Lawsuit Seeks to Win $5 Million on Donor’s Pledge

The St. John’s Health Center Foundation, which supports the hospital of the same name in Santa Monica, CA, has filed a lawsuit to collect $5 million that Paula Kent Meehan had pledged.

The legal action raises questions about whether charities can and should sue to collect on unfilled pledges.

Giant Gavel by Sam Howzit via FlickrMeehan made her fortune after founding the Redken hair-care products company in the 1960s. In 2007, she made the pledge to St. John’s, according to a report in the Los Angeles Times. Rather than simply including St. John’s in her will (a revocable gift commitment), Meehan also signed an “estate pledge commitment” that said her pledge would be “legally binding on me and my heirs, executors, administrators, personal representatives and assigns.”

In recognition of the irrevocable gift commitment, the Foundation planted a tree in Meehan’s honor and placed her name on a donor wall in the lobby of the hospital.

Unfortunately, “in 2013, Meehan revoked her pledge to the St. John’s Foundation after the ouster of the hospital’s top executives and the proposed sale of the nonprofit Catholic hospital,” says the Times report. When Meehan died last year, the Foundation contacted Meehan’s representatives to seek fulfillment of the pledge. When they refused to pay, “the Foundation sued the executors of her estate for breach of contract for $5 million.”

Let’s look at three of the obvious questions this case raises:

1. Can a nonprofit organization sue a donor?

The answer to this question is simple: Yes. The St. John’s Foundation has already done just that. Pledges, whether verbal or written, are contracts that can be enforced under the rules of contract law.

2. Can the Foundation win its lawsuit?

To answer this question, we would need more information. For example, we do not know the complete and precise language of the estate pledge commitment. The commitment might have been conditional allowing Meehan to change her mind if certain conditions were not met. Or, the commitment might have been ironclad without any provision for altering its terms. Undoubtedly, this will be one of the key issues decided by the Los Angeles County Superior Court.

3. Should a charity sue one of its donors?

This is the most challenging question. Clearly, the St. John’s Foundation believes it should. However, just because a charity can sue a donor does not necessarily mean it should.

Filing a lawsuit against a donor could dissuade others from making a pledge commitment or giving at all.

“‘From a practical or public relations perspective, I couldn’t imagine a worse strategy,’ said Doug White, director of the master’s in fundraising management program at Columbia University. ‘This is not the way an organization should behave with a donor. It sends a very bad message,’” reports the Times.

On the other hand, Howie Pearson, a Stanford University attorney and professor of estate planning at its law school, told the Times, “The charity is caught: On the one hand, you want to be donor friendly; on the other hand, the charity does have a fiduciary obligation to protect its assets.”

The St. John’s Foundation lawsuit isn’t just a messy situation for that particular organization. The public relations fallout from it could affect other charities working with philanthropists who might get cold feet as a result.

Frankly, I’m not sure why a donor would ever sign an irrevocable gift commitment unless she did so to receive significant, tangible benefit. Even then, the donor should ensure the commitment paperwork contains provisions for altering or terminating the agreement in the event of a material change in the organization, for example.

When negotiating a gift agreement with a donor, you should make sure the donor fully understands the terms of the agreement and the binding nature of the commitment. Depending on the donor, he may or may not feel particularly comfortable with the arrangement; however, it’s better to learn that during the negotiation rather than face ending up in court later. The donor should understand that once the commitment is signed, the organization will treat it as the binding contract that it is.

As I’ve written about before, there are at least three circumstances when initiating a lawsuit can make sense for a charity:

  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 into bankruptcy. Suing the donor would be a way for the nonprofit to establish its claim.

In any event, suing a donor should always be an absolute last resort.

While I’m not a lawyer, I must add that just as a nonprofit organization should not automatically sue a donor over an unfilled pledge; it also should not automatically decide never to sue a donor. Doing the latter would negate the very idea of an irrevocable gift commitment and could undermine the integrity of other such commitments and the ability of the organization to book such pledges as assets.

The key to staying out of a courtroom is to negotiate agreements with donors that the donors fully understand. Then, solid stewardship practices will help ensure that the donors do not get “buyer’s remorse.”

So, what could the St. John’s Foundation have done (that it may or may not have) to avoid the lawsuit?

  • It could have remained in close contact with Meehan to explain the changes at the hospital and to demonstrate that the hospital’s mission would remain unchanged or would be enhanced.
  • It could have attempted to renegotiate the gift agreement with Meehan, perhaps allowing her to restrict her gift.
  • It could have reached out to Meehan’s heirs to negotiate with them to honor her initial commitment and, thereby, avoid a lawsuit.

The St. John’s case is sad for a number of reasons. There will be no clear-cut winner in this one; both sides will be losers. We should continue to monitor this case as it will have implications for all charities and our relationships with donors.

That’s what Michael Rosen says… What do you say?

6 Comments to “Lawsuit Seeks to Win $5 Million on Donor’s Pledge”

  1. Yikes! Michael covers the situation here. The only “winners” are the attorneys, who will collect their fees regardless of the outcome.

    • Colleen, thank you for your comment. In my post, I wrote, “… both sides will be losers.” By writing that, I accidentally implied there would be no winners. However, you correctly point out that the attorneys will indeed be the real winners.

  2. [Unfortunately, “in 2013, Meehan revoked her pledge to the St. John’s Foundation after the ouster of the hospital’s top executives and the proposed sale of the nonprofit Catholic hospital,” says the Times report.] The hospital lost favor with the donor due to some questionable decisions. They should absorb the impact of their decisions, rather than raise red flags to ALL potential donors.

    • Byron, thank you for taking the time to share your thoughts on this. Yes, it certainly does appear that the donor revoked her pledge as a result of decisions made by the board that have/will significantly impact the organization. I don’t know how the Foundation stewarded the donor, if at all. However, a great stewardship effort that explained the hospital’s decisions might have avoided the problem with the donor’s pledge commitment. If solid stewardship proved ineffective, the Foundation could have attempted to renegotiate the pledge, something I don’t know if they did or not. If that failed, the next step for the Foundation was to consider a lawsuit. I trust, certainly hope, the Foundation agonized over its decision. Even if the Foundation wins its lawsuit, it will certainly be at a significant cost, and I’m not talking about just legal fees. It will be interesting to see how this story continues to unfold.

  3. Michael, what isn’t clear in this article is what obligations (if any) had the Foundation made as a result of the pledge? As an example, if a donor had committed significant support for a facility and the “irrevocable pledge” had been used to borrow the funds to complete the project, then the Foundation’s fiduciary responsibility must be considered. If however, this was a gift that was undesignated, or simply being added to the Foundation’s assets for future needs, then a different tact might be in order.

    • Joe, thank you for your comment. Unfortunately, the information available on this story is limited. If the Foundation took action based on the donor’s pledge, as you’ve mentioned, then the Foundation would have a stronger legal case and would have a bigger drive to pursue the fulfillment of the pledge. However, even if the gift was going to go toward general operating expenses as an unrestricted contribution, the Foundation would still have a fiduciary responsibility though, on balance, it might have decided not to pursue the fulfillment of the pledge. It will be interesting to see what the final court decision is and what that decision is based on.

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