome the presumption that its assets were irrevocably committed to

charitable purposes.

^"'Cal. Corp. Code § 5111 (West Supp. 1984).



838 INDIANA LAW REVIEW [Vol. 18:777

also recognizes the mutual benefit corporation as one which '*can operate

for any lawful purpose that does not contemplate the distribution of

gain, profits, or dividends to members, except upon dissolution. "^^^

Instead of using the term "mutual benefit," Indiana should use the

term "general purpose" nonprofit. ^^^

When nonprofits are classified, it will be considerably easier to set
out those standards that are applicable to both types and those standards

applicable only to one type of organization. Following this Article is a

proposed revision of the Indiana Not-For-Profit Corporation Act which

will demonstrate the efficacy of classification in eliminating the defects

in the current Act.

-^^Id. § 7111 (amended).

'^^The term "mutual benefit" implies that a group of individuals are working to-

gether for some common purpose such as to promote community understanding of
political issues or to promote better working conditions. It does not quite embrace

those nonprofits that are engaged in essentially commercial activities such as hospitals,

day-care centers, and the many research institutes around the country. Consequently,
the term "general purpose" nonprofit has been selected to try to encompass both mu-

tual benefit and commercial nonprofit corporations.



1985] NOT-FOR-PROFIT 839

Appendix

Proposed Revised Non-Profit Corporation Act*

Section 1. Short Title

This Act shall be known and may be cited as the Indiana Non-Profit
Corporation Act.

Section 2. Definitions

As used in this chapter:

(a) "Corporation" means any corporation formed under this
chapter, and includes any corporation formed before September 2,
1971, that elects to accept the provisions of this chapter by filing

articles of acceptance as provided in this chapter.

(b) "Domestic corporation" means a corporation formed under the

laws of this state, and the term "foreign corporation" means every

other corporation.

(c) "Articles of incorporation" means both the original articles of
incorporation and any and all amendments thereto (except where the
original articles of incorporation only are referred to), and in the case

of corporations organized before September 2, 1971, articles of ac-

ceptance filed in the office of the secretary of state and all amend-

ments thereto.

(d) "Nonprofit" as applied to any corporation organized or re-

organized under this chapter means any corporation which does not

engage in any activities for the profit of its members and which is
organized and conducts its affairs for purposes other than the pecu-

niary gain of its members. The term also shall include but not be
Hmited to any religious, civil, social, educational, fraternal, charitable,

or cemetery association organized or reorganized under this chapter

which does not engage in any activities for the profit of its trustees,

directors, incorporators, or members.

(e) "Incorporator" means one (1) of the signers of the original
articles of incorporation.

(f) "Subscriber" means one who subscribes for a membership in
a corporation organized or reorganized under this chapter, whether

before or after incorporation.

(g) "Member" means one who has signified his intention of being
a member of a corporation organized or reorganized under this chap-
ter and who has met the requirements of the corporation for mem-
bership and who has been accepted as a member by the corporation.

Regular typeface denotes language currently in Indiana's Not-For-Profit Cor-
poration Act. Italics indicates proposed additions and/or changes in the current Act.



840 INDIANA LAW REVIEW [Vol. 18:777

The term includes the trustees or directors or incorporators of a cor-
poration organized or reorganized under this chapter, and for the
purposes of this chapter the corporation may organize or reorganize
although it has no membership apart from its trustees, directors, and
incorporators. If in any case membership in the corporation is coexten-
sive with the trustees, directors, or incorporators of the corporation,
for the purposes of this chapter the trustees, directors, or incorpora-
tors shall also constitute members within the meaning of this chapter.

(h) '*Assets" includes all the property and rights of every kind

of a corporation, and the term ''fixed assets" means such assets as

are not intended to be sold or disposed of in the ordinary course of

business.

(i) "Principal office" means that place in this state designated by

the corporation as its principal place of doing business, the address

of which is required by this chapter to be kept on file in the office

of the secretary of state.

(j) "Resident agent" means that person designated by the corpo-

ration, whose name and address is required by this chapter to be
kept on file in the office of the secretary of state.

(k) "Subscription" means any written agreement or undertaking,

accepted by the corporation, for a membership in the corporation.

(1) "Director" means any member of the managing board of a
corporation, whether designated a director, trustee, manager, gover-

nor, or by any other title.

Section 3. Purposes

Two types of nonprofit corporations are eligible to incorporate under
the provisions of the Act: (1) public benefit nonprofit corporations which
may be formed for any public, charitable or religious purpose or pur-
poses; and (2) general purpose nonprofit corporations which may be
formed for any lawful purpose provided that the sole or even primary
purpose is not to make profits for its members, directors, or officers.

Section 4. General Powers

(a) Each corporation shall have the capacity to act possessed by
natural persons, but shall have authority to perform only those acts

as are necessary, convenient or expedient to accomplish the purposes

for which it is formed and such as are not repugnant to law. Noth-

ing in this chapter shall be construed or interpreted as permitting or

authorizing the transaction or conducting of a banking, railroad (other

than a tourist, amusement, and non-freight-carrying railroad), utilities

other than rural water or sewer systems utilities, insurance, surety,

trust, safe deposit, mortgage guarantee, building and loan or credit

union business.



1985] NOT-FOR-PROFIT 841

(b) Subject to any limitations or restrictions imposed by law, or

the articles of incorporation, or any amendment thereto, each corpo-
ration shall have the following general rights, privileges and powers:

(1) To continue as a corporation under its corporate name for
the period limited in its articles of incorporation, or, if the period is

not so limited, then perpetually;

(2) To sue and be sued in its corporate name;

(3) To have a corporate seal and to alter the same at pleasure:
however, the use of a corporate seal or an impression thereeof shall

not be required upon, and shall not affect the validity of any instru-

ment whatsoever, notwithstanding the provisions of any other section

of this chapter or of any other statute;

(4) To acquire, own, hold, use, lease, mortgage, pledge, sell, con-
vey or otherwise dispose of property, real or personal, tangible or

intangible;

(5) To borrow money and to issue, sell or pledge its obligations
and evidences of indebtedness, and to mortgage its property and

franchises to secure the payment thereof;

(6) To carry out its purposes in this state and elsewhere; to have
one or more offices out of this state; and to acquire, own, hold and

use, and to lease, mortgage, pledge, sell, convey or otherwise dispose

of property, real or personal, tangible or intangible, out of this state;

(7) To acquire, hold, own and vote and to sell, assign, transfer,
mortgage, pledge, or otherwise dispose of the capital stock, bonds,

securities or evidences of indebtedness of any other corporation, do-

mestic or foreign, insofar as the same shall be consistent with the

purposes of the corporation;

(8) To appoint such officers and agents as the affairs of the cor-
poration may require and to define their duties and fix their compen-
sation;

(9) To indemnify any director or officer or former director or
officer of the corporation, or any person who may have served at its
request as a director or officer of another corporation, against ex-

penses actually and reasonably incurred by him in connection with

the defense of any civil action, suit or proceeding in which he is

made or threatened to be made, a party by reason of being or hav-
ing been a director or officer, except in relation to matters as to

which he is adjudged in the action, suit or proceeding to be liable

for negligence or misconduct in the performance of duty to the cor-

poration: However, the indemnification is not exclusive and does not

impair any other rights those indemnified may have under any pro-
vision of the articles of incorporation, by-laws, resolution, or other

authorization adopted, after notice, by a majority of the members
voting at an annual meeting; and provided further that expenses in-

curred in defending any action, suit, or proceeding, civil or criminal.



842 INDIANA LAW REVIEW [Vol. 18:777

may be paid by the corporation in advance of the final disposition
of such action, suit, or proceeding notwithstanding any provisions of

this article to the contrary upon receipt of an undertaking by or on

behalf of the director, officer, employee, or agent to repay the amount

paid by the corporation if it shall ultimately be determined that the

director, officer, employee, or agent is not entitled to indemnification

as provided in this section;

(10) To purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corpo-
ration, or is or was serving at the request of the corporation as a

director, officer, employee or agent of another corporation, partner-

ship, joint venture, trust or other enterprise against any liability as-

serted against him and incurred by him in any such capacity, or

arising out of his status as such, whether or not the corporation

would have the power to indemnify him against liability under the

provisions of this section;

(11) To make by-laws for the government and regulation of its
affairs;

(12) To cease its activities and to dissolve and surrender its cor-
porate franchise; and

(13) To do all acts and things necessary, convenient or expedient
to carry out the purposes for which it is formed.

(c) No corporation shall, by any imphcation or construction, pos-
sess the power of engaging in any activities for the purpose of or

resulting in the pecuniary remuneration to its members as such, but
this provision shall not prohibit reasonable compensation to members
for services actually rendered; nor shall the corporation be prohibited

from engaging in any undertaking for profit so long as such under-

taking does not inure to the profit of its members.

Section 5. Corporate Name

(a) The corporate name of every corporation that is organized
under this chapter, and of every corporation which accepts the pro-

visions of this chapter, shall include the word "Corporation" or ''In-

corporated", or one of the abbreviations thereof.

(b) A corporation that is organized under this chapter or which
accepts the provisions of this chapter:

(1) may not use as a part of its corporate name any word or
phrase which indicates or implies any purpose or power not pos-

sessed by corporations organizable under this chapter; and

(2) shall take a corporate name that is, upon the records of the
secretary of state, distinguishable from the name of any other
corporation then existing under the laws of this state or author-

ized to transact business in this state and distinguishable from any

name to which another person has obtained exclusive rights under



1985] NOT-FOR-PROFIT 843

subsection (c). However, a corporation may take a name that is
not distinguishable from the name of another corporation if at
the same time:

(A) the other corporation changes its corporate name, or dis-

solves or withdraws from transacting business in this state or
ceases to exist; or

(B) the written consent of the other corporation, signed by

any current officer of the corporation and verified and af-

firmed subject to penalties for perjury, is filed with the sec-

retary of state.

(c) Any person intending to organize a corporation, any domestic
corporation intending to change its name, any foreign corporation in-

tending to make appliation for a certificate of admission to transact
business in this state or authorized to transact business in this state

and intending to change its name, and any person or persons intend-

ing to organize a foreign corporation and make application for a cer-
tificate of admission to transact business in this state may reserve the
exclusive right to the use of a corporate name, except as hereinbefore

provided, for a period of one hundred twenty (120) days, by filing

in the office of the secretary of state a notice of intention and

specifying the name, and paying the fee prescribed by IC 23-3-2-2(o).

(d) Subject to the provisions of this section, any corporation may
change its corporate name at any time by amending its articles of
incorporation in the manner hereafter provided.

Section 6. Principal Office; Resident Agent

(a) Each corporation shall maintain an office or place of business
in this state, to be known as the "principal office", and have an
officer or agent resident in this state designated as the resident agent

of the corporation. The post office address of the principal office
and the name and post office address of the resident agent must be
stated in the original articles of incorporation at the time of incor-

poration. Thereafter, the location of the principal office or the des-

ignation of the resident agent, or both, may be changed:
(1) at any time, when authorized by the board of directors, by
filing with the secretary of state on or before the day any such

change is to take effect; or

(2) if within five (5) days after the death of the resident agent

or other unforeseen termination of his agency, a certificate is filed,

signed by any current officer of the corporation and verified and

affirmed subject to penalties of perjury, stating the change to be

made and reciting that this change is made pursuant to authori-
zation by the board of directors.

(b) If the resident agent for one (1) or more corporations changes

address, the agent may change the address on file with the secretary



844 INDIANA LAW REVIEW [Vol. 18:777

of State by filing in the office of the secretary of state a statement

setting forth:

(1) the names of the corporations for which the change is effec-

tive;

(2) the old and new addresses of the resident agent; and

(3) the date on which the change is effective.

If the old and new addresses of the resident agent are the same as

the old and new addresses of the principal office of the corporations,

the statement may include a change of address of the principal office
of the corporations.

