Donor Lawsuits Highlight Need to Tread Cautiously With Gift Agreements

Recent news reports about wealthy donors rescinding big gifts to the University of Nevada at Las Vegas and a lawsuit brought by a donor against the University of Chicago, among other examples, show it is crucial for nonprofits to be crystal clear with donors about what to expect from their contributions — and the limits of their influence.

Wealthy philanthropists have always exerted some level of control over the institutions they support, but today they appear to be pushing for more, say philanthropy experts.

What has changed? Today’s rich donors feel emboldened in part because their gifts are getting larger, says Doug White, a philanthropy consultant. Plus, the wealthy are richer than ever.

“I talk to very wealthy folks a lot nowadays, and they do tend to have a sense that, ‘I’m going to demand things,’” White says.

UNLV lost a $14 million pledge for a new building from the Engelstad Family Foundation, according to news accounts, because the grant maker’s trustees were upset that the university’s board of regents appeared to be pushing out its current president. The university was soon in danger of losing two other gifts, one for $8 million and another for $25 million, for related reasons.

In other cases, donors have sought to claw back money already given.

In February, the Pearson Family Members Foundation filed suit against the University of Chicago for $22.9 million — the amount the family has paid toward a $100 million pledge made in 2015 to establish the Pearson Institute for the Study and Resolution of Global Conflicts. The foundation’s main complaint involves the hiring of leaders and faculty at the institute.

The university insisted in a statement it had honored the gift agreement, adding, “All academic and hiring decisions are the sole purview of the University and its faculty, guided by the principle of academic freedom.”

The Chronicle spoke to several experts for guidance on how to ensure that the warm glow that comes with the first big announcement of a multimillion-dollar gift commitment doesn’t cool over time. Here are their tips.

Press donors to be specific about their expectations.

Philanthropy experts say the burden of good stewardship lies primarily with the institution receiving the gift, but donors also need to make their wishes clear.

“Generous donors should be encouraged to define the purpose of their gift that can be fulfilled faithfully, but also with flexibility,” says Douglas Eakeley, a lawyer who represented Princeton University in a 2002 case brought by the heirs of a couple who gave the university $35 million in 1961.

“Part of stewardship is understanding what that purpose is, making sure it is faithfully followed, and the steps taken to put it into effect are communicated to the donor and the donor’s family,” says Eakelely.

Getting donors to articulate clearly and upfront what they want their gift to accomplish can be tricky because even the wealthiest, most sophisticated philanthropists may not be aware of how much is involved in executing a gift, or how the nonprofit operates, says Richard Marker, a philanthropy adviser and former head of a foundation.

“Even though I tell funders it’s their responsibility to articulate what’s going to matter to them and how they want this to proceed, you can’t assume that they’ve thought that through,” says Marker. “It’s the obligation of a sophisticated nonprofit to at least ask those questions, to at least have a discussion about what’s going to matter to the donor.”

Be cautious in what you promise in exchange for a gift.

Although charities need to understand what donors want, White says they also need to be sure they are not making promises that undermine their missions or operations.

Nonprofits should assess which preferences are reasonable and which aren’t, White says. For example, it’s smart for donors to want information about how gifts are being used and to demand accountability and transparency.

However, it may be unreasonable for supporters to opine on employment decisions or items that affect the daily operations of the nonprofit, says White.

Beware of cultural clashes.

Donor expectations can be particularly complicated when a wealthy philanthropist comes from the business realm where things are often done with speed and agility.

The business world is different from academia, where decisions often have to be made through a series of people or offices, says Timothy Seiler, a faculty member at the Fund Raising School at the Indiana University Lilly Family School of Philanthropy and a former vice president of the university’s foundation.

“There’s a clear hierarchy in higher education. I’m not sure the business world always understands that, and I’m not sure the academic world is fully cognizant of how things are done in the business world, so that may contribute to where things end up going awry even with a written agreement,” says Seiler.

And of course, get it writing, and get it right.

A recent lawsuit brought by financier Bruce Bent against his alma mater, St. John’s University, illustrates the importance of gift agreements and reiterates the need for in-depth discussions between donors and nonprofits at the outset of a gift.

Bent gave the university’s endowment $500,000 in 1981, and university officials named the business school building Bent Hall to recognize the donor.

Eighteen years later, St. John’s named the business school the Peter J. Tobin College of Business for the donor who gave the business school $10 million in 1999. Bent Hall’s name, however, never changed.

Although Bent and St. John’s did not draw up a written agreement covering Bent’s gift, the donor claims in his suit that the university reneged on an oral agreement to grant Bent naming rights in perpetuity.

St. John’s spokesman, Brian Browne, says the university is indeed honoring the oral agreement since the name of the building remains Bent Hall. Browne says that Bent’s name appears in four places on the building, and the Bent Hall name appears on maps and signage throughout St. John’s campus.

It’s unclear whether Bent has much of case, but the situation shows what can happen when no written agreement exists to guide developments over time.

“Gift agreements were probably less common” 37 years ago, says Seiler. “Particularly in instances where you had a trusted, long-time donor. Back then you could take the verbal agreement to the bank, to use a terrible cliché,” he says.

Things are different today, and conversations among development leaders about the need for clear gift agreements have grown in recent years, says Seiler, partly because stories like the Pearson and Bent cases get picked up by news organizations and receive a lot of attention.

Each time one of these cases goes public, Eakeley says, it can encourage other disgruntled donors to think about bringing a suit, which is bad for both the donor and the beneficiary. Nonprofits should do everything they can to avoid legal battles, says Marker.

“Sometimes you have unreasonable funders. There’s no question that sometimes happens,” says Marker. However, he adds, usually lawsuits happen “because something wasn’t talked about up front.”