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Newsletter > November 2012 > "The Chapter House Rules; How Corporate Structure Can Handcuff a House Corporation"
The Chapter House Rules; How Corporate Structure Can Handcuff a House Corporation
Sean Callan, Manley Burke, email@example.com
When we think of the Greek chapter house, we think of more than simply bricks and mortar. The chapter house is often the dominant evidence of a Greek organization’s presence on a particular campus. More than simply another slice of the collegiate housing market, the chapter house is widely perceived as a symbol of the shared values held by those who inhabit it.
While this principled view of the chapter house is accurate, we should never forget that the chapter house is, in fact, bricks and mortar as well. Industry wide, Greek organizations own and operate in excess of $3 billion in real estate, often located in prime locations. These buildings house some 250,000 students. In short, chapter housing is a big business which we all have an obligation to steward well.
There can be little doubt that housing, in the aggregate, is the largest asset of the Greek community. Oddly, and in some cases vexingly, this pool of assets is usually legally owned by local house corporations, not by the national organizations. There are many historical reasons for this anomaly, as well as current practicalities that make the local house corporation better able to manage and operate a chapter house than a national fraternity. Nevertheless, the issue remains that significant assets in the form of chapter houses remain outside the control of the national fraternities.
Clearly, there are many tasks that are better suited to a local house corporation than a national fraternity office. For instance, local volunteers are better able to determine competitive rents, identify the amenities necessary to compete on a particular campus, set appropriate budgets, and effectively handle alumni relations. In short, local volunteers are invaluable; the chapter house could not succeed without their efforts.
However, local volunteers are many times unable to properly manage a chapter house under duress. Chapter closures are of particular concern. Of course, chapters close for a variety of reasons from low membership to risk management violations. But the future of the chapter house in this situation is many times unclear, dependent upon an array of factual and legal circumstances unique to each individual chapter house. Due to the historical development of local house corporations, there is very little commonality among these organizations. In fact, even different house corporations operating under the banner of a single national organization often have wildly different organizational structures. This can lead to legal and practical obstacles that simply overwhelm the resources of local volunteers.
In addition, chapter closures can be emotionally traumatic events. When a chapter closes, the goals and desires of local volunteers often diverge from the mission of the national organization to steward the asset for the benefit of its members. This divergence of mission can cause significant risk to the chapter house asset.
For instance, some local house corporations attempt to continue to own the asset, renting the house to non-members akin to a boarding house operation. This causes significant liability exposure both for the house corporation and possibly the national fraternity. In addition, and as we have noted before, renting to non-members would very likely destroy the exempt nature of the house corporation rendering it liable for income tax. The sudden exposure of the chapter house asset to significant liability and tax risks may very well substantially de-value the chapter house asset.
The organizational documents of most house corporations anticipate these problems to a degree. Nearly all house corporation articles of incorporation or bylaws, or both, contain a provision similar to the following:
In the event that the ___________ Chapter of _________ Fraternity no longer exists or operates at the _______ University, then this corporation shall be dissolved. In the event of dissolution of the Corporation, all of the then remaining assets of the Corporation shall be distributed to the _____________ Fraternity, or if _____________ Fraternity is no longer in existence, then for one or more of the social purposes for which the Corporation is organized, or for one or more charitable or educational purposes, to or for the benefit of an organization or organizations described in Section 501(c) (7) or Section 501(c) (3) of the Internal Revenue Code of 1986, as amended.
So, the formative documents seem to provide that the chapter house reverts to the national if the chapter closes. However, the reality is that such a provision likely will not operate to accomplish the nuts and bolts process of transferring real estate. In the example cited above, the transfer provision is not triggered until the corporation is dissolved. In most states, dissolution is a statutory procedure that must be voted upon by the members of the house corporation.
For most house corporations, holding a valid member vote is an unwieldy proposition at best and impossible at worst. Typically, the members of a house corporation are ‘all collegiate and alumni members of the chapter’. There are variations on this definition of membership, but generally the member class is defined in this or a similar way. This means that a majority (or in some states a supermajority) of every initiated member of a chapter must vote to dissolve the house corporation. As a practical matter, this is, indeed, a tall order.
Further complicating the matter of a member vote, typical house corporation documents both prohibit proxy voting while requiring a minimum number of members to achieve a quorum. The proxy prohibition generally means that a member must be physically present at the meeting to vote. The quorum requirement means that a certain minimum threshold of members, often a majority of members, must be present to take a valid membership vote. So, the interplay of these hypothetical but very typical provisions means that to accomplish a valid member vote, the house corporation must hold a member meeting where a majority of the members attend in person to validly dissolve the corporation and approve the transfer of the chapter house.
Holding a members’ meeting which is physically attended by a majority of the members of a house corporation would be challenging in a perfect circumstance. Holding such a meeting when the chapter has closed, and interest in the chapter is low, is almost impossible. The practical effect of creating a broad class of members together with a proxy prohibition and quorum requirement is to handcuff the house corporation. That is, it is possible that a house corporation may find itself with no realistic possibility of taking any valid corporate action. This means, of course, that the chapter house will continue in limbo, owned by an inactive house corporation that is unable to act to preserve, sell or otherwise steward the chapter house asset.
Of course, the discussion to this point has assumed that the local house corporation officers actually desire to transfer the chapter house back to the national organization. As mentioned above, this desire is not always present. In fact, many times the local officers will desire to continue to own and control the house for a variety of reasons. In that case, it is even more difficult for the national organization to facilitate a meeting of the members to validly transfer the chapter house.
The first important point to take from this discussion is that a dissolution and distribution clause like the example above, on its own, is likely not effective to actually transfer the chapter house to the national fraternity. This is true irrespective of whether a vote is necessary either to trigger a dissolution and distribution clause or to voluntarily transfer the chapter house to the national organization prior to dissolution. In all likelihood, a member meeting will be required to dissolve the house corporation or to transfer the chapter house.
The second important point to take from this discussion is that there are steps that national fraternities can take, in concert with the house corporations, to ensure that the chapter house asset is preserved for the future benefit of the organization’s members. For instance, national fraternities may consider urging house corporations to proactively evaluate their membership class, proxy voting restrictions, and quorum requirements. These provisions can be modified before a crisis develops to avoid the issues described above.
The precise solution in any particular situation can only be determined after a review of the relevant state law and corporate documents. However, a full review of housing inventory is a review that should pay for itself with the first seamless transfer of a troubled chapter house. Given that chapter houses represent such an enormous asset value, the cost of such a proactive review pales in comparison to the value of the assets potentially at risk.