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MacCONAGHY & BARNIER, PLC

JOHN H. MacCONAGHY, SBN 83684
JEAN BARNIER, SBN 231683
645 First St. West, Suite D
Sonoma, California 95476
Telephone: (707) 935-3205
Facsimile: (707) 935-7051
Email: macclaw@macbarlaw.com
Attorneys for Plaintiff
JANINA M. HOSKINS, Trustee in Bankruptcy

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

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SAN FRANCISCO DIVISION

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In re

)
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ARCHITECTURE FOR HUMANITY, INC.)
)
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Debtor.
)
____________________________________)
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JANINA M. HOSKINS, Trustee
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in Bankruptcy of the Estate of
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ARCHITECTURE FOR HUMANITY, INC.)
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Plaintiff,
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v.
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CAMERON SINCLAIR; KATE STOHR; )
MATTHEW CHARNEY;
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CLARK MANUS; SCOTT MATTOON;
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NIAMA JACOBS; CLIFF CURRY;
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MARGARET STEWART; PAUL GABIE; )
NARRY SINGH; TAYLOR MILSAL,
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and TOSHIKO MORI;
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Defendants.
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____________________________________)

AP No.
COMPLAINT FOR DAMAGES
FOR (1) NEGLIGENCE, (2) GROSS
NEGLIGENCE, AND (3) BREACH OF
FIDUCIARY DUTY

Plaintiff Janina M. Hoskins, Trustee in Bankruptcy of the Estate of Architecture for

Humanity, Inc., (Plaintiff), hereby alleges:

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Case No. 15-30513 DM

(Chapter 7)

INTRODUCTION
1.

This adversary proceeding arises from the gross mismanagement of a non-profit

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charitable trust named Architecture for Humanity, Inc. (the Debtor), founded to solicit

charitable donations to fund design and construction services in geographical areas subject to

natural disasters or endemic poverty, such as Haiti, areas of the U.S. Eastern Seaboard

devastated by Hurricane Sandy, and areas of Japan destroyed by the Fukushima tsunami.

Defendants were all either compensated or uncompensated members of the Board of Directors of

the Debtor during the periods of time this mismanagement occurred.

2.

During the relevant periods of time referenced in this Complaint, the Debtor

solicited millions of dollars of donations from corporate and individual donors, all of which were

transmitted to the Debtor in trust. Most of these donations were restricted, meaning that they

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could only be used for actual project expenses. A much smaller portion of the donations were

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unrestricted, meaning that they could be used for executive and staff salaries, promotional

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expenses, and other overhead items. The Debtor was obligated to maintain these donations in

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restricted and unrestricted accounts. Through written grant agreements, Debtor was

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obligated to return most of the restricted funds to the donors in question if the funds were not

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used for the particular project expenses directed by the donors.

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3.

Starting no later than the year 2013, the Debtor, acting through the above-named

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Defendants, completely disregarded the restricted and unrestricted nature of the funds and

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began a wholesale looting of the restricted funds and used them to pay executive and staff

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salaries, promotional expenses, and other overhead items which were properly paid only with

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unrestricted funds. The Debtor, acting through the above-named Defendants, continued

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soliciting more donations and continued this practice of disregarding the distinction between

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restricted and unrestricted funds up to the filing of the petition for relief, even though it was

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provided an opinion from its auditors that it was out of trust and could not survive as a going

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concern and even though it was provided an opinion by its counsel that this practice

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constituted gross negligence and a breach of trust.

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4.

As a result of this negligence, gross negligence, breach of fiduciary duty, and

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breach of trust by the Defendants and each of them, from and after 2013, the Debtor incurred in

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excess of $3,000,000 in additional and unnecessary liabilities in favor of various donors, as is

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more fully alleged below.

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JURISDICTION AND VENUE

5.

On April 17, 2015 (the Petition Date), Architecture for Humanity (Debtor)

filed a voluntary petition for relief under Chapter 7 in the above-entitled Court (the Main

Case). Thereafter, Plaintiff was duly appointed as the Chapter 7 Trustee in Bankruptcy and

vested with all causes of action and other litigation rights held by the Debtor which she now

prosecutes on behalf of the Debtors bankruptcy Estate.

6.

This U.S. District Court for the Northern District of California has original

subject matter jurisdiction over this adversary proceeding pursuant to the provisions of 28 USC

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157 and 1334 and 11 USC 541. The District Court has, by general order, referred the Main

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Case and all adversary proceedings filed in connection with the Main Case to the U.S.

