An animal shelter that decided not to build a new and expanded facility has been ordered to return a $50,000 contribution from donors who made the gift expressly for the construction of new rooms for large dogs and older cats.  An appellate court in New Jersey, in a harshly worded opinion it said was a case of first impression, said that the penalty was possibly the “most lenient sanction” in a case that could include breach of fiduciary duty and civil fraud.  (Adler v. SAVE, Superior Ct., NJ, App. Div.,8/5/13.)

SAVE, a “no kill” shelter operating in Princeton Township, began a sophisticated fundraising drive to raise funds for a new shelter.  Its brochures provided renderings of a new state of the art facility and offered naming rights.  Bernard and Jeanne Adler, who had frequently contributed to the organization and volunteered services, made a gift of $50,000, which they said was a major gift for them, to support the new rooms and receive naming rights. 

When the shelter sought local approval for the new construction, it ran into difficulties and was unable to get permits.  Suffering from other financial problems, it ultimately decided to merge with another organization and construct a much smaller facility elsewhere.  It gave up its mission of operating a sanctuary where animals could live out their lives, and began to operate primarily as an adoption facility for short-term care. 

The Adler’s requested their money back.  The shelter refused.  A trial judge ordered return of the funds and the Appellate Division has affirmed.

The Court said that it had not found, and the parties had not cited, any published opinion in the state involving the right of a living donor to demand return of a “conditional inter vivos gift” based on the recipient’s failure to honor the conditions.  Guided by its “collective jurisprudential experience and general sense of fairness,” it concluded that where a recipient “accepted the gift fully aware of the donor’s conditions and did not express any reservation to the donor about its ability to meet those conditions, … this created a reasonable expectation in the donor’s mind that (1) the recipient would attempt to meet those conditions in good faith; (2) absent the donor’s consent, the recipient did not have the right to ignore or disregard any of the material conditions of the gift; and (3) if the recipient of the gift decides to unilaterally disregard the donor’s express condition, basic fairness dictates that the gift must be returned to the donor.”

It said its analysis was “consistent with the principles governing a fiduciary relationship.”  “By opting to disregard plaintiffs’ conditions, SAVE breached its fiduciary duty to plaintiff.  Under these circumstance, requiring SAVE to return the gift appears not only eminently suitable, but a mild sanction.  After all, it can be argued that not every donor who may have cause to question the reasonableness of a charity’s actions has the tenacity and wherewithal to purse a claim.  Furthermore, depending on the amount of the gift involved, some donors may come to the conclusion that initiating legal action is not a cost-effective means of obtaining redress.”

The shelter argued that it should be allowed to invoke cy pres or equitable deviation doctrines to use the gift in a manner that most closely fulfills the donors’ purpose.  But the Court said that under the facts of this case it would be a “perversion” of the principles because the shelter had not consulted with the donors on what might fulfill their original purpose.

The Court also rejected a “public policy” argument raised by the shelter.  The shelter had argued that allowing the trial court’s decision to stand would mean that New Jersey charities will risk losing contributions “merely because they take longer than anticipated to raise funds needed to build a new facility or start a new initiative.”  The Court said that the donors did not seek return of their gift because it took longer than anticipated to build the facility, but demanded return because the shelter “unilaterally decided to violate the expressed conditions of their gift.”

The Court said that “responsible charities” should welcome the decision “because it will assure prospective donors that the expressed conditions of their gift will be legally enforceable.  Thus the trust relationship necessary to promote generous gift giving has been strengthened by the tenacious efforts of two people who love large dogs and older cats.”

YOU NEED TO KNOW

The opinion did not discuss the standing of the donors to seek enforcement of the terms of their gift.  There are many states in which donors have no standing once they have made the gift, unless they specifically preserve the right to enforce by contract.  In those states, the Attorney General stands in the shoes of the public in enforcing such conditions.  The courts in those states have generally adopted the theory that charities should be protected from unfettered litigation that could be initiated by every small donor to the cause.  The Attorney General did not enter an appearance in this case and there was no indication whether the office took any position in the case.

The Uniform Trust Code, which has been adopted in many states, provides that living donors have the right to release and to enforce restrictions on their gift, but at least one state court has said that the UTC does not apply to outright gifts to corporations and not to separate trusts. (SeeNonprofit Issues®, 6/16/08.)

It will be interesting to see how the standing issue plays out in New Jersey and elsewhere after this decision.