(c) A resident agent who files a statement under subsection (b)
shall first notify in writing each corporation for which the agent is

resident agent that the statement will be filed, and the statement must

recite the fact that this notice has been given. The statement shall be

executed and verified in duplicate and affirmed subject to penalties

of perjury by the resident agent in his individual name; however, if

the resident agent is a foreign or domestic corporation, the statement

must be executed by a current officer of the corporation and verified

and affirmed subject to penalties of perjury. The statement, executed

in duphcate, shall be delivered to the secretary of state. If he finds

that it conforms to the requirements of law, the secretary of state

shall, upon payment of the required fees, endorse upon each of the

duplicates tendered for filing, over his signature and offical seal, the

word "filed" followed by the date of the filing. The secretary of

state shall retain one (1) executed copy of the statement in his files.

He shall attach to the other filed copy a certificate stating that the
instrument is an executed copy of the statement filed in his office,

giving the date of the filing, and shall return the other copy to the

resident agent.

(d) Any person who has been designated by a corporation as its
resident agent for service of process may file with the secretary of
state a signed statement that he is unwilling to continue to act as

resident agent for the corporation for the service of process. The sec-
retary of state shall forthwith give written notice, by mail, to the

corporation, of the filing of this statement and its effect, which no-

tice shall be sent to the corporation at its principal office or place

of business as shown in the records of his office. Five (5) days after
the filing of this statement with the secretary of state, the person's

responsibility as agent shall terminate. If and when the corporation
shall not have available in this state its resident agent as hereinbefore

provided, service of legal process upon such corporation, in all in-
stances in which such service could be made on such agent if avail-
able, may be had by serving the secretary of state upon the same
terms and provisions as provided in IC 23-1-11-6.



1985] not-for-profit 845

Section 7. By-Laws

The power to make, alter, amend or repeal the by-laws of a corpo-
ration shall be vested in its board of directors unless otherwise pro-

vided in the articles of incorporation. The by-laws may contain any
provision for the regulation and management of the affairs of the
corporation not inconsistent with the articles of incorporation and the

laws of this state, including provisions respecting: the time and place

of holding and the manner of conducting meetings of members; the

manner of calling special meetings of members or directors; the pow-

ers, duties, tenure and qualifications of officers and directors of the

corporation and the time, place and manner of electing them; re-

quirements for bonding officers or employees; the form of member-

ship certificates and the manner of creating the exercising proxies.

Section 8. Members

A corporation may have one or more classes of members. Public
benefit corporations may choose to have no members. If the corpo-
ration has one or more classes of members, the designation of such
class or classes, the manner of election or appointment and the qual-
ifications and rights of the members of each class shall be set forth
in the articles of incorporation or the by-laws. If in the case of
public benefit corporations, the corporation has no members, that fact
shall be set forth in the articles of incorporation or the by-laws. A
corporation may issue certificates evidencing membership therein. The
members, directors, officers and employees shall not, as such, be li-
able for the corporation's obligations except to the extent of their

contributions to the corporation.

Section 9. Meetings of Members

Meeting of members may be held at such place, either within or
without this state, as may be provided in the bylaws. In the absence
of any such provision, all such meetings shall be held at the regis-

tered office of the corporation in this state.

An annual meeting of the members shall be held at such time as
may be provided in the by-laws. Failure to hold the annual meeting
shall not work a forfeiture or dissolution of the corporation.

Special meetings of the members may be called by the president
or by the board of directors. Special meetings may also be called by
such other officers or persons or number or proportion of members
as may be provided in the articles of incorporation or the by-laws.
In the absence of a provision fixing the number or proportion of
members entitled to call a meeting, a special meeting of members may
be called by members having one-twentieth of the votes entitled to
be cast at such meeting.



846 INDIANA LAW REVIEW [Vol. 18:777

Section 10. Notice of Members' Meetings

Unless otherwise provided in the articles of incorporation or the by-

laws, written notice stating the place, day and hour of the meeting

and, in case of a special meeting, the purpose or purposes for which

the meeting is called, shall be delivered not less than ten or more

than fifty days before the date of the meeting, either personally or

by mail, by or at the discretion of the president or by the secretary,

or the officers or persons calling the meeting, to each member enti-
tled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail addressed

to the member at his or her address as it appears on the records of
the corporation, with postage thereon prepaid.

Section 11. Voting

The right of the members, or any class or classes of members, to

vote may be limited, enlarged or denied to the extent specified in the
articles of incorporation or the by-laws. Unless so limited, enlarged

or denied, each member, regardless of class, shall be entitled to one

vote on each matter submitted to a vote of members.

A member entitled to vote may vote in person or, unless the ar-
ticles of incorporation or the by-laws otherwise provide, may vote by
proxy executed in writing by the member or by his duly authorized
attorney-in-fact. No proxy shall be valid after eleven months from
the date of its execution, unless otherwise provided in the proxy.

Where directors or officers are to be elected by members, the by-laws

may provide that such elections may be conducted by mail.
The articles of incorporation or the by-laws may provide that in

all elections for directors every member entitled to vote shall have
the right to cumulate his vote and to give one candidate a number

of votes equal to his vote multiplied by the number of directors to
be elected, or by distributing such votes on the same principle among
any number of such candidates.

If a corporation has no members or its members have no right
to vote, the directors shall have the sole voting power.

Section 12. Quorum

The by-laws may provide the number or percentage of members en-
titled to vote represented in person or by proxy, or the number or
percentage of votes represented in person or by proxy, which shall
constitute a quorum at a meeting of members. In the absence of any
such provision, members holding one-tenth of the votes entitled to be
cast on the matter to be voted upon represented in person or by
proxy shall constitute a quorum. A majority of the votes entitled to
be cast on a matter to be voted upon by the members present or



1985] NOT-FOR-PROFIT 847

represented by proxy at a meeting at which a quorum is present shall

be necessary for the adoption thereof unless a greater proportion is

required by this Act, the articles of incorporation or the by-laws.

Section 13. Members' Derivative Actions

(a) A member of any corporation incorporated under this chapter
shall have the right to maintain an action on behalf of the corpora-

tion.

(b) No action may be instituted or maintained in the right of any
corporation by any member of such corporation unless all three of
the following conditions exist:

(1) The plaintiffs allege in the complaint that they were members
at the time of the transaction or any part thereof of which plaintiffs

complain, or that plaintiffs' memberships thereafter devolved upon

plaintiffs by operation of law from holders who were holders at the
time of the transaction or any part thereof complained of; and

(2) The plaintiffs represent at least five percent (5%) of the

membership of the corporation or of a particular class of members

of the corporation; and

(3) The plaintiffs allege in the complaint with particularity plain-

tiffs' efforts to secure from the board such action as plaintiffs desire,
or the reasons for not making such effort, and allege further that

plaintiffs have either informed the board in writing of the ultimate

facts of each cause of action against each defendant or delivered to

the corporation or the board a true copy of the complaint which

plaintiffs propose to file.

Section 14. Directors

(a) The affairs of every corporation shall be managed by a board
of directors who may be members of the corporation, with such other
qualifications as the bylaws may prescribe.

(b) The exact number of directors, or in lieu thereof the mini-
mum and maximum number of directors, shall be prescribed in the
articles of incorporation, but under no circumstances shall the mini-

mum number of directors be less than three (3). However, the exact
number of directors shall be prescribed from time to time in the by-
laws of the corporation and may be either the minimum number or
the maximum number or any number in between as prescribed in the
articles of incorporation.

(c) In the event the number of directors is increased by the by-
laws of any corporation, the election of the additional director or

directors shall be by a vote of the members of the corporation.
(d) Each director shall serve for that period of time stipulated in

the articles of incorporation. Where the articles of incorporation es-



848 INDIANA LAW REVIEW [Vol. 18:777

tablish no term of office, each director shall serve not more than

three (3) years, or until his successor is elected and qualified.

(e) When the board of directors consists of nine (9) or more
members, the articles of incorporation may provide that the directors
shall be divided into two (2) or more groups whose terms of office

shall expire at different times, however, no term shall continue longer

than three (3) years.

(f) Any vacancy occurring on the board of directors caused by a
death, resignation, or otherwise, shall be filled until the next annual

meeting through a vote of a majority of the remaining members of

the board. A majority of the entire board of directors shall be nec-
essary to constitute a quorum. However, when filling vacancies a ma-
jority of the existing directors shall be required for a quorum.
However, the bylaws of any corporation may prescribe that a lesser
number than the majority of the entire board may constitute a quo-
rum, but the number shall not be less than one-third (1/3) of the

total number of directors and in no case shall be less than two (2)
directors. The act of a majority of the directors present at a meeting

who constitute a quorum shall be the act of the board of directors.

(g) Meetings of the board of directors may be held upon such
notice as may be provided in the articles of incorporation or the by-
laws. Unless otherwise provided by the articles of incorporation or

bylaws, any or all of the board of directors or of a committee des-

ignated by the board may participate in a meeting of the board or
committee by means of a conference telephone or similar communi-

cations equipment by which all persons participating in the meeting

can communicate with each other, and participation in this manner
constitutes presence in person at the meeting.

(h) The board of directors may, by resolution adopted by a ma-

jority of the entire board pursuant to a provision of the bylaws, des-

ignate two (2) or more members of the corporation to constitute an
executive committee, which to the extent provided in the resolution

or in the bylaws, shall have and exercise all of the authority of the

board of directors in the management of the corporation; but the
designation of a committee and the delegation of authority to it, shall

not operate to relieve the board of directors or any member thereof
of any responsibility imposed upon it or him by this chapter.

(i) Unless otherwise provided by the articles of incorporation or

bylaws, any action required or permitted to be taken at any meeting

of the board of directors or of any committee thereof may be taken
without a meeting, if prior to such action a written consent to such

action is signed by all members of the board or of such committee,
as the case may be, and such written consent is filed with the min-
utes of proceedings of the board or committee.



1985] not-for-profit 849

Section 15. Officers

The officers of a corporation shall be chosen by the board of direc-
tors at a time, in a manner, and for the terms and with the title

which the by-laws may prescribe; however, the articles of incorpora-
tion or by-laws may also provide that officers are to be elected by
the members of the corporation instead of by the board of directors.

Each officer shall hold office until his successor is chosen and qual-

ified. If the by-laws so provide, any two (2) or more offices may be
held by the same person, except that the duties of the president and

secretary shall not be performed by the same person.

All officers and agents of the corporation between themselves and

the corporation shall have the authority and perform any duties in

the management of the property and affairs of the corporation as

may be provided in the by-laws, or, in the absence of any provision,
as may be determined by resolution of the board of directors. Any
officer or agent may be removed by the board of directors whenever,
in its judgment, the best interests of the corporation will be served

but this removal shall be without prejudice to the contract rights, if

any, of the person removed. Election or appointment of an officer

or agent shall not of itself create contract rights.

Section 16. Standards of Conduct

(a) Public Benefit Corporations. A director shall perform the duties
of a director, including duties as a member of any committee of the
board upon which the director may serve, in the utmost good faith
and loyalty, in a manner such director believes to be in the best in-

terest of the corporation and with such care, including the utmost

reasonable inquiry, as an ordinarily prudent director in a like posi-

tion would use under similar circumstances.

(b) General Purpose Corporations. A director shall perform the
duties of a director, including duties as a member of any committee

of the board upon which the director may serve, in good faith, in a
manner such director believes to be in the best interests of the cor-

poration and with such care, including reasonable inquiry, as an or-

dinarily prudent person in a like position would under similar
circumstances.