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Bankruptcy Court for the Northern District of California. Venue is proper here pursuant to the

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provisions of 28 USC 1409.

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7.

This matter is a non-core proceeding related to the Main Case as defined by 28

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USC 157. Plaintiff consents to final judgment of the Bankruptcy Court pursuant to the

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provision of 28 USC 157(c)(2).

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PARTIES
8.

Plaintiff Janina M. Hoskins is the duly appointed Chapter 7 Trustee of the Estate

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of Architecture for Humanity. Due to the fact that Plaintiff was not appointed until after the

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Petition Date, Plaintiff does not have personal knowledge of the facts alleged in this complaint

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that arose prior to the filing of the Main Case, and therefore alleges all of those facts on

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information and belief. Plaintiff reserves her right to amend this Complaint to allege additional

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claims against the Defendants and to challenge and recover avoidable transfers made to or for

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the benefit of any of the Defendants in addition to those claims for relief alleged in this

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Complaint.

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9.

The Debtor Architecture for Humanity is a non-profit charitable corporation

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organized under the laws of the State of New York and qualified as a tax exempt corporation

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pursuant to Section 501(c)(3) of the Internal Revenue Code. At all relevant times, the Debtor
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was headquartered in the State of California and registered with the State of California as a

charitable trust. As such, the Debtor and the Defendants are subject to the substantive laws of

both the State of New York and the State of California.

10.

Defendants Cameron Sinclair and Kate Stohr are each individuals residing and

doing business in the Northern District of California. At relevant times, Defendants Sinclair and

Stohr have been some, but not all, of the officers and directors of the Debtor. As such,

Defendants Sinclair and Stohr owed the Debtor fiduciary duties of care and loyalty. Defendants

Sinclair and Stohr are referred to below as the Compensated Directors.

11.

Defendants Matthew Charney, Clark Manus, Scott Mattoon, Niama Jacobs,

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Taylor Milsal, Margaret Stewart, Narry Singh, and Toshiko Mori are each individuals who did

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business in the Northern District of California during the periods referenced in this complaint.

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These Defendants are referred to below as the Volunteer Directors. At relevant times, the

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Volunteer Directors were the remaining members of the Board of Directors of the Debtor. As

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such, the Volunteer Directors owed the Debtor fiduciary duties of care and loyalty. To the extent

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that the Volunteer Directors are subject to the substantive law of the State of California, the

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Volunteer Directors are not entitled to the immunities set forth in California Corporations Code

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Sections 5047.5 and 5239 because (a) the acts and omissions of the Volunteer Directors alleged

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below constituted gross negligence and (b) on information and belief, the Volunteer Directors

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are indemnified by liability insurance for their grossly negligent acts and omissions.

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GENERAL ALLEGATIONS
12.

On January 16, 2002, the Debtor was organized as a New York nonprofit

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corporation. Thereafter, the Debtor established its principal place of business in the State of

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California and registered as a Charitable Trust in the State of California.

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13.

Starting in the calendar year 2009, the Debtor experienced a dramatic increase in

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its revenues, all of which were either public or private charitable donations. Its gross revenues

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went from $1,747,262 in the year 2009; to $5,501,336 in the year 2010; to approximately

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$7,200,000 in the year 2011; to over $10,000,000 in the year 2012; to $12,365,805 in year 2013.

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14.

This dramatic increase in revenues was due, in part, to a corresponding increase

in the Debtors overhead and administrative expenses, including payment for fundraising

services, executive compensation, the purchase of a building, and staff expenses.

15.

However, although the Debtor had sufficient cash on hand to pay these

dramatically increased expenses, using that cash commonly resulted in a breach of trust with the

Debtors donors.

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Most of the donations made to the Debtor were made in trust with significant

restrictions on the use of the donated funds, known generally in nonprofit administration and

designated internally by the Debtor as restricted funds. Donated funds which could be used

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for any purpose including overhead and administrative expenses are known as unrestricted

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funds.

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forth below:

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Examples of the restricted donations made or agreed to be made to the Debtor are set

a)

On January 15, 2013, Nike USA made a grant to the Debtor in the amount

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of $1,000,000. This grant was made for the purpose of implementing a

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project known as Hurricane Sandy Rebuild Efforts, and was made on

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the express condition that 15% of the grant could be used for the Debtors

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overhead. A correct copy of this Grant Agreement is attached to this

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Complaint and labeled Exhibit 1.

