Published in the Idaho State Bar Advocate Magazine, September 2016.
By Arthur B. Macomber
Stability in the law provides certainty to business planning. This is especially true for nonprofit organizations, because they frequently operate on a shoestring and have volunteer directors and officers. Due to financial constraints, these organizations cannot easily afford high-priced corporate counsel to steer them through the legal maze. Further inhibiting operational efficiency, volunteer directors and officers frequently have little or no managerial experience that gives the judgment required to apply Idaho statutes in conjunction with organizational governing documents.
Complete changes to the Idaho statutes governing the organization and operation of nonprofits were enacted in 2015.1 Idaho has little experience or case law interpreting these new statutes, but because they are uniform acts, the cohesive structure has been pre-developed in other jurisdictions to Idaho’s benefit. This article reviews some of the statutory changes, so practitioners can counsel their clients to avoid costly errors in the operation of nonprofit organizations.
Overview of statutory structure for Idaho nonprofits
In general, the structure of Idaho law is that there is one set of statutes for unincorporated nonprofits, and another set for incorporated nonprofits.2 This dual structure remains.
Unincorporated nonprofits are usually very small. They frequently consist of homeowners associations of fewer than 20 parcels where privacy is of great concern, other small organizations of fewer than 50 members that have a single common purpose, or ad hoc organizations that have a specific but short-term corporate purpose.
Incorporated nonprofits usually involve larger numbers of people, and they have more detailed internal governing documents such as articles of incorporation and bylaws. They may have additional sets of rules due to the nonprofit having either multiple purposes or a wider scope of operations, including property ownership and maintenance.
In choosing a statutory structure for a nonprofit, practitioners should focus on particular client needs, the length of time the organization is envisioned to exist, the scope of the nonprofit’s planned operations, and the managerial and operational capabilities of its prospective directors, officers, and staff. After the statutory structure is chosen, the articles of incorporation and bylaws should be written to ensure not only the viability of the organization during the term of its existence, but also to ensure its relative efficiency in the accomplishment of its particular purposes.
Finally, specific statutes governing particular types of nonprofits or their operations should be reviewed to ensure lawful operation. Other chapters of the Idaho Code contain special criteria for financial administration of particular unincorporated and incorporated nonprofits formed to accomplish certain public policy goals, such as for auctioning wolf or bighorn sheep hunting tags, operating food banks, or for low-income housing.3 Attorneys should be aware that these specialized statutes may apply to organizations they are forming or organizations they are taking on as clients, in addition to the two general statutory regimes covering unincorporated and incorporated nonprofits. These specialized statutes may govern the nonprofit’s operations, especially financial operations, or govern process requirements for internal governance accountability.
What new laws affect unincorporated nonprofits?
The repealed statutory regime for unincorporated nonprofits was Chapter 7 of Title 53 of Idaho Code formerly found with other partnerships. The new statutes, effective July 1, 2015, are at Chapter 27 of Title 30 of Idaho Code. Attorneys may be tipped off about the relative size of unincorporated nonprofits when they see its traditional placement in Idaho Code with partnerships. Pursuant to both old and new statutory regimes, an unincorporated nonprofit consists of “two (2) or more members.”4 The new Code provides a manager-member structure. The definition for “manager” is “a person that is responsible, alone or in concert with others for the management” of the nonprofit.5 This accompanies a new definition for “member” as one who “may participate in the selection of persons authorized to manage the affairs” of the nonprofit.6 However, whereas the old statute indicated merely that the members were “joined by mutual consent for a common, nonprofit purpose,” the 2015 statute is more explicit in stating these members are “joined under an agreement that is oral, in a record, or implied from conduct for one or more common, nonprofit purposes.”7
The words “implied from conduct,” are useful in understanding legislative intent. An unincorporated nonprofit’s pattern of conduct may over time be construed as “established practices,” which over time may evolve into “governing principles” for the “purpose or operation” of the nonprofit and “the rights and obligations of its members and managers.”8 “Established practices” are a nonprofit’s operational habits used “without material change during the most recent five (5) years of its existence,” or during its entire existence if the nonprofit has not existed for five years.9 To avoid battles over veracity amongst managers or members, an organization should document established practices with specific past conduct as examples in order to provide clarity to patterns of ongoing governance, especially if there are frequent losses of organizational knowledge triggered by the departure of managers.
The new statute is also explicit in that unincorporated nonprofit associations do not include trusts, marriages or other domestic living arrangements, joint tenancies or similar common ownership arrangements, or relationships under agreements that expressly deny the creation of unincorporated nonprofit associations.10 The explicit carve outs are helpful in ensuring a nonprofit that is being formed is indeed going down the correct statutory path in doing so. Additional help is provided in the new statute because explicit references to definitions found in Chapter 21 of Title 30 (the Idaho Uniform Business Organizations Code) are stated to apply to those words when found in the new Chapter 27.
