Sometimes, nonprofit organizations sue philanthropists over unpaid pledges. This was recently the case with the Kansas City Art Institute. When a charity pursues this type of legal action, it sends shockwaves throughout the nonprofit and philanthropic sectors.
I do believe there are times when a nonprofit can and should sue a donor. However, this should only be done as an absolute last resort. The three instances when a lawsuit might be acceptable are:
1. The donor dies with an outstanding pledge and an heir challenges the will. In that case, the nonprofit might need to sue the estate to establish its claim and collect.
2. The nonprofit incurs real expense based on the donor’s commitment. For example, based on a pledge agreement, the nonprofit breaks-ground on a new building. The nonprofit might need to sue simply to survive.
3. The donor is about to or has entered bankruptcy. Suing the donor would be a way for the nonprofit to establish its claim. (By the way, I suspect that this fear might be what may have triggered the Art Institute case.)
In any case, suing a donor should only be done after careful consideration and only when all other options have been exhausted.
Brian and Robert are friends of mine. They are both seasoned, wise development professionals who have served on the national board of the Partnership for Philanthropic Planning. I’m pleased that they have offered to share some of their wisdom below as they introduce us to the concept of “concierge stewardship.”
Brian and Robert both generously provided insights and material for my book, Donor-Centered Planned Gift Marketing, for which I won the AFP-Skystone Partners Prize for Research in Fundraising and Philanthropy.
Now, Brian and Robert have written their own book, Philanthropic Planning Companion: The Fundraisers’ and Professional Advisors’ Guide to Charitable Gift Planning, and I’m honored to have been included in their comprehensive volume. The book is part of the AFP/Wiley Fund Development Series.
The official description of the book notes, “For fundraisers and professional advisors alike, The Philanthropic Planning Companion is the one-stop resource you’ll keep by your side to help your donors/clients meet their charitable and personal planning objectives.”
So, do you want to avoid a nightmare at your organization? If so, read on:
The Kansas City Art Institute recently sued Larry and Kristina Dodge for failure to pay $4 million on a $5 million pledge that was to be used to pay for construction of a new building, according to The Kansas City Star.
When the Dodges attempted to defend themselves (rather than hire an attorney they indicated that they could not afford), they made procedural errors and a default judgment was entered against them for the full $4 million due on the pledge. According to The Star, the Dodges made three payments on their pledge before their financial situation was impacted by the Great Recession, limiting their ability to fulfill the commitment.
In the article, Larry Dodge is quoted, indicating that he and his wife were in negotiation with the Institute to come up with a payment plan when it unexpectedly filed suit to collect on the pledge.
Regardless of the outcome, the reputations of both the Dodges and the Institute are forever harmed. Prospective donors will think twice before making a major commitment to a charity that would sue them to collect on a pledge. Meantime, the Dodges reputation, despite their many years of generous philanthropy, will be forever tarnished.
We cannot judge the merits of the Art Institute’s action or the ability of the Dodges to pay on their pledge, as we are not privy to all of the facts of the case. However, it raises a much larger issue about charities and pledges.