Aubrey McClendon graduated from Duke University in 1981 and was the co-founder of Chesapeake Energy Corp. Mr. McClendon became wealthy as a Colorado wildcatter in the oil industry, and he and his wife (also a Duke alum) provided significant financial support to Duke over the years. Unfortunately, McClendon died suddenly in a car crash in March and left behind a complex estate including a large number of assets (investments in almost 200 companies) and liabilities (hundreds of millions of dollars of loans and other creditors), one of which was his financial pledge commitment to Duke.
The university has faced a good deal of negative publicity over its filing of a court claim for its pledge receivable. Doug White, the former head of the nonprofit management program at Columbia University indicated that pursuing the pledge could make the university look bad. He believes that suing a donor is not a positive action and could negatively affect relations with other donors. Richard Marker, a philanthropy professor at the University of Pennsylvania said Duke could face public relations issues by making such a claim.
But what about the university’s obligation to collect a pledge? In a series of posts I wrote about the enforceability of pledged donations, I've noted that there may be a legal and fiduciary requirement to pursue pledge collections, as Duke is doing.
It should also be noted that Duke initially received a request from the probate court to submit a claim for the unpaid portion of pledges to the university. Filing a claim was not a unilateral action completely on the part of the university. Michael Schoenfeld, Duke’s vice president for public affairs, was quoted as saying that Duke’s claim submission was a “routine transaction,” in no way impinging on the University’s respect for the McClendon family. He also said “It is common for the executors of large and complex estates to solicit claims from charitable organizations with pledges that were not fulfilled at the time of the donor’s passing.”
In our series on collecting pledges, we noted the unique circumstances that the charity faces when the donor passes away before completing the pledge payments. In this situation, it appears that Duke is on very solid ground and its actions are being unfairly characterized in the press.
In an article in the Duke Chronicle, the university freely discusses the pros and cons of seeking a pledge payment from a donor’s estate. Good transparency by the university in explaining its actions! The article concludes with the expectation that people will view this situation with the realization that the university has operated since the pledge was made with some expectation of collecting this and other pledges and that such revenue streams are binding commitments on the part of the donor. It made this announcement on August 25, 2016.
Yet on August 29, 2016 the university announced that it withdrew its claim against the estate. In doing so, it said it was in response to negative publicity. There were no comments posted in the Duke Chronicle website, so the university must be responding to negative reactions reported in the outside press. In the withdrawal notice, Michael Schoenfeld is quoted as saying that the university is “deeply sorry for any pain this has caused the McClendon family.”
I believe that it was unwise to withdraw the claim from the court. The complex untangling of Mr. McClendon’s finances will continue with $9.9 million less in potential liabilities to be satisfied by whatever assets exist in the estate. Some believe that the estate is insolvent, and given the fact that the estate’s value is heavily dependent on the value of oil, that assessment changes daily. But this is not a reason to withdraw Duke's claim.
So what has motivated the university to withdraw its claim? We highly doubt it was a legal analysis. As explained in other posts here, the university likely had a valid claim and a legally enforceable contract that it may have been obligated to attempt to collect under generally accepted accounting principles and its fiduciary responsibilities. The university eloquently explained its reasons for submitting the claim in the Duke Chronicle only four days prior to withdrawing the claim.
In the withdrawal statement, the university mentioned the pain their claim may have caused the McClendon family. Given that many news articles mention the potential for the assets of the estate to be insufficient to pay the debts, compassion for the family may, in fact, be the motivation. If the estate’s assets cannot completely satisfy the estate’s liabilities, there will be nothing remaining for the family.
Universities seek to be compassionate. It is one of the qualities they try to instill in their students. Demonstrating a lack of compassion is why the philanthropy experts questioned the wisdom of Duke’s court claim. However, if a sudden concern for compassion toward the McClendon family was the university’s motivation, then the university’s claim withdrawal action may have been misguided.
Yes, the pool of liabilities that need to be satisfied by the estate’s assets have been reduced by $9.9 million as a result of Duke’s withdrawal. But will this guarantee that the family will eventually inherit assets from the estate? Not necessarily. If the assets of the estate can not completely satisfy all of the liabilities, what generally happens is that the liabilities are partially satisfied—e.g., everyone receives 50 cents for each dollar of their claim.
Perhaps Duke’s claim withdrawal will only serve to increase the partial estate liability payment from 40 cents on the dollar to 65 cents on the dollar. Unless the estate’s assets actually exceed the remaining estate liabilities, the family will still receive nothing. Wouldn’t it have been better for the university to remain a creditor of the estate and at least receive some portion of the $9.9 million it was owed?