(c) Public Benefit and General Purpose Corporations. In perform-
ing the duties of a director, a director shall be entitled to rely on

information, opinions, reports or statements, including financial state-

ments and other financial data, in each case prepared or presented

by:

(1) One or more officers or employees of the corporation whom
the director believes to be reliable and competent in the exercise

of their duties; or



850 INDIANA LAW REVIEW [Vol. 18:777

(2) Counsel, independent accountants or other persons as to mat-

ters which the director believes to be within such person's profes-

sional or expert competence; or

(3) A committee of the board upon which the director does not
serve, as to matters within its designated authority, which com-

mittee the director believes to merit confidence;

so long as, in any such case, the director acts in utmost good faith
in the case of Public Benefit Corporations and in good faith in the
case of General Purpose Corporations, after reasonable inquiry when

the need therefor is indicated by the circumstances and without
knowledge that would cause such reliance to be unwarranted.

Section 17. Self-Dealing Transactions

(1) Public Benefit Corporations.

(a) Except as provided in subdivision (b), for the purpose of this

section, a self-dealing transaction means a transaction to which the

corporation is a party and in which one or more of its directors has

a material financial interest and which does not meet the require-

ments of paragraph (1), (2), or (3) of subdivision (d). Such a direc-

tor is an * 'interested director** for the purpose of this section.

(b) The provisions of this section do not apply to any of the

following:

(1) An action of the board fixing the compensation of a director
as a director or officer of the corporation.

(2) A transaction which is part of a public or charitable program
of the corporation if it: (i) is approved or authorized by the corpo-

ration in good faith and without unjustified favoritism; and (ii) re-
sults in a benefit to one or more directors or their families because
they are in the class of persons intended to be benefited by the pub-

lic or charitable program.

(3) A transaction, of which the interested director or directors have
no actual knowledge, and which does not exceed the lesser of 1 per-

cent of the gross receipts of the corporation for the preceding fiscal

year or one hundred thousand dollars ($100,000).
(c) The Attorney General or, if the Attorney General is joined as

an indispensable party, any of the following may bring an action in
the superior court of the proper county for the remedies specified in

subdivision (h):

(1) The corporation, or a member asserting the right in the name
of the corporation pursuant to Section 13.

(2) A director of the corporation.
(3) An officer of the corporation.
(4) Any person granted relator status by the Attorney General.
(d) In any action brought under subdivision (c) the remedies

specified in subdivision (h) shall not be granted if:



1985] NOT-FOR-PROFIT 851

(1) The Attorney General, or the court in an action in which the

Attorney General is an indispensable party, has approved the trans-

action before or after it was consummated; or

(2) The following facts are established:

(A) The corporation entered into the transaction for its own ben-
efit;

(B) The transaction was fair and reasonable as to the corporation

at the time the corporation entered into the transaction;

(C) Prior to consummating the transaction or any part thereof the

board authorized the transaction in good faith by a vote of a ma-
jority of the directors then in office without counting the vote of the

interested director or directors, and with knowledge of the material

facts concerning the transaction and the director's interest in the
transaction. Except as provided in paragraph (3) of this subdivision,

action by a committee of the board shall not satisfy this paragraph;

and

(D)(i) Prior to authorizing or approving the transaction the board

considered and in good faith determined after reasonable investigation

under the circumstances that the corporation could not have obtained

a more advantageous arrangement with reasonable effort under the

circumstances or (ii) the corporation in fact could not have obtained

a more advantageous arrangement with reasonable effort under the

circumstances; or

(3) The following facts are established:

(A) A committee or person authorized by the board approved the
transaction in a manner consistent with the standards set forth in

paragraph (2) of this subdivision;

(B) It was not reasonably practicable to obtain approval of the

board prior to entering into the transaction; and
(C) The board, after determining in good faith that the condi-

tions of subparagraphs (A) and (B) of this paragraph were satisfied,

ratified the transaction at its next meeting by a vote of the majority

of the directors then in office without counting the vote of the in-

terested director or directors.

(e) Except as provided in subdivision (f), an action under subdi-

vision (c) must be filed within two years after written notice setting

forth the material facts of the transaction and the director's interest
in the transaction is filed with the Attorney General in accordance

with such regulations, if any, as the Attorney General may adopt or,
if no such notice is filed, within three years after the transaction oc-
curred, except for the Attorney General, who shall have 10 years after
the transaction occurred within which to file an action.

(f) In any action for breach of an obligation of the corporation
owed to an interested director, where the obligation arises from a self-
dealing transaction which has not been approved as provided in sub-



852 INDIANA LAW REVIEW [Vol. 18:777

division (d), the court may, by way of offset only, make any order
authorized by subdivision (h), notwithstanding the expiration of the

applicable period specified in subdivision (e).

(g) Interested directors may be counted in determining the pres-
ence of a quorum at a meeting of the board which authorizes, ap-
proves or ratifies a contract or transaction.

(h) If a self-dealing transaction has taken place, the interested di-

rector or directors shall do such things and pay such damages as in

the discretion of the court will provide an equitable and fair remedy
to the corporation, taking into account any benefit received by the

corporation and whether the interested director or directors acted in

good faith and with intent to further the best interest of the corpo-

ration. Without limiting the generality of the foregoing, the court may
order the director to do any or all of the following:

(1) Account for any profits made from such transaction, and pay
them to the corporation;

(2) Pay the corporation the value of the use of any of its prop-
erty used in such transaction; and

(3) Return or replace any property lost to the corporation as a

result of such transaction, together with any income or appreciation

lost to the corporation by reason of such transaction, or account for
any proceeds of sale of such property, and pay the proceeds to the
corporation together with interest at the legal rate.

(2) General Purpose Corporations.

(a) No contract or other transaction between a corporation and
one or more of its directors, or between a corporation and any do-

mestic or foreign corporation, firm or association in which one or more

of its directors has a material financial interest, is either void or

voidable because such director or directors or such other corporation,

business corporation, firm or association are parties or because such

director or directors are present at the meeting of the board or a

committee thereof which authorizes, approves or ratifies the contract

or transaction, if:

(1) The material facts as to the transaction and as to such direc-

tor's interest are fully disclosed or known to the members and such
contract or transaction is approved by the members in good faith,
with any membership owned by any interested director not being en-
titled to vote thereon;

(2) The material facts as to the transaction and as to such direc-

tor's interest are fully disclosed or known to the board or committee,
and the board or committee authorizes, approves or ratifies the con-

tact or transaction in good faith by a vote sufficient without count-
ing the vote of the interested director or directors and the contract
or transaction is just and reasonable as to the corporation at the time

it is authorized, approved or ratified; or



1985] NOT-FOR-PROFIT 853

(3) As to contracts or transactions not approved as provided in
paragraph (1) or (2) of this subdivision, the person asserting the va-

lidity of the contract or transaction sustains the burden of proving

that the contract or transaction was just and reasonable as to the

corporation at the time it was authorized, approved or ratified.

A mere common directorship does not constitute a material fi-
nancial interest within the meaning of this sub-division. A director is
not interested within the meaning of this subdivision in a resolution

fixing the compensation of another director as a director, officer or

employee of the corporation, notwithstanding the fact that the first

director is also receiving compensation from the corporation.
(b) No contract or other transaction between a corporation and

any corporation, business corporation or association of which one or

more of its directors are directors is either void or voidable because

such director or directors are present at the meeting of the board or

a committee thereof which authorizes, approves or ratifies the con-

tract or transaction, if:

(1) The material facts as to the transaction and as to such direc-

tor's other directorship are fully disclosed or known to the board or
committee, and the board or committee authorizes, approves or rati-

fies the contract or transaction in good faith by a vote sufficient
without counting the vote of the common director or directors or the
contract or transaction is approved by the members in good faith; or

(2) As to contracts or transactions not approved as provided in
paragraph (1) of this subdivision, the contract or transaction is just

and reasonable as to the corporation at the time it is authorized, ap-

proved or ratified.

This subdivision does not apply to contracts or transactions cov-

ered by subdivision (a).

Section 18. Books and Records

All corporations shall keep full and complete books and records which

shall show, at all times, the financial condition of the corporation

and a separate financial account of each member. All books and rec-
ords of any nature whatsoever of any corporation shall be open for

inspection by any member, for proper purposes, at any reasonable

time.

Section 19. Earnings

No member of any corporation organized or reorganized under this
chapter shall have or receive any earnings from such corporation, ex-

cept a member who is an officer, director, or employee of such cor-
poration, in which event he may receive fair and reasonable
compensation for his services as officer, director, or employee and a



854 INDIANA LAW REVIEW [Vol. 18:777

member may also receive principal and interest on monies loaned or
advanced to the corporation as hereinbefore provided.

Section 20. Loans To Officers

No corporation shall make any advancement for services to be per-
formed in the future or shall make any loan of money or property
to any officer or director of the corporation.

Section 21. Incorporators

One (1) or more persons, or a domestic or foreign corporation, may
act as incorporator or incorporators of a corporation by signing, ac-

knowledging and delivering, in dupHcate, to the secretary of state ar-

ticles of incorporation for the corporation.

Section 22. Articles of Incorporation

When the provisions of section 17 of this chapter have been com-
plied with, the incorporators shall execute and file, in the manner

hereafter provided, articles of incorporation setting forth the follow-

ing:

(1) The name of the proposed corporation;

(2) The purpose or purposes for which it is being formed;

(3) The period of time during which it is to continue as a cor-
poration, if the time is to be limited;

(4) The post-office address of its principal office and the name
and address of its resident agent;

(5) A definite, concise and complete statement of its classes of
members and a statement of the relative rights, preferences, limita-
tions and restrictions of each class thereof, together with a statement

of the voting rights of each class;

(6) The number of directors constituting the initial board of di-

rectors;

(7) The names and addresses of the first board of directors;

(8) The names and addresses of the incorporators;

(9) A statement of the property and an estimate of its value, to
be taken over by the corporation at or upon its incorportion;

(10) Any other provision, consistent with the laws of the state,
for the regulation of the affairs of the corporation, and creating, de-

fining, limiting or regulating the powers of the corporation, of the

board of directors or of its members.

The articles of incorporation shall be prepared and signed in du-

plicate in and upon the form prescribed by the secretary of state,
signed by the incorporator and verified and affirmed subject to pen-

alties for perjury and shall be presented in duplicate to the secretary

of state at his office, accompanied by the fees prescribed by law.



1985] not-for-profit 855

Section 23. Certificate of Incorporation—Issuance
Upon the presentation of the articles of incorporation, if the secre-

tary of state finds they conform to law, he shall indorse his approval

upon the duphcate of the articles, and, when all fees required by law

have been paid, shall file one (1) copy of the articles in his office

and issue a certificate of incorporation to the incorporators. The certificate

of incorporation, together with the remaining copy of the articles bearing

the indorsement of his approval, shall be returned by him to the incor-

porators or their representatives.

Section 24. Certificate of Incorporation—Effect
Upon the issuance of the certificate of incorporation by the secretary

of state, the corporate existence shall begin, all subscribers for mem-
bership shall be deemed accepted by the corporation and the subscri-

bers shall be deemed members of the corporation.

The certificate of incorporation issued by the secretary of state

shall be conclusive evidence of the fact that the corporation has been

incorporated; but proceedings may be instituted by the state to dis-
solve, wind up and terminate a corporation which should not have

been formed under this chapter or which has begun business without

a substantial compliance with the conditions prescribed by this chap-

ter.

Section 25. Adoption of By-Laws

If the articles of incorporation provide for the adoption of by-laws

by the members, the incorporators or a majority of them, after the

issuance of the certificate of incorporation, shall call a meeting of

the members for the purpose of adopting the by-laws, giving at least

ten (10) days' notice by mail to each member of the time and place
of the meeting, unless this notice is waived in writing by any or all

of the members, in which cases the notice shall be given only to those

who have not waived notice. The members shall meet at the time
and place designated and shall adopt the by-laws. After the adoption

of the by-laws, the directors named in the articles of incorporation
as the first board of directors shall meet at the request of a majority

of them and shall elect officers and transact any other business which

may properly come before the board.
If the articles of incorporation do not provide for the adoption

of the by-laws by the members, then, after the isssuance of the cer-

tificate of incorporation, the directors, named in the articles of in-
corporation as the first board of directors, shall meet at the request

of a majority of them, adopt the by-laws, elect officers and transact

any other business which may properly come before the board.



