Charitable Pledges

Take-Away: As we enter into the annual charitable giving season, the questions arise if a pledge to a charity is enforceable or if outstanding at the time of the pledgor’s death, if it is a deductible debt. Michigan’s law on the enforcement of charitable pledges is weak and without much guidance. The federal government has much clearer rules as to when a pledge agreement will be treated as enforceable, and thus a legitimate debt that will be considered to determine the pledgor’s taxable estate. A lingering question to those who are directors, officers and trustees of non-profit entities is whether the failure to enforce a charitable pledge could result in personal liability to the director, officer or trustee for their failure to preserve a charity’s asset.

Fiduciary Duties and Unpaid Pledges: A charity will understandably be reluctant to file a lawsuit to collect an outstanding pledge, not wanting to appear greedy or ungrateful. Balanced against that practical reaction to enforce an outstanding pledge is the fiduciary duty of the charity’s board to convert the unpaid pledge to an asset of the charity. For directors and officers of a charity, as fiduciaries, they have an obligation to act prudently to protect and preserve the charity’s assets. This duty encompasses the collection of debts owed to the charity that are legally enforceable.

Uniform Act Implications: The Uniform Prudent Management of Institutional Funds Act treats a pledge to an endowment fund as an asset of the charity. Under that Uniform Act, a charitable organization has a duty to exercise ordinary business care and prudence in governing its institutional funds. The failure to attempt to collect an endowment pledge could be seen as a violation of the Uniform Act.  Therefore, if the pledgor declines to fulfill a pledge and he or she clearly has adequate resources to fulfill the pledge, the charity has a fiduciary duty to enforce the pledge. A breach of that fiduciary duty can result in personal liability for the charity’s director or officer.

FASB Implications: According the Financial Accounting Standards Board (FASB) charities are required to record an enforceable a pledge as an ‘asset’ when the pledge is made. If a pledge is unfulfilled, the charity must write-off the unpaid amount of the pledge.

Michigan Law and Unpaid Pledges: Not much Michigan law exists on whether a charity must enforce a charitable pledge, and when that pledge actually becomes enforceable. Several different legal theories exist to enforce a charitable pledge, all of which suggest how a charitable pledge might be structured to assure its enforcement.

• Contract Theory: A pledge is nothing more than an oral or written contract where the pledgor promises to contribute a sum of money, or an asset, gratuitously. It must be more than just an expression of intent to do something in the future. In addition, it must be more than an expression of intent that is changeable at the whim of the person who makes their expression of philanthropic intent. For there to be a legally binding contract, a pledge must be supported by consideration.  Michigan’s Supreme Court has held that the ‘mutual promises between subscribers of pledges for a lawful purpose will constitute adequate consideration to support that reliance being the nature of a pledge.” In re: Upper Peninsula Development Bureau, 364 Mich 179 (1961). In that decision, the Court noted that all the pledgors had signed the same pledge agreement. Consequently, it was not necessary for the charity to prove that: (i) the contested pledge was an inducement to other donors to pledge and pay their money to the charity; or (ii) others had pledged and paid in reliance upon the defaulted pledge. In short, the fact of the charity’s reliance on the pledge was presumed, sufficient to make a binding contract.
• Promissory Estoppel: A binding charitable pledge can also be implied based upon the equitable principle of promissory estoppel. A claim based on promissory estoppel means that the charity in good faith relied upon the pledge and it thus incurred expenses, as the necessary ‘contractual’ consideration.  In re Estate of Timko, 51 Mich App 662 (1974). However, for a pledge to be enforceable upon the basis of promissory estoppel there must be a promise [by the pledgor] that is “clear and definite.” State Bank of Standish v. Curry, 442 Mich 76 (1993). If the pledgor’s promise is optional, then the pledge is unenforceable by the charity.
• Equitable Estoppel: This source of enforcement is often relied upon by courts where there is no formal pledge campaign promoted by the charity, hence there are no ‘mutual promises’ of others to support the contract theory of enforcement. The Timko decision is an example of this remedy. There, a board member of a non-profit entity made the statement, recorded in the charity’s board minutes, that if the charity purchased a building that he had negotiated, and it paid $1,000 a month for 5 years, he [the board member] would pay the unpaid mortgage balance after those five years had passed. The charity started making the monthly payments, but before the 5 years passed, the board member died. The charity then filed a claim against the decedent’s estate for the unpaid pledge. The court found the pledge enforceable because of the actual and substantial reliance by the charity when it purchased the building and then commenced paying the $1,000 a month mortgage obligation.
• Constructive Trust: Even when the elements of a contract or equitable or promissory estoppel do not exist, it is still possible for a Michigan court to impose a constructive trust. This judicial remedy is used to bring about a fair result. The constructive trust remedy was used in a situation where the decedent intended to name a charity in his Will, but he failed to do so in reliance on the promises of those who were to take under his Will that they would take their inheritance and carry out the decedent’s charitable objectives. The Michigan Supreme Court observed: “If the beneficial interest in the decedent’s property, or any part of that property, is to be diverted from his intestate successors by the imposition of a constructive trust, it is necessary, as we have seen, that his failure to so provide by Will resulted from his reliance upon the express or implied agreement with those who take by intestate succession to hold for the benefit of another.” Thurn v. McAra, 374 Mich 22 (1964). The Court has even extended the constructive trust remedy to situations where there exists no express agreement or promise made by the recipient of the pledgor’s property to turn it over to another. Kent v Klein, 352 Mich 652 (1958).

