Seeking Control in Court

Disgruntled donors sue over use of their gifts

The question of how much influence donors or their families can exercise over their donations after the gifts

have been made lies at the heart of a handful of high-profile lawsuits now pending in courts around the country.

The lawsuits — in California, Illinois, New Jersey, and New York — underline tensions that can arise over restrictions imposed by donors. They also suggest that donors may be making significant headway in persuading courts to grant them legal authority to enforce those restrictions — a development that could force many more groups to spend increased time and money defending themselves in legal battles.

In what may prove to be a landmark case, a donor’s widow is suing St. Luke’s-Roosevelt Hospital Center, in Manhattan, to enforce the terms of a $10-million gift. New York is one of many states that have traditionally given only their attorneys general the power to sue a nonprofit group under such circumstances.

But a state appeals court last year cleared the way for the woman to proceed with her case, saying in its decision: “The donor of a charitable gift is in a better position than the Attorney General to be vigilant and, if he or she is so inclined, to enforce his or her own intent.” The trial is expected to begin next summer.

Idea Might Spread

Even though the appeals court’s ruling applies only in New York, nonprofit legal observers say the case could open the door for donors in other states to take their grievances to court, a development many charities fear would expose them to a spate of lawsuits from disgruntled donors.

“New York is home for probating some of the most important estates in the country, and lots of other states look to New York for guidance,” says Frank J. Serbaroli, a New York lawyer with extensive experience representing health-care institutions. “Courts in other states may say it’s a good idea to deputize interested parties to keep monitoring how the moneys are used, because no attorney general in the country can monitor how gifts are used on his or her own.”

If such a view proves correct, nonprofit institutions could see a rise in cases like the following, which are currently being pursued in court:

• In California, Paul F. Glenn is asking a state court to order the University of Southern California to transfer his gift of a $1.6-million endowed chair in geriatric biology to another institution. Mr. Glenn contends that the university used the money from his gift for other purposes, including paying scientists who should not have been eligible for the money under the terms of Mr. Glenn’s gift. The university has denied any wrongdoing.
• In Illinois, the family members of John G. Searle, a pharmaceuticals tycoon, have engaged in a legal battle with the Chicago Community Trust over control of the $300-million Searle Fund, established in 1967 by Mr. Searle and activated after his death in 1978. His fund, like other donor-advised funds, permits people he appointed to make recommendations about how money in the fund should be distributed. Searle family members contend that the Chicago Community Trust has virtually stopped seeking or honoring the family’s advice on making grants from the fund, and that it may also have been charging unreasonable administrative fees. The Chicago Community Trust has denied the charges and has filed a countersuit to free up nearly $40-million it says it owes grantees for 2001 and 2002.
• In New Jersey, Princeton University is fighting an attempt by members of a donor couple’s family to take back a $560-million endowment that provides 75 percent of the annual operating budget of Princeton’s Woodrow Wilson School of Public and International Affairs. Charles S. Robertson and Marie H. Robertson donated about $35-million in stock in 1961 to establish the Robertson Foundation as a “support organization” to train Princeton graduate students for careers in government service, particularly in international affairs. (A support organization receives more favorable tax treatment than does a private foundation, but has much less discretion about which groups it can support.)

Says William S. Robertson, a son of the donors and a foundation board member: “Princeton ruled the foundation by fiat. Their attitude was, ‘We will do what we want and will tell you later what we have done.’” Princeton denies that it has been an unfaithful steward of the foundation.

Law Unclear

The Robertson descendants are able to sue Princeton because New Jersey is one of only a few states that have granted the right to sue to donors or their representatives. In other states, including California and Illinois, the issue is less clear because few court cases have been tried to settle the matter.

“Historically, donors had no rights to anything,” says Daniel L. Kurtz, a former New York charity regulator who is now in private practice. “Once a gift was completed, a donor would not have standing” to enforce the terms of his gift, even if it were subsequently used in a manner at variance with his stated wishes.

“The law is pretty well settled in most jurisdictions: When you make a gift, whether restricted or otherwise, you have completed a transfer of property rights,” Mr. Kurtz says. Property is a bundle of rights, he says, and although donors can contractually retain the right to enforce provisions of their gifts, the more such rights they retain, the less likely the Internal Revenue Service is to determine that they have transferred enough of their rights to constitute a gift that would qualify for a charitable tax deduction.

