By Elizabeth Patterson Nonprofits often see gift opportunities that come with strings attached, also known as donor-restricted gifts. However, what isn’t always clear is just how strong those strings can be, or how long they may last! Over the past few years there has been a surge in cases where the donor (or his or her heirs) is suing to get back that contribution claiming these restricted funds were not used as promised. Generally, gifts are unrestricted and the charity can use them for its purposes as it sees fit. However, when the gift comes with restrictions or conditions, the nonprofit recipient generally has to adhere to those restrictions. We have had success removing such restrictions with the donor’s consent or by obtaining a court decree, applying what is known as cy prés when compliance with those restrictions become sufficiently problematic, but sometimes, neither remedy is obtainable. Some recent and well publicized cases include: Garth Brooks donated $500,000 to a hospital for a women’s center that was to be named after his late mother. Brooks had met with the hospital’s president several times discussing the donation. The hospital claimed that the gift was unrestricted and that only after the donation was made did Brooks state that he wanted the funds to be used for a women’s center in honor of his mother. Brooks said that the donation was made for the sole purpose of constructing the women’s center. The agreement was never committed to in writing, and the jury found in favor of Brooks, awarding him punitive damages of $500,000 in addition to returning his donation of $500,000. Similarly, Scott Ginsburg, a Texas businessman, sued Georgetown University, requesting that the University return his $7.5 million in donations because the University backed out of putting his name on the law school’s sports and fitness center. Once the Securities and Exchange Commission found that Mr. Ginsburg had engaged in insider trading, Georgetown said it thought twice about putting his name on the building and offered to return his money. Other colleges, such as Johns Hopkins and Columbia are also involved in battles about how closely they are following the wishes of donors.
For now, nonprofits in Missouri are less susceptible to such donor lawsuits. Under Missouri and Kansas law (with certain exceptions), only the State’s Attorney General has standing to enforce such restrictions. The rationale for this position is that the donor, in order to obtain the charitable income tax deduction, must irrevocably give control of the asset to the charity. Thus, any use of the donation for other non-restricted purposes doesn’t create any actual or imminent injury to the donor. Many other jurisdictions have allowed donors to recover, so this is an area where we expect to see considerable activity in the future. How can a charity avoid these problems? First, it should have a gift acceptance policy that requires review of any proposed gift conditions before the gift is accepted. Second, put it in writing. Written gift agreements can protect nonprofits from “he said – she said” arguments. The written gift agreement should specifically state any restrictions. If possible, the agreement should provide flexibility to deal with changes in these circumstances. Additionally, these gift agreements should include an ethics clause, stating what actions might be taken to protect the reputation of the nonprofit or the donor should the reputation of either party come to question especially with gifts related to “naming rights.” Finally, organizations need to educate its donors so they understand that changes and/or the passage of time may seriously limit the ability to honor certain gift restrictions and that when such restrictions cannot be honored, the donated funds may sit unused for an indefinite period of time. Encourage your donors to use non-binding language in documenting the donor’s written intent. For instance, an agreement can provide that if it is not practical to use the funds for the intended purpose, the nonprofit has flexibility to use the funds for other charitable purposes (or the funds be applied to a contingent purpose). There are ways to address these issues with advance planning. The lawyers at Van Osdol & Magruder look forward to assisting our nonprofit clients in this important area.