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b)

On June 20, 2013, the Alcoa Foundation made a grant to the Debtor in the

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amount of $1,500,000 payable over three years in installments of

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$642,402 in the year 2013, $527,799 in the year 2014, and $329,799 in the

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year 2015. This grant was made for the purpose of implementing a project

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known as Academic Partners in Building and Construction, and was

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made on the express condition that Only expenses directly related to the

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purpose of this grant are allowable; therefore, a general overhead

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percentage of indirect costs are not allowed. A correct copy of this letter

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agreement is attached to this Complaint and labeled Exhibit 2.

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c)

On August 1, 2013, the Community Safety Foundation made a grant to the

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Debtor in the amount of $140,000 pursuant to a written Grant Agreement

and budget providing that only $28,547 of the grant funds could be used

for general overhead and further requiring that all funds advanced by the

donor would be maintained in a separate account. This grant was made

for the purpose of implementing a project known as Resilient OK, A

correct copy of this Grant Agreement is attached to this Complaint and

labeled Exhibit 3.

d)

On April 16, 2014, the Prudential Foundation made a grant to the Debtor
in the amount of $1,000,000 pursuant to a written Memorandum of

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Understanding providing that only $47,500 of the grant funds could be

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used ...in order to cover its expenses for administering the grant(s)... A

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correct copy of this Memorandum of Understanding is attached to this

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Complaint and labeled Exhibit 4.

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e)

On February 20, 2014, the Give2Asia foundation made a grant to the

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Debtor in the amount of $40,000 pursuant to a written Grant Agreement

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and budget providing that only $3,900 of the grant funds could be used for

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general overhead and further requiring that all funds advanced by the

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donor would be maintained in a separate account. A correct copy of this

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Grant Agreement is attached to this Complaint and labeled Exhibit 5.

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17.

No later than July 21, 2012, the Defendants were notified by the Debtors

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management that there was a deficit in the Debtors unrestricted funds account in the amount

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of $185,000. In other words, as of that date, the Debtor had committed a breach of trust as to

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one or more of its donors and misused the funds donated to the Debtor in trust.

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18.

On October 26, 2012, the Defendants were each transmitted a Memorandum from

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the Finance Committee of the Board of Directors entitled, Material Deterioration in Financial

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Outlook Special Board Meeting Required. This Memorandum noted, among other things that

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the deficit on the Debtors unrestricted funds had increased to $529,000 as of 9/30/2012, that

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the Finance Committee was ...deeply concerned about the fiscal outlook of the organization...,
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and that, If the deficit in unrestricted assets worsens in the Q2 FY 2012-13, which ends on 31

December, we will find ourselves in an exceedingly dire financial position. A correct copy of

this Memorandum is attached to this Complaint and labeled Exhibit 6.

19.

Notwithstanding the warnings of this Memorandum, the Defendants and each of

them continued to manage the Debtor in a grossly negligent fashion and in breach of their

fiduciary duties throughout the remainder of 2012 and 2013. The deficit in unrestricted funds

and the corresponding breach of trust as to restricted funds did, in fact, continuously worsen

throughout 2012 and 2013.

20.

On January 29, 2014, the Defendants were transmitted an independent auditors

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report for the fiscal year ending 6/30/2013, noting, among other things, that the deficit in

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unrestricted funds had increased to $1,144,775 as of 6/30/13, that the Debtor still had cash and

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cash equivalents of $4,247.220 as of that date, and ...the Organization has suffered recurring

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losses in unrestricted activities and has a net deficit in unrestricted assets that raise substantial

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doubt about its ability to continue as a going concern. A correct copy of this independent

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auditors report is attached to this Complaint and labeled Exhibit 7. Shortly prior to the

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transmission of the independent auditors report, the Defendants were advised by management

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that the Debtor was bringing in only $6,000 per month in unrestricted funding, but that it was

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making $165,000 per month in unrestricted expenditures, and that by the end of November,

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2013, the deficit would likely rise to $1,950,000.

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21.

