## Facts

- Queen of Angels Hospital was a California nonprofit, religiously affiliated hospital corporation formed in 1927, which operated a hospital, trained medical personnel, ran a clinic, and performed charitable work.
- In 1932, Queen added a ten-story wing that housed an outpatient clinic; over time, members of a related religious order (the Motherhouse) performed substantial services at the hospital and clinic, historically without conventional salary arrangements.
- By the late 1960s and early 1970s, Queen encountered serious financial difficulties.
- Queen entered a long-term lease (effective May 1, 1971) transferring operation of most hospital facilities to W.D.C. Services, Inc., a for-profit company, while Queen retained the outpatient clinic and convent property.
- The lease provided substantial minimum rent (reported as $800,000 annually for the first two years and $1,000,000 annually thereafter) and renewal options.
- Queen intended to continue as a charitable corporation and use lease proceeds to support charitable healthcare activities, including establishing free or low-cost outpatient clinics in underserved areas.
- Queen and the Motherhouse also agreed to a retirement-payment plan for elderly Sisters who had worked for decades at Queen, providing modest monthly payments funded by Queen.
- The California Attorney General, charged with oversight of charitable assets and charitable corporations, disputed (1) the retirement payments and (2) certain transaction-related fees; the parties sought declaratory relief as to the lease, the retirement plan, and the fees.

## Issues

1. Whether a nonprofit hospital corporation could lease substantially all hospital facilities to a for-profit operator and redirect income to charitable healthcare activities without violating its corporate charitable purpose or duties governing charitable assets.
2. Whether the nonprofit could lawfully fund retirement payments to members of an affiliated religious order for past services that were historically voluntary and not subject to a prior compensation obligation.
3. Whether professional and transaction-related fees incurred in connection with the lease were lawful and consistent with fiduciary duties governing charitable funds.

## Decision

- The Court of Appeal upheld the lease as a permissible transaction consistent with Queen’s charitable healthcare purposes, where Queen remained a charity and the arrangement provided resources for continued charitable medical services.
- The court rejected the retirement-payment agreement as presented, concluding it was not a permissible use of charitable assets.
- The court upheld the challenged fees associated with the lease, finding no basis to treat them as an unlawful diversion of charitable assets when tied to a lawful transaction and not shown to be unreasonable or self-dealing.
- The disposition affirmed the split result: lease and fees approved; retirement plan invalidated.

## Legal Principles

- A charitable corporation must use its assets in furtherance of the charitable purposes set out in its governing documents; operational changes are permissible if the core charitable healthcare mission is maintained.
- Leasing a charity’s principal operating assets to a for-profit operator is not inherently inconsistent with charitable obligations if the transaction is prudent, fair, and the resulting income is applied to charitable purposes.
- Charitable assets may not be used to confer non-incidental private benefits; retroactive payments to affiliated persons or entities for past voluntary service, absent a prior legal obligation, are subject to strict scrutiny and may be disallowed.
- Reasonable professional fees incurred to accomplish a lawful, mission-consistent transaction may be paid from charitable assets, absent proof of excessiveness, self-dealing, or misuse.

## Conclusion

The court permitted a nonprofit hospital to lease most of its facilities to a for-profit operator and pay related transaction fees where the arrangement supported continued charitable healthcare, but it disallowed a retirement-payment plan for an affiliated religious order as an improper private benefit not sufficiently connected to the charity’s permitted purposes.


Queen of Angels Hosp. v. Younger, 66 Cal. App. 3d 359, 136 Cal. Rptr. 36 (Ct. App. 1977)