Unfortunately, the new Idaho Code section 30-27-102 is followed by ambiguity in the next section. The repealed statute stated, “[p]rinciples of law and equity supplement this chapter unless displaced by a particular provision of it.”11 After the definitions in the new statute we find that “[t]his chapter supplements the law of this state that applies to nonprofit associations operating in this state. If a conflict exists, that [other] law applies.”12 However, it is unclear which other law is being referenced. Is it (A) Idaho law that applies pursuant to Idaho Code section 30-21-705, because of circumstances occurring before July 1, 2015, (B) the incorporated nonprofit association law effective July 1, 2015 and found in Chapter 30 of Title 30, (C) some other statute applying to specific operation of a wolf tag auction or food bank operation as mentioned previously in this article, or is it the amorphous “principles of law and equity,” or (D) some combination depending on the specific facts involved? The way through the quagmire is to apply Idaho’s principles of statutory interpretation,13 which include the doctrine of in para materia. This doctrine explains that various statutes on the same subject matter should be construed together, so that inconsistencies in one statute may be resolved by looking at another statute on the same subject.14
As of July 1, 2015, the statutes for unincorporated nonprofits are located in Title 30 at Chapter 27, however the old Chapter 7 of Title 53 “may have continuing applicability to certain actions and proceedings taken or commenced before its repeal, pursuant to [Idaho Code] 30-21-705.”15 This is important to practitioners and nonprofits, because the repeal of the old law did not affect:
[t]he operation of the statute or any action taken under it before its repeal; [or] any ratification, right, remedy, privilege, obligation or liability acquired, accrued or incurred before its repeal; [or] a violation of the statute or any penalty, forfeiture or punishment incurred because of the violation before its repeal; or any proceeding, reorganization or dissolution commenced under the statute before its repeal, and the proceeding, reorganization or dissolution may be completed in accordance with the statute as if it had not been repealed.16
This is the initial filter through which Idaho lawyers should view the statutory changes effective July 1, 2015. A set of pertinent questions may include: (1) what operations of law occurred before repeal; (2) what express actions were taken by the nonprofit before repeal; (3) what was acquired, accrued, or incurred by the organization, its members, or third parties before repeal; (4) was the repealed statute violated or was there penalty or punishment due to such violation before repeal; and (5) what processes, including litigation, petitions, reorganizations, or dissolutions were commenced prior to repeal? Determination of these facts requires close questioning of new clients, and proper preparation of those clients prior to such questioning should include the introduction that due to statutory changes, a number of initial questions will be posed to determine the applicable and most beneficial law. An important change is that an unincorporated nonprofit still “may acquire, hold . . . or transfer an estate or interest in real or personal property,” but it can no longer encumber property by making it security for a debt.17 An unincorporated nonprofit may have contractual debt, obligations, or tort liability, but it cannot use personal or real property to secure its debt.18 Further comment on this new incentive is below.
The final dramatic change in the unincorporated nonprofit statutes obliterated the express fiduciary duty applicable to a person charged with holding an estate or interest in property for the benefit of the nonprofit.19 “Fiduciary relationships are commonly characterized by one party placing property or authority in the hands of another, or being authorized to act on behalf of the other.”20 The repealed statute21 affirmed the common law of agency by using the word “fiduciary.” What did the legislature mean by its removal of the word “fiduciary” from the new statute?22 Does the legislature intend to only disaffirm the common law? Or to expressly abrogate it by omission? This is unknown. All we can discern is that according to the plain language of the new statutes no fiduciary duty applies to persons holding property for an unincorporated nonprofit.23 How can legal counsel help clients avoid trouble?
In Idaho Code section 54-2094, the Idaho legislature expressly altered the common law fiduciary duties of real estate brokerages related to regulated real estate transactions:
[T]his act is intended to abrogate the common law of agency as it applies to regulated real estate transactions, [and so] the duties and obligations owed to a represented client in a regulated real estate transaction are not fiduciary in nature and are not subject to equitable remedies for breach of fiduciary duty.24
In regulated real estate transactions, the Idaho legislature made its intent clear in the statute, but in the new unincorporated nonprofit statute the legislature has simply removed a word that appeared to statutorily affirm the common law.
The danger is that with the limited resources usually available to an unincorporated nonprofit, one of those entities will need to either bring a case to the Idaho Supreme Court for interpretation of the legislative intent of the new statute, or simply stop entrusting property to people unless there is a written contract related to such property affirming managerial duty, responsibility, and liability. The likelihood is that unincorporated nonprofits will continue to safeguard property, and so a written contract is the safest method for ongoing operations. With proper managerial care, such documentation will become part of the “established practices”25 of the nonprofit, so that organizational integrity is protected and can be defended.
