People Ex Rel. Groman v. Sinai Temple
1971 Cal. App. LEXIS 1205, 20 Cal.App.3d 614, 99 Cal. Rptr. 603 (1971)
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Rule of Law:
A nonprofit corporation may engage in a commercial, profit-making business as one of its main purposes, provided that its articles of incorporation prohibit the distribution of any gains, profits, or dividends to its members.
Facts:
- Sinai Temple was organized as a nonprofit religious corporation with articles of incorporation prohibiting the distribution of profits to its members.
- In 1964, its articles were amended to add the purpose of owning and operating cemeteries for people of the Jewish faith.
- In 1963, Sinai Temple entered into a contract to purchase a large cemetery and mortuary business from Forest Lawn Company for $9,750,000.
- The purchase included 82 acres of land, a fully equipped mortuary, customer lists, and goodwill.
- Most of the purchase price was financed, with payments based on the future 'net cash flow' from the business's operations.
- Since 1964, Sinai Temple has operated the cemetery as a commercial enterprise, soliciting the general Jewish community in competition with other cemeteries.
- The business is far larger than the needs of Sinai Temple's own members and has earned substantial profits, which have been applied to reduce the purchase debt.
Procedural Posture:
- The Attorney General, on behalf of the People of California, brought an action in quo warranto against Sinai Temple in a California trial court.
- The trial court sustained the defendant's demurrer to the initial complaint but granted leave to amend.
- The plaintiff filed a first amended complaint.
- The trial court then sustained the defendant's general demurrer to the amended complaint without leave to amend and dismissed the action.
- The plaintiff, as appellant, appealed the judgment of dismissal to the California Court of Appeal.
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Issue:
Does a nonprofit corporation organized for religious and cemetery purposes unlawfully exercise its corporate franchise by operating a large-scale, commercial cemetery and mortuary for profit, when those profits are used to pay for the business and are not distributed to its members?
Opinions:
Majority - Files, P. J.
No. A nonprofit corporation does not unlawfully exercise its corporate franchise by conducting a profit-making business as a primary purpose, so long as the corporation's articles prohibit the distribution of gains to its members. The controlling statute, Corporations Code section 9200, focuses on whether the corporation's purposes 'contemplate the distribution of gains, profits, or dividends to the members thereof,' not whether it earns a profit. The legislative history confirms this interpretation, as the law was changed in 1931 from a standard prohibiting activity where 'pecuniary profit is not their object' to the current standard focused on 'distribution.' The court distinguishes between the prohibited distribution of profits and the permissible inurement of benefits to members, such as providing discounts on cemetery plots or using funds for religious activities, which are not considered concealed dividends. Furthermore, established case law holds that operating a mortuary is a lawful incident to a cemetery purpose.
Analysis:
This decision clarifies that a corporation's 'nonprofit' status under California law is determined by the destination of its income, not the nature of its income-generating activities. It establishes that nonprofits can operate significant, competitive, commercial enterprises as a main purpose to fund their mission, provided profits are not distributed to members. This ruling allows nonprofits to leverage commercial ventures for financial stability and growth, potentially blurring the operational lines between nonprofit and for-profit entities in certain industries. The case reinforces the legal distinction between the impermissible private inurement of profits and the permissible provision of benefits to members that furthers the organization's core mission.
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