Princeton case puts spotlