Article Archives >> Lead Stories >> March 1-31, 2009

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Who Has Standing to Challenge
Nonprofit Corporate Action?
Pa. court dismisses complaint
by Blue Cross subscribers, policy holders

Who has standing to challenge the propriety of corporate action in a nonprofit corporation?

Pennsylvania courts have decided a series of cases in recent years trying to set the parameters of standing, and the Commonwealth Court has recently added one more to the continuum.  It has denied standing to subscribers and policy holders of Northeastern Blue Cross, a Pennsylvania nonprofit corporation, who sought to challenge the accumulation of what they called excessive reserves as a breach of fiduciary duty.  (Petty v. Hospital Service Association of Northeastern Pennsylvania, No. 1346 C.D. 2008, 2/19/09.)

The Pennsylvania nonprofit corporation law provides that a court may determine the validity of corporate action “upon petition of any person whose status as, or whose rights or duties as, a member, director, member of an other body, officer or otherwise…are or may be affected by” such action.

In 1990, the Commonwealth Court held that a father and son could not challenge the determination of a youth baseball league not to select the son for the all-star team.  The Court held that they did not qualify under the “or otherwise” provision because their status was not “even remotely similar” to the specific categories spelled out in the statute.

In 2001, the same Court granted standing to an employee of a nonprofit corporation to challenge her job termination because she held the position of Director of Administration, a position provided for in the organization’s bylaws and subject to appoint by the board of directors.  The Court held that her status was akin to that of an officer and was within the meaning of “otherwise” in the statute.

In a prior case involving Blue Cross reserves brought by subscribers to Independence Blue Cross in the Philadelphia area, the Commonwealth Court had held that the question of rates and reserves was within the exclusive jurisdiction of the state Insurance Department.  The Supreme Court reversed and remanded to the Commonwealth Court to determine whether the subscribers in that case had standing to pursue the claims in court.

On remand, the Commonwealth Court held that those subscribers had standing to sue because the bylaws of the corporation placed the subscribers in the same class as members, directors, and officers.  It also found that those suing only as consumers had no standing.  It found that the Independence Blue Cross bylaws vested powers in distinct groups of subscribers that would otherwise have been exercised by the board.  They had power to nominate directors, remove the entire board, and to submit proposals to the board, including amendments to the articles or bylaws, sale of assets, merger or division, or dissolution.

In this case, the subscribers were merely customers, and did not have powers equivalent to members or directors, the Court said. 

The Court rejected a common law argument for standing.  It held that any consumer could sue for breach of contract of insurance, but that the claims made here did not allege a breach of the contract to pay for health care under the contract.  The subscribers and policy holders did not show how they were harmed by the accumulation of reserves other than that it was a violation of the nonprofit corporation law.

The Court said that the subscribers’ argument would mean that every person who contracts with a nonprofit corporation could go beyond the confines of the underlying agreement and challenge the validity of any of that nonprofit’s corporate actions.  “While imaginative, this is nothing more than attempt to circumvent the Legislature’s express limitation” on standing in the statute.

YOU NEED TO KNOW

Like the law of trusts, the universe of people who can challenge nonprofit corporation action, other than the state Attorney General, is significantly limited by most state nonprofit corporation laws.  Note that even those who have standing to challenge under Pennsylvania law, can challenge only when they claim that their own rights or duties may be affected by such action.

Article Archives >> Lead Stories >> March 1-31, 2009