What new laws affect incorporated nonprofits?
The repealed statutes for incorporated nonprofits were found at Chapter 3 of Title 30 of Idaho Code.26 Effective July 1, 2015, the new statutes are found at Chapter 30 of Title 30 of Idaho Code.27 The standard corporate structure is retained, utilizing directors and officers,28 and members remain optional.29 Part 4 of the new statute specifically covers membership, should the corporation choose to have members.30 The new statutory provisions regarding incorporation, filing requirements, and the definitions up through Idaho Code section 30-30-207 are identical to the old statute through Idaho Code section 30-3-22, except liability for pre-incorporation transactions does not fall “jointly and severally” on pre-formation persons “purporting to act as or on behalf of [such] a corporation.”31 However, such matters would appear to be curable at the initial organization meeting where initial directors may carry “on any other business proper for the meeting,” including ratification of pre-incorporation transactions.32
The general powers of incorporated nonprofits are also identical, but as noted above, the unincorporated nonprofit can no longer encumber property, whereas incorporated nonprofits may do so.33 With this significant change in the law, there may be a market incentive to utilize incorporated nonprofits as opposed to unincorporated nonprofits in the future, unless the unincorporated nonprofits can amass funds for operational and capital expenditures by other means. This may mean the price for the relative privacy of an unincorporated nonprofit may be a higher dues-paying requirement for the membership due to the lack of the organization’s ability to encumber property to secure debt.
The quorum for member meetings remains at 10 percent of “the votes entitled to be cast” unless the law or “the articles or bylaws” provide for a different percentage.34 The quorum requirements for directors’ meetings remain the same.35 In the new Code, the terms “person” and “individual” remain undefined, so when that new Code mirrors the old stating, “all directors must be individuals,” it would be clearer if it stated “all directors must be natural persons.36 The question is raised but not answered: an individual what?
The standards of conduct for both directors and officers remain the same.37 The balance of the new statute is substantially similar to the repealed statute, except the new statute does not include certain provisions related to administrative dissolution, and dissolution by the nonprofit itself,38 and foreign nonprofit corporations.39
Statutory provisions related to corporate records, including inspection of such records by members of the incorporated nonprofit, remain the same as in the repealed statute.40 Transition provisions begin at Idaho Code section 30-30-1201 and continue through Idaho Code section 30-30-1204, including statutory effects on qualified foreign nonprofit corporations and canal companies and Carey Act companies.41
The general structure of the new statutes applying to nonprofit corporations in Idaho remains substantially the same. However, there are specific new provisions which may affect financing, internal operations, and other items of governance that require careful legal scrutiny, especially related to whether the repealed or the new laws apply to particular sets of facts. Legal counsel should carefully consider each organizational client’s needs prior to recommending whether to incorporate or to initiate a particular operational methodology.
- S.L. 2015, ch. 243 § 53 (unincorporated nonprofits); S.L. 2015, ch. 243 § 74 (incorporated nonprofits). 2. Idaho Code §§ 30-27-101, et seq. (unincorporated nonprofits) and 30-30-101, et seq. (incorporated nonprofits) (eff. Jul. 1, 2015).
- Examples include: Idaho Code §§ 67- 7710 (raffles & duck races); 67-7707 (bingo); 5-339(3)(c) (food banks); 63-602GG (low-income housing); 36-408(5)(a) (auctioning of bighorn sheep tags); 36-408(5) (b) (lotteries for bighorn sheep tags); 36- 408(8) (auction of wolf hunting permits); 36-408(7) (free hunting permits for big game for veterans); 36-408(6) (free hunting permits for big game for minor child with a life-threatening medical condition).
- Repealed Idaho Code § 53-701(2) and Idaho Code § 30-27-102(a)(5) (eff. Jul. 1, 2015).
- Idaho Code § 30-27-102(a)(3) (eff. Jul. 1, 2015).
- Idaho Code § 30-27-102(a)(4) (eff. Jul. 1, 2015). persons.”
- Compare repealed Idaho Code § 53- 701(2) with Idaho Code § 30-27-102(a) (5) (eff. Jul. 1, 2015).
- Idaho Code subsections 30-27-102(a) (1) (established practices); (a)(2) (governing principles); and (a)(5) (definition of unincorporated nonprofit association).
- Idaho Code § 30-27-102(a)(1) (established practices) (eff. Jul. 1, 2015).
- Idaho Code § 30-27-102(a)(5) at subsections (A) through (E).
- Repealed Idaho Code § 53-702.
- Idaho Code § 30-27-103(b) (eff. Jul. 1, 2015).
- Twin Lakes Canal Co. v. Choules, 151 Idaho 214, 217, 254 P.3d 1210, 1213 (2011); citing BHC Intermountain Hosp., Inc. v. Ada Cnty., 150 Idaho 93, 95, 244 P.3d 237, 239 (2010) (“a statute that is ambiguous must be construed with legislative intent in mind, which is ascertained by examining not only the literal words of the statute, but the reasonableness of the proposed interpretations, the policy behind the statute, and its legislative history.”)
