Spoiling Golf at a Private ClubJune 18, 2021
Best Practices for Trade Association and Private Club GovernanceNovember 28, 2022
Separation of Powers in the Context of Private Clubs and Trade Associations
By Fred L. Somers, Jr., Esq. The author is an Atlanta, Ga. attorney concentrating on legal matters pertaining to private clubs and trade associations. This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.
It strikes me as both odd and contrary to the norms of a democratic society that the judicial and legislative roles are combined in the governing board of nonprofit entities. This combination of powers we believe may often result in biased judicial decisions. Biased because in a dispute between a member and the organization, the board is most likely to take the side of the organization, as its duty of loyalty is first to the organization and not to individual members.
It gets particularly sticky when the dispute is between an individual member and one or more of the board members themselves or their close friends or family. We have witnessed occasions when the board acted improperly when adjudicating a hearing in these instances in a biased, unreasonable, and unfair manner towards individual members in favor of a director(s). For instance, in one case when a member persistently and correctly complained about a board’s decisions, the board called for a disciplinary hearing to show cause why the member shouldn’t be expelled or otherwise sanctioned for conduct detrimental to the best interests of the organization.
Right or wrong in the moral sense, (assuming that moral judgments are appropriate in such instances), the manifest conflict of interest in the cited case by allowing the board to decide who should prevail in the dispute is most apparent. It is not like we are living in the swashbuckling days of pirates and privateers when the ship’s captain was the judge and jury regarding seamen perceived as mutinous. Or, in the realm of absolute monarchies or imperial regimes where the king or dictator decides what laws shall apply to a constituent when these laws have been violated, whether the citizen has violated them, and what punishment should be administered if any.
The governing board using what it perceives as the applicable societal moral standards of behavior to apply to member conduct being weighed is presumably guided and influenced by what the organization’s bylaws, rules, and policies recite. However, in the member disciplinary proceedings, we have been privy to rely more on the subjective views of the directors comprising the judges. Little compassion or empathy occurs when the miscreant member was acting under the influence of alcohol and crossed the “zero tolerance” policy regarding employee sexual harassment. No additional consideration is even forthcoming should the member be a long-term member. The judgment pronounced is the result of adherence to black-and-white standards with no consideration for “grey” causes of behavior or conditions attendant to the behavior. As demonstrated by Bruno Latour, there are a myriad of causes leading to events about which we pay little heed in attempting to evaluate and judge these events on a presumptive but perhaps falsely “objective” basis.
Combining legislative and adjudicative functions in a nonprofit governing board may be efficient, but is contrary to democratic republican principles, inherent in the private governance of organizations situated within a democratic republic. Why not favorably consider a separate and independent (of the governing board) judiciary committee? We say independent of the governing board because as recently expressed in a recent complaint filed against FINRA, hearing officers are subject to the inherent pressure, bias, and conflict of interest flowing from being employed or appointed by one of the two litigants. See Case 8:22-cv-02347 Document 1 Filed 10/12/22 Page 1 of 30 Page ID 1, Scottsdale Capital Advisors. Thus, it seems appropriate the judiciary function should be exercised by someone not appointed by the governing board.
This judiciary committee would be charged with hearing and deciding all disputes between the organization and an individual member(s), and the action to be taken, if any, following the hearing.
But you might ask, how do we select the members of the judiciary committee? Is it overly burdensome for the membership to have to elect both judiciary committee and governing board members at their annual meeting? Or, preferably, should not the tenure of judiciary board members be longer than governing board tenures so the elections for vacancies on the respective bodies occur on different occasions? Should judiciary committee decisions be final or subject to appeal to an independent arbitrator?
Suppose the individual member contends the board acting in an ultra vires manner, i.e., beyond its authority under the organization’s articles or certificate of organization, operating agreement, or bylaws. Obviously, in such a case, the constituency of the judiciary committee may need to include one or more lawyers or others who have an understanding of fair and reasonable legal processes and other legal principles to decide the issue at hand. In a large organization, there should not be a problem identifying such candidates. Smaller organizations or those with membership admission requirements effectively barring lawyers from membership may have to reach outside their membership for judiciary committee members. But this creates the potential for expenses not contemplated or thought to be reasonable to impose on the organization’s members.
Moreover, we have found if the details of how disputes between members and the organization or governing board are set forth as a matter of policy or law, members conducting the dispute hearing can easily do so if provided with guidance with sufficient, written clarity, the procedures to follow and applicable legal principles. For example, private organizations not tainted with public governmental powers are not bound by constitutional precepts of due process. Thus, unless an applicable state statute mandates minimum fair process standards for nonprofit entities, the entity is free to prescribe its own rules and procedures for dispute hearings. These procedures normally do not include a right to counsel, adverse witness confrontation, or the right to a transcript or to record the proceedings.
The answer may be to exclude disputes not specifically allocated to the jurisdiction of the judiciary committee, e.g., an ultra vires complaint, shall be referred to an independent arbitrator or mediator for a final, non-appealable decision and the expenses therefor shall be awarded to the prevailing party. Thus, the organization will only bear the dispute resolution expense if the governing board is not the prevailing party.
Concern then needs to be focused on the scope of authority given to the judiciary committee, the credentials required for participation, the tenure of individual members, and the finality or not of the judiciary committee’s decisions. If not final and binding, then to what agency should the appeal be permitted? Appeal to the ultimate internal authority, i.e., the membership itself, is sometimes used. However, in a dispute which needs to be kept confidential, e.g. a sexual harassment case, it is most dangerous from a liability viewpoint to expose the dispute to the general membership.
Rather, if the judiciary committee’s decision is appealable to a third-party, independent arbiter, then we are back into extraneous costs and the fair method of allocation of these costs. Further, if an independent arbiter is to ultimately decide the dispute, then why not start with the independent arbiter?
It is beyond the scope of this writing to spell out the needed governing document adjustments required to accomplish the creation of a judiciary committee. If the idea is of interest, we may follow up in a later article with suggestions of how this may be accomplished.
In summary, non-profit private organizations should consider separating the judicial function from the executive (management) and legislative (governing board) functions.