856 INDIANA LAW REVIEW [Vol. 18:777

Section 26. Amendment of Articles—Authority
A corporation may at any time amend its articles of incorporation

without limitation so long as the articles as amended would have been

authorized by this chapter as original articles, by complying with the

provisions of sections 23 through 25 of this chapter.

Section 27. Amendment of Articles—Proposal—Adoption
Every amendment to the articles of incorporation shall first be pro-

posed by the board of directors by the adoption of a resolution set-

ting forth the proposed amendment and directing that it be submitted

to a vote of the members entitled to vote in respect thereof at a

designated meeting of the members, which may be an annual meeting
or a special meeting of the members. If the resolution shall direct

that the proposed amendment is to be submitted at an annual meet-

ing, notice of the submission of the proposed amendment shall be
included in the notice of the annual meeting. If the resolution shall

direct that the proposed amendment is to be submitted at a special
meeting, this special meeting shall be called by the resolution propos-

ing the amendment, and notice of the meeting shall be given at the

time and in the manner provided in section 9 of this chapter.
An amendment so proposed shall be adopted upon receiving the

affirmative votes of a majority of the votes entitled to be cast in

regard to the amendment unless the articles of incorporation or by-
laws require a larger proportion of votes.

Section 28. Amendment of Articles—Members
Entitled to Vote

The members entitled to vote in respect to proposed amendments to

articles of incorporation shall be determined as follows:

(a) In addition to the members entitled by the articles of incor-

poration to vote upon amendments, the members of a class shall be
entitled to vote as a class on a proposed amendment, if the amend-

ment would:

(1) Authorize the board of directors to fix or alter by resolution

the classes of members or the relative rights, preferences, qualifica-
tions, limitations or restrictions of any class or classes, or would re-

voke such authority of the board of directors.

(2) Change the designations, preferences, limitations or relative

rights of the members of such class.

(3) Create a new class of members having rights and preferences

prior and superior to the members of that class, or increase the rights

and preferences of any class having them prior to or superior to the

members of the class.



1985] NOT-FOR-PROFIT 857

(b) As to all Other proposed amendments, only the members who
by the terms of the articles of incorporation are entitled to vote

thereon, shall be entitled to vote in respect to the amendments.

Section 29. Articles of Amendment—Content—Filing
Upon the proposal and adoption of any amendment to the arti-

cles of incorporation, there shall be executed and filed, in the man-

ner hereinafter provided, articles of amendment setting forth the
following:

(a) The amendment so adopted.
(b) The manner of its adoption and the vote by which it was

adopted.

Upon the adoption of any amendment, a corporation may file
amended articles in the office of the secretary of state in lieu of the

aforementioned articles of amendment. The amended articles, which

may differ from the previously existing articles in the respects au-
thorized by the resolution of amendment, shall contain a statement

that they supersede and take the place of the previously existing ar-

ticles of the corporation, and shall also contain all the statements

required by this chapter, to be included in the original articles.

In lieu of stating the names and addresses of the first board of

directors in amended articles, they shall state the names and ad-
dresses of the directors holding office at the time of adoption of the

amended articles. In lieu of stating the names and addresses of the

incorporators in amended articles, they shall state the names and ad-
dresses of the president or vice-president and secretary or assistant

secretary of the corporation.

The articles of amendment or amended articles shall be prepared
and signed in duplicate, in the form prescribed by the secretary of

state, by any current officer of the corporation and verified and af-

firmed subject to penalties for perjury, and shall be presented in du-

plicate to the secretary of state, at his office, accompanied by the

fees prescribed by law.

Section 30. Certificate of Amendment

Upon the presentation of the articles of amendment or amended ar-
ticles, the secretary of state, if he finds that they conform to law,

shall indorse his approval upon both of the duplicate copies of the
articles of amendment or amended articles, and, when all fees have
been paid as required by law, shall file one (1) copy of the articles

of amendment or amended articles in his office, issue a certificate of
amendment to the corporation, and shall return it to the corporation,
together with the copy of the articles of amendment or amended ar-
ticles, bearing the indorsement of his approval.



858 INDIANA LAW REVIEW [Vol. 18:777

Section 31. Effect of Certificate of Amendment

Upon the issuance of the certificate of amendment by the secretary
of state, the amendment shall become effective and the articles of
incorporation shall be deemed amended accordingly.

If amended articles are filed and approved as herein provided,

the secretary of state shall, upon request, certify a copy of them, or
in the alternative, certify all or any part of the articles of incorpo-

ration, amendment, merger, consolidation, dissolution or amended ar-
ticles, or other papers of the corporation, lawfully received and filed

by him.

No amendment shall affect any existing cause of action in favor
of or against the corporation, or any pending suit in which the cor-

poration shall be a party, or the existing rights of persons other than

members; and, in the event the corporate name shall be changed by
any amendment no suit brought against the corporation under its for-
mer name shall be abated for that reason.

Section 32. Change of Corporate Name

(a) Whenever any corporation amends its articles of incorporation to

change its corporate name, it shall, within ten (10) days after the

issuance of the certificate of amendment, file for record, with the

county recorder of each county in this state in which it has real

property at the time the amendment becomes effective, a duplicate of

the certificate of amendment, duly certified by the secretary of state

under the seal of his office.

(b) Whenever any corporation shall restate its articles of incor-

poration in articles of acceptance so as to change its corporate name,

a duplicate certificate of acceptance, duly certified by the secretary of

state under the seal of his office, shall be filed for record, within

ten (10) days after the issuance of the certificate of acceptance, with

the county recorder of each county in this state in which the corpo-

ration has any real property at the time the certificate is issued.

(c) Whenever any corporation is a party to a merger or consoli-

dation, the surviving or new corporation, as the case may be, shall,
within ten (10) days after the merger or consolidation becomes effec-

tive, file for record with the county recorder of each county in this [sic]

in which any of such corporations own real property at the time of
the merger or consolidation the title to which will be transferred by

the merger or consoHdation, a duplicate of the certificate of merger

or consolidation, certified by the secretary of state under the seal of

his office.

Section 33. Sale of Entire Assets

Any corporation may, at any time, if otherwise lawful, sell, lease,
exchange, mortgage, pledge, or otherwise dispose of all or substan-



1985] NOT-FOR-PROFIT 859

tially all of its fixed assets, for the purpose of terminating and wind-

ing up, or changing the nature of its business (such a sale, lease,

exchange, mortgage, pledge or other disposition for such purpose being

referred to in this chapter as a "Special Corporate Transaction"),

upon any terms and conditions and for any consideration, including

shares in other corporations, as it deems necessary to comply with

the provisions of this chapter.

Section 34. Special Corporate Transaction—
Proposals By Directors—

Notice To Members

Any special corporate transaction shall first be proposed by the board
of directors by the adoption of a resolution setting forth the terms

and conditions of this transaction and directing that it be submitted

to a vote of the members at a designated meeting, which may be an
annual meeting or a special meeting of those members entitled to vote.

If the designated meeting at which this special corporate transaction

is to be submitted, is an annual meeting, notice of the submission of

this transaction shall be included in the notice of the annual meeting.

If this same transaction is to be submitted at a special meeting of

members entitled to vote, the special meeting shall be called by a
resolution designating the meeting, and notice of this meeting shall be

given at the time and in the manner provided in section 9 of this chapter.

In the case of corporations formed without members, the vote of the board

of directors shall be final.

Section 35. Special corporate Transactions-
Authorization By Members

The proposed special corporate transaction shall then be submitted to

a vote of the members entitled to vote in respect thereof at the an-

nual or special meeting directed by the resolution of the board of

directors proposing such special corporate transaction, and shall be

authorized upon receiving the affirmative votes of a majority of the

members entitled to vote in respect thereof. Unless otherwise provided
in the articles of incorporation if the members of any class are en-

titled to vote as a class, the proposal shall be adopted upon receiving
the affirmative vote of the required percentage of the members of
each class entitled to vote thereon as a class, and of the total mem-
bers entitled to vote thereon.

The members of any corporation entitled to vote in respect to a
proposed special corporate transaction shall be the members which by
the articles of incorporation of such corporation are entitled to vote

in questions involving such special corporate transaction.



860 INDIANA LAW REVIEW [Vol. 18:777

Section 36. Special Corporate Transactions—
Abandonment by Directors

After authorization by a vote of the members, the board of direc-

tors, nevertheless, in its discretion, may abandon the special corporate
transaction, subject to the rights of third parties under any related

contracts without further action or approval by the members.

Section 37. Voluntary Dissolution

A corporation may dissolve and wind up its affairs in the following
manner:

(a) If there are members entitled to vote thereon, the board of
directors shall adopt a resolution recommending that the corporation

be dissolved, and directing that the question of such dissolution be
submitted to a vote at a meeting of members entitled to vote thereon,
which may be either an annual or a special meeting. Written notice
stating that the purpose, or one of the purposes, of such meeting is

to consider the advisability of dissolving the corporation, shall be given

to each member entitled to vote at such meeting, within the time and
in the manner provided in this Act for the giving of notice of meet-
ings of members. A resolution to dissolve the corporation shall be
adopted upon receiving at least two-thirds of the votes which mem-
bers present at such meeting or represented by proxy are entitled to

cast.

(b) If there are no members, or no members entitled to vote

thereon, the dissolution of the corporation shall be authorized at a

meeting of the board of directors upon the adoption of a resolution

to dissolve by the vote of a majority of the directors in office.

Upon the adoption of such resolution by the members, or by the
board of directors if there are no members or no members entitled

to vote thereon, the corporation shall cease to conduct its affairs ex-

cept in so far as may be necessary for the winding up thereof, shall
immediately cause a notice of the proposed dissolution to be mailed

to each known creditor of the corporation, and shall proceed to col-
lect its assets and apply and distribute them as provided in this Act.

Section 38. Distribution of Assets

The assets of a corporation in the process of dissolution shall be ap-

plied and distributed as follows:
(a) All liabilities and obligations of the corporation shall be paid and

discharged, or adequate provision shall be made therefor;
(b) Assets held by the corporation upon condition requiring return,

transfer or conveyance, which condition occurs by reason of the dissolu-

tion, shall be returned, transferred or conveyed in accordance with such

requirements;



1985] NOT-FOR-PROFIT 861

(c) Assets received and held by the corporation subject to limitations
permitting their use only for chartiable, religious, eleemosynary, benevolent,

educational or similar purposes, but not held upon a condition requiring
return, transfer or conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more domestic or foreign corporations,
societies or organizations engaged in activities substantially similar to those

of the dissolving corporation, pursuant to a plan of distribution adopted

as provided in this Act;

(d) Other assets, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or by-laws to the extent that
the articles of incorporation or by-laws determine the distributive rights

of members, or any class or classes of members, or provide for distribu-
tion to others;

(e) Any remaining assets may be distributed to such persons, societies,
organizations or domestic or foreign corporations, whether for profit or

non-profit, as may be specified in a plan of distribution adopted as pro-
vided in this Act.

Section 39. Plan of Distribution

A plan providing for the distribution of assets, not inconsistent with
the provisions of this Act, may be adopted by a corporation in the
process of dissolution and shall be adopted by a corporation for the

purpose of authorizing any transfer or conveyance of assets for which

this Act requires a plan of distribution, in the following manner:

(a) If there are members entitled to vote thereon, the board of
directors shall adopt a resolution recommending a plan of distribution

and directing the submission thereof to a vote at a meeting of mem-
bers entitled to vote thereon, which may be either an annual or a
special meeting. Written notice setting forth the proposed plan of dis-

tribution or a summary thereof shall be given to each member en-
titled to vote at such meeting, within the time and in the manner

provided in this Act for the giving of notice of meetings of mem-
bers. Such a plan of distribution shall be adopted upon receiving at

least two-thirds of the votes which members present at such meeting
or represented by proxy are entitled to cast.