Due to these dramatically increasing deficits in unrestricted funds and the

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corresponding instances of breach of trust as to the restricted funds donated in trust by the

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Debtors donors, the prudent course of action would have been for the Debtor to terminate

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operations no later than January 29, 2014 to further prevent dissipation of the restricted funds

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and return those funds to the Debtors donors and other creditors on a pro rata basis. As of that

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date, the Debtor had cash and cash equivalents on hand of not less than $3,000,000 to do so.

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22.

On March 28, 2014, and April 8, 2014, the Defendants received further

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Memorandums from the law firm of Jenner & Block, counsel for the Debtor, advising them that

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their ongoing misuse of restricted funds was likely grossly negligent, a breach of trust, and a
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breach of fiduciary duty. Correct copies of these Memoranda are attached to this Complaint and

labeled Exhibits 8 & 9.

23.

Notwithstanding these repeated warnings from responsible members of

management and the Debtors business advisors, the Defendants continued to operate the Debtor

in the same grossly negligent fashion throughout the year 2014, invading the restricted funds

to pay ongoing operating losses in overhead, and dissipating the assets of the Debtor so that by

the time the Debtor filed its Chapter 7 petition for relief, the amount of cash had been reduced to

$200,000, the Debtors general liabilities had increased, and the amount by which the Debtor

was out of trust on the restricted funds had likewise increased.

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FIRST CLAIM FOR RELIEF

(Damages for Ordinary Negligence)
(Against the Compensated Directors Only)

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24.

Plaintiff realleges and incorporate the allegations contained in Paragraphs 1

through 23, inclusive.

25.

As officers and directors of the Debtor, the Compensated Directors owed the

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Debtor a duty of care to exercise the diligence, care, and skill that ordinary prudent persons

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would exercise under similar circumstances in the management, supervision, and conduct of the

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Debtors business and financial affairs, including its fund raising, accounting, and project

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funding practices.

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26.

Also, the Compensated Directors and each of them agreed and were obligated by

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statute, contract, and/or common law to diligently and honestly administer the affairs of the

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Debtor, and were under a duty to ensure that the Debtor operated in compliance with all laws,

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rules, and regulations, as well as all applicable donor contracts, policies, rules, and regulations of

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the Debtor. The Compensated Directors, collectively and individually, owed to the Debtor the

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highest duty of due care and diligence in the management and administration of the affairs of the

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Debtor, in the use and preservation of its assets and property, and in the adoption and carrying

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out of business practices that were safe, sound, and prudent.

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27.

The Compensated Directors are not entitled to application of the business

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judgment rule because none of the Compensated Directors actions or inactions that are the basis

of this negligence claim were in taken in good faith. Nor were the Compensated Directors

reasonably well-informed in taking such actions or inactions because the Compensated Directors

repeatedly approved donor grants and expenditures in violation of the grant agreements in

question and the advice of the Debtors auditors and attorneys.

28.

As further detailed in Paragraphs 12 -23 of this Complaint, the Compensated

Directors failed to discharge their duties to the Debtor as described herein, breaching the

statutory and common law duties that they owed to the Debtor and were thus negligent.

29.

Each of the Compensated Directors, during the period of time he or she was an

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officer or director of the Debtor, was negligent in abdicating his/her responsibilities to the

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Debtor as an officer or director. Each of the Compensated Director was unreasonable in failing

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to investigate material facts; failing to carry out his/her responsibilities to the Debtor by failing

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to act with appropriate care, including reasonable inquiry, as an ordinary prudent person in a like

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position would use under similar circumstances; and failing to act in good faith. Each of the

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Compensated Director was ignoring the danger his/her negligence was causing to the Debtor,

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negligently soliciting restricted charitable donations without the intent to utilize such donations

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for the restricted purposes in question; negligently accounting for such donations; and

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authorizing the expenditure of such donations for improper purposes, including their own

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excessive executive compensation, all as further described in Paragraphs 12-23 of this

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Complaint.

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30.

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As a direct and proximate result of the negligence of the Compensated Directors,

the Estate suffered damages in an amount to be determined at trial, in excess of $3,000,000.

WHEREFORE, Plaintiff prays for judgment as set forth below.

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SECOND CLAIM FOR RELIEF

(Damages for Gross Negligence)
(Against All Defendants)

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31.

Plaintiff realleges and incorporate the allegations contained in Paragraphs 1

through 30, inclusive.

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32.

