Charity's Duty to Disclose Racist Distribution of Raised Funds:

I now have more details on the Missouri Attorney General's lawsuit against the racist post-Katrina fundraisers, which I earlier blogged about here. I've put up the complaint (see the previous link); here's the essence of the AG's argument:

Defendants . . . have engaged in methods, acts, uses and practices of deception, fraud, false pretenses, false promise, misrepresentation, unfair practice, and the concealment, suppression and omission of material facts in connection with the advertisement charitable solicitations, all in violation of [sec.] 407.020, [Rev. Stat. Missouri], for reasons including, but not limited to, the following:

a. The concealment, suppression, and omission of the material fact that Defendants are not properly registered as tax exempt entities and hold no tax exempt status.

b. The concealment, suppression, and omission of the material fact that consumers' donations made to Defendants are not tax deductible.

c. The concealment, suppression, and omission of the material fact that Defendants do not intend to utilize any of the moneys received through charitable solicitations for the benefit of non-white victims of Hurricane Katrina.

d. The concealment, suppression, and omission of the material fact that Defendants that the charitable donations will be used for hurricane relief for white victims only.

e. Engaging in the unfair practice of soliciting charitable donations which will be used for hurricane relief for white victims only.

A few questions: (1) Should objections (a) and (b) be treated as different, for legal purposes, from objections (c) and (d)?

(2) Charities often choose whom to give money to — sometimes they prefer poor people over rich people, people with children over people without children, women over men, blacks over whites, fellow Baptists over others, or whatever else; sometimes they do this categorically and sometimes they consider various attributes together with other factors. Are charities required to disclose all of these criteria, none of these criteria, or only some of these criteria — and, if the latter, which ones?

(3) In Riley v. National Federation of the Blind (1989), the Court struck down a requirement that fundraisers disclose in their pitches what fraction of the donations are used for fundraising expenses. Though the government argued that such a requirement was needed so that people wouldn't be misled into believing that most of their money was going to help the needy — when in reality 90% might end up being used up for expenses — the Court concluded that such a requirement was nonetheless unconstitutional. Given this, would it be constitutional to have a legal rule that requires disclosure of (a & b) non-tax-exempt status or (c & d) racial targeting of the aid?

(4) The Missouri AG seems to suggest that it's per se unfair — and thus forbidden by state law — to solicit charitable donations that will benefit only whites, regardless of whether the charity discloses this, see objection (e). Is that really dictated by state law? Is it constitutional? If it is, would it be constitutional for Missouri law to allow fundraising to help blacks or Hispanics or Jews (including secular Jews, to make this an ethnic criterion and not a religious one) and to forbid fundraising to help whites? (I'm not sure whether Missouri law does this, but I'm asking this question hypothetically.)

A few Socratic questions: (1) Are objections (a) and (b) different from objections (c) and (d)?

I'm probably falling for a trap here, but it would seem to me that the answer has to be yes; (c) and (d), are legal, whereas at least (b) is not. (I don't know Missouri law, but people are prosecuted for that in NY.)

(If it is legal, I'd be tempted to incorporate as the (for profit) White Aryan Benificent Society, disburse 0% aid to racists, and disclose nothing.)
9.13.2005 8:56pm
Ah, strike the above. I would have answered differently to the revised version.
9.13.2005 10:18pm
Doesn't the 9th circuit Kamehama Schools ruling imply that charities can't operate exclusively for the benefit of one racial/ethnic group? or is education different? (or the 9th circuit not dispositive?)

And to me, (b) sounds equally worthy of punishment as lying about prices on an advertising flyer.
9.13.2005 11:17pm
nk (mail) (www):
Whoa, guys. "The concealment, suppression, and omission"?
"Engaging in the unfair practice of soliciting charitable donations which will be used for hurricane relief for white victims only"? This is a horse____ complaint. First year law school: WHERE IS THE MATERIAL MISREPRESENTATION REQUIRED FOR FRAUD? Sure, if these people lied and said they were a 503(c) charity and EO/AA they would be guilty of fraud but nothing in the complaint says they did that.

