Springfield Business Journal Articles


Breaking Up with a Charity Can Be Hard To Do

Most of us have a non-profit organization that is close to our hearts, whether it is a hospital, a university or our local church.  According to the National Philanthropic Trust, 95.4% of American households give to charity.  The average annual household contribution is $2,974, for total giving in 2014 of $358.38 billion.  "In 2014, the majority of charitable dollars went to religion (32%), education (15%), human services and grant making foundations (12%), and health (8%)."

A common form of giving is to pledge future gifts, whether those gifts will occur during a person's lifetime or at death.  But what if a donor makes a pledge and then changes his mind?

Charitable pledges are governed by the principals of contract law.  One of the most basic requirements for a contract to be enforceable is that each party receives consideration, that is, something of value.  Each party does not have to receive equal consideration, and the consideration can be as small as a "peppercorn."  This is known as the peppercorn theory and can be traced back to William Blackstone's Commentaries on the Law of England of 1773.  

There are many cases which address what consideration is.  A New York case from 1891 is illustrative.  In 1869 William I. Story, I promised his nephew, William I. Story, II, that if the nephew refrained from drinking alcohol, using tobacco, swearing, and playing cards or billiards until the age of twenty-one, he would give him $5,000.  The nephew complied, but the uncle died before the money was paid.  The executor of the uncle's estate refused to pay the nephew, and the nephew sued.  The court ruled in favor of the nephew holding that the "forbearance of legal rights" constituted consideration.

If you enter a contract that turns out to be a bad deal, the court will not void the contract.  A court will not inquire into the adequacy of the consideration.  However, there must be actual consideration.  A mere promise to pay, whether to a person or a charity, is generally not enforceable.

Very few charitable pledges involve consideration to the donor.  If the donor received consideration, the transaction would be a sale rather than a gift, and would not be tax deductible.  That is why the IRS requires a donor to have a receipt from a charity stating that "no goods or services were given to the donor in exchange for this contribution" or the statement must identify the value of any benefits provided to the donor that must be subtracted from the donation.

So when can a charitable pledge be enforced?  There is an exception to the consideration requirement for reliance, also called "estoppel."  A 2012 Illinois Supreme Court case, Rush University Medical Center v. Sessions, illustrates these concepts while also giving guidance on offshore trusts.

In 1995 Robert Sessions made an irrevocable pledge of $1.5 million dollars to Rush University Medical Hospital ("Rush") in Chicago.  The pledge was to be used to construct a new house for the university's president on its campus.  In 1996 Sessions sent a letter to Rush confirming this purpose, stating that his pledge was "made in order to induce Rush to construct a Rush University Presidential Residence" and promising that if he did not pay the pledge in full during his lifetime that it would be paid from his estate.

In reliance on Sessions' pledge, Rush constructed the president's house on its campus in Chicago at a cost in excess of $1.5 million.  The house is used as a residence for the president and for conferences and other university events.  Rush named the house the "Robert W. Sessions House" and held a public dedication honoring Sessions for his generosity.  Sessions was present at the dedication and cut the ceremonial ribbon.

Sessions did not make any payments during his lifetime toward the $1.5 million pledge.  In February 2005 Sessions was diagnosed with late-stage lung cancer and he blamed Rush for not finding the cancer earlier.  In March 2005 Sessions signed a new will eliminating his gift to Rush.  He died on April 25, 2005, and Rush filed suit against he estate for payment of the pledge.  Rush also sued a Cook Islands trust created by Sessions since the vast majority of Sessions' assets were in the trust.

The doctrine of reliance is intended to avoid injustice and provides that when a person has acted to his detriment based on the promises of another, the promises will be enforced. Rush relied on Sessions' promises to its detriment by paying for the construction of the president's home.  The detrimental reliance was so clear that Sessions' estate did not even contest its liability.  Rather, it claimed that Rush could not reach Sessions' assets because they were held in a "spendthrift" Cook Islands trust which Sessions had created and of which he had been a beneficiary during his lifetime.

A "spendthrift trust" is a trust that cannot be reached by a beneficiary's creditors.  However, a person cannot create a spendthrift trust for himself.  This is called a "self-settled spendthrift trust" and would allow people to refuse to pay their bills and still keep all of their assets.  The Supreme Court clearly stated why such trusts are void as to creditors under Illinois law:

    It could be said that the policy behind the common law rule is not limited solely to deterring fraud, as it prevents the distinct injustice of allowing a person to use a trust as a vehicle to park his assets in a way that preserves his own ability to benefit from those assets, while keeping them outside the reach of his present and future creditors.  If the law were otherwise, it would make it possible for a person free from debt to place his property beyond the reach of creditors, and secure to himself a comfortable support during life, without regard to his subsequent business ventures, contracts, or losses.

Jurisdictions like the Cook Islands allow self-settled spendthrift trusts, which is the big selling point of offshore trusts.

Regardless of the Cook Island law, the Illinois Supreme Court found that Sessions' trust was liable for the pledge based on the law of self-settled trusts and fraudulent transfers.  However, a Cook Islands court will not recognize an Illinois judgement and will not enforce one if it conflicts with the laws of the Cook Islands.  Therefore, Rush could have had a judgement with no way to enforce it.  Fortunately, the trust owned some land in Illinois.  Presumably Rush enforced its judgement against the land.

In conclusion, most charitable pledges are revocable and can be cancelled at any time, however, you should be aware of reliance by the charity.  A very common form of reliance is a capital campaign for building or remodeling.  In reliance on the pledges it receives, an organization will contract to buy, build or remodel a facility. Therefore, these pledges are likely enforceable.
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