Lawsuit in New York Could Affect Earmarked Funds at 550 Community Foundations

A long-running fight between two charities has reached a New York State appeals court,

and the eventual ruling could affect the amount of control that the nation’s 550 community foundations can exercise over donors’ gifts.

At stake, according to legal briefs filed in the case, are the rights and powers of community foundations, courts, and state attorneys general to take care of donated funds.

Last fall, a lower court ruled that the New York Community Trust, the country’s largest community foundation, overstepped its authority in 1971 when it redirected money earmarked for a specific charity, the Community Service Society of New York, to other causes (The Chronicle, November 4). The ruling was the first ever to define a community foundation’s “variance power” to depart from a donor’s instructions.

The New York Community Trust appealed the decision to the New York Supreme Court’s Appellate Division, which is expected to rule in the next few months. Future appeals are expected, no matter which side wins the next round.

Community foundations solicit gifts from many donors, usually within a specific geographic region, and then distribute them as grants to local charities.

The lawsuit was brought against the New York Community Trust in 1995 by the Community Service Society. The social-service charity argued that the community foundation had insufficient reason for cutting off payments that the society had regularly received from six trusts that the community fund oversaw.

The exact dollar amounts at issue in the dispute are unclear, but millions of dollars appear to be involved. The trusts date back to 1929, and the original donors included Laura Spelman Rockefeller, wife of the oil magnate John D. Rockefeller, and Linda A. Griffith, wife of the filmmaker D.W. Griffith. The donors of each of the funds named the Community Service Society as a beneficiary for all or for a specified percentage of the fund’s income.

Most community funds, including the New York Community Trust, require donors to agree to a “variance” clause as a condition of accepting their gifts. The New York Community Trust’s governing document says that the organization can use its variance power when “circumstances have so changed” since a gift was made “as to render unnecessary, undesirable, impractical, or impossible a literal compliance with the terms” of the donation.

The New York Community Trust said that its decision in 1971 to redirect money from the Community Service Society was justified because it believed that the charity was changing its approach to helping the poor by working more with other organizations and providing fewer direct services. It based that understanding on a newspaper article and other materials.

The Community Service Society said its mission has never varied and includes many programs that serve the poor.

Surrogate Court Judge Eve Preminger ruled last year that the New York Community Trust had failed to establish a compelling reason for redirecting the money from the Community Service Society.

The community foundation’s decision to use its variance power “must be grounded in a change of circumstance that negatively affects the designated charity to such a degree that it would be likely to prompt a donor of the fund to redirect it,” the judge said.

Judge Preminger said that the New York Community Trust did not uncover enough negative information to support its decision. She rejected the trust’s argument that uncertainty about the charity’s future could constitute “undesirability.”

The judge also ruled that a statute of limitations would allow the Community Service Society to recover only six years’ worth of lost gifts.

In its appeal, the New York Community Trust said that Judge Preminger was out of bounds to rule that a community foundation must ground its decision to redirect money on the basis of “negative details.”

The judge “rewrote the variance power without any legal basis whatsoever” and her “newly minted” standard was narrower, improper, and unworkable, the community foundation said. Judge Preminger wrongly “substituted her judgment for that of a distribution committee comprised of 11 leading members of the New York City community,” the organization added.

A friend-of-the-court brief filed with the appeals court by eight community foundations said that Judge Preminger’s decision thwarted donors who like to give to community foundations because they know their money can be later redirected to serve the changing needs of communities.

The lower court’s ruling, if upheld, would encourage charities in the same boat as the Community Service Society to file lawsuits challenging their loss of funds, the community foundations said.

“Fear of similar litigation will likely chill the exercise of the variance power by distribution committees around the country,” said the community foundations, “relegating billions of dollars of charitable assets to the icy grip of the ‘dead hand of the past.’ ”

The Council on Foundations agreed that community foundations could face “dire consequences” if Judge Preminger’s ruling is not overturned. “If parties and courts are permitted, over a quarter-century later, to question discretionary decisions made by philanthropic experts and leaders, community foundations will be stymied in their ability to make decisions that promote the interests of the communities they serve,” the council said in a brief filed with the appeals court.

The Community Service Society has its own lineup of supporters who filed briefs with the appeals court.

New York Attorney General Eliot Spitzer, who is a party to the case, said in his brief that the New York Community Trust should have notified his office in 1971 that it was using its variance power. That failure is itself reason enough for upholding Judge Preminger’s ruling, he said.

What’s more, Mr. Spitzer made it clear that he believes community foundations should always inform the Attorney General’s office when they use their variance powers so that regulators can review the decisions.

The Attorney General also argued that the six-year statute of limitations should not apply to his office when it is enforcing the law on charitable trusts.

In a friend-of-the-court brief, the National Committee for Responsive Philanthropy and the National Network of Grantmakers said that “judicial review” was necessary to prevent a community foundation’s “precipitous use” of its variance power.

In addition, the two groups said that they “strongly believe that the possibility of limited judicial review will be beneficial to the entire philanthropic community, including the community foundations themselves.”

“Although instances of judicial review will be rare, the possibility of review will focus decision-makers on rational, not arbitrary, procedures and decisions,” they added.

The Starr Foundation, which has given $2.6-million to the New York Community Trust since 1983, said in a brief that it had withheld its 1999 grant because of the pending lawsuit. Said the foundation: “There is an important public-policy interest in ensuring that funds donated to community foundations are not used for purposes other than those specified by the terms of the grant unless a variance is clearly reasonable in light of an extraordinary change in circumstances.”