Art for Donors’ Sake

Brandeis University’s announcement last month that it will close its museum and sell its $350-million art collection to shore up the university’s finances has unsettled the nonprofit world.

Although the institution said it might reconsider the decision to sell the art, its choice to close the museum is the latest in an expanding series of public rifts between prominent charitable institutions and donors. It is inevitable that the bad economy will lead to many more challenges over the degree to which a donor’s intentions must be respected by a charity and the extent to which a charity may control and use its assets, so nonprofit institutions and donors should watch carefully and do all they can to prevent damaging controversies from erupting.

Brandeis’s Rose Art Museum holds more than 8,000 works, including contemporary-art masterpieces by Willem de Kooning and Andy Warhol, so the university attracted considerable complaints from the art world when it made its announcement. Opponents argue that the decision violates donors’ intentions in giving the pieces to the museum. What’s more, museum ethics codes have long discouraged the sale of artwork unless the proceeds are used to buy new art pieces; at many institutions, such sales are flatly prohibited.

Brandeis’s president and other top university officials say they made the difficult decision to close the museum out of economic necessity and the need to protect the university’s ability to carry out its mission to educate students. The Massachusetts attorney general’s office has announced that it will intervene and review Brandeis’s decision, which probably will include scrutinizing the agreements, wills, and other documents associated with gifts of artwork to the museum, to ascertain whether Brandeis’s plan would violate the wishes of the donors who gave the art.

The Brandeis matter follows in the footsteps of several high-profile disputes in which a donor’s intentions emerged as a source of contention between an arts institution and its donors. The National Academy Museum, in New York, has been criticized for its decision to sell two Hudson River School paintings for approximately $15-million — a decision it made because the troubled economy is threatening its survival. And the Albright-Knox Art Gallery, in Buffalo, N.Y., recently faced community outrage when it announced that it would sell several pieces of artwork as part of an attempt to bolster its contemporary-art collection. Local residents were upset to lose older pieces that were some of their favorites.

When arts organization seek to sell (or deaccession) a piece of artwork that was contributed by a donor, it could face questions about whether it is upholding its fiduciary duty to further the charitable goals of the donor. A donor could argue that, at a minimum, he or she reasonably expected that the contributed artwork would be used to further the charitable mission of the beneficiary, as opposed to being used as an investment asset. Indeed, under federal tax laws, donors who give artworks in their lifetimes can’t obtain a full charitable deduction unless the work is used to further the organization’s charitable mission.

In some instances, a donor and charitable organization may have entered into a formal agreement outlining the terms of the gift and how the organization will use artwork or other donated items. A gift agreement typically specifies the charity’s obligation in using the contributed pieces and the rights of the donor (or her heirs) to enforce the terms of the gift. In such instances, it would be problematic for the organization to sell the art pieces or other items, especially if the donor or the donor’s family objects to the transaction.

When no formal agreement accompanies a gift, the charitable organization may have a good argument that the donation was made for general purposes, in which case the charity typically will have more leeway to use (or sell) the asset for its general purposes. However, most museums have policies on the use of donated artworks, and the museum may be obliged to follow that policy if it can be established that the donor relied on that when making the gift.

In light of the Brandeis matter and similar cases, art patrons may have a greater incentive to fully document the terms of their gifts in formal agreements. Such controversies may even prompt donors to guard against attempts by museums to dispose of contributed items by including in gift agreements provisions that require the museum to use and display contributed artwork or to transfer any unused piece of art to another similar organization. In other cases, particularly those involving large and noteworthy collections, a donor may decide to contribute her collection to her own private foundation, which in turn would loan artwork to museums, eliminating the possibility that the artwork could be sold by the museum.

The disconnect that could arise between charities and donors in situations involving the use of contributed artwork is exacerbated by the current recession. But all aspects of the relationship between charities and donors are likely to suffer increased tension as nonprofit groups face new financial pressures.

For example, if a charity postpones or terminates a building project or capital campaign, what is it expected to do with money provided for the purpose? Some donors may wonder whether the money should be returned, while the charity will have an obvious incentive to argue that the funds should remain with the charity. Likewise, as charities consider revising policies regarding the use of endowments, donors may wonder what say, if any, they have in the use of money they contributed to an endowment, particularly if a charity attempts to use the principal from an endowment to pay for general operations.

To avoid such controversies, donors and charities should work to clearly articulate their expectations with respect to donations of cash, marketable securities, real property, artwork, collectibles, or anything else of value. Otherwise, nonprofit institutions may find that the erosion of trust by donors may be longer lasting and more damaging than the deep recession America now faces.

Neil T. Kawashima is a lawyer at McDermott Will & Emery, in Chicago. He often works with wealthy donors making gifts, as well as with private foundations and charities.