Article Archives >> Lead Stories >> November 1-30, 2009

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Court Rejects UTC Rule
For Gift to Corporation
Executors lack standing to challenge
use of gift to charitable corporation

An appellate court in Missouri has held that executors of an estate have no standing to challenge the use of their gift to a charitable corporation and has refused to extend the more liberal standing rules of the Uniform Trust Code to give them the right to challenge the nonprofit’s use of their grant.  (Hardt v. Vitae Foundation, Ct. of App., MO, West. Dist., Divl. Three, No. WD70525, 11/10/09.)

Edwin and Karl Hardt, as executors of the estate of Selma Hartke, made two gifts to the Vitae Foundation to support the pro-life cause.  In March, 2001, they gave $4.2 million to be used as a 50/50 matching gift to develop an advertising program in various major market areas around the country.  The Foundation acknowledged receipt of the gift and agreement “to the terms and conditions.”

In November, 2002, they gave another $4 million from the estate, $3 million to be used as additional matching grants for media campaigns and $1 million for development of a website aimed at teenagers.

In August 2003, the Foundation told the executors’ counsel that some portions of the grant were not being used as the executors had wished, but were being expended for administrative expenses, including significant new staff hires.  In 2004, the executors learned that the Foundation had adopted a “radically different” development strategy and that little of the funds had been used for media advertising.  They asked for an accounting, and when dissatisfied with the use of the funds, filed a petition in 2008 for an additional accounting, restoration of the gift, and an injunction to prevent further expenditures inconsistent with the gift, or in the alternative a transfer to another organization of their choosing.

A trial court dismissed the petition for lack of standing and the Court of Appeals has affirmed.

The Court of Appeals noted that at common law, only the Attorney General had standing to enforce the terms of a charitable gift to either a charitable trust or a charitable corporation.  There is an exception where the donor has specifically made the gift “subject to a condition subsequent,” but the parties agreed that this exception did not apply here.

The Hardts claimed that the Court should adopt the rule of the recently enacted Uniform Trust Code, which specifically gives a donor the right to enforce the terms of a trust.  They recognized that the UTC did not apply directly to corporations, but argued that the rule should be applied since many of the rules for charitable trusts also apply to charitable organizations. 

But the Court said that the language of the UTC was unambiguous and was limited to charitable trusts.  The Court said it “lacks the authority to apply common law precedents to construe the legislation in a manner that is inconsistent with the express language” of the statute.

The Court also noted that Missouri had recently adopted the Uniform Prudent Management of Institutional Funds Act (See Ready Reference Page: “New UPMIFA Sets Rules for Management of Charitable Funds.”) which applies to both charitable trusts and charitable corporations, but “it does not expressly grant the donor standing to enforce” the donor’s intent as the UTC does.  “On the contrary, the prefatory note explicitly acknowledges that the Attorney General continues to be the protector both of the donor’s intent and of the public’s interest in charitable funds.”

The Court also rejected the argument that standing should be expanded as a matter of public policy, citing the case in New York state allowing a donor’s executor to challenge use of funds at St. Luke’s-Roosevelt Hospital. (See Nonprofit Issues®, April/May, 2001.)  In that case, the Attorney General had failed to seek enforcement of the conditions.  In this case, there was no indication that the Attorney General had even been advised of the issue.

The Court also rejected the application of the cy pres doctrine.

YOU NEED TO KNOW

The Court does not discuss the Foundation’s acceptance of the “terms and conditions” of the gift.   Normally, as a matter of contract, a donor may establish the terms and conditions of a gift and retain the right to enforce those terms. It isn’t clear why the letter referred to in the opinion did not satisfy those requirements.

Article Archives >> Lead Stories >> November 1-30, 2009