$100-Million Foundation in Legal Dispute Will Be Split Into Two Funds

A three-year legal battle over a $100-million foundation has ended with two states splitting its assets, and the leader of the foundation, who was accused of squandering millions of dollars meant for charity, left in charge.

Charity regulators in Mississippi and Tennessee say they are pleased with the settlement because it avoids further legal wrangling and allows grant making to resume. But some observers of the case say that state officials gave up too much in dropping their pursuit of possible wrongdoing at the foundation.

“The states’ primary focus was on getting the money, and they were not paying nearly enough attention to whether the funds were being used, or will be used, properly or appropriately,” says a tax aide on the Senate Finance Committee who asked not to be named.

Under terms of the court-approved agreement, the Maddox Foundation, created nearly 40 years ago in Nashville and now based in Hernando, Miss., will hand over $55-million to a newly revived Maddox foundation in Nashville, to be renamed the Dan and Margaret Maddox Charitable Trust.

The Mississippi foundation will keep the remainder of its assets — about $26-million in cash and as much as $30-million in real-estate holdings. Robin G. Costa, president of the Maddox Foundation and one of its three board members, will remain at the helm of the Mississippi organization.

Tennessee officials, with a state court’s approval, will appoint a governing board for the Nashville foundation. The settlement is expected to get final approval from the Internal Revenue Service and a Mississippi county court soon.

In a 2004 lawsuit, the State of Tennessee accused Ms. Costa of wresting control of the Maddox Foundation and moving it out of state without proper court approval.

The lawsuit also charged that Ms. Costa had mismanaged and misspent the foundation’s money, using it to buy minor-league hockey and football teams and take extravagant trips, sometimes using chartered jets, and billing them to the foundation.

Other revelations also came to light during the court proceedings, including claims that she used foundation money to settle a sexual-harassment lawsuit brought against her by a staff member of the hockey team she owned.

Aubrey B. Harwell Jr., Ms. Costa’s lawyer, denies any improper spending by Ms. Costa, and calls the allegations against her “bitter and dirty.”

He says many of the expenses considered excessive or inappropriate have been misunderstood. He says, for example, that the foundation’s multimillion-dollar expenditures on the sports teams were made to bolster the local Mississippi economy.

“The hockey team is the principal tenant of the DeSoto County Civic Center,” says Mr. Harwell. “If they were to leave, the civic center would not be around to provide a venue for other nonprofits in the community.”

Founders Die in Accident

Dan Maddox, a wealthy Nashville businessman, started the Maddox Foundation in 1968. The foundation did most of its grant making in the area known as Middle Tennessee, including to a local YMCA and Belmont University.

When Mr. Maddox was killed in 1998, along with his wife, Margaret, in a boating accident, the foundation had about $4-million in assets. The couple’s estate left more than $100-million to the foundation, and instructions that control of the foundation be turned over to two individuals, Mr. Maddox’s step-granddaughter, Tommye Maddox Working, and Mr. Maddox’s longtime assistant, Ms. Costa.

A year later, Ms. Costa orchestrated the foundation’s move to Mississippi. In 2004, Ms. Working took her concerns about the move and the foundation’s management and spending to the Davidson County district attorney, in Nashville. Together, on behalf of the State of Tennessee, they filed the lawsuit in state court, asking that the foundation and its assets be returned to Nashville.

Robert E. Cooper Jr., Tennessee’s attorney general, says the settlement was a success on that score.

“It recovers significant assets for the people of Tennessee and it will also achieve and help perpetuate the charitable purposes that Dan and Margaret Maddox intended,” he says.

He adds that the likelihood that the case would drag on for years, and the inherent risks of taking other legal challenges to trial, made the settlement an attractive option.

But some charity watchers say the states may have sold out too quickly.

“They totally passed on dealing with very serious allegations for what looks like greed to get the money in their own jurisdictions,” says Jack B. Siegel, a Chicago lawyer who advises nonprofit groups through his company, Charity Governance Consulting.

Mr. Siegel says he wouldn’t be surprised if the settlement raised the ire of federal lawmakers, like Sen. Charles E. Grassley, of Iowa, who have been complaining about lax oversight of charities by state regulators.

“This looks like maybe the states aren’t doing their job,” he says.

In addition, he says, the IRS, after it gives final approval to the settlement, may want to revisit some of the issues raised in the case.