New York Appeal

The New York case, which was filed by Adele Smithers-Fornaci, has chipped away at the view that only attorneys general should be able to seek legal recourse to enforce the terms of donations.

Mrs. Smithers-Fornaci (who remarried in 1999) had herself named administrator of the estate of her first husband, R. Brinkley Smithers, solely so she could sue to enforce the terms of a $10-million gift, paid in installments from 1971 to 1983, to support the Smithers Alcoholism Treatment and Training Center.

St. Luke’s-Roosevelt Hospital Center, she contends, violated the terms of her husband’s gift by, among other things, selling the Art Deco townhouse on East 93rd Street where the treatment center was first housed and seeking to place the bulk of the $15-million proceeds into its general fund.

After Mr. Smithers’s death in 1994, Mrs. Smithers-Fornaci discovered that the hospital had used restricted assets from the Smithers Endowment Fund for expenses unrelated to alcoholism treatment. She notified the attorney general, who demanded return of the money, and the hospital gave back nearly $5-million to the endowment fund in 1995.

Upon further negotiation, the hospital and the attorney general reached an agreement in 1998, under which the hospital agreed to return to the endowment fund $1-million from the proceeds of any sale of the building. But Mrs. Smithers-Fornaci objected to those terms, and sued both the hospital and the attorney general. Those defendants argued that Mrs. Smithers-Fornaci had no legal right to bring suit, and a lower court judge agreed.

But an appellate court reversed that finding and ordered that proceeds from the building’s sale be held in escrow pending the outcome of the trial.

The appeals court pointed out that the attorney general only found out from Mrs. Smithers-Fornaci about the hospital’s misappropriation of the endowment funds, and of its decision to close the in-hospital detoxification unit that the Smithers gift was intended to support. “It was only Mrs. Smithers’s vigilance that brought this to light,” the court said, “since apparently the Attorney General had no procedure in place by which to insure compliance by the donee.”

Paul R. Levenson, a lawyer for Mrs. Smithers-Fornaci, calls the lawsuit “an important case because it strengthens the rights of donors and their estates to make sure the terms of their gifts are honored.”

Mrs. Smithers-Fornaci, who has already spent several hundred thousand dollars on the litigation, hopes her effort will smooth the path for other donors and their representatives who feel their gifts have been misused. “It will afford families the opportunity to be able to go forward and have standing without going through the expense” of a protracted legal battle, she says of the court’s ruling. “Going through a lawsuit can be an extremely wearing experience.”

Charities Fear Consequences

Some observers, however, say the appellate court’s decision bodes ill for charities.

“It will result undoubtedly in a loss of resources for charitable purposes,” says the hospital’s lawyer, Edward S. Kornreich, “because more time will have to be spent placating or litigating with donors who may not always be acting in a consistent fashion and may not have the broad interests of the charitable beneficiaries at heart.”

Richard C. Allen, a Boston lawyer who formerly ran the public-charities division in the office of the Massachusetts attorney general, says the reason states have tended to limit the rights of donors to sue charities is “to protect charities from having to devote their resources and time to defending what could be extensive amounts of litigation.”

Mr. Allen says that attorneys general might resist the loss of their exclusive jurisdiction should other courts follow New York’s lead. “There probably would be a concern that opening this up would impose a cost on charity in terms of a floodgate problem,” he says, compelling organizations to divert resources from their missions to defend lawsuits.

What’s more, attorneys general would no longer be in control of decisions about which cases most merit their attention, he says, but would have to weigh in on suits brought by donors or their representatives, even if they deemed them less important.

Donor Assurances

Others, however, say nonprofit groups benefit when donors feel assured that their money will be well spent. This includes making sure donors have the right to go to court should problems arise. Without such protections in place, they say, charities may lose out on some big donations.

William Robertson, who is one of the parties in the lawsuit against Princeton, says his father set up a supporting organization instead of giving money directly to the university precisely out of concern that his donation over time might be used for purposes unrelated to his wishes.

“He was suspicious of the intentions and motives of every institution,” says Mr. Robertson, “because of this history of institutions simply applying funds to uses which were not sought or approved by the donor.”