VA Supreme Court Ruling in Sweet Briar Case Important for Donor Restrictions

The board of Sweet Briar College wants to close the institution in August this year. This has become quite an emotional decision in the state of Virginia. It has also raised a number of issues relative to donor-restricted funds contributed to charitable organizations. On June 9, 2015, the full bench of the Virginia Supreme Court commented on briefs and arguments of opposing counsel, and those comments are significant for donors and charitable institutions alike. This is a very serious issue.

Regular readers of the Gift Adviser will recall that there are multiple ways to donate to charity. Donors can provide either unrestricted financial support or restricted financial support. Unrestricted support may be used by the charity for any purpose consistent with the organization’s charitable mission. Restricted support is provided by the donor and accepted by the charity for use in a specific manner. This post is primarily about the various issues that arise in donor-restricted contributions, and I have been following the Sweet Briar College case because restricted giving is at the heart of the issue.

In addition to the two different types of support, donors also have the option of giving directly to the charitable institution or to a charitable trust whose beneficiary is the charitable institution. Most charitable organizations are organized as charitable not-for-profit corporations operating within a corporate structure with powers given it by a state nonprofit corporation statute. A charitable trust, on the other hand, is governed by the trust instrument. In general, a charitable trust is more restrictive and gives trustees little room to stray from the donor’s intentions. Trustees generally must obtain permission from both the state attorney general and a court to make changes to the original terms of the trust. Corporations, on the other hand, operate in accordance with general good business practices and much less government oversight.

Sweet Briar College is a unique charitable institution in that it was created under the terms of the will of an individual. Indiana Fletcher Williams left her real estate and financial estate in trust for the purpose of operating a women’s college. The original trustees created Sweet Briar College as a Virginia non-stock, not-for-profit corporation to carry out the purpose of her will. The college has operated this way for over 100 years. When the current governing board decided to close the institution, it did not consult with the Virginia attorney general or with any Virginia court. The board believes it has made a business decision that is within its corporate rights and powers as the governing board.

I, along with many others, questioned this decision. According to review of Ms. Williams’ will, it appears that she made a gift in perpetuity that I believe cannot be undone according to the principles of normal corporate law. The governing board has argued that Sweet Briar, as a corporation, is not governed by trust law. The Virginia attorney general has curiously stayed out of this case. However, legal action has been filed by the county attorney on behalf of the citizens of Virginia. The Virginia attorney general did offer his opinion that the county attorney did not have legal standing in the case. How does the AG decide not to do his job and then also opine that the county attorney cannot take up the cause? Who does he think is protecting the citizens of his state? Hopefully, this case will significantly diminish the political future of this man.

The county attorney filed a motion in a Virginia circuit court seeking a temporary injunction against further closing actions by the college. The circuit court granted the motion in part and denied it in part. The county attorney appealed the decision to the Virginia Supreme Court. The circuit court’s action were predicated, at least in part, upon the legal conclusion that the law of trusts cannot apply to a corporation. This is significant to all of those donors who chose to give donor-restricted gifts directly to a charitable corporation rather than to a charitable trust. If it is true that the law of trusts does not apply to a corporation, then holding a charity to compliance with the donor restrictions becomes much more difficult.

The Virginia Supreme Court concluded that this legal decision was erroneous; “The law of trusts can apply to a corporation.” The court then cited other rulings on which it based its decision. These other courts noted that a trust is not a separate legal entity but a fiduciary relationship between the parties; that a corporation has the same capacity to take and hold property in trust as any individual and to administer trust property and act as a trustee; and that the charitable, nonprofit, or non-stock status of a corporation does not alter this legal principle. As I said, this is a good decision for restricted-fund donors everywhere.

Although the circuit court judge ruled in favor of the legal standing of the county attorney, that issue was again raised at the Supreme Court, which decided not to rule on the issue. I am not sure what this means other than that with litigators, an argument is never really over. And, this case is far from over.

Of course, the real problem here is that in spite of the court actions, many Sweet Briar faculty have found jobs at other institutions for next year. Undergraduates have made plans to attend other colleges. The ability of the college to continue as if this decision to close never happened is questionable. The college finds itself in this situation because the governing board may not have understood itse fiduciary obligation to the Williams Trust.

Members of the governing board who have made this decision are probably immune from prosecution. But the lawyers who advised them likely have deep pockets and malpractice insurance, and the Saving Sweet Briar people should start looking in that direction to find the funds to get the college back on its operational feet.