As I drive to work each morning, there is an old, white, not obviously Hispanic, man who goes up to the stopped cars and asks "Spare a quarter?" Can he be indicted for the ommission of not telling me he is a tax-exempt charity? Well, how about the unfair practice of soliciting charitable donations which will be used for food, drink, clothing and shelter for an old, white, not obviously Hispanic, man only?

I have practiced law for twenty-three years and I believe that I have a very large vocabulary but horse____ is the only word I can think of to describe this complaint.
9.13.2005 11:39pm
frank cross (mail):
Well, I can't say I'm terribly familiar with the law here, but I know that a material omission can be a fraud. If a reasonable person would believe that a charity would not discriminate based on race, absent express disclosure, the failure to disclose such discrimination could be materially misleading. While a contributor to a charity of a specific religion might believe that the charity might favor beneficiaries of that religion, the same would not be true of donations to an apparently general charity that was in fact racist in its policies. Thus, a corporation could be liable for failing to disclose an intention that a reasonable investor would find material.

As for whether this otherwise actionable omission should be constitutionally protected, my instincts say no but I don't know the law well enough.
9.14.2005 12:05am
I couldn't find anything on this, so I pose the questions to the more knowledgeable.
The Salvation Army has an expressed policy against homosexuality and is a tax-exempt organisation.
Does the Salvation Army forbid homosexuals from receiving any proceeds from donations?
If they did, could they be subject to lawsuits? Is their policy alone grounds for a lawsuit like the one under discussion? Could the same be true of the Boy Scouts?
I have given to the Salvation Army and have never been advised of any policies against any group. Have I been defrauded?
9.14.2005 12:30am
Paco (mail) (www):
Re the common law fraud question re fraud by omission of a material fact: While there is a problem bringing a cause for fraudulent omission in some circumstances (eg the Lanham Act), MO seems to provide for such a cause of action:

Silence or nondisclosure of a material fact can be an act of fraud if there exists a duty to disclose. Andes v. Albano, 853 S.W.2d 936, 943 (Mo. banc 1993). Concealment of a fact which one has a duty to disclose properly serves as a substitute element for a false representation in the tort of fraudulent misrepresentation. Triggs v. Risinger, 772 S.W.2d 381, 382 (Mo.App.1989). The duty to disclose arises either where there is a relation of trust and confidence between the parties or where one party has superior knowledge or information not within the fair and reasonable reach of the other party. Andes, 853 S.W.2d at 943.

The statute specifically provides for it as well:

The act, use or employment by any person of any deception, fraud, false pretense, false promise, misrepresentation, unfair practice or the concealment, suppression, or omission of any material fact in connection with the sale or advertisement of any merchandise in trade or commerce or the solicitation of any funds for any charitable purpose, as defined in section 407.453, in or from the state of Missouri, is declared to be an unlawful practice.
9.14.2005 12:53am
Anthony Argyriou (mail) (www):
1) Yes. Assuming that (c) and (d) are illegal, they're a different form of illegal than (a) and (b). The fraud is different - the tax-deductible status of a charity might not make a difference to some people, while some people may not care (or may prefer) if the charity is distributed on a racist basis.

2) Depends on the laws of the governing jurisdiction. There is also the matter of how disclosure is required - disclosure of tax-exempt status or the lack thereof may be required to be attached to all solicitations while the detailed financial reporting required of "non-profits" only has to be made available under certain circumstances. Similar laws regarding disclosure of the basis on which charities disburse funds may have a similar range in degree of disclosure.

3) I think that part 2 of Riley is incorrectly decided. Fundraising solicitations for charities are commercial speech, despite the legal gymnastic of the majority opinion and precedents cited therein. My personal belief is that infringement on commercial speech should bear higher scrutiny than it now does, but if it is constitutional to require sellers of dietary supplements to make statements which may directly contradict the opinions of the seller, it is constitutional, if not wise, to require charities to disclose certain things about their operations in their fundraising solicitations.