California Corporations Code Sections 5047.5 and 5239 and New York Nonprofit

Corporations Law Sections 719 and 720-a, provide that directors and officers of a nonprofit

corporation maybe held liable to the nonprofit corporation in question for loss or damage caused

by their gross negligence, as defined by applicable law. California law defined gross

negligence as either a want of even scant care or an extreme departure from the ordinary

standard of care.

33.

As officers and directors of the Debtor, the Defendants owed the Debtor a duty of

care to exercise the diligence, care, and skill that ordinary prudent persons would exercise under

similar circumstances in the management, supervision, and conduct of the Debtors business and

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financial affairs, including its fund raising, accounting, and project funding practices.
34.

Also, the Defendants and each of them agreed and were obligated by statute,

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contract, and/or common law to diligently and honestly administer the affairs of the Debtor, and

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were under a duty to ensure that the Debtor operated in compliance with all laws, rules, and

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regulations, as well as all applicable donor contracts, policies, rules, and regulations of the

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Debtor. The Defendants, collectively and individually, owed to the Debtor the highest duty of

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due care and diligence in the management and administration of the affairs of the Debtor, in the

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use and preservation of its assets and property, and in the adoption and carrying out of business

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practices that were safe, sound, and prudent.

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35.

The Defendants are not entitled to application of the business judgment rule

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because none of the Defendants actions or inactions that are the basis of this gross negligence

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claim were in taken in good faith, nor were the Defendants reasonably well-informed in taking

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such actions or inactions because the Defendants repeatedly approved donor grants and

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expenditures in violation of the grant agreements in question and the advice of the Debtors

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auditors and attorneys.

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36.

As further detailed in this Complaint, the Defendants failed to discharge their

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duties to the Debtor as described herein, breaching the statutory and common law duties that

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they owed to the Debtor and were thus grossly negligent.

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37.

Each of the Defendants, during the period of time he or she was an officer or

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director of the Debtor, was grossly negligent in abdicating his/her responsibilities to the Debtor

as an officer or director, unreasonable in failing to investigate material facts, failing to carry out

his/her responsibilities to the Debtor by failing to act with appropriate care, including reasonable

inquiry, as an ordinary prudent person in a like position would use under similar circumstances,

failing to act in good faith, ignoring the danger his/her negligence was causing to the Debtor,

negligently soliciting restricted charitable donations without the intent to utilize such donations

for the restricted purposes in question, negligently accounting for such donations, and

authorizing the expenditure of such donations for improper purposes, including their own

excessive executive compensation, all as further described in Paragraphs 12 - 23 of this

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Complaint.

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38.

Each Defendant was grossly negligent in that his/her manner of carrying out

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his/her duties and responsibilities to the Debtor constituted a want of even scant care or an

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extreme departure from the ordinary standard of care. Instead, Defendants acted with such a

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degree of carelessness and inattention to the performance of their duties so as to constitute gross

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negligence.

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39.

As a direct and proximate result of the gross negligence of the Defendants and

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each of them, the Estate has suffered damages in an amount to be determined at trial, in excess of

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$3,000,000.

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WHEREFORE, Plaintiff prays for judgment as set forth below.

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THIRD CLAIM FOR RELIEF

(Breach of Fiduciary Duty California Substantive Law)
(Against All Defendants)

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40.

Plaintiff realleges and incorporates the allegations contained in paragraphs 1

through 39, inclusive.

41.

At all relevant times, the assets, principal place of business, and state of registry

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as a charitable trust has been in the State of California. Plaintiff is informed and believes and on

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that basis that, for those reasons, notwithstanding the fact that the Debtor is a New York

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nonprofit corporation, the rights and liabilities of the Defendants as officers and directors of the
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Debtor are properly determined by the substantive nonprofit corporate law of the State of

California, pursuant to applicable choice of law rules.

42.

As officers and directors of the Debtor, the Defendants owed it fiduciary duties

of care and loyalty.

43.

From no later than July 21, 2012, and continuing through December 31, 2014,

the Defendants and each of them breached their fiduciary duties of care and loyalty to the

Debtor, all in violation of California Corporations Code Sections 5230, 5231, 5237(a)(1), and

5237(a)(2); California Government Code Section 12599.6 and 12599.8, and California Probate

Code Sections 18501 - 18510.

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44.

