The Queens Borough Public Library recently announced the selection of Dennis Walcott, the former chancellor of the New York City Department of Education, as its new president and CEO. While an exciting announcement for the library, Walcott faces tremendous challenges as the organization continues to deal with the fallout from the scandal involving its former president, Thomas Galante, and his reported self-indulgent spending habits using library funds.
In early 2014, news outlets picked up on what was perceived to be the excessive compensation of Galante, then president and CEO of Queens Library in New York. Galante had received a base salary of nearly $400,000 in the previous year, and his compensation reportedly also included payment, capped at $37,000, for a car of his choice every three years. Adding fuel to the flame was the fact that $140,000 had also reportedly been spent to renovate Galante’s offices during this same time period, while nearly 130 jobs at the library had been eliminated through layoffs and attrition in the previous five years.
While there is frequently uproar regarding nonprofit executive compensation that is perceived to be excessive (even when such compensation may not in fact be excessive in light of all of the relevant facts and circumstances), there was actually much more to the story here. Later in 2014, the New York Comptroller began an audit of and subsequent investigation into possible misconduct at the library. According to the comptroller’s report on the investigation issued in July 2015, the auditors “observed the absence of key financial controls and identified questionable expenditures and practices engaged in by the library’s senior management that put the library’s finances at risk of abuse.”
The investigation found that Galante and Bridget Quinn-Carey, the former library Chief Operating Officer (who subsequently served as the interim CEO and President), had used their organizational credit cards to make more than $310,000 in prohibited or inappropriate purchases during the 2012 to 2014 fiscal years. Galante was responsible for incurring approximately $260,000 of these charges. The report also concluded that a significant portion of those expenses should have been, but were not, reported by the library as taxable income to those individuals. The prohibited purchases included such things as $23,000 in fuel for personal use, restaurant meals at which only Galante appeared to be present, tickets to Disneyland, four tickets to a Maroon 5 concert purchased for nearly $2,000, Apple TVs for Galante’s home office, satellite radio subscriptions for Galante’s car, parking ticket and towing fees, and $6,500 in purchases on dates when Galante was reportedly on leave from his library role.
The comptroller’s report further focused on the fact that, while serving as the library’s CEO and president, Galante was also simultaneously being paid between $150,000 and $200,000 per year for providing consulting services to a school district. Based on his calendar entries and other records, the comptroller asserted that Galante appeared to have been spending time that should have been devoted to his role at the library on this consulting job.
In June 2014, the New York State legislature enacted legislation allowing the mayor of New York City and the Queens borough president, who appoint the Directors of the Library, to also remove them from office. The following month, eight of the library’s directors (seven of whom had served on the board for more than ten years) were in fact removed. After initiating its own investigation, the library’s reconstituted board terminated Galante’s employment for cause in December 2014. Five additional library executive staff members subsequently resigned from their positions.
Unfortunately, however, the story is likely far from over for the library. The library reported in its Form 990 for the fiscal year ending June 2015 that, “[b]y letter dated August 18, 2015, the Library demanded that…Galante…repay the Library over $330,000 in automatic excess benefits and excess compensation he received from the beginning of 2009 through September 20, 2014,” while serving as president and CEO. Galante responded by filing a lawsuit against the library in federal court in November 2015 seeking a declaratory judgment that he did not actually receive and does not owe the excess benefits that the library has demanded be repaid. His lawsuit further demanded more than $2 million in payments from the library for a claimed breach of his employment contract, which was amended by the library’s board in November 2012 to add a provision providing for $1.9 million in severance payment if Galante were to be terminated without cause.
Last month, the library filed a countersuit seeking repayment of the inappropriate expenses incurred by Galante, as well as legal fees the library paid on behalf of Galante after he received a subpoena from the U.S. Attorney’s Office. It could be a number of years before these suits are resolved, and the potential for additional enforcement actions against Galante remains.
The Legal Implications
While such a scandal has obvious adverse public relations implications for a nonprofit, it also has significant potential legal and tax implications for the organization and the individuals involved. In its 2015 Form 990, the library further reported that it had engaged in an excess benefit transaction during the relevant fiscal year and that it was seeking reimbursement from Galante of the excess compensation and automatic excess benefits he had received from the library. An excess benefit transaction is one in which a disqualified person (generally, a person who is in a position to exercise substantial influence over the affairs of the organization) receives an economic benefit from a 501(c)(3) public charity that is in excess of the value that such individual p