D.C. UNIFORM UNINCORPORATED NONPROFIT ASSOCIATION ACT OF 2000

By Nicholas G. Karambelas, Esq.

Copyright 2003. All rights reserved.

[PUBLISHED IN JULY/AUGUST 2003 ISSUE OF WASHINGTON LAWYER MAGAZINE] [Vol.18 No. 2]

For over 40 years the District of Columbia has labored under one of the most cumbersome and antiquated nonprofit corporations statutes in the nation. Enacted in 1962, the District of Columbia Nonprofit Corporation Act, D.C. Code §29-301.01, had been one of the only statutory business organization available in the District of Columbia to persons seeking to pursue nonprofit purposes. That act has been amended periodically for technical corrections over the years. However, that statute has never been amended in any substantive way even though the model act from which the statute derives was fundamentally amended in 1987. Fortunately, the D.C. City Council broke the spell of the nonprofit corporations act when it enacted the Uniform Unincorporated Nonprofit Association Act (referred to as the Act), D.C. Code §29-971.01 - 971.15. Without much fanfare, the Act was enacted in 2001 and offers an alternative to the inflexible and obsolete restraints imposed by the nonprofit corporations act.

The Act was drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) and recommended for adoption by the states in its present form in 1996. As of January 1, 2003, Alabama, Arkansas, Colorado, Delaware, Hawaii, Idaho, Texas, West Virginia, Wisconsin and Wyoming have also enacted the Act. The purpose of the Act is to codify and reform the common law as it has developed in the case law with respect to a unincorporated nonprofit association (referred to as UNA). As is often true of case law that has developed over decades through different eras of economic history, the case law of UNAs is ambiguous, contradictory and confusing. Though the UNA is recognized at common law, it has never been clear when and under what circumstances a UNA can hold title to property in its own name, sue or be sued in its own name, afford limited liability to its members and principals and be governed. Consequently, persons forming and managing a UNA assumed a substantial risk as to how these issues would apply to the UNA. The Act clarifies these issues in the same way that the revised uniform partnership acts clarify similar issues with respect to general and limited partnerships. A UNA formed under the Act is, in concept, the nonprofit equivalent of a limited liability company or limited liability partnership.

I. DEFINITION AND FORMATION

A UNA is defined as two or more members who join together by mutual consent to pursue a common nonprofit purpose. A person is a member of an unincorporated nonprofit association as long as that person participates in either selecting the persons who shall manage the affairs of the UNA or in developing the policies of the UNA. Any legal person can be a member of an UNA including an individual, a business entity, government agency/instrumentality or another UNA. An entity member of a UNA need not be a nonprofit entity so that a for profit corporation or limited liability company can be a member of a UNA. Like a general partnership, a UNA is not required to file articles or any other legal instrument with the Mayor in order to be formed and existing under the Act. A UNA is formed as soon as two more persons have mutually consented as a matter of fact to form the UNA and pursue a nonprofit purpose through the UNA. The Act does not require that the mutual consent be manifested in writing. However, as a practical matter, the members should affirmatively declare the formation of the UNA in a signed writing or in articles of association, (see discussion at Part IV, infra.). The UNA exists as long as there are at least two members who maintain the mutual consent to pursue a nonprofit purpose. If, at any time, there are less than two members or the purpose becomes a for profit purpose, the UNA ceases to exist. No formal dissolution or termination instrument is required.

The Act does not define the term “nonprofit purpose”. As a general proposition, the term “nonprofit” means that the net gains realized by the organization do not inure to the benefit of the members or principals and no distributions are made except on dissolution. Whether the UNA has a nonprofit purpose is an issue that will be determined under federal law or state law. Clearly, a UNA that is an organization described in and qualified under IRC §501(c) (3), (4) or (5) has a nonprofit purpose. By analogy, any purpose for which a nonprofit corporation can be formed is a nonprofit purpose for which a UNA can be formed. Such purposes include but are not limited to benevolent, charitable, missionary, educational, scientific, research, literary, musical, social, athletic, patriotic, political, civic, trade association, arts promotion and mutual improvement. The Alabama version of the Act expressly states that a UNA can be formed for any purpose for which a nonprofit corporation can be formed under Alabama law.

II. SEPARATE LEGAL ENTITY - HOLDING PROPERTY

At common law, an unincorporated association for any purpose, whether for nonprofit or profit, was not a legal entity that was separate and distinct from its members. Such an association was treated like a general partnership under the original Uniform Partnership Act (1916) and was deemed to be merely an aggregation of the members. Consequently, it was unclear how, if at all, an unincorporated association could hold title to property, enter into contracts or even to accept gifts and donations. Some case law attempted to apply the awkward concept of tenancy in partnership to unincorporated associations but such case law only served to further confuse the property issue.

