The Nonprofit Ethicist Comments on a Mental Health Center Suing a Foundation

January 18, 2012; Source: Smoky Mountain News | An odd case. The Smoky Mountain Center for Mental Health, which oversees mental health services in a 15-county area in North Carolina, is claiming in a lawsuit that the Evergreen Foundation has been hoarding money that it should have been distributing to support mental health services in the region. Evergreen is apparently sitting on $17 million.

Making the story more unusual is the fact that the Evergreen Foundation was originally established by the Smoky Mountain Center as a support mechanism to hold property for the agency. State law prohibits state agencies from buying and selling properties. It was through sales and rental of these properties that Evergreen has accumulated the cash it has in hand. But something happened with the executive who was leading both organizations. He left Smoky Mountain amid allegations that he was using his position for personal financial gain—but stayed at Evergreen. Uh oh! This led to the split and Smokey Mountain’s claim that Evergreen “absconded” with millions.

Adding insult to injury, according to this article, Evergreen has charged Smoky Mountain rent even though contracts between two state that a building should be provided for the “free and exclusive use” of Smoky Mountain Center.

None of this makes much sense to us. Evergreen claims it has made some small grants to mental health agencies, including Smokey Mountain, but according to this article it made only $33,000 in grants between 2001 and 200—even while its assets grew from $13.5 million to $20.7 million. I asked the nonprofit ethicist what he thought about this whole situation and here is what he said.

“Family feuds are the worst. After reading this article, don’t you feel like a cop who has been called to the scene of a domestic disturbance? Furniture is overturned, broken dishes are everywhere and you have to figure out who started it.

It is tempting to take the side of Smoky Mountain Center for Mental Health, especially when the article uses loaded words like “hijacked,” “lost money,” “hoarding,” etc. In a contest between the haves and the have-nots, it always alluring for us in the nonprofit sector to side with the have-nots. We are hard-wired that way.

All lawsuits are a little weird but this one raises the bar. First, Smokey Mountain alleges that Evergreen kept money it received from “public coffers” instead of spending it—for over two decades! That’s a long time for everyone in state government—including the North Carolina auditor—to be asleep at the switch, and it’s a long time for Smokey Mountain to sit on its hands. Second, why would Smoky Mountain sue an organization that has millions in the bank that it will surely use in its own defense? Somebody at the mental health center ought to have his head examined (unless of course he just wants to embarrass the executive director of Evergreen).

I am not an attorney but I know that you have to have standing to sue, and if the money involved is government money, I don’t see how a third party has standing. If I am right, a court will throw the case out and all that the plaintiff will have to show for thousands of dollars spent on lawyers is a headline.

I suspect, this is the reverse of the usual situation where an organization fires its executive director. Here the executive director of Smoky Mountain essentially fired it by transferring its assets to Evergreen and then joining Evergreen to manage the very same assets. This theory explains the unusual timing of the lawsuit. Smoky Mountain is suing over a process it alleges had been going on for two decades but the Executive Director only jumped ship four years ago – enough time for a pot of bad blood to boil over.”

                                      The Nonprofit Ethicist

–Ruth McCambridge