- Latin for “in the same matter.” “It is a canon of construction that statutes that are in para materia may be construed together, so that inconsistencies in one statute may be resolved by looking at another statute on the same subject.” Black’s Law Dictionary, 10th Ed., p. 911 (2014).
- Cumulative Annual Pocket Part for Titles 50 to 53 at page 239.
- Idaho Code §§ 30-21-705(1) through (5) (eff. Jul. 1, 2015).
- Compare repealed Idaho Code § 53- 704(1) with Idaho Code § 30-27-106(a) (eff. Jul. 1, 2016).
- Idaho Code § 30-27-108 (“debt, obligation, or other liability” still allowed, see Idaho Code § 53-706(2).)
- Compare Idaho Code § 53-716(2) (“vested the . . . interest in another person to hold [it] as a fiduciary for the benefit of the nonprofit”) to Idaho Code § 30-27-130 (“the interest was vested in one or more persons to hold the interest for members of the Association . . .”).
- Country Cove Dev., Inc. v. May, 143 Idaho 595, 603, 150 P.3d 288, 296 (2006); Idaho First Nat. Bank v. Bliss Valley Foods, Inc., 121 Idaho 266, 277, 824 P.2d 841, 852 (1991).
- Compare repealed Idaho Code § 53- 716(2) with new Idaho Code § 30-27- 130(b) (eff. Jul. 1, 2015). 22. Idaho Code § 30-27-130(b) (eff. Jul. 1, 2015).
- Idaho Code § 30-27-130(b); see also Idaho Code § 73-116. 24. Kuhn v. Coldwell Banker Landmark, Inc., 150 Idaho 240, 246, n.1, 245 P.3d 992, 998, n.1 (2010).
- Idaho Code subsection 30-27-102(a) (1) (established practices) (eff. Jul. 1, 2015).
- Idaho Code § 30-3-1, et seq. (repealed eff. Jun. 30, 2015).
- Idaho Code § 30-30-101, et seq. (eff. Jul. 1, 2015).
- Idaho Code § 30-30-601(1) (directors required); Idaho Code § 30-30-621(1) (officers required, except for religious corporations).
- Idaho Code §§ 30-3-17(1)(f) (repealed eff. Jun. 30, 2015); 30-30-202((1)(f) (eff. Jul. 1, 2015); and 30-30-403 (no requirement to have members).
- Idaho Code §§ 30-30-401 through 30- 30-412, replacing repealed Idaho Code §§ 30-3-34 through 30-3-45.
- Repealed Idaho Code § 30-3-19.
- Idaho Code § 30-30-205(1)(a) (eff. Jul. 1, 2015).
- Compare Idaho Code § 30-3-24(7) (repealed eff. Jun. 30, 2015) to Idaho Code § 30-30-302(7) (eff. Jul. 1, 2015).
- Compare repealed Idaho Code § 30- 3-56(1) with Idaho Code § 30-30-511(1) (eff. Jul. 1, 2015).
- Compare repealed Idaho Code § 30- 3-78 with Idaho Code § 30-30-616 (eff. July 1, 2015).
- See definitions at Idaho Code § 30- 30-103, then compare repealed Code § 30-3-64 with new § 30-30-602 (eff. Jul. 1, 2015).
- For director standards, compare repealed Idaho Code §§ 30-3-80 and 30- 30-618; for officer standards compare repealed Idaho Code § 30-3-85 with new Idaho Code § 30-30-623 (eff. Jul. 1, 2015).
- Repealed Idaho Code §§ 30-3-114 through Idaho Code § 30-3-115D.
- Repealed Idaho Code §§ 30-3-116 through 30-3-129 have been replaced by chapter 2 for foreign nonprofit corporations in Idaho Code §§ 30-30- 1201 and 30-30-1202 (eff. Jul. 1, 2015).
- Idaho Code §§ 30-30-1101 through 30-30-1106 (eff. Jul. 1, 2015).
- Idaho Code § 30-30-1202 (foreign nonprofit corporations) and Idaho Code § 30-30-1203 (Canal and Carey Act companies) (eff. Jul. 1, 2015). There are specific new provisions which may affect financing, internal operations, and other items of governance that require careful legal scrutiny.
About Arthur Macomber
Arthur B. Macomber has an undergraduate degree in business from George Fox University. Prior to attending the University of California Hastings College of the Law, he enjoyed 25 years in business, real estate, and construction. Mr. Macomber is licensed in Idaho, Montana, and Washington and runs Bristol George, PLLC from Coeur d’Alene, focusing on real property, land use, water, and construction.