(b) If there are no members, or no members entitled to vote

thereon, a plan of distribution shall be adopted at a meeting of the

board of directors upon receiving a vote of a majority of the direc-

tors in office.

Section 40. Revocation of Voluntary
Dissolution Proceedings

A corporation may, at any time prior to the issuance of a certificate
of dissolution by the Secretary of State, revoke the action theretofore



862 INDIANA LAW REVIEW [Vol. 18:777

taken to dissolve the corporation, in the following manner:

(a) If there are members entitled to vote thereon, the board of
directors shall adopt a resolution recommending that the voluntary

dissolution proceedings be revoked, and directing that the question of
such revocation be submitted to a vote at a meeting of members en-
titled to vote thereon, which may be either an annual or a special
meeting. Written notice stating that the purpose, or one of the pur-

poses, of such meeting is to consider the advisability of revoking the

voluntary dissolution proceedings, shall be given to each member en-
titled to vote at such meeting, within the time and in the manner

provided in this Act for the giving of notice of meetings of mem-
bers. A resolution to revoke the voluntary dissolution proceedings shall
be adopted upon receiving at least two-thirds of the votes which

members present at such meeting or represented by proxy are entitled

to cast.

(b) If there are no members, or no members entitled to vote
thereon, a resolution to revoke the voluntary dissolution proceedings

shall be adopted at a meeting of the board of directors upon receiv-

ing the vote of a majority of the directors in office.
Upon the adoption of such resolution by the members, or by the

board of directors where there are no members or no members enti-
tled to vote thereon, the corporation may thereupon again conduct its
affairs.

Section 41. Articles of Dissolution

If voluntary dissolution proceedings have not been revoked, then

when all debts, liabilities and obligations of the corporation shall have

been paid and discharged, or adequate provision shall have been made
therefor, and all of the remaining property and assets of the corpo-

ration shall have been transferred, conveyed or distributed in accord-

ance with the provisions of this Act, articles of dissolution shall be

executed in duplicate by the corporation by its president or a vice

president, and by its secretary or an assistant secretary, which state-

ment shall set forth:
(a) The name of the corporation.
(b) If there are members entitled to vote thereon, (1) a statement

setting forth the date of the meeting of members at which the reso-
lution to dissolve was adopted, that a quorum was present at such
meeting, and that such resolution received at least two-thirds of the
votes which members present at such meeting or represented by proxy
were entitled to cast, or (2) a statement that such resolution was

adopted by a consent in writing signed by all members entitled to
vote with respect thereto.

(c) If there are no members, or no members entitled to vote
thereon, a statement of such fact, the date of the meeting of the
board of directors at which the resolution to dissolve was adopted



1985] NOT-FOR-PROFIT 863

and a statement of the fact that such resolution received the vote of
a majority of the directors in office.

(d) That all debts, obligations, and liabilities of the corporation

have been paid and discharged or that adequate provision has been
made therefor.

(e) A copy of the plan of distribution, if any, as adopted by the
corporation, or a statement that no plan was so adopted.

(f) That all the remaining property and assets of the corporation

have been transferred, conveyed or distributed in accordance with the

provisions of this Act.

(g) That there are no suits pending against the corporation in any

court, or that adequate provision has been made for the satisfaction

of any judgment, order or decree which may be entered against it in
any pending suit.

Section 42. Filing of Articles of Dissolution

Duplicate originals of such articles of dissolution shall be delivered to

the Secretary of State. If the Secretary of State finds that such arti-

cles of dissolution conform to law, he shall, when all fees have been

paid as in this Act prescribed:

(1) Endorse on each of such duplicate originals the word ''Filed,
**

and the month, day and year of the filing thereof.

(2) File one of such duplicate originals in his office.

(3) Issue a certificate of dissolution to which he shall affix the

other duplicate original.

The certificate of dissolution, together with the duplicate original

of the articles of dissolution affixed thereto by the Secretary of State,

shall be returned to the representative of the dissolved corporation.

Upon the issuance of such certificate of dissolution the existence of
the corporation shall cease, except for the purpose of suits, other

proceedings and appropriate corporate action by members, directors

and officers as provided in this Act.

Section 43. Approval of Superior Court

No action for voluntary dissolution shall be final until approved by
the superior court in the county in which the corporation is located.

A copy of the petition for dissolution must be submitted to the Sec-
retary of State and the Attorney General, both of whom shall have
the authority to participate in the proceedings before the court.

Section 44. Involuntary Dissolution

A corporation may be dissolved involuntarily by a decree of the su-
perior court in an action filed by the Attorney General when it is
established that:



864 INDIANA LAW REVIEW [Vol. 18:777

(a) The corporation has failed to file its annual report within the

time required by this Act; or

(b) The corporation procured its articles of incorporation through

fraud; or

(c) The corporation has continued to exceed or abuse the author-

ity conferred upon it by law; or

(d) The corporation has failed for ninety days to appoint and

maintain a registered agent in this State; or

(e) The corporation has failed for ninety days after change of its

registered agent to file in the office of the Secretary of State a state-

ment of such change.

Section 45. Notification To Attorney General

The Secretary of State, on or before the last day of December of
each year, shall certify to the Attorney General the names of all cor-

porations which have failed to file their annual reports in accordance

with the provisions of this Act. He shall also certify, from time to
time, the names of all corporations which have given other cause for
dissolution as provided in this Act, together with the facts pertinent

thereto. Whenever the Secretary of State shall certify the name of a
corporation to the Attorney General as having given any cause for

dissolution, the Secretary of State shall concurrently mail to the cor-

poration at its registered office a notice that such certification has

been made. Upon the receipt of such certification, the Attorney Gen-
eral shall file an action in the name of the State against such cor-
poration for its dissolution. Every such certificate from the Secretary

of State to the Attorney General pertaining to the failure of a cor-

poration to file an annual report shall be taken and received in all

courts as prima facie evidence of the facts therein stated. If, before

action is filed, the corporation shall file its annual report, or shall

appoint or maintain a registered agent as provided in this Act, or

shall file with the Secretary of State the required statement of change

or registered agent, such fact shall be forthwith certified by the Sec-

retary of State to the Attorney General and he shall not file an ac-
tion against such corporation for such cause. If, after action is filed,

the corporation shall file its annual report, or shall appoint or main-

tain a registered agent as provided in this Act, or shall file with the

Secretary of State the required statement of change of registered agent,

and shall pay the costs of such action, the action for such cause
shall abate.

Section 46. Venue and Process

Every action for the involuntary dissolution of a corporation shall be
commenced by the Attorney General in the superior court of the



1985] NOT-FOR-PROFIT 865

county in which the registered office of the corporation is situated.
Summons shall issue and be served as in other civil actions. If process
is returned not found, the Attorney General shall cause publication

to be made as in other civil cases in some newspaper published in
the county where the registered office of the corporation is situated,

containing a notice of the pendency of such action, the title of the

court, the title of the action, and the date on or after which default
may be entered. The Attorney General may include in one notice the
names of any number of corporations against which actions are then
pending in the same court. The Attorney General shall cause a copy

of such notice to be mailed to the corporation at its registered office
within ten days after the first publication thereof. The certificate of
the Attorney General of the mailing of such notice shall be prima

facie evidence thereof. Such notice shall be published at least once

each week for two successive weeks, and the first publication thereof
may begin at any time after the summons has been returned. Unless
a corporation shall have been served with summons, no default shall
be taken against it earlier than thirty days after the first publication

of such notice.

Section 47. Jurisdiction of Court to Liquidate
Assets and Affairs of Corporation

Courts of equity shall have full power to liquidate the assets and

affairs of a corporation:

(a) In an action by a member or director when it is made to
appear:

(1) That the directors are deadlocked in the management of the
corporate affairs and that irreparable injury to the corporation is being

suffered or is threatened by reason thereof, and either that the mem-
bers are unable to break the deadlock or there are no members hav-
ing voting rights; or

(2) That the acts of the directors or those in control of the cor-
poration are illegal, oppressive or fraudulent; or

(3) That the members entitled to vote in the election of directors
are deadlocked in voting power and have failed for at least two years
to elect successors to directors whose terms have expired or would

have expired upon the election of their successors;

(4) That the corporate assets are being misapplied or wasted; or

(5) That the corporation is unable to carry out its purposes.

(b) In an action by a creditor:

(1) When the claim of the creditor has been reduced to judgment
and an execution thereon has been returned unsatisfied and it is es-
tablished that the corporation is insolvent; or

(2) When the corporation has admitted in writing that the claim



866 INDIANA LAW REVIEW [Vol. 18:777

of the creditor is due and owing and it is established that the cor-
poration is insolvent.

(c) Upon application by a corporation to have its dissolution con-
tinued under the supervision of the court.

(d) When an action has been filed by the Attorney General to
dissolve a corporation and it is established that liquidation of its af-
fairs should precede the entry of a decree of dissolution.

Proceedings under this section shall be brought in the county in

which the registered office or the principal office of the corporation

is situated.

It shall not be necessary to make directors or members parties to
any such action or proceedings unless relief is sought against them

personally.

Section 48. Procedure In Liquidation of
Corporation By Court

In proceedings to liquidate the assets and affairs of a corporation the

court shall have the power to issue injunctions, to appoint a receiver
or receivers pendente lite, with such powers and duties as the court,

from time to time, may direct, and to take such other proceedings
as may be requisite to preserve the corporate assets wherever situated,
and carry on the affairs of the corporation until a full hearing can

be had.

After a hearing had upon such notice as the court may direct to
be given to all parties to the proceedings and to any other parties in

interest designated by the court, the court may appoint a liquidating
receiver or receivers with authority to collect the assets of the cor-

poration. Such liquidating receiver or receivers shall have authority,

subject to the order of the court, to sell, convey and dispose of all

or any part of the assets of the corporation wherever situated, either

at public or private sale. The order appointing such liquidating re-

ceiver or receivers shall state their powers and duties. Such powers

and duties may be increased or diminished at any time during the
proceedings.

The assets of the corporation or the proceeds resulting from a
sale, conveyance, or other disposition thereof shall be applied and

distributed as follows:

(a) All costs and expenses of the court proceedings and all liabil-
ities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefor;

(b) Assets held by the corporation upon condition requiring re-

turn, transfer or conveyance, which condition occurs by reason of the

dissolution or liquidation, shall be returned, transferred or conveyed

in accordance with such requirements;

(c) Assets received and held by the corporation subject to limita-



1985] NOT-FOR-PROFIT 867

tions permitting their use only for charitable, religious, eleemosynary,

benevolent, educational or similar purposes, but not held upon a con-

dition requiring return, transfer or conveyance by reason of the dis-

solution or liquidation, shall be transferred or conveyed to one or

more domestic or foreign corporations, societies or organizations en-

gaged in activities substantially similar to those of the dissolving or

liquidating corporation as the court may direct;
(d) Other assets, if any, shall be distributed in accordance with

the provisions of the articles of incorporation or the by-laws to the

extent that the articles of incorporation or by-laws determine the dis-

tributive right of members, or any class or classes of members, or

provide for distribution to others;

(e) Any remaining assets may be distributed to such persons, so-
cieties, organizations or domestic or foreign corporations, whether for

profit or not for profit, specified in the plan of distribution adopted

as provided in this Act, or where no plan of distribution has been

adopted, as the court may direct.
The court shall have power to allow, from time to time, as ex-

penses of the liquidation compensation to the receiver or receivers and

to attorneys in the proceeding, and to direct the payment thereof out

of the assets of the corporation or the proceeds of any sale or dis-

position of such assets.

