Seventh Circuit Examines Conflict of Interest Issue Relevant to Private Foundations

09 March 2020 Publication
Authors: Jason J. Kohout Abbey M. Magnuson Emmaline S. Jurgena

The board members or trustees of private foundations frequently serve on the boards of organizations that apply for and receive grants. This may present the possibility of a conflict of interest issue when the foundation board approves the grant to the recipient organization. Whether service on the board of a recipient organization causes a legal conflict of interest for the director (requiring the director to abstain from the vote to approve the foundation grant) is an often-raised question without a clear answer. 

In Doermer v. Callen, 847 F.3d 522 (7th Cir. 2017), the Seventh Circuit held that a director serving on the board of a grantee could properly vote to approve the grant and that the director’s board service did not create a conflict.

In the case, Kathryn Callen served as a board member of the Doermer Family Foundation with her brother Richard Doermer and a third non-family member director. Kathryn also served on the board of trustees of the University of Saint Francis. The Doermer Family Foundation voted to make a gift to Saint Francis; Kathryn and the third independent director voted to approve and Richard objected; because the vote was 2-1, the Foundation made the grant.

Later, Richard sued the Doermer Family Foundation, Kathryn, the other director, and Saint Francis claiming that she had engaged in a “conflicted” vote which was a type of “self-dealing” and that the grant should be rescinded—which probably did not make for a happy Thanksgiving dinner in the Doermer family!

The Court rejected most of Richard’s arguments because of standing (most of the discussion is about standing and whether Richard could bring the claims on behalf of the Foundation). However, in the last two paragraphs of the decision, the Court held that while Kathryn had been on both sides of the transaction (as a director of both organizations) and accordingly was conflicted, the grant to Saint Francis was not voidable under the conflict of interest statute because the transaction qualified under an exception for transactions that were “fair to the corporation at the time the … transaction is authorized.” (Under Indiana—and Wisconsin law—if a conflict exists, it is not voidable if the transaction meets certain exceptions, such as the non-conflicted directors approve after the conflict is disclosed or that the transaction is fair to the organization). Without elaboration, the Court found that the grants to Saint Francis were “fair” to the Foundation (or at least not unfair to the Foundation). The Court also rejected the idea that Kathryn had received unjust enrichment from the grant (which benefited Saint Francis and not her individually).

The Court’s reliance on the “fairness” exception was somewhat odd (a transaction is usually considered “fair” when the corporation receives value from a party equal to the value it provides to that party; in this case, the Foundation made a gift to Saint Francis without receiving a benefit). Nonetheless, it is instructive that a Court roundly rejected the concept that just because a director serves as a director of a grantee means that the director is conflicted in voting or for approving the grant (and that the grant could be subject to rescission). Importantly, while the director may be understandably partial to an organization where she serves as director, the grant is made for charitable purposes and does not enrich the director (unless there are other facts present).

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