Mixed Emotions over Sweet Briar Mediated Settlement

Congratulations to the Sweet Briar Community for fighting the good fight and keeping their college open for at least another year, and probably indefinitely. The most important part of the victory is the removal of the current board, which acted inappropriately and possibly illegally in attempting to close the college this August. However, I have mixed emotions over the mediated settlement that brings us to this point.

As regular readers of this blog know, my forte is restricted donations, and when I first wrote about the Sweet Briar closing, I questioned whether the board was going about this closure in a manner that was in compliance with the law. Gifts in perpetuity cannot be undone as easily as the Sweet Briar board and their legal advisors envisioned.

A lawsuit was quickly filed on behalf of the Commonwealth of Virginia by a Virginia county attorney. This lawsuit appeared to have all of the correct ingredients, except for the fact that it was not filed by the Virginia attorney general, the individual whose responsibility it is to enforce laws and protect the citizens of the commonwealth. The Virginia AG eventually did get involved in the case by questioning the legal standing of the County Attorney! The AG filed a friend-of-the-court brief in which he argued that the general assembly grants only the attorney general the authority to determine when it is necessary to protect the public interest. Apparently, he did not believe that the closure of a charitable nonprofit organization in his state had any potential public interest issues.

The lawsuit went forward, and concurrently, the AG asked the parties to get together and try to compromise on their differences. Of course, what is the compromise between one party wanting to close the college and the other party wanting to keep it open?

The Virginia circuit court recognized the legal standing of the county attorney, but issued a mixed ruling that was immediately appealed to the Virginia Supreme Court. The circuit court’s actions were predicated, at least in part, upon the legal conclusion that the law of trusts cannot apply to a corporation. The Virginia Supreme Court said that this was an error and cited other rulings on which it based its decision. The law of trusts did apply to the college corporation and the board was not in compliance with the law in its attempt to close the institution in the manner in which it was going about it. In my mind, when your actions are not in compliance with the law, your actions are against the law. Right?

The case was sent back to the circuit court. It never got there, as the parties agreed to the settlement mediated by the AG.

An out-of-court settlement, including a court-approved settlement such as this one, is basically a contractual agreement in which each side drops its original action and agrees to a new action. In this case, the board stops its attempt to close the college and the county attorney and others drop their various lawsuits in opposition to the closing.

The potentially unintended consequence of a settlement is that neither side in the dispute is found to be in the wrong. Neither side is found to have broken the law or acted in a manner contrary to the law. Lacking such “guilt,” can there be financial consequences to any of the actions prior to the settlement?  In this case, there are significant financial consequences. This fact is without question, since the group Saving Sweet Briar, Inc. must provide $12 million to the college and the Virginia AG will take actions to release $16 million from the college’s restricted endowment fund. And the parties recognize that this is an amount that will be sufficient “to operate the college for (only) the next academic year.” 

Depending on how many of Sweet Briar’s students reverse their actions and come back to enroll in September, getting through the next year may only be one-fourth of the challenge ahead.

The Virginia Supreme Court made it clear that the principles of trust law do apply to the gift instrument that created Sweet Briar College. This was a good affirmation of a basic principle governing restricted donations to charitable organizations, but it was not a groundbreaking decision. The court quoted many other cases that reached the same conclusion. The Sweet Briar board and their legal advisors should have known the law. But they broke the law; they attempted to close the college without going through the appropriate channels. Their illegal actions have caused the institution significant financial harm—at least $28 million, and possibly over $100 million.

Does the mediated settlement negate the potential for the college to proceed against the parties causing this financial damage? Is this why the college’s board and their financial advisors threw in the towel so quickly after the Virginia Supreme Court decision? Prior to the court’s decision, the college’s board rejected the idea of resigning; they rejected the $12 million offered by Saving Sweet Briar, Inc.

And what are we to make of the Virginia attorney general’s actions? He never involved himself in this case; his office never sought to enforce the law; he filed a position paper against his own county attorney; and then he mediated a settlement that may have saved the college’s legal advisors millions in damages. Also recall that the settlement may be insufficient to save the college, especially as it uses $16 million of previously restricted endowment for a purpose other than its original restricted purpose. This weakens an endowment that many said was already insufficient.

The rumor is that the AG has his eye on the governor’s mansion—Saving Sweet Briar, Inc. may need to re-brand themselves as Saving Virginia, Inc., should he go in that direction. Someone needs to save the commonwealth from this politician.

I sincerely hope that all of the faculty and students return to Sweet Briar this fall and that the actions of the Sweet Briar alumni encourage applications and transfers-in to triple. This apparently is a special place, and I wish them all the luck and success in the future—in perpetuity!