A receiver of a corporation appointed under the provisions of this
section shall have authority to sue and defend in all courts in his
own name as receiver of such corporation. The court appointing such
receiver shall have exclusive jurisdiction of the corporation and its

property, wherever situated.

Section 49. qualification of Receivers

A receiver shall in all cases be a citizen of the United States or a
corporation for profit authorized to act as receiver, which corpora-

tion may be a domestic corporation or a foreign corporation author-
ized to transact business in this State, and shall in all cases give such

bond as the court may direct with such sureties as the court may
require.

Section 50. Filing Of Claims In Liquidation Proceedings

In proceedings to liquidate the assets and affairs of a corporation the

court may require all creditors of the corporation to file with the
clerk of the court or with the receiver, in such form as the court
may prescribe, proofs under oath of their respective claims. If the
court requires the filing of claims it shall fix a date, which shall be

not less than four months from the date of the order, as the last
day for the filing of claims, and shall prescribe the notice that shall



868 INDIANA LAW REVIEW [Vol. 18:777

be given to creditors and claimants of the date so fixed. Prior to the
date so fixed, the court may extend the time for the filing of claims.
Creditors and claimants failing to file proofs of claim on or before
the date so fixed may be barred, by order of court, from participat-
ing in the distribution of the assets of the corporation.

Section 51. Discontinuance Of Liquidation Proceedings

The liquidation of the assets and affairs of a corporation may be
discontinued at any time during the liquidation proceedings when it

is established that cause for liquidation no longer exists. In such event

the court shall dismiss the proceedings and direct the receiver to re-

deliver to the corporation all its remaining property and assets.

Section 52. Decree Of Involuntary Dissolution

In proceedings to liquidate the assets and affairs of a corporation,

when the costs and expenses of such proceedings and all debts, ob-
ligations, and liabilities of the corporation shall have been paid and

discharged and all of its remaining property and assets distributed in

accordance with the provisions of this Act, or in case its property

and assets are not sufficient to satisfy and discharge such costs, ex-

penses, debts, and obligations, and all the property and assets have

been applied so far as they will go to their payment, the court shall

enter a decree dissolving the corporation, whereupon the existence of
the corporation shall cease.

Section 53. Survival Of Remedy After Dissolution

The dissolution of a corporation either (1) by the issuance of a cer-

tificate of dissolution by the Secretary of State, or (2) by a decree

of court when the court has not liquidated the assets and affairs of
the corporation as provided in this Act, or (3) by expiration of its

period of duration, shall not take away or impair any remedy avail-
able to or against such corporation, its directors, officers, or mem-
bers, for any right or claim existing, or any liability incurred, prior

to such dissolution if action or other proceeding thereon is com-

menced within two years after the date of such dissolution. Any such
action or proceeding by or against the corporation may be prosecuted
or defended by the corporation in its corporate name. The members,

directors and officers shall have power to take such corporate or other
action as shall be appropriate to protect such remedy, right or claim.

If such corporation was dissolved by the expiration of its period of
duration, such corporation may amend its articles of incorporation at
any time during such period of two years so as to extend its period

of duration.



1985] NOT-FOR-PROFIT 869

Section 54. Annual Report

An annual report accompanied by a filing fee of one dollar [$1.00]
shall be filed with the secretary of state by all nonprofit corpora-

tions, domestic or foreign, whether incorporated under this or any

other law. However, if a corporation is incorporated under a law of
this state, which provides that it shall file annual reports with the

secretary of state, this section shall not apply to it. The fee shall be

in lieu of all other annual fees to be paid by the corporation. The

report shall be filed in the month of February; however, any corpo-

ration which operates on a fiscal year basis, which is other than a

calendar year, may file the report during the second calendar month
following the end of the fiscal year, but shall first notify the secre-

tary of state, on forms provided by the secretary of state, of the

period of its fiscal year. Such report shall contain the following in-

formation as of the last day of the preceding calendar or fiscal year:

(a) The name of the corporation.
(b) The location and post office address of its principal office in

this state and the name and address of the resident agent or of some
designated person residing in this state upon whom service of process
may be served.

(c) The date of incorporation, and, if a foreign corporation, the

date when admitted and qualified in this state as a foreign corpora-

tion.

(d) The law under which it was incorporated.

(e) The names and residence addresses of officers and directors

and the number of existing members.

(f) The purposes of the corporation.

(g) A totalled itemized account of all outstanding debts, including
the names of persons or corporations to whom sums are owing, the
original amount of the debt incurred, the method of making pay-

ment, and from what funds the debt is to be paid. If any member,

any relative of a member, or any person having a contract or agree-

ment concerning the subject matter of the debt has any interest or

opportunity to profit from the transaction, an explanation must be

filed together with copies of any written agreements connected with

the subject matter of the indebtedness.

(h) A list of all property, real and personal, owned by the cor-
poration, itemized to the extent required by the secretary of state,

and its current market value set opposite each respective item. Pro-

vided that the list of all real property also includes the price paid

for it by the corporation, a legal description, the acreage or size of
each tract or lot, and the assessed value of each tract or lot.

(i) The nature and kind of activities in which the corporation has

been engaged during the year covered by the report.



870 INDIANA LAW REVIEW [Vol. 18:777

(J) What, if any, distribution of funds has been made to any
members during the year covered by the report.

(k) A statement of the aggregate amount of any loans, advances,
overdrafts or withdrawals and repayments made to or by any offi-
cers, directors or members.

(I) A verified itemized statement of revenue received by the cor-
poration from all sources during the preceding calendar year, clearly
stating the sources of the revenue in each instance, together with a

general statement showing total disbursement and all cash and assets.

No trust fund shall be included as an asset of the corporation, but
must be separately listed and identified. Said reports shall be pre-

pared and filed in and on forms prescribed and furnished by the sec-

retary of state. If upon receipt of such report, the secretary of state,

after reviewing it, determines or has reason to believe that the cor-

poration filing the report is not disclosing its true financial condition

or is violating any of the provisions of this chapter or the nonprofit

corporation law in general, he may require the corporation to dis-
close all material facts by submitting a duly verified audit bearing the

certificate under oath of a qualified public accountant recognized by

the secretary of state, replying to interrogatories and/or reporting un-

der oath on any matters requested by the secretary of state.

The board will cause an annual report to be sent to the members
not later than 120 days after the close of the corporation 's fiscal year.

This requirement need not be complied with if:

(1) The corporation is a public benefit corporation and has fewer
than 100 members or ten thousand dollars ($10,000) in assets at any
time during the fiscal year.

(2) The corporation is a general purpose corporation. Not-with-

standing the foregoing a copy of the annual report shall be furnished

to:

(1) All directors of the corporation; and

(2) Any member who requests it in writing.
Public benefit corporations shall place an advertisement in a

newspaper of general circulation in the county in which the corpora-

tion's principal place of business is located informing readers that their

annual reports have been filed with the Secretary of State. The ad-
vertisement must appear within 120 days after the close of the cor-
poration's fiscal year.

Public benefit corporations must place at least three (3) copies of
their annual reports in the public library in the county in which their

principal place of business is located.

Section 55. Merger Or Consolidation—Authority
Any one or more nonprofit corporations which are organized or re-

organized under the provisions of this chapter may merge or consol-



1985] NOT-FOR-PROFIT 871

idate with one or more other not-for-profit corporations organized
under the laws of this state or any other state or states of the United

States of America, if the laws under which the other corporation or

corporations are formed, shall permit the merger or consoHdation. The
constituent corporations may merge into a single corporation, which
may be any one (1) of the constituent corporations, or they may
consolidate to form a new corporation, which may be a corporation
of the state of incorporation of any one (1) of such constituent cor-

porations as shall be specified in the agreement hereinafter required.

Section 56. Merger of Domestic Corporation

Any two (2) or more domestic corporations may merge into another
domestic corporation in the following manner:

(a) Agreement of Merger. The board of directors of each corpo-

ration shall, by a resolution adopted by a majority vote of the mem-
bers of the board, approve a joint agreement of merger setting forth:

(1) The names of the corporations proposing to merge, and the

name of the corporation into which they propose to merge, which
is hereinafter designated as the surviving corporation.

(2) The terms and conditions of the proposed merger and the
mode of carrying them into effect.

(3) A restatement of the provisions of the articles of incorpora-
tion of the surviving corporation as may be deemed necessary or
advisable to give effect to the proposed merger.

(4) Any other provisions with respect to the proposed merger
which are deemed necessary or desirable.

The resolution of the board of directors of each corporation ap-

proving the agreement shall direct that the agreement be submitted to

a vote of the members of the corporation, who are entitled to vote
in respect to the proposal for merger, at a designated meeting, which

may be an annual meeting or a special meeting of those members
entitled to vote. If the designated meeting at which the agreement is

to be submitted is an annual meeting, notice of the submission of

the agreement shall be included in the notice of the annual meeting.

If the designated meeting is a special meeting, it shall be called by

the resolution designating the meeting, and notice of this meeting shall

be given at the time and in the manner provided in section 9 of this
chapter.

(b) Adoption of Agreement. The agreement of merger so ap-
proved shall be submitted to a vote of the members of each corpo-
ration entitled to vote on the agreement, at the meeting directed by

the resolution of the board of directors of the corporation approving

the agreement, and the agreement shall be adopted by the corpora-

tion upon receiving the affirmative votes of those members who are
entitled to vote in respect thereof. If the members of any class of



872 INDIANA LAW REVIEW [Vol. 18:777

members are entitled to vote as a class, the proposal shall be adopted

upon receiving the affirmative vote of a majority of the members of
such class, and of the total shares entitled to vote.

Notwithstanding the requirements of this subsection, unless re-

quired by its articles of incorporation with respect to corporations

having more than one hundred (100) members, no vote of the mem-
bers of the surviving corporation shall be required to adopt an agree-

ment of merger if the agreement of merger does not amend the
articles of incorporation of the surviving corporation or contain any

provision which, if contained in a proposed amendment to the arti-
cles of incorporation, would entitle the members of any class to vote
as a class. If an agreement of merger is adopted by the surviving

corporation through action of its board of directors and without any

vote of its members, pursuant to this paragraph, then that shall be

so stated in the articles of merger required to be filed with the sec-

retary of state by the dictates of this section.

(c) Members Entitled to Vote. The members of any corporation

entitled to vote in respect to an agreement of merger of the corpo-

ration, shall be the members who, by the terms of the articles of

incorporation of the corporation, are entitled to vote upon questions

of merger. Any class of members of any corporation shall be entitled
to vote as a class if the agreement of merger contains any provision

which, if contained in a proposed amendment to articles of incorpo-

ration, would entitle the class to vote as a class.

(d) Notice to Members. Within five (5) days after an agreement

of merger is adopted by any corporation, the secretary of such cor-

poration shall deliver or mail a written or printed notice of the

adoption of the agreement to each member of record of the corpo-
ration, who was not present in person or represented by proxy at the
meeting at which the agreement was adopted.

(e) Reapproval by Directors and Execution of Agreement. As soon

as practicable after the expiration of a period of thirty (30) days from

the adoption of the agreement of merger by the members of the

merger corporation which is the last, in point of time, to adopt the

merger, the agreement shall again be considered by the board of di-

rectors of each participating corporation at a regular or special meet-

ing of the board, and if the board of directors of each corporation,

by a majority vote, shall again approve the agreement and authorize

its execution, the agreement shall be signed on behalf of each cor-

poration by any current officer of the corporation and verified and

affirmed subject to penalties for perjury. However, in the event that

the members of the corporation vote unanimously in favor of the

adoption of the agreement of merger, a reapproval of the agreement

by the board of directors of each corporation shall not be required.

