Court Says New York Community Trust Was Wrong to Redirect Earmarked Money

A New York state court has ruled that one of the country’s oldest and largest community foundations overstepped its authority 28 years ago when it redirected money earmarked for a specific charity to other causes.

The decision marks a significant step in a long-running case that has been closely followed by community foundations around the country. The court ruling is believed to be the first in the nation to define a community foundation’s power to alter a donor’s instructions. But the decision is expected to be appealed, meaning that a final verdict may be years away.

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

Surrogate Court Judge Eve Preminger sided with the Community Service Society. The judge said she recognized that community foundations have special authority, often referred to as variance power, to make changes to a donor’s instructions. Such power, she said, goes beyond a determination that it is no longer possible, practical, or necessary to make a donation; the power can be exercised merely because a donation has become “undesirable” due to a change in circumstances.

But Judge Preminger concluded that the New York Community Trust failed to establish a compelling reason for redirecting the money from the Community Service Society. She said the community foundation had a responsibility to identify “negative details” that made it necessary to exercise its variance power.

The New York Community Trust had argued that its decision was justified because a newspaper article and other materials it obtained had led it to believe that the Community Service Society was changing its approach to helping the poor by working more with other charities and providing fewer direct services.

The New York Community Trust did not elaborate on its concerns about that potential change, according to Judge Preminger’s decision, but said only that the possibility of a new direction had prompted the community foundation’s distribution committee to decide in 1971 to redirect money from the six funds to other causes.

But Judge Preminger said that “uncertainty about future developments” at a charity was insufficient reason to invoke the variance power.

The exact dollar figures at stake in the dispute are unclear, but millions of dollars could be involved. Judge Preminger has ordered the New York Community Trust to provide a full accounting of the six funds within 120 days.

David R. Jones, president of the Community Service Society, said an accounting firm he hired several years ago had estimated that some $5-million might be owed the society in payments that had been sent elsewhere over the past 10 years, the time period covered by the lawsuit. An additional $500,000 in annual donations, he said, could be generated by the six trusts in future years.

“This decision comes at a particularly important time for us,” said Mr. Jones. “In New York we’ve had no movement of people out of poverty because of the economic good times. So these moneys are going to serve the poor of the City of New York, just as intended by the testators who created these trusts.”

New York Community Trust officials, however, were confident that Judge Preminger’s decision would ultimately be reversed. Ani F. Hurwitz, a senior official at the foundation, called the decision “perplexing,” adding that the trust planned to file “an immediate appeal.”

The six trusts involved in the case date back to 1929. The original donors included Laura Spelman Rockefeller, wife of the oil magnate John D. Rockefeller, and Linda A. Griffith, wife of the film maker D. W. Griffith.

Some observers said that Judge Preminger’s opinion sends a mixed message to the more than 500 community foundations that now exist in the United States. Community foundations rarely exercise their authority to make changes to a donor’s requests, they said.

Community foundations have “kind of thought they had pretty broad discretion,” said Christopher Hoyt, a University of Missouri at Kansas City law professor and the author of The Legal Compendium for Community Foundations. “But we’re seeing that there are some limits to their interpretation.”

In her opinion, Judge Preminger emphasized the need for community foundations to have “flexibility to redeploy ineffectively allocated charitable assets in situations other than those where the identified charitable purpose is literally impossible or impractical.”

But Judge Preminger said that the court had a role in insuring that community foundations balance such flexibility against “a change of circumstances that negatively affects the designated charity to such a degree that it would be likely to prompt a donor of the fund to re-direct it.”