Q: I am involved with a local chapter of a national organization. We regularly send money to National in return for services. However, recently we received a request from our national office for the loan of a rather significant amount of money, to be paid back over the next five years. We were assured that this was truly a request, not mandatory, and that we would receive a promissory note and interest. The interest rate quoted was more than fair, given current interest rates. Despite all this, we aren’t really in the position to make such a loan, at least not easily. Besides which, we are uncomfortable about the whole thing. Representatives from other chapters have expressed similar feelings. Yet, none of us feel like we can really refuse.

Some people have told us that our national organization’s request is illegal, especially since our donors did not contribute to have their money go somewhere else. Is this true? If not, can you suggest how we can graciously refuse to comply without ruining our relationship with National?

A I do not envy you your position. If the national board made – or at least approved – the decision, your charter gives the national board this sort of authority over the chapters, and neither your chapter nor the national bylaws prohibit it, I’m afraid that, while perhaps coercive, the “request” is probably legal. This would be particularly true if your national board is made up of chapter representatives who had a say in the decision to appeal to the chapters.

As to the argument that your donors did not contribute to have their money sent elsewhere, while most likely true, your national organization could probably argue successfully that the money is being used to further the same mission that they (the donors) are giving to locally. It could even argue that the mission will be advanced further/faster because of the additional services that only the national entity can offer.

In truth, your chapter’s position is enhanced by a strong national organization. And, your name and your brand can be irreparably harmed if the national organization should fail.

I suggest you begin by having your board chair contact the chair of the national entity and have a frank discussion. I would ask such things as for what will the money be used? Will it go to providing additional programs, services to the chapters or to pay vendors? What happens if, down the line, the national organization cannot afford to repay its debts? How will external communications be handled so that if/when the public gets wind of this your brand is not compromised? And, is there a reason why the organization can’t obtain its needed funding through a bank? Yes, lending has dried up considerably, but are there substantive problems you don’t know about that could negatively impact your chapter?

Have your board consider the responses to the above questions. If you are satisfied that the need is legitimate and the risk is relatively low, determine whether lending the money will truly hamper the work you are doing at the local level. If not, make the loan and focus on the financial and psychic returns you will get back. If so, consider sending in a lesser amount as a good faith offering.

If you are not satisfied that the need is legitimate and the risk appropriate, or if you feel that making the loan will cause resentment and distrust to drive a permanent wedge between your chapter and National, you must either lay out your own conditions for the loan or say no. Both will be easier to do because you took the above steps.

I fear that your organization’s experience may be just the tip of the iceberg. My guess is that a number of national officers of organizations with chapters are looking at this as a quick way to raise funds in these difficult economic times. For the weaker organizations, this may just hasten their demise.

COMMENTS


The organization might want to consider two caveats:

1. If this is a required payment, and the local chapters use the same name as national and follow a set method of operation, it could conceivably make the relationship into a franchise relationship.

2. If it is really a loan, where the lender is relying on the national for repayment, it may well fit into the category of securities. Depending on the state and the number of lenders, this may require disclosure (e.g. an offering circular or private placement memorandum), and possibly registration.

– Lisa Runquist
Runquist & Associates
Northridge, CA