The board of directors of any of the corporations, by appropriate



1985] NOT-FOR-PROFIT 873

resolutions adopted at any time, may authorize the execution and
consummation of the agreement of merger at such time as the pro-

cedures required by the section have been complied with.

The articles of merger shall be signed on behalf of each corpo-

ration by any current officer of the corporation and verified and af-

firmed subject to penalties for perjury, and shall then be presented

to the secretary of state at his office, accompanied by those fees pre-

scribed by law.

(f) Articles of Merger. Upon the execution of the agreement of
merger by all of the corporations parties thereto, there shall be exe-

cuted and filed, in the manner hereinafter provided, articles of merger

setting forth the agreement of merger, the signatures of those author-

ized to sign for the merging corporations, the manner of its adoption

and the vote by which it was adopted by each of the corporations.

(g) Certificate of Merger. Upon the presentation of the articles of
merger, the secretary of state, if he finds that they conform to law,

shall indorse his approval upon both of the duplicate copies of the

articles, and, when all fees have been paid as required by law, shall
file one (1) copy of the articles in his office, issue a certificate of

merger, and shall return the remaining copy of the articles, bearing

the indorsement of his approval, together with the certificate of

merger, to the surviving corporation.

Section 57. Consolidation of Domestic Corporation

Any two (2) or more domestic corporations may consolidate into a
new corporation organized under this chapter in the following man-
ner:

(a) Agreement of Consolidation. The board of directors of each

corporation shall by a resolution adopted by a majority vote of the

members of the board, approve a joint agreement of consolidation

setting forth:

(1) The names of the corporations proposing to consolidate, and
the name of the resultant new corporation, which is hereinafter des-
ignated as the new corporation;

(2) The terms and conditions of the proposed consolidation and
the mode of carrying it into effect;

(3) With respect to the new corporation, all of the statements re-
quired by section 18 of this chapter to be set forth in original arti-

cles of incorporation for corporations formed under this chapter; and

(4) Any other provisions with respect to the proposed consolida-
tion which are deemed necessary or desirable.

(b) In all respects other than set forth in this section, the provi-

sions for merger in section 42 of this chapter shall be complied with

the same as if the proposed consolidation was to be a merger.

(c) Articles of Consolidation. Upon the execution of the agree-



874 INDIANA LAW REVIEW [Vol. 18:777

ment of consolidation by all of the participating corporations, articles

of consolidation shall be executed and presented to the secretary of

state at his office, in duplicate, accompanied by the fees prescribed

by law, in the same manner and form as prescribed above in subsec-

tion (0 of section 42 of this chapter for a merger.

(d) Certificate of Consolidation and Incorporation. Upon the
presentation of the articles of consolidation, the secretary of state, if

he finds they conform to law, shall indorse his approval upon both
of the duplicate copies of the articles, and, when all fees have been
paid as required by law, shall file one (1) copy of the articles in his

office, issue a certificate of consohdation and incorporation to the

new corporation and shall return to the new corporation or its des-
ignated agent, the remaining copy of the articles of consolidation,

bearing the indorsement of his approval, together with the certificate

of consolidation and incorporation.

Section 58. Mergers and Consolidations

Author's Note: This section, and subsequent sections, would cover
the merger or consolidation between domestic and foreign corporations,

the merger offoreign corporations admitted to transact business in Indiana,

the effective date of merger or consolidation and the effect of mergers

and consolidations.

One or more foreign corporations and one or more domestic cor-
porations may be merged or consolidated in the following manner, if
a merger or consolidation is permitted by the laws of the state under

which each such foreign corporation is organized:

(a) Each domestic corporation shall comply with the provisions of

this chapter with respect to a merger or consolidation of domestic

corporations and each foreign corporation shall comply with those

applicable provisions of the laws of the state under which it is or-

ganized.

(b) If the surviving or new corporation is to be governed by the

laws of any state other than this state, it shall comply with the pro-

visions of this chapter for foreign corporations if it is to transact

business in this state, and in every case it shall file with the secretary

of state;

(1) An agreement that it may be served with process in this state
in any proceeding for the enforcement of any obligation of any do-

mestic corporation which is a party to the merger or consolidation

and in any proceeding for the enforcement of the rights of a dis-

senting member of any domestic corporation against the surviving or
new corporation;

(2) An irrevocable appointment of the secretary of state as its
agent to accept service of process in any proceeding together with the



1985] NOT-FOR-PROFIT 875

address to which a copy of such process should be mailed by the

secretary of state.

The effect of the merger or consolidation shall be the same as

that of a merger or consolidation of domestic corporations, if the

surviving or new corporation is to be governed by the laws of this

state. If the surviving or new corporation is to be governed by the

laws of any state other than this state, the effect of the merger or

consolidation shall be the same as that of the merger or consolida-

tion of domestic corporations except when the laws of the other state
provide otherwise. The surviving or new corporation shall file for

record dupHcates of the certificate of merger or consolidation, duly

certified by the secretary of state under the seal of his office, as pro-

vided in section 28(c) of this chapter. If the surviving or new cor-

poration is to be governed by the laws of any state other than this

state, within thirty (30) days after the effective date of the merger or

consolidation, it shall file with the secretary of state a duplicate of

the certificate of merger or consolidation issued by its state of incor-

poration, duly certified by the officer of the state having custody

thereof.

Section 59. Merger or Consolidation of Domestic
AND Foreign Corporations

One or more foreign corporations and one or more domestic corpo-
rations may be merged or consolidated in the following manner, if a
merger or consolidation is permitted by the laws of the state under

which each such foreign corporation is organized:

(a) Each domestic corporation shall comply with the provisions of

this chapter with respect to a merger or consolidation of domestic

corporations and each foreign corporation shall comply with those
applicable provisions of the laws of the state under which it is or-

ganized.

(b) If the surviving or new corporation is to be governed by the
laws of any state other than this state, it shall comply with the pro-

visions of this chapter for foreign corporations if it is to transact

business in this state, and in every case it shall file with the secretary

of state;

(1) An agreement that it may be served with process in this state
in any proceeding for the enforcement of any obligation of any do-

mestic corporation which is a party to the merger or consolidation

and in any proceeding for the enforcement of the rights of a dis-

senting member of any domestic corporation against the surviving or
new corporation;

(2) An irrevocable appointment of the secretary of state as its
agent to accept service of process in any proceeding together with the



876 INDIANA LAW REVIEW [Vol. 18:777

address to which a copy of such process should be mailed by the

secretary of state.

The effect of the merger or consolidation shall be the same as

that of a merger or consolidation of domestic corporations, if the

surviving or new corporation is to be governed by the laws of this
state. If the surviving or new corporation is to be governed by the
laws of any state other than this state, the effect of the merger or

consolidation shall be the same as that of the merger or consolida-

tion of domestic corporations except when the laws of the other state
provide otherwise. The surviving or new corporation shall file for re-
cord duplicates of the certificate of merger or consolidation, duly cer-

tified by the secretary of state under the seal of his office, as

provided in section 30 of this chapter. If the surviving or new cor-
poration is to be governed by the laws of any state other than this

state, within thirty (30) days after the effective date of the merger or

consolidation, it shall file with the secretary of state a duplicate of

the certificate of merger or consolidation issued by its state of incor-

poration, duly certified by the officer of the state having custody

thereof.

Section 60. Foreign Corporations-Admission

Any foreign corporation organized without capital stock and as a
nonprofit corporation, not now qualifed to transact business in this
state, shall procure a certificate of admission from the secretary of

state before transacting business in this state in the manner herein-

after provided and shall otherwise comply with the provisions and be

subject to the regulations set forth in this chapter.

Section 61. Foreign Corporations-Powers

No foreign corporation shall be admitted for the purpose of trans-
acting any kind of business in this state which domestic corporations

are not permitted to transact by the laws of this state. A foreign
corporation admitted to do business in this state shall have the same,

but no greater, rights and privileges, and be subject to the same li-

abilities, restrictions, duties and penalties, now in force or hereafter
imposed upon domestic corporations of like character, and to the same

extent as if it had been organized under this chapter to transact the^

business for which its certificate of admission is issued.

Section 62. Foreign Corporations-Corporate Name

No foreign corporation shall be admitted to do business in this state
having a name which, at the date of such admission, could not be
taken by a domestic corporation under the provisions of section 5 of

this chapter, except that the name of a foreign corporation need not



1985] NOT-FOR-PROFIT Sll

include the word ^'corporation'' or ** incorporated" or one of the ab-

breviations thereof; and no such foreign corporations after it has been

admitted shall, by amendment to its charter, assume any name which,

at the date of the filing of such amendment as hereinafter provided,

could not be taken by a domestic corporation, under the provisions

of said section 5 of this chapter.

Section 63. Foreign Corporation-Application for Admis-
sion

Whenever a foreign corporation desires to be admitted to do business

in this state, it shall present to the secretary of state at his office

accompanied by the fees prescribed by law:

(1) a copy of its articles of incorporation or association, with all

amendments thereto, duly authenticated by the proper officer of

the state or country wherein it is incorporated; and

(2) an application for admission, executed in the manner herein-

after provided, setting forth:

(a) The name of such corporation.
(b) The location of its principal office or place of business with-

out this state, and the location of the proposed principal office

or place of business within this state.

(c) The names of the states in which it has been admitted or

qualified to do business.

(d) The character of business under its articles of incorporation

or association which it intends to carry on in this state.

(e) The names and post-office addresses of its officers and direc-
tors.

(0 The name and post-office address of some person permanently
residing in this state, upon whom, as the resident agent of the
corporation until his successor shall have been appointed, service

of legal process may be had.
(g) If the memberships are divided into classes the designations

of the different classes, and a statement of the relative rights,

preferences, limitations and restrictions of each class, together with

a statement as to the voting rights of any such class,

(h) A statement of property in Indiana and an estimate of the
value thereof, to be taken over by this corporation upon its ad-
mittance to Indiana.

(i) Any other provisions, consistent with the laws of the state of
Indiana for the regulation and conduct of the affairs of the cor-

poration, and creating, defining, limiting or regulating the powers

of the corporation, of the directors or of the members or any
class or classes of members.

(j) Such further information as the secretary of state may require
which shall include a statement of assets and liabilities as of the



878 INDIANA LAW REVIEW [Vol. 18:777

last day of the last calendar month preceding the submission of
the application for admission.

The application shall be signed in duplicate in the form pre-

scribed by the secretary of state, by any current officer of the cor-

poration and verified and affirmed subject to penalties for perjury.

The secretary of state shall have power and authority to interro-

gate all foreign corporations, and the officers and agents thereof, ap-

plying for admission in this state, with respect to the character of

business in which such corporations proposed to engage in Indiana,

and with respect to any other matters required to be stated in appli-

cations for admission; and such interrogatories shall be answered un-

der oath. Such interrogatories and answers shall be filed with the

respective applications to which they pertain, and shall operate as a

limitation upon the authority of such corporations to transact busi-

ness in this state.

Section 64. Foreign Corporations-Certificate of Admission

Upon the presentation of the application of admission, the secretary
of state, if he finds that it conforms to law, shall indorse his ap-

proval upon each of the duplicate copies, and, when all fees required

by law shall have been paid, shall file one (1) copy of the applica-

tion, together with the authenticated copy of the articles of incorpo-

ration or association of the corporation, in his office, and shall issue

to the corporation a certificate of admission, accompanied by one (1)
copy of the application bearing the indorsement of his approval, which

certificate shall set forth:

(1) The name of the corporation, the state or country where it
was incorporated and the location of its principal office in such state

or country;

(2) The character of business it is authorized to transact in this

state;

(3) The amount of the fee paid for its admission;

(4) The address of the corporation in this state, and;

(5) The name and address of its resident agent in this state for
the service of legal process.

Upon the issuance of a certificate of admission by the secretary
of state, the corporation therein named shall be admitted, and shall
have authority to transact in this state, the business set forth in such

certificate, subject to terms and conditions prescribed by this chapter.

