Supreme Court Cites New Law in Pushing to Dismiss Controversial Texas Annuities Case

THOMAS J. BILLITERI

The U.S. Supreme Court has given a strong signal that it wants a bitterly contested lawsuit against charities that offer gift annuities to come to an end.

In a two-sentence order in December, the justices nullified a decision by the U.S. Court of Appeals for the Fifth Circuit, which last spring refused to dismiss the lawsuit. The Supreme Court told the appellate court to reconsider the suit in light of a federal law enacted last summer that retroactively exempts gift annuities from antitrust laws.

The suit was filed in 1994 by the grandniece of an elderly Texas woman who bought $200,000 in annuities from the Lutheran Foundation of Texas. The suit charged that the American Council on Gift Annuities, which recommends annuity payout rates that many charities use, conspired with charities nationwide to keep those rates artificially low.

Gift annuities let a donor make a tax-deductible contribution to a charity and collect regular payments from the charity until the donor’s death, at which point the charity retains the remaining principal. Older donors receive higher payout rates than younger ones because they have shorter life expectancies.

The suit reverberated through the charity world, initially causing some non-profit organizations — especially small ones without big legal resources — to postpone or stop issuing gift annuities.

Terry L. Simmons, president of Charitable Accord, a national coalition of charities that has led the fight against the annuity lawsuit, said the case has also made charities more aware “that there are plaintiffs’ lawyers out there looking for the opportunity to sue charities with big endowment funds.”

It also has reminded charities that a donor’s entire family should be in on the planned-giving process when possible, said Mr. Simmons, who is vice-president of the Baptist Foundation of Texas, which manages charitable assets for the Baptist denomination.

“When heirs are left out of the discussion process, they can become disgruntled,” Mr. Simmons said.

Last summer’s law marked Congress’s second attempt to derail the suit and future legal action over gift annuities. In 1995 it passed legislation that retroactively shielded charities from antitrust claims over gift annuities. But the bill left a loophole: It did not cover for-profit organizations.

After the 1995 legislation passed, charities sought to have the case dismissed, but a U.S. District Court, and later the appellate court, refused. Plaintiffs argued that the council was not a charity and should not be protected. They also argued that banks and other for-profit organizations conspired to set payout rates and that the 1995 law did not protect such an arrangement from lawsuits.

Last summer’s legislation extended immunity from antitrust litigation to all parties “involved in the planning, issuance, or payment of charitable gift annuities,” regardless of their tax status.

Mr. Simmons said he believes that last summer’s law will ultimately end the suit. “It was literally drafted to meet the criteria” of the appellate court, he said.

Lawyers for the plaintiffs in the Texas case did not return phone calls seeking comment on the Supreme Court order.

Whether or not the suit is halted, it has already had a profound effect on the non-profit world. One measure of that is the financial cost of the litigation.

Mr. Simmons estimates that charities have spent as much as $30-million on legal fees. His estimate includes as much as $20-million for the 40 charities and other organizations named as defendants and an additional $10-million for approximately 1,900 other charities that at one point were charged in the suit but were later dropped as defendants.

The suit has also focused new attention on state laws that regulate gift annuities. Laws on gift annuities vary by state, but the National Association of Insurance Commissioners is drafting a model law that could bring some consistency, depending on whether states adopt the measure.

The association’s proposal would require charities that offer gift annuities to be licensed by state insurance regulators and to set aside money in reserve accounts to insure that donors receive their annuity income even if the charity runs into money problems. Charities also would have to file an annual financial report with state regulators detailing their annuity business and reserve accounts.

The insurance commissioners’ association may approve a proposal in June to submit to the states.

Jerry Fickes, a New Mexico regulator who chairs the group that drafted the model law, said he was not aware of a charity that had defaulted on an annuity contract. But, he added, “the future isn’t always the same as the past.”

The U.S. economy has enjoyed expansive growth since World War II, he noted, making it relatively easy for charities to make money on their investments — and therefore to meet the payout obligations in their annuity contracts. But a change in interest rates or a drop in the stock market could cause charities to make less — and potentially to default on payments to annuity holders, he said.

Not only that, said Mr. Fickes, many annuity contracts are based on outmoded mortality data that don’t reflect the fact that people live longer than they used to. If a charity’s investments suffer from a poor stock or bond market and, at the same time, an annuity holder lives longer than expected, a charity could be forced to default on a gift-annuity contract, Mr. Fickes said.

Many charities do not like the proposed model law, said Mr. Simmons of the Baptist Foundation. The law, especially its reserve and reporting requirements, is “too much regulation” and “beyond the pale” of what is needed, he said. Small charities, which depend on gift annuities to raise money, will be scared off by the law, he said.

“No one has pointed to abuses to justify this,” he said. “It’s regulation for regulation’s sake.”

Mr. Simmons also argued that the proposed measure runs counter to a recent trend among some states toward deregulation of gift annuities. He said such states as Florida, Colorado, Indiana, Iowa, Louisiana, and Texas have recently taken steps to relax laws governing charities that offer annuities.

Mr. Fickes, the state insurance official, said the point of the model law is to bolster trust in the non-profit world by “giving confidence to people that there will be solvency if they need these annuity payouts.

“We’re not trying to be a roadblock to charities,” he added. “We’re actually trying to help them.”

Besides affecting the regulatory scene, the suit has helped spur structural changes among some groups, including the Presbyterian Church (USA) Foundation and the Baptist Foundation of Texas.

In December 1996 the Baptist Foundation — with $1.6-billion in total assets — formed a for-profit, state-chartered trust-company subsidiary, a precaution in case the Texas Legislature at some point cancels the ability of charities to serve as their own trustee of planned-giving assets, said Mr. Simmons.

“We feel establishing the trust company is a good cautionary move because we cannot be certain of what the Texas Legislature will do in the future,” he said.

Mr. Simmons said the trust company aims to become a “profit center” by managing the assets not only of the Baptist Foundation of Texas but also those of other charities, and perhaps by entering other arenas, such as individual retirement accounts and business related to church bonds.

Another legacy of the suit is the formation of Charitable Accord, which recently became a permanent, dues-paying membership organization supported by about 1,000 charities and individuals, according to Mr. Simmons.

The coalition has spent about $1.4-million on lobbying and other activities in the annuity case and will continue to be an advocate for charities on other policy issues, he said.

The coalition is pushing for federal legislation that would allow people to roll over an individual retirement account tax-free to a charity or into a planned gift, Mr. Simmons said.

The annuity suit “dramatically increased the cohesiveness of the charitable community,” Mr. Simmons said. “We came together very quickly to accomplish a common goal; we did it efficiently and convincingly; and as a consequence we’ll be able to do it again when the need arises.”