Revealed in the Sweet Briar Mess: Basic Truths About Nonprofits and Restricted Gifts

This week, the Virginia attorney general asked Sweet Briar College and the "Save Sweet Briar" people to come together to talk and see if they could settle their differences. Attorney General Mark Herring is hoping that the two sides can reach a compromise and find a solution.

Personally, I find this outrageous. The college’s board is trying to close the college and do who knows what with the assets, while the opposing side wants to keep the college open but with different leadership. What sort of compromise does AG Herring have in mind? Does he think there is a middle ground here?

As I have pointed out in the past, the Virginia AG is the responsible party that determines if tax-exempt charities are doing the right thing. The AG has the authority to investigate, seek the truth, and then protect the public interest. This means that if closure is in the public interest, the AG must approve a plan of liquidation to make sure that all of the assets end up continuing to serve the Virginia public. If closure is not in the public interest, then the AG must liquidate the current board and install others whose actions will be consistent with the public good. Do you see a compromise solution here? I sure do not.

Do politicians ever read their job descriptions?

The other interesting event that occurred at the beginning of May was the college requesting injunctive relief against the sale of assets. A number of lawsuits have been filed against the college’s closure plan; the courts realize that closure may be just a formality for an institution that has been decimated piecemeal. Thus, the injunction preventing the sale of assets.

On May 2, 2015, the college asked permission to sell some assets that they claimed were costing money to hold. (Doesn’t that apply to almost all the assets?) They picked some very specific assets—horses and toxic chemicals, indicating that the former required feeding and specific employees to care for them and the chemicals likewise would need to be disposed of prior to the termination of the employees with those skills. What is clear from the college’s request is that it is planning to proceed with the staff termination phase of the closure regardless of the injunctions. Apparently, they do not view employees as “human resources” and assets of the institution, which I believe were also covered by the freeze.

Elliott Schuchardt, the attorney for Campbell et al, the suit against the college, wrote a great letter on May 4 relative to the situation. In his letter, he correctly points out that the college is legally required to comply with the restrictive covenants of its existence until it obtains a court order granting relief from those covenants. These restrictive covenants go all the way back to the incorporation of the college in 1901. This is the basic foundation of the restricted gift to charity—only the courts can make changes.

In addition, Schuchardt points out that modification of a gift’s restrictive covenants must also be made by a judge. Repurposing a restricted gift is very difficult and can easily backfire, as I've previously written. The Sweet Briar board has not yet begun the formal process of repurposing gifts, although numerous donors have come forward questioning the spending of funds they have given to the college. Is the college complying with the law?

In regard to the endowment, Schuchardt mentions the UPMIFA law, which I've written about here, and noted that President Jones, while serving at Trinity College in Connecticut, was found to have illegally diverted close to $200,000 from a restricted endowment. The Connecticut AG ordered Trinity to restore the money to the endowment. Obviously, Jones is an executive who may not understand the very complex UPMIFA law of endowments.

Would the Sweet Briar auditors have noted the failure to comply with UPMIFA? This is a reasonable question and the Sweet Briar board might be quick to point to clean audit reports as proof of UPMIFA compliance. However, auditors are not lawyers and they generally do not examine compliance with laws. Rather, auditors simply ask management if they are in compliance with all laws and regulations and inquire as to the basis for their answer.

Schuchardt ends his letter indicating that he anticipates that Virginia’s attorney general will enforce Virginia state law in the near future. Good luck with that!