Specifically, and without any limitation of the foregoing, the Defendants

committed each of the following acts and omissions in their management of the Debtor:

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(a)

Commingled and failed to segregate the restricted and unrestricted

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funds of the Debtor, and made unauthorized diversion of the Debtors

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assets in an amount not less than $3,000,000;

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(b)

Failed to cause the Debtor to maintain accurate books of account;

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(c)

Caused the Debtor to incur in excess of $3,000,000 in liabilities in favor

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its charitable donors by using restricted funds for unrestricted

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purposes, all in breach of an express trust in favor of these donors;

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(d)

Continued to operate and consume the assets of the Debtor solely for their

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personal benefit (in the case of the Compensated Directors) while

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incurring significant additional debts and withholding the liquidation

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value of these assets for creditors; and

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(e)

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Failed or refused to cause the Debtor to report the misuse of restricted

funds to the donors in question and the State Attorney General.

45.

Plaintiff is informed and believes an on that basis alleges that had the Defendants

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not breached their fiduciary duties to the Debtor, as alleged above, the Debtor would have been

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able to liquidate its assets and return unusable restricted donations in a manner to generate a

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significant return to its existing creditors and/or limit additional liabilities to its donors.
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46.

As a direct and proximate cause of this breach of fiduciary duties, the Estate has

been damaged in an amount presently unknown, but which Plaintiff is informed and believes and

on that basis alleges exceeds $3,000,000 to be determined at trial.

WHEREFORE, Plaintiff prays for judgment as set forth below.

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FOURTH CLAIM FOR RELIEF

(Breach of Fiduciary Duty New York Substantive Law)
(Against All Defendants)

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47.

Plaintiff realleges and incorporates the allegations contained in paragraphs 1

through 46, inclusive.

48.

This claim for relief is pled in the alternative that the rights and liabilities of the

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Defendants as officers and directors of the Debtor are properly determined by the substantive

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nonprofit corporate law of the State of New York.

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49.

As officers and directors of the Debtor, the Insider Defendants owed it fiduciary

duties of care and loyalty.

50.

From no later than July 21, 2012, and continuing through December 31, 2014, the

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Defendants and each of them breached their fiduciary duties of care and loyalty to the Debtor, all

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in violation of New York N-PCL Sections 513(b) and 550-558, and New York EPTL Sections

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8-1.1 to 8.1-8.

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51.

Specifically, and without any limitation of the foregoing, the Defendants

committed each of the following acts and omissions in their management of the Debtor:

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(a)

Commingled and failed to segregate the restricted and unrestricted

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funds of the Debtor, and made unauthorized diversion of the Debtors

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assets in an amount not less than $3,000,000;

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(b)

Failed to cause the Debtor to maintain accurate books of account;

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(c)

Caused the Debtor to incur in excess of $3,000,000 in liabilities in favor

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its charitable donors by using restricted funds for unrestricted

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purposes, all in breach of an express trust in favor of these donors;

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(d)

Continued to operate and consume the assets of the Debtor solely for their

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personal benefit (in the case of the Compensated Directors) while

incurring significant additional debts and withholding the liquidation

value of these assets for creditors; and

(e)

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Failed or refused to cause the Debtor report the misuse of restricted

funds to the donors in question and the State Attorney General.

52.

Plaintiff is informed and believes an on that basis alleges that had the Defendants

not breached their fiduciary duties to the Debtor, as alleged above, the Debtor would have been

able to liquidate its assets and return unusable restricted donations in a manner to generate a

significant return to its existing creditors and/or limit additional liabilities to its donors.

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53.

As a direct and proximate cause of this breach of fiduciary duties, the Estate has

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been damaged in an amount presently unknown, but which Plaintiff is informed and believes and

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on that basis alleges exceeds $3,000,000 to be determined at trial.

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PRAYER FOR RELIEF

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WHEREFORE, Plaintiff prays for judgment as follows:

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1.

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For an award of compensatory money damages in an amount not less than

$3,000,000 plus interest thereon at the legal rate, according to proof;

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2.

For costs of suit incurred herein; and

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3.

For such other and further relief as the Court deems proper.

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Dated: June 10, 2016

MACCONAGHY & BARNIER, PLC

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/s/ John H. MacConaghy

John H. MacConaghy
Attorneys for Plaintiff Janina M. Hoskins,
Trustee in Bankruptcy

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8048.DIRECTORS.COMPLAINT.WPD

Case: 15-30513

Doc# 49

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Filed: 06/10/16 Entered: 06/10/16 16:39:15

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