Article Archives >> Lead Stories >> May 1-16, 2004

Grantmaker May Rescind Commitment
When Grantee Fails to Meet Conditions
Disgruntled beneficiary has no standing to seek
removal of trustee or stoppage of alternate project

A disgruntled grantee, which was denied a major grant when it failed to raise matching funds, has lost an effort to force foundation trustees to make the grant. And despite success in the trial court in its effort to stop the foundation from funding a competing project, the Supreme Court of Iowa has said the grantee has no standing to question the internal management of the foundation. (In the Matter of the Clement Trust, No. 130 / 01-2035, 4/7/04.)

The Clement Charitable Trust was established in 1982 to sponsor programs for senior citizens in several counties of Iowa. The donor’s attorney and niece were the two trustees.

They decided to fund the construction and operation of senior centers which met certain criteria, including certain goals for physical layout and the obligation to raise matching money for the project. In 1995, the trust agreed to grant $50,000 to a newly formed nonprofit to construct a new senior center if it raised $100,000. When the group failed to provide satisfactory plans and failed to meet the matching funds deadline, the foundation revoked the grant, although it said the group could reapply.

After additional correspondence the trustees told the group that their request was denied and that the foundation intended to construct its own senior center in the same town. The group sued, without the assistance of the attorney general, claiming that the trustees had unreasonably exercised their discretion under the trust and that the attorney-trustee’s efforts to “micro-manage” the plans for the community center went “well beyond the reasonable activities of a trustee.”

The trial court found that the trustees had acted reasonably in rejecting the request for funding, but had abused their discretion in spending funds to build a separate center. It recognized that the attorney trustee might have been “over-zealous” in his conduct, but declined to remove him from his position.

On appeal, the Supreme Court focused first on the question of standing. It cited the state law which provides that only the creator of the trust, a trustee, the attorney general or “other person with a special interest in the trust” has standing to participate in a suit involving the trust. The purpose is to allow a trust to “proceed expeditiously and free of judicial intervention” except in limited situations.

The Attorney General is the only person with standing to enforce “an interest shared by other members of the public” and the fact that a person is a possible beneficiary is insufficient to confer standing.

The Supreme Court concluded that the nonprofit had standing not because of its purported ability to represent the senior citizens of the town, but rather “from the trustees’ formal decision to contribute trust funds” to its building project. “As a consequence of this commitment, notwithstanding that it was subject to conditions, [the nonprofit] became more than a possible beneficiary of the trust; it acquired a special interest in seeing that the trustees lived up to their promise… [It had] standing to vindicate this interest, and only this interest in this lawsuit.”

The Court dismissed the nonprofit’s claims about the trustee’s micromanagement and the grant to its own project. It considered only whether the trustees had abused their discretion in revoking the grant after the conditions were not met.

The Court said the trust gave the trustees the discretion to select the specific beneficiaries and that it would not interfere with the administration of a trust “based simply on a difference in judgment with respect to what should be done and who in particular should benefit from the trust.”

It concluded that the trustees did not abuse their discretion in establishing criteria for its grants or for refusing the grant when the conditions were not met.

YOU NEED TO KNOW

It is rare that a foundation is sued for failing to make a grant or for revoking one. Interestingly this case was not brought on the theory of breach of contract, since the disgruntled grantee apparently recognized that it had failed to meet the contractual conditions. Its abuse of discretion theory probably had a slightly better chance where the grantmaker was a trustee rather than a corporation. But in either case, without the Attorney General’s leadership, it is very difficult to prove that trustees or directors have abused their discretion. In addition to being impolitic if the organization ever wants to apply for a grant again, it is most likely a waste of time and money.

Article Archives >> Lead Stories >> May 1-16, 2004