The Act makes clear that a UNA is a legal entity that is separate and distinct from the members. A UNA can hold title to real or personal property and any cognizable estate or interest in such property. It can acquire, transfer or encumber real or personal property in its own name. A UNA can receive gifts as a legatee or devisee or be a beneficiary of a trust or insurance contract in its own name. The Act enables a UNA to file a statement of authority which grants to an identified person the power to transfer an estate or interest in real property and such a statement is deemed conclusive proof of the authority of any such person to transfer real property in the name of the UNA.

Significantly, the District of Columbia has added a filing requirement that Uniform Act does not contain. If a District of Columbia UNA holds real property, it must file with the Mayor each year for which it holds any such property a list of its officers including their names, addresses and telephone numbers. The clause “holds real property” is unnecessarily ambiguous since it could encompass a leasehold. even though it is likely that the clause was meant to apply only to a UNA that holds title to property. The Act does not specify a penalty or a particular consequence for failing to file. Presumably, a lender or buyer would consider any such failure similar to a curable cloud on title and require that the necessary filing be made for each year during which the UNA held the real property. The Act also sets forth a transition provision such that if, before April 3, 2001, an unincorporated association purported to hold property in its own name, title to that property shall be deemed to have vested after April 3, 2001 unless, presumably prior to April 3, 2001, the transferor and the UNA treated the transfer as ineffective.

III. SEPARATE ENTITY - LIMITED LIABILITY

At common law, the members of an unincorporated association did not have limited liability. If the assets of the unincorporated association were insufficient, each member could be held liable for the debts and obligations of the unincorporated association to extent of the personal assets of each such member. The lack of limited liability followed logically from the common law concept that an unincorporated association was not a legal entity that was separate and distinct from the members.

In addition to being a separate and distinct legal entity for the purpose of holding real property, a UNA is a separate and distinct legal entity for the purpose of determining rights, obligations and liabilities in contract and tort. The UNA can enter into contracts in its own name and incur contractual obligations in its own name. Also, a UNA can assert causes of action in tort and a UNA be held liable in tort.

Because a UNA is a separate and distinct legal entity, it follows that the members are afforded limited liability. The Act specifically affords limited liability to any person who is a member of a UNA, participates in managing a UNA or is deemed to be a member even though that person may not have acted affirmatively to become a member. The limited liability afforded under the Act applies to any debt or obligation of the UNA, whether incurred by contract or in tort, and the nature of the limited liability protection is the same as the protection afforded to shareholders of a corporation and members of a limited liability company. Using the same statutory concept on which the limited liability of a general partner in a limited liability partnership is predicated, a person who is a member of a UNA is not personally liable for the debts and obligations of UNA solely because that person is a member of the UNA. However, like a partner in a limited liability partnership, if a third party can articulate a cause of action against a member that derives from a theory other than the mere fact that the member is a member of the UNA, then the person who is a member can be held liable to the third party.

The Act is silent on whether and the circumstances under which the limited liability protection afforded to the members of a UNA can be disregarded. The Act mandates that general principles of law and equity continue to apply to UNAs unless displaced by a particular provision of the Act. Consequently, the law of the District of Columbia on disregarding the limited liability protection applies to a UNA. There is no apparent reported case law in the District of Columbia on disregarding the limited liability of an unincorporated entity such as a limited liability company or a limited liability partnership. Therefore, a party seeking to cause the limited liability of a UNA to be disregarded would have to analogize from the case law that “pierces the veil” of a corporation or look to the case law of other jurisdictions.

IV. LITIGATION

For the purposes of litigation, the Act mandates that a UNA has the capacity to sue or be sued in its own name, whether in court or in any form of alternative dispute resolution. A member may assert a cause of action the UNA and a UNA can assert a cause of action against a member. Adopting substantially the federal standing rule, the Act also enables a UNA to assert a claim in its own name on behalf of its members as long as (i) at least one of the members of the UNA has standing to assert the claim, (ii) the interest that the UNA seeks to protect by the claim is “germane” to the purposes of the UNA and (iii) neither the claim nor the relief requested requires that a member of the UNA participate in the cause of action. The UNA need not demonstrate that the UNA itself incurred an injury or has an interest to protect but only that it can articulate an injury to a member or to an interest of its members.

A cause of action against a UNA is commenced by serving a summons and complaint. The service of process issue for a UNA is the proper person on whom the summons and complaint must be served. Because no filing of any kind is required to commence the existence of a UNA, a UNA may but is not required to appoint a registered agent. Under the Act, a summons and complaint may be served on any one of an appointed registered agent, an officer, managing or general agent, or any person who has been authorized by the UNA to participate in the management of the affairs of the UNA. If no such person can be served, then service can be made on any member of the UNA. Although the UNA is not required to appoint a registered agent it is probably prudent to do so since, by their nature, many UNAs will be managed on an informal basis without clear lines of authority. It may not always be clear who is an officer or a person authorized to participate in management or even who is a member.
Appointing a registered agent enables the principals of the UNA to receive prompt notice of any litigation for the purpose of responding timely to a cause of action. Also, to the extent that there is any question as to when or whether a UNA is formed, appointing an agent can serve as public notice that the UNA has been formed and exists. The UNA appoints a registered agent by filing a statement with the Corporations Division of the D.C. Department of Consumer and Regulatory Affairs. The statement must set forth the following:

