Associations, Nonprofits and Political Organizations Report - Summer 2021
Date: August 23, 2021
Supreme Court Strikes Down California Donor Disclosure Requirement - Confirms Broad Protection for Anonymity and First Amendment Associational Rights
By: Jeffrey P. Altman
In Americans for Prosperity Foundation vs. Bonta, two tax-exempt charities recently prevailed in their decade long fight to protect the identities of their major donors from state disclosure requirements. At issue was the requirement for nonprofits who want to engage in fundraising to provide California with their confidential taxpayer versions of IRS Form 990, Schedule B, which include donor names that are not subject to public disclosure. Even though the state pledged confidentiality – a promise not always kept in the past – the United States Supreme Court concluded that this California requirement was unconstitutional.
The Supreme Court ruled that this broad disclosure requirement was not narrowly tailored to the claimed governmental interest in investigating charitable wrongdoing or the state’s administrative convenience. The Court concluded that the “disclosure requirement imposes a widespread burden on donors’ associational rights” and held that it was “facially” invalid for all nonprofits – not just as “applied” to the specific nonprofits that filed this case based on the threats or burdens they were able to establish (which in this case took years of litigation).
The Americans for Prosperity Foundation decision is of particular interest given the broader societal and political debate as to whether the public should be able to know who provides financial support to cause related and other nonprofit groups. One side claims a need or right to know the source of so-called “dark money” while the other side cites personal threats to donors and boycotts of their businesses that may result from having their support revealed. In this case, the majority opinion concluded that the “chilling effect on association is enough” to strike down the disclosure requirement.
The majority opinion in Americans for Prosperity Foundation harkened back to the Supreme Court’s 1958 seminal decision in NAACP vs. Alabama. In that case, the Supreme Court struck down an effort by the Alabama Attorney General to obtain the group’s membership lists in light of threatened economic reprisals and violence if members’ affiliation with the organization were disclosed. The concurring opinion in Americans for Prosperity Foundation case emphasized that the Assembly Clause in the United States Constitution includes the right to associate anonymously and implicates other First Amendment rights, such as freedom of the press.
A strongly worded dissent argued that the NAACP rationale should not apply broadly in the current context without a particular organization having to “plead and prove that disclosure will likely expose them to objective harms, such as threats, harassment, or reprisals.” The dissent opposed a broad holding that the statute is “facially” invalid for all nonprofits and suggested that each nonprofit instead should have to establish why disclosure would be unconstitutional as “applied” to its particular circumstances.
The broader debate will continue, but for now, California can no longer enforce its donor disclosure requirement. Moreover, both New York and New Jersey, the two other states with similar donor disclosure fundraising requirements, indicated that they also would no longer enforce a similar requirement.
It remains to be seen how the Americans for Prosperity Foundation decision will be applied in other contexts.
The Party Must Go On: Ipso Facto Provisions in Event Contracts
By: David W. Gaffey
The COVID-19 pandemic has wreaked havoc on many sectors of the US economy. The hospitality industry has been particularly hard hit, causing many hotels and other conference venues to seek bankruptcy protection. Such bankruptcy filings can create considerable problems for organizations with conferences and events scheduled at these venues, many of which must be booked and planned years in advance. Therefore, organizations often include “ipso facto” provisions in their event contracts entitling them to declare a default under the contract or to terminate the contract outright if the venue files a bankruptcy case.
Although seemingly straightforward, in practice these “ipso facto” provisions are rarely enforceable against debtors in bankruptcy. Section 365(e)(1) of the Bankruptcy Code specifically overrides and renders unenforceable any executory contract provision that purports to modify or terminate the contract because of the insolvency or financial condition of the debtor or the filing of a bankruptcy case by the debtor. Additionally, section 541(c) of the Bankruptcy Code provides that an interest of the debtor in property, including contracts, becomes property of the debtor’s bankruptcy estate notwithstanding any contract provision “conditioned on the insolvency or financial condition of the debtor” or the commencement of a bankruptcy case that would result in the forfeiture, modification, or termination of the debtor’s interest in the contract. Combined, these provisions ensure that any contracts with a bankrupt party survive and remain enforceable despite the bankruptcy filing.
Making matters worse, once a venue files for bankruptcy, an event contract cannot be terminated for any reason without specific bankruptcy court approval. Effective immediately upon the bankruptcy filing, section 362(a)(3) of the Bankruptcy Code bars any act to “exercise control over property of the [bankruptcy] estate,” which includes any attempt to terminate contracts to which the debtor is a party. Event contracts often represent substantial revenue for the venue and thus are important assets that a bankrupt venue will seek to preserve at all costs. For this reason, attempts to terminate contracts in violation of section 362(a) of the Bankruptcy Code can result in significant penalties and sanctions against the offending party.
It is critical to note that these restrictions do not apply to valid terminations of an event contract occurring before the venue files its bankruptcy case. Prudent organizations should carefully monitor their important event venues, and, if any concerns regarding a venue’s solvency or ability to fulfill its contract responsibilities arise, terminate the contract in accordance with the contract terms (if possible) as promptly as possible. If an organization does find itself locked into an event contract with a bankrupt venue, it should immediately seek the assistance of legal counsel to protect itself in the bankruptcy case and, if possible, explore its options to escape the contract without violating the Bankruptcy Code.
Meet The Team
Stephen Schaefer is a partner in our ANPO section. He has represented trade associations, professional membership organizations, academic societies, and other nonprofit organizations as legal counsel for over 20 years. Stephen handles a variety of work for nonprofit clients including governance, contract review, intellectual property, and international operations. He is a member of ASAE.
Stephen, his wife Jenny, and their three teenage children live in Howard County, Maryland. He currently serves on the board of the St. Agnes Hospital Foundation where he recently finished a term as the board chair. Stephen enjoys volunteering with the Boy Scouts and recently completed the triple-crown of scouting high adventure trips with his Eagle Scout son – Philmont, Northern Tier, and Sea Base. He also enjoys playing tennis in his spare time.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.