In a recent New York County Supreme Court case, Empire 33rd LLC v. Forward Ass’n Inc., the court ruled in favor of the defendant charities to dismiss the plaintiff’s complaint demanding the return of payments under an agreement in which it alleged defendants lacked the “required approvals and consents required by law” to execute.  The court found that the proposed sale of property by the defendant charities was duly authorized by the NY Supreme Court, as Section 203 of the New York Not-for-Profit Corporation Law (“NPCL”) requires.

In this case, the plaintiff alleged that it entered into an agreement to purchase real property from the defendant charities.  The defendant charities submitted two petitions before the NY Supreme Court asking the court’s permission to sell the property.  The first petition stated that no member vote was held by the charities on the proposed sale of the property and a revised second petition was later filed stating that no members of the charities were entitled to vote on the sale.  The court authorized the sale by Order.  One year later, the plaintiff demanded return of its payments with interest, alleging that the defendants lacked the required approvals and consents by law to agree to sell the property and were in material breach of their representations and warranties in the agreement.  The defendants later informed the plaintiff that because it did not make a scheduled payment under the agreement, they were retaining the down payment as liquidated damages.

The plaintiff brought four causes of action, all based on the assertion that the agreement was invalid because the corporation was without capacity or power to sell the property, in violation of Sections 510 and 511 of the NPCL.  The defendants argued, however, that the plaintiff’s claim, although it did not mention “ultra viresspecifically, was essentially invoking the doctrine since the complaint alleged that the defendants acted without corporate authority when they entered into the agreement, and that they had no corporate authority to sell the property.  The court agreed with the defendants.  The defendants then asserted their statutory defense to the ultra vires doctrine.

The defense to ultra vires is found in Section 203 of the NPCL.  It provides that “no act of a corporation and no transfer of real or personal property to or by a corporation, otherwise lawful, shall, if duly approved or authorized by a judge, court or administrative department or agency…be invalid by  reason of the fact that the corporation was without capacity or power to do such act or to make or receive such transfer….”  The Section provides three circumstances in which such a lack of capacity or power may  be asserted: (i) by a shareholder of the corporation; (ii) by the corporation itself; and (iii) by the attorney general.

In arriving at its decision, the court reasoned that the sale was authorized by order of the court and since all of the counts, including the breach of contract or fraud claims and enforcing an alleged lien on the property, depended on whether the agreement was void, which it was not, they all had to be dismissed as well.

This case shows how NY charities can successfully apply the ultra vires defense to breach of contract and fraud claims if the proposed transaction is duly authorized, as Section 203 requires, and none of the three exceptions under Section 203 apply.  In this case, successful use of the defense enabled the charities to keep the plaintiff’s down payments.  Interestingly, the charities could have asserted the ultra vires doctrine to back out of the contract altogether.  Accordingly, it is extremely important to determine the scope of the authority and power of any charity with which a corporation, including another charity, contracts.