In Indiana, the State’s authority to oversee nonprofits lies with the Attorney General. The Attorney General has broad authority to monitor, investigate, and, if necessary, prosecute civil actions to protect the public’s interest in charities, including nonprofit corporations. The primary statutory source of this authority is found at Indiana Code sections 23-17-24-1 and -1.5.
Indiana Code Section 23-17-24-1
Indiana Code section 23-17-24-1 empowers the Attorney General to file a civil action seeking a court order dissolving a nonprofit corporation if that corporation: has obtained its articles of incorporation through fraud (section 23-17-24-1(a)(1)(A)); has continued to exceed or abuse the authority conferred upon it by law (section 23-17-24-1(a)(1)(B)); is a public benefit corporation (the Nonprofit Corporations Act defines three types of nonprofit corporations: the public benefit corporation, the religious corporation, and the mutual benefit corporation) whose assets are being misapplied or wasted (section 23-17-24-1(a)(1)(C)); or is a public benefit corporation unable to carry out its purposes (section 23-17-24-1(a)(1)(D)).
When exercising this authority to seek dissolution, the Attorney General generally determines whether there is unfairness or fraud toward the public, whether the nonprofit corporation is carrying out its legitimate purposes, or whether assets are being diverted to the personal benefit of officers, directors, members, or controlling persons. The Attorney General can use his authority to test the legality of any actions the corporation has taken or intends to take.
Even if the Attorney General proves a factual basis for dissolution under Indiana Code section 23-17-24-1(a), dissolution does not automatically result. Under section 23-17-24-1(b), before a court can order a nonprofit corporation’s dissolution it must consider reasonable alternatives to dissolution. If the corporation is a public benefit corporation, section 1(b) requires the court to consider whether dissolution is in the public interest. If the corporation is a mutual benefit corporation, section 1(b) requires the court to consider whether dissolution is the best way to protect the interests of the corporation’s members. Section 23-17-24-1(b) thus provides for remedies short of dissolution.
Indiana Code Section 23-17-24-1.5
For circumstances in which the Attorney General believes a remedy short of dissolution is appropriate, Indiana Code section 23-17-24-1.5 expands the relief the Attorney General can seek to include: injunctive relief; the appointment of temporary or permanent receivers; the permanent removal of trustees, corporate officers, or directors who have breached their fiduciary duties to the nonprofit; and the appointment of permanent court approved replacement trustees, corporate officers or directors, and members. (Section 23-17-24-1.5(b)(1) through -(4).) Section 1.5 ties the circumstances under which each of these forms of relief can be granted to other provisions of the Act. For relief against the corporation, the Attorney General must prove a violation of section 23-17-24-1, while for relief against a director or officer, he must prove that the director or officer violated one of the statutory duties the Act imposes upon directors or officers. (Section 23- 17-24-1.5(c).)
Other Relevant Statutes
Beyond the authority set forth at Indiana Code sections 23-17-24-1 and −1.5, the Act identifies other areas implicating the Attorney General’s authority. The following list should help nonprofit leaders and their advisors spot issues potentially involving the Attorney General’s authority:
Indiana Code section 23-17-4-4: Attorney General's authority to challenge a nonprofit corporation's power to act (challenge of so-called ultra vires acts)
Indiana Code section 23-17-19-2: Attorney General’s right to receive notice of certain mergers between a public benefit corporation or a religious corporation and a business or mutual benefit corporation
Indiana Code section 23-17-24-2(d): Attorney General's right to receive notice and to intervene in a proceeding brought by a person seeking the involuntary dissolution of a public benefit or religious corporation
Indiana Code section 23-17-26-2: Attorney General's authority to collect civil penalties of up to $10,000 against a foreign nonprofit corporation that transacts business in Indiana without a certificate of authority
Indiana Code section 23-17-30-4: where meeting or other consent or vote procedure is impossible or impractical, Attorney General's authority to petition court for order requiring meeting or other vote procedure on matter enabling the nonprofit corporation to continue managing its affairs, including amendments to articles of incorporation or bylaws, dissolution, merger, or sale of assets
Attorney General's Broad Authority to Protect the Public Interest
In 2009 the Indiana Supreme Court issued a decision recognizing that the Attorney General is the proper public authority to protect the public interest in charitable and benevolent agencies and that current statutes codify the common law which has historically provided expansive authority to the Attorney General to ensure the rectitude of entities created in the name of public good. Zoeller v. East Chicago Second Century, Inc., 904 N.E.2d 213 (2009) stands for the proposition that the Attorney General has broad authority to protect the public interest in charitable and benevolent agencies, whether in the form of trusts for benevolent public purposes or nonprofit corporations.
In Zoeller, the Attorney General sought a court order imposing a constructive trust for public benefit and an accounting over money paid to a private for-profit corporation under a local development agreement between a gaming licensee and the City of East Chicago. The local development agreement directed a percentage of the licensee's riverboat gambling proceeds to a private for-profit corporation, which was to use the proceeds for local economic development projects in East Chicago. An investigation conducted by the Attorney General at the request of the Indiana Gaming Commission found that much of the $16 million paid to the for-profit corporation had not been directed to economic development, but instead could be traced to the for-profit corporation's principals.
The for-profit corporation moved to dismiss, arguing that its for-profit status took it out from under the Indiana Trust Code provisions that give the Attorney General supervisory authority over charitable activity. The trial court dismissed the Attorney General's claims and the Court of Appeals affirmed. The Supreme Court reversed, holding that the Attorney General had authority to bring the action and had properly stated a claim for constructive trust.
With respect to the constructive trust claims specifically, the Court found that the Indiana legislature’s adoption of the trust code, which enumerates the Attorney General’s authority in matters involving trusts for benevolent public purposes and charitable trusts, codified the common law. But the issue before the Court involved the imposition of a constructive trust, causing the Court to address the Attorney General’s authority over matters involving agencies or organizations created for the public good more broadly. In reaching its decision, the Court found that “[t]he people's interest in the rectitude of entities created in the name of public good, such as charities, has long led to regarding the Attorney General as an officer with authority to enforce those interests.” The Court explicitly recognized the Attorney General’s “broad common law and statutory authority . . . to protect the public interest in charitable and benevolent instrumentalities."
For further information about the topics discussed on this page, see:
Zoeller v. East Chicago Second Century, Inc., 904 N.E.2d 213 (2009)