Tax Treatment of Charitable Pledges: An enforceable charitable pledge carries tax consequences. In Private Letter Ruling 9718031 (February 4, 1997) the IRS noted with regard to an unpaid charitable pledge of a decedent: “Under IRC 2053(c)(1)(d) deductible claims against the decedent’s estate, and Treasury Regulation 20.2053-5, in the case of a claim founded on a promise or agreement of the decedent to make a contribution or a gift to or for any donee that is described in IRC 2055 [the Charitable Estate Tax Deduction section] for purposes specified in IRC 2055, the deduction is limited to the extent that it would be an allowable deduction under IRC 2055 if the promise or agreement were a bequest as in a bequest exclusively for a charitable purpose.”  In that Private Letter Ruling a decedent had signed an agreement with a university in which he pledged $250,000 for the school’s building fund. The university received state appropriations for the construction of the building, subject to the university raising matching funds. Because the university was able to show its actual reliance, the decedent’s pledge was enforceable. Consequently, the unpaid pledge was a legitimate deductible expense (or debt) against the pledgor’s taxable estate.

Trends: Despite the reluctance of charities to publically sue donors, there seems to be a growing trend to collect large pledges from a deceased pledgor’s estate:

Haverford Case: Howard Marshall, II, the Texas oil tycoon, who happened to marry the late Anna Nicole Smith whose estate also generated plenty of litigation over several years, pledged millions over the years to Yale University and Haverford College. Some pledges were in writing, other pledges were made orally. On Mr. Marshall’s death it was learned that millions of dollars of pledges were unpaid. Yale decided to not pursue Mr. Marshall’s estate to force the payment of his $25 million in pledges, probably. Haverford College, not possessed of Yale’s notoriously large endowment fund, thought differently with regard to its $4.0 million pledge from Mr. Marshall. A Texas jury denied Haverford’s claim finding the pledge was not enforceable because Haverford had not substantially relied on Mr. Marshall’s total alleged pledge amount. [Anna Nicole did not fare very well either in that long, drawn out probate litigation against her octogenarian husband’s estate.] Haverford did receive about $1.2 million from one of Mr. Howard’s charitable remainder trusts, however.

Duke: Duke University filed a claim in 2016 against the estate of Aubrey McClendon, the former CEO of Chesapeake Energy Corp, for the payment of nearly $10 million in outstanding charitable pledges. The lawsuit was settled out of court.

No Proof of Charity Reliance: The Brooklyn-based institute Oholei Torah-Oholei Menachem failed to collect on a $1.8 million pledge. The court found that the organization had failed to demonstrate that it accepted the pledge by incurring liabilities in reliance on the pledge, and thus the institute had no claim to the money. Matter of Kramer, 2016 N.Y. App. Div. Lexis 4110, DDIF 36 Misc. 3d 1207(A) (Sur. Ct. Kings Co. 2012)

Estate Pledge: John’s Health Center Foundation in Santa Monica, California filed a lawsuit to collect a $5.0 million pledge that Paula Kent Meehan (Redken Hair care products founder) had given to the hospital in an ‘estate pledge commitment.’ Paula later revoked her pledge in 2013, which precipitated the lawsuit to collect on the revoked pledge. That litigation is still pending. If the pledge is enforceable, then St. Johns will have to wait until Ms. Meehan’s death, as it was an ‘estate’ pledge.

Random Questions: While charities are obviously reluctant to sue to collect a charitable pledge due to the bad publicity involved with those efforts, there does seem to be a trend growing to sue to enforce a pledge, especially when the pledged amount involved is significant. Still not very clear, however, is the liability exposure of a charity’s board of trustees, or its officers, who make a deliberate decision to not sue to collect a charitable pledge. Some questions might be the following:

Who would have legal standing to bring a lawsuit against the members of a charity’s board of trustees for the failure to collect a pledge- any member of the public served by the charity, or only the Attorney General? Last week’s reported decision in Glassic as Trustee for the James Bellamy Trust v. University of Michigan Regents, No. 344971 (November 19, 2019) seems to expand the class that may sue to enforce a charitable gift. Is it a small step to extend legal standing to other interested persons or members of the public to bring an action against a charity’s board for its failure to enforce a charitable pledge, particularly when that member of the public financially supports the charity?

Could another pledgor who fulfilled his/her pledge to the same charity sue the trustees or officers for discriminating in collecting that pledgor’s pledge, but not the pledge of another pledgor?

Could a grant made to a public charity by a large foundation be voidable if the foundation subsequently learned that the charity consciously decided to not sue to collect charitable pledges made by others, e.g. a sign of mismanagement by the charity thus jeopardizing the grant?

Do error and omission insurance policies that are put in place to protect charity board members, or charity directors and officers, cover claims brought for the failure to enforce a charitable pledge?

Conclusion: The decision to use the charity’s limited resources to pursue litigation against a pledgor to collect a pledge is a difficult one, and no doubt a decision that will always be subject to considerable ‘second-guessing.’ Those who sit on the charity’s board, or as an officer of the charity, should be prepared to document fully the formal decision to not pursue the collection of a pledge, or to distinguish why some pledges are enforced while other pledges go unenforced.