Law & Governance

Law & Governance November -0001 : 0-0

The Responsibilities of a Parallel Foundation

Michael Watts and Kathy O'Brien


In 2002, the Ontario Superior Court of Justice was called upon to consider a charitable foundation's relationship with - and obligations to - the hospital it was created to benefit. The case sheds some light on the obligations of a foundation's board of directors.
The case, Bloorview Childrens Hospital Foundation v. Bloorview MacMillan Centre ([2002] O.J. No. 521), involved a dispute between the Bloorview MacMillan Centre (the "Hospital"), a public rehabilitation hospital serving young people with disabilities and special needs, and its parallel foundation (the "Foundation"). The lawsuit between the Hospital and the Foundation was triggered when the Foundation's board failed to respond affirmatively and promptly to an April 2000 request made by the Hospital's board for $15 million to fund construction of a new hospital building. The case raises the questions: (i) Who owns and controls Foundation funds that were transferred to the Foundation from the Hospital; and (ii) Does a Foundation board breach its fiduciary duties by denying a funding request from the Hospital?

The background: The Foundation was created in 1982, as an attempt by the Hospital to ensure that donor funds would not appear on its balance sheet and thereby compromise its access to Ministry funding. The Court found that the Hospital made the decision that its funds would be better preserved in a parallel foundation than in the Hospital. The Foundation was incorporated with objects requiring it to apply its income and capital "primarily for the benefit of the patients of Bloorview Childrens Hospital", and secondly, to fund the improvement of patient care related to disabled young persons and for the advancement of health care education, including research related to disabled persons in Canada . After the newly incorporated Foundation received its charitable registration status in 1983, the Hospital transferred $10 million in unrestricted donor funds to the Foundation. Over the years, the Foundation has served as the fund-receiving body of the Hospital. The relationship between the Hospital and Foundation was unremarkable until this dispute arose.

The Hospital made a number of allegations against the Foundation, including that the Foundation was acting contrary to its objects by not granting the $15 million request for construction funding; that the Foundation was merely a trustee for the $10 million (and additional subsequent funds) transferred from the Hospital to the Foundation, with the Hospital being the true beneficial owner of the Foundation funds; and that various governance changes made by the Foundation, which reduced the Hospital's control over the Foundation, constituted a breach of fiduciary duty.

The Superior Court made the following relevant findings:

  • The Foundation is a separate entity that legally and beneficially owns its funds. Despite arguments by the Hospital's legal counsel, the Court could find no evidence that the transfer of funds from the Hospital to the Foundation imposed a trust or created a trust in favour of the Hospital. The transfer of funds was done manifestly to protect the financial interests of the Hospital.
  • The Court also commented on the "very special relationship between the foundation and the hospital", given that the funds were owned and controlled by the Foundation but were received from the Hospital. Also, the Court focussed on the Foundation's corporate purpose; its letters patent require the Foundation to primarily apply its funds for the benefit of the patients of the hospital. As a result, the Court held, "the foundation cannot, either at law or in equity, treat the considered requests made by the hospital as if they came from a stranger. The directors of the hospital are strategically placed to recognize the best interests of its patients and to advise the foundation about such interests."
  • The Court then went on to articulate the legal duty owed by the Foundation to the Hospital. The Foundation, which has as its purpose "advancing the welfare of the patients of the hospital, is required to give careful and fair consideration to any request for assistance made by the hospital". The Court states that the Foundation directors are required "to give a demonstrable, disinterested, thorough, and indeed sympathetic consideration" to any request for funding by the Hospital. Failure to do so "may well be considered a breach of their duty to the patients of the hospital, and may provide for grounds for an application to dissolve the foundation." Having set out their legal duty, the Court made a point to find that it did not believe that the Foundation directors had breached their legal or fiduciary duties: the Foundation had not been either capricious or unreasonable in giving its response.

Given the shortage of funding dollars for hospitals across the province, it is our experience that disputes between hospitals and parallel foundations are arising with more frequency. While in the past foundations and hospitals had the same goals , their interests are more inclined to diverge when the hospital is in financial crisis. Often, a foundation's goals are to establish long-term funding (i.e., legacies) for the hospital, whereas the hospital is seeking to obtain immediate funding to assist its current and pressing financial concerns (such as capital equipment purchases).

The Bloorview case is a timely and useful articulation of both the autonomy of foundations from hospitals and the duty of a foundation's board to give particular, thoughtful and sympathetic consideration to each hospital request for funding. Foundations will have to demonstrate that they have undertaken a thorough investigation of the benefits and detriments of granting hospital requests and provide prompt replies, with detailed reasons, to the hospital.

The decision has been appealed, and a decision is pending.

About the Author(s)

Michael Watts and Kathy O'Brien are lawyers practising exclusively with health care clients in the Health Law Group of Cassels Brock.


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