4) I don't believe that it would be "unfair" for a charity to solicit contributions solely for the benefit of whites (or blacks, etc), provided there was some disclosure. It may be illegal to do so, but the purpose of such a law is not to create a level playing field between charities competing for a limited supply of contributions, which would be the legal meaning of "unfair", but because it is undesireable to allow private parties to use race for making certain economic decisions.
9.14.2005 2:13am
Jeff Boulier (mail) (www):
DK: Doesn't the 9th circuit Kamehama Schools ruling imply that charities can't operate exclusively for the benefit of one racial/ethnic group? or is education different?

Intriguing. Does this imply that, in the 9th circuit, the United Negro College Fund is operating outside the law?
9.14.2005 3:48am
arbitraryaardvark (mail) (www):
It is a civil case. In defending civil cases, I tend to focus on counterclaims. Here, the state attempts to compel speech, actionable under the state and federal constitutions. Riley is most on point but see also Wooley v Maynard (live free or die), Talley v California, McIntyre v Ohio, Buckley v ACLF, Watchtower v Stratton. The registration requirement might be trickier. But does Missouri want to require churches to get a license before they can pass a collection plate? I expect that there's a free exercise claim there as well. If the charity is engaged in lawful speech and religious activity, is the AG violating 17 usc 421, civil rights law, a federal felony? If the AG is engaged in a felony and a violation of the state constitution, Missouri recognizes an action quo warranto to remove such officer. However, an action quo warranto can only be brought by the AG... oh well. However, any Volokh reader can file a disciplinary complaint against the AG and the two AAG's. Or, since the practice of law is a first amendment activity, would this interfere with the AG's civil rights? It's a somewhat circular argument.
9.14.2005 5:27am
Jeroen Wenting (mail):
When throwing in all kinds of laws providing preferential treatment to blacks and other minority groups I can see how a situation could arise in which it is illegal to raise funds to help white people but legal to raise funds specifically to help black people.
The one would be illegal under racial equality laws, the other allowed under laws providing preferential status to minorities (laws which are usually taken to override restrictions on activities disallowed under racial equality).
Whether something like that is constitutional, I don't know. Does the constitution have anything at all to say about racial equality or "affirmative action"?
9.14.2005 6:48am
What duty do they have to disclose their tax status or their methods of distribution? Is it a statutory duty or common law duty or just that duty that people in their gut feel that says "well, it'd be nice to know how my money is spent."

The difference between (a) and (b), and (c) and (d), is that I'd say it's way more likely that you can find a legal duty involving tax-exempt status, rather than a duty that says you can't be a racist or use money in a racist manner.

The fundamental problem I see with this lawsuit is that it is an unreasonable expectation that a charitable organization will use its funds 100% in accord with YOUR preferences.
9.14.2005 12:22pm
markm (mail):
In regards to (a) and (b), the following are both plainly true:
1. Wrongly assuming that a donation is tax exempt can adversely effect the donor's finances on top of the ammount of the donation.
2. Whether or not donations are tax exempt can affect the decision as to whether to donate.

IANAL, but it seems obvious that #1 is a lot better reason for requiring that the organization make the tax-exempt status clear than #2. This shouldn't require that every request for money come with an explicit statement as to tax exempt status, but only that presentations that would fool a reasonable person include an explicit statement.

For (c) and (d), and for Riley, #2 is true and #1 is not. I can see a point to overturning Riley at least when the presentation is misleading, but if you follow this precedent, (c) and (d) are out. The racism is distasteful, but it's not unlawful.
9.14.2005 6:13pm
Paul doson (mail) (www):
The description of the subject is in detail and the readers will draw usefull information from the article.
9.15.2005 2:35am