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Why do charities need creditor proofing? This is why.

proofIn the aftermath of the abuse scandals at Catholic schools and churches the charity world learned much about how creditors could seize control of a charity’s assets. As a result many organizations began studying methods to protect charitable assets in case of an unsuccessfully defended lawsuit against them. Lawyers though know that the lessons of the past have not sunk in at many charities and now there is a very public example that comes from the failure to learn from history.

The Calgary Jewish Academy (the “CJA”) was sued by its former principal for unjust dismissal. The facts of the case are not germane to the issue of creditor proofing but are instructive for board management. Fundamentally, it appears that the president of the Board of Directors took a dislike to the Principal of the school and, as the Court found, took inappropriate steps to have him fired. These steps were effectively designed to ensure that the President’s opinion would be forced on the rest of the board as, amongst other things, he restricted the flow of information and insisted on being the only point of contact with the Principal. As an aside, the lesson to be learned here is that there must be mechanisms for the free flow of information in any organization.

The circumstances taken by the President were so egregious that the former Principal was awarded almost $900,000 in damages by the Court. While the school is appealing the decision the former Principal is taking collection action against the school. In this case that involves the seizure of furniture and other items apparently critical for the school’s functioning – keep in mind that it is January and so these seizures are taking place in the middle of the school year. The school has applied for a stay to try and delay enforcement.

It is for this exact reason that many organizations separate out their assets from their operations. This is usually done by creating different corporations for different purposes. While none of these things is foolproof the plan is usually to force a potential antagonist to sue the operational organization which, of course, does not hold the assets. That way even if successful the assets of the overall group are saved and can be used to restart operations in another entity.

It is a pity that the Calgary Jewish Academy with over 100 years of good work did not review its situation before its President acted injudiciously. Protection of charitable property is one of the most fundamental duties of charity directors and creditor proofing should be near the top of the list of all responsible boards.

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Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLP is one of Canada’s foremost experts in the law related to charities and non-profit organizations. Their team of bloggers is led by Adam Aptowitzer LLB. He is a lawyer practicing in the areas of charity and tax law. He is a member of both the bars of Alberta and Ontario. He has been speaking and writing on the topic of charity law for several years and been published in numerous publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in many publications including the National Post.Read more here
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