Interesting Lessons from Sweet Briar College Lawsuit

The Amherst County Attorney has filed suit against Sweet Briar College as a result of its March 3, 2015 announcement and plan to close at the end of the current term. Background on this situation can be found in my previous post on Sweet Briar. Here, I examine the actual lawsuit, noting many factors that are critical to an understanding of restricted giving, endowment management, and nonprofit governance. 

The lawsuit seeks an injunction because the proposed closing of the college is “unlawful.” In addition, the suit seeks to enjoin the college from using funds raised by charitable solicitations for purposes other than the solicited purposes or the general purposes of the college. As discussed in one of my early posts, when an institution solicits a gift for a specific purpose, that gift is a restricted gift even if the donor’s gift instrument does not read like a restricted gift instrument. The other interesting point that the suit emphasizes is that all gifts to a charitable institution are somewhat restricted since the donated funds must be used within the organization’s tax-exempt mission.

The plaintiff in this action is the Commonwealth of Virginia. Nonprofit organizations do not have stockholders as public companies have. When a public company does something wrong, it is the stockholders who seek relief in the courts. A nonprofit organization is a legal entity that serves the public in general, and specifically the citizens of the state in which it is incorporated or otherwise established. Therefore, it is the citizens of Virginia who are seeking relief from the courts for the unlawful actions of the board of the college.

Nonprofit organizations are exempt from income and other taxes. This increases the tax burden on the part of other citizens. Therefore, it is entirely logical to think of the citizens who have awarded tax exemptions as being most interested in the actions of the nonprofit benefiting from tax-exempt status. Thus, the Commonwealth of Virginia is the appropriate plaintiff in this lawsuit. Every citizen should realize that they are an interested party in the actions of tax-exempt entities. Every citizen is directly paying for some of the operations of the tax-exempt entity and they have a right to expect appropriate management and a duty to demand appropriate performance from tax-exempt entities designed to serve the public good.

The lawsuit notes that in addition to being a charitable organization with obligations to the citizens, the college is also a testamentary trustee since it was created by the will of Indiana Fletcher Williams. Therefore, the college must operate in accordance with trust law as well as state laws governing charitable organizations.  Any charitable organization that has accepted permanently restricted endowment contributions becomes a trustee of that contribution, thereby expanding the laws under which it must operate. Although states’ attorneys general have not enforced trust law in regard to endowment gifts, the UPMIFA laws are clear on the obligations of institutions who have accepted permanently restricted endowment type gifts.

In summary, this lawsuit demonstrates some interesting fundamental facts concerning nonprofit charitable organizations:

 

  • Charitable organizations “belong” to the citizens and it is the duty of the state to monitor and enforce the laws established to assure that these organizations operate for the public good.
  • Endowment-type gifts—donor restricted gifts in perpetuity—establish a trust relationship and impose a set of operating obligations on the recipient organization that is in addition to the general charitable organization laws of the state.
  • Restricted gifts, including specific purpose gifts solicited by the organization, must be used in accordance with the specified restrictions.