Section 65. Resident Agent for Service of Process

(a) Each foreign corporation admitted to do business in this state shall

constantly keep on file in the office of the secretary of state a cer-

tificate of any current officer of the corporation, verified and af-

firmed subject to penalties for perjury, setting forth the location of



1985] NOT-FOR-PROFIT 879

its principal office in this state and the name of its agent or repre-
sentative at that office on whom service of legal process may be had
in all suits and actions that may be commenced against it. For the
purposes of this section, the application for admission filed by a for-

eign corporation is such a certificate. Whenever a corporation changes

the location of its principal office in this state or changes its agent

for service of legal process or such agent shall be removed by death,

resignation, or incapacity, the officers of the corporation shall im-

mediately file a new certificate with the secretary of state.

(b) If the resident agent for one (1) or more corporations changes

address, the agent may change the address on file with the secretary
of state by filing in the office of the secretary of state a statement

setting forth:

(1) the names of the corporations for which the change is effec-

tive;

(2) the old and new addresses of the resident agent; and

(3) the date on which the change is effective.
If the old and new addresses of the resident agent are the same as
the old and new addresses of the principal office of the corporations,

the statement may include a change of address of the principal office
of the corporations.

(c) A resident agent who files a statement under subsection (b)
shall first notify in writing each corporation for which the agent is

resident agent that the statement will be filed, and the statement must

recite the fact that this notice has been given. The statement shall be

executed and verified in duplicate and affirmed subject to penalties

of perjury by the resident agent in his individual name; however, if

the resident agent is a foreign or domestic corporation, the statement

must be executed by a current officer of the corporation. The state-

ment, executed in duplicate, shall be delivered to the secretary of state.

If he finds that it conforms to the requirements of law, the secretary

of state shall, upon payment of the required fees, endorse upon each
of the duplicates tendered for filing, over his signature and official

seal, the word "filed" followed by the date of the filing. The sec-
retary of state shall retain one (1) executed copy of the statement in

his files. He shall attach to the other filed copy a certificate stating
that the instrument is an executed copy of the statement filed in his

office, giving the date of the fiUng, and shall return the other copy

to the resident agent.

(d) Any person who has been designated as resident agent for
service of process by a foreign corporation may file with the secre-
tary of state a signed statement that he is unwilling to continue to

act as resident agent for the corporation. Upon the filing of such
statement with the secretary of state, the capacity of the person as

resident agent terminates and the secretary of state shall give written

notice by mail to the foreign corporation of the filing of the state-



880 INDIANA LAW REVIEW [Vol. 18:777

ment and its effect. The notice shall be addressed to the corporation
at its principal office or place of business as shown by the records

of his office.

(e) If and when any foreign corporation admitted to do business

in this state shall not have available in this state its agent or repre-

sentative on whom service of legal process may be made, service may
be made upon the secretary of state, accompanied by a fee of five
dollars ($5), and the secretary of state shall mail such process by reg-

istered mail with return receipt requested to the post office address

of the corporation in the state in which the corporation is incorpo-

rated as shown by its last annual report to the secretary of state.

The returned receipt shall be filed with the court in which the action

is pending and shall be considered sufficient service upon the nonres-

ident corporation. In the event that the corporation refuses to accept

or claim the registered mail, the registered mail shall be returned by

the secretary of state to the plaintiff or his attorney, and it shall be

appended to the original process, together with an affidavit of the

plaintiff or of his attorney or agent to the effect that the summons
was delivered to the secretary of state, and thereafter returned un-

claimed by the post office department, and such affidavit, together

with the returned envelope including the summons, shall be consid-
ered sufficient service upon the nonresident corporation. Any legal
process served upon the secretary of state as herein provided shall

not be returnable in less than thirty (30) days from the date on which

the service is made upon the secretary of state. The court in which
the action is brought may order such continuances as may be reason-
able to afford the corporation opportunity to defend the action.

Section 66. Amendments to Charter

Each foreign corporation admitted to do business in this state shall

keep on file in the office of the secretary of state a duly authenti-

cated copy of each instrument amending its articles of incorporation

or association; but the filing of any such instrument shall not of it-

self enlarge or alter the character of business which the foreign cor-

poration is authorized to transact in this state as set forth in the

certificate of admission, nor authorize such corporation to transact

business in this state under any other name than the name set forth
in its certificate of admission unless such foreign corporation shall

apply for and receive an amended certificate of admission as pro-
vided in the next succeeding section.

Section 67. Amended Certificate

Any foreign corporation admitted to do business in this state may
alter or enlarge the character of business which it is authorized to



1985] NOT-FOR-PROFIT 881

transact in this state under its articles of incorporation or association,

and any amendments thereof filed with the secretary of state as
hereinabove provided, and may obtain authority to transact business
in this state under a different name than the name set forth in its
certificate of admission, by procuring an amended certificate of ad-
mission from the secretary of state in the manner hereinafter pro-

vided.

Whenever a foreign corporation desires to procure an amended
certificate, it shall present to the secretary of state at his office, ac-

companied by the fees prescribed by law, an application for an
amended certificate of admission, stating the change desired in the
character of business under its articles of incorporation or association

and the name under which it desires to transact business. The appli-
cation shall be signed in duplicate, in the form prescribed by the sec-

retary of state, by any current officer of the corporation and verified

and affirmed subject to penalties for perjury.

Upon the presentation of such application, the secretary of state,
if he finds that it conforms to law, shall indorse his approval upon

each of the duplicate copies and shall file one (1) copy of the appli-

cation in his office and issue to the corporation an amended certifi-

cate of admission, accompanied by one (1) copy of the application

bearing the indorsement of his approval. The certificate shall set forth
the character of business that the corporation is authorized thereafter

to transact in this state.

Upon the issuance of an amended certificate of admission by the
secretary of state, the corporation shall have authority to transact the

business set forth in the certificate, subject to the terms and condi-

tions prescribed by this chapter.

If amended certificate of admission authorizes the corporation to
transact business in this state under a new corporate name, the cor-
poration shall, within ten (10) days after the issuance of any such

amended certificate, file for record a duplicate amended certificate fo
admission, duly certified by the secretary of state under the seal of

his office, with the county recorder of each county in this state in

which it shall have real property at the time such amended certificate
is issued.

Section 68. Withdrawal From State

Any foreign corporation admitted to do business in this state may
withdraw from this state by surrendering its certificate of admission,

and any amended certificates of admission that may have been issued
to it, and by filing with the secretary of state, accompanied by the

fees prescribed by law, a statement of withdrawal setting forth:

(1) The name of the corporation and the state or country in which
it was incorporated.



882 INDIANA LAW REVIEW [Vol. 18:777

(2) The date of the issuance of its certificate of admission, and
of each amended certificate of admission, if any.

(3) That it is no longer operating in this state and that it has no
property located in this state.

(4) That it surrenders its authority to transact business in this state

and returns for cancellation its certificate of admission and any
amended certificate of admission issued to it.

(5) That it revokes the authority of its then named resident agent
to accept service of legal process; and that it consents that proc-

ess against it thereafter may be had upon the corporation, in any
action or proceeding upon any liability or obligation incurred
within this state before the filing of the statement of withdrawal,

by serving the secretary of state.

(6) A post-office address to which the secretary of state may mail
a copy of any process against it that may be served upon him.
Such statement shall be signed, in the form prescribed by the

secretary of state, by any current officer of the corporation and ver-

ified and affirmed subject to penalties for perjury.

Upon the filing of such statement, accompanied by the certificate
of admission and any amended certificates of admission issued to the
corporation, the authority of the corporation to transact business in

this state shall cease; but the filing of such statement shall not affect

any action by or against such corporation pending at the time thereof

or any right of action existing at or before the filing of such state-

ment in favor of or against such corporation.

Section 69. Revocation of Certificate

The certificate of admission of any foreign corporation admitted to
do business in this state may be revoked at any time by the secretary
of state:

(1) upon the failure of an officer or director to whom interro-
gatories are propounded by the secretary of state to answer fully
and to file such answers in the office of the secretary of state

within thirty (30) days after the mailing of the interrogatories by

the secretary of state;

(2) upon the existence in this state of the corporation for thirty

(30) days without appointing and maintaining an agent in this state

upon whom service of legal process may be had;
(3) upon the existence in this state of the corporation for thirty

(30) days without keeping on file in the office of the secretary
of state duly authenticated copies of each instrument amending
its charter;

(4) upon the failure, neglect or refusal of the corporation to pay
within thirty (30) days any fee required by the laws of this state;

or



1985] NOT-FOR-PROFIT 883

(5) for wilful misrepresentation of any material matter in any ap-

plication, statement, affidavit, or other paper, filed by such cor-
poration pursuant to this chapter.

No certificate of authority of a foreign corporation shall be re-
voked by the secretary of state unless he shall have given the cor-

poration not less than sixty (60) days' notice thereof by first class

mail addressed to its resident agent at his address in this state or, if

there is no resident agent, to the principal office of the corporation
outside this state.

Upon revoking any such certificate of admission, the secretary of
state shall (1) issue duplicate copies of a certificate or revocation, (2)

file one (1) copy in his office, and (3) mail to the corporation at its

principal office outside this state by registered or certified mail a no-

tice of such revocation, accompanied by one (1) of the copies of the

certificate of revocation.

Upon the revocation by the secretary of state, the authority of
the corporation to transact business in this state shall cease, and such
corporation shall not thereafter transact any business in this state un-

less it applies for and receives a new certificate of admission.

Section 70. Application to Corporations Now Qualified

Foreign corporations entitled to transact business in this state, as not-

for-profit corporations, at the time this chapter becomes effective shall

be entitled to all of the rights and privileges, and shall be subject to

all the limitations, restrictions, liabilities and duties, prescribed herein

for foreign corporations admitted to transact business in this state

under this chapter.

Section 71. Service of Process After Withdrawal or Re-
vocation

Whenever the certificate of admission of any foreign corporation shall

be withdrawn or revoked, then, in any suit or proceeding thereafter

commenced against it for or on account of any obligation or liability
growing out of any business theretofore or thereafter done by it in

this state, service of legal process may be had by serving such proc-
ess upon the secretary of state upon the same terms and provisions

as provided for by section 53 of this chapter in the case of service

of legal process on a foreign corporation which is admitted to do
business but does not have a resident agent in this state.

Section 72. Transaction of Business Without
Certificate of Admission; Maintenance of Suits; Penalty

(a) No foreign corporation transacting business in this state without
procuring a certificate of admission or, if such a certificate has been



884 INDIANA LAW REVIEW [Vol. 18:777

procured, after its certificate of admission has been withdrawn or re-

voked, may maintain any suit, action or proceeding in any of the
courts of this state upon any demand, whether arising out of con-

tract or tort; and every such corporation so transacting business is

Uable by reason thereof to a penalty of not exceeding ten thousand

dollars ($10,000), to be recovered in an action to be begun and pros-

ecuted by the attorney general in any county in which such business

was transacted.

(b) If any foreign corporation transacts business in this state

without procuring a certificate of admission, or, if a certificate has

been procured, after its certificate has been withdrawn or revoked, or

transacts any business not authorized by the certificate, the corpora-

tion is not entitled to maintain any suit or action at law or in equity

upon any claim, legal or equitable, whether arising out of contract

or tort, in any court in this state; and the attorney general, upon

being advised that any foreign corporation is so transacting business

in this state, shall bring an action in the circuit or superior court of

Marion County for an injunction to restrain it from transacting such

unauthorized business and for the annulment of its certificate of ad-

mission, if one has been procured.

(c) An agent of any foreign corporation who transacts for the
corporation any business in Indiana before it has procured a certifi-

cate of admission or after its certificate has been withdrawn or re-

voked commits a Class C infraction.