A recent New York Times story detailed serious governance problems at the Thoroughbred Retirement Foundation, a charitable entity funded by prominent philanthropists, including a $5 million endowment from the Paul Mellon estate, which later added another $2 million.
Other organizations favored by donors, notably National Public Radio and Planned Parenthood, have been the subject of embarrassing incidents that may have raised questions in some donors’ minds about their leadership and practices. Overseas, Mohammad Yunus was accused of using Bangladesh’s Grameen Bank, a pioneer in microlending, for personal gain and forced to retire as its head despite indications that political infighting lay behind the charges. Moreover, organizations in some countries engaged in microlending have come under attack for usurious lending practices.
These situations raise a question: What recourse do donors have when they think a recipient organization has gone off the rails?
Many ways exist for a donor to control a gift, according to David Leibell, a partner at the law firm Wiggin and Dana. The least control comes from an unrestricted gift, which means the charity can basically do whatever it wants with the gift within its charitable purposes. Other gifts such as an endowment may be restricted as to use—scholarships, say—or how much can be spent—income from the endowment or whatever organization’s spending policy is, usually 4.5% a year.
Leibell, whose practice focuses on business succession and charitable planning,says that many times donors use a charity’s form or rely on a very simple instrument such as a pledge agreement or a restricted gift agreement to set up a gift rather than work with an expert. Later, they may find that if something goes wrong, they do not have standing to enforce the terms of a restricted gift.
When a gift is restricted, and that is put in writing, the focus turns to what a donor can do to enforce the terms if the recipient organization does not use the gift for the intended purpose or misuses it.
Leibell says that in most states, unless the donor retains some kind of enforcement mechanism in the instrument, “which is typically not the case,” he or she has no standing in court. “The court wouldn’t recognize them as a plaintiff because only the attorney general in most states has standing to enforce the terms of a restricted charitable gift.” There are exceptions, however.
“If Connecticut is among the most conservative with respect to not giving donors standing, which is the general rule, New York is the most liberal, and has in many cases given donors of restricted charitable gifts the ability to enforce the terms on their own or with the attorney