1. Name of the UNA
2. Federal and D.C. Tax Identification Numbers
3. Address of the UNA (need not be in D.C.)
4. Name and Address of Registered Agent (must be D.C. address)
5. Statement Appointing Agent Signed and Acknowledged by Person Authorized to Manage Affairs of the UNA, and
6. Statement of Registered Accepting Appointment Signed and Acknowledged by Registered Agent

Because a UNA is a legal separate and distinct from its members, a cause of action against the UNA does not abate or otherwise expire merely because members withdraw or new members join the UNA or different persons are authorized to participate in the management of the UNA. A judgment or an order rendered against the UNA binds the UNA only and not the members or persons authorized to participate in management unless any such person separately named in any such judgment or order.

Even though a UNA is a distinct legal entity separate from its members, it is treated as a partnership rather than as a corporation for federal diversity subject matter jurisdiction purposes. Consequently, the state citizenship of each member of the UNA must be completely diverse from the state citizenship of each opposing party. If only one member of UNA is a citizen of the same state as only one of the opposing parties, the cause of action cannot be heard in federal court under the diversity jurisdiction. If a member who is a citizen of the District of Columbia sues a UNA formed under the laws of the District of Columbia, that cause of action cannot be maintained in a federal court.

IV. GOVERNANCE AND MANAGEMENT - ARTICLES OF ASSOCIATION

Unlike the corporate, partnership and limited liability company statutes, the Act does not contain any default provisions that shall control the governance and management issues of a UNA if the members have not otherwise agreed on any such issues. The Act does not require that the UNA have any such agreement. In fact, the Act does not even mention or otherwise refer to the governance and management of the UNA. Unlike the operating agreement of a limited liability company formed under the laws of the District of Columbia, the Act does not require that any agreement among the members as to how the UNA will be governed and managed be in writing.

More so than any statute enabling any other form of legal entity, the Act defers to the members on governance and management issues. Consequently, the freedom and the responsibility for formulating the governing and management structure of the UNA reposes exclusively in the members. The Acts offers no guidance nor any “safety net” with respect to the governance and management of the UNA If the members choose not to address such issues in any systematic and rational way, then they do not require the services of an attorney. A UNA requires legal services with respect to governance and management only if the members have chosen to conceptualize governance and management issues that are relevant to the UNA and to commit the resolution of those issues to a writing that is legally binding on the members and principals. Traditionally, the constitutive document of an unincorporated association is referred to as articles of association. The articles are not filed with any government authority and are maintained among the records of the UNA.

The most significant service the attorney can render to the members of a UNA is to craft and draft clear and precise articles of association that accurately articulate the desires and purposes of the members and that are legally binding. The articles can be as formal and detailed as the members desire or as may be required by the purpose of the UNA. At a minimum the following issues should be addressed in the articles:

1. Date of Formation, Declaration of Formation and Nonprofit Purpose
2. Definition of Member and Qualifications for Membership
3. Delegation of Governance and Management to Governing Body
4. Description of Governing Body and Method of Decision-Making
5. Method of Selection of Governing Body, Succession and Removal
6. Issues That Require Ratification of Members
7. Method and Margin of Voting by Members
8. Appointment of Agents
9. Source, Security for and Use of Funds
10. Events in Dissolution and Disposition of Assets on Dissolution
11. Indemnification for Governing Body Principals
12. Governing Law and Dispute Resolution

As long as the articles of association specify that the law of the District of Columbia shall govern the UNA, other jurisdictions in which the UNA pursues its purpose will most likely apply the internal affairs doctrine which holds that the internal affairs of the UNA shall be governed by the laws of the jurisdiction of formation or any other jurisdiction as long as that choice is not wholly irrational. The limited liability protection afforded by the Act also should be respected by any jurisdiction in which the UNA pursues its purpose. However, any such jurisdiction may apply its own law with respect to disregarding the limited liability protection.

V. USES OF THE UNA

Except that its purpose must be a nonprofit purpose, the Act does not restrict or limit the types of nonprofit purposes that a UNA can pursue. Given the flexibility and ease of formation of a UNA, it is a viable and preferable alternative to a nonprofit corporation especially for purposes such as neighborhood associations and parent-teacher associations. The Internal Revenue Service recognizes unincorporated associations for the purpose of granting tax exempt status under the various provisions of §501(c). The UNA is also an excellent form of organization for a 527 committee, political action committee, public affairs committee or political campaign. However, as with any other unincorporated entity, a UNA is deceptively simple. It is simple to commence the existence of the UNA. Governing, managing and operating the UNA in a competent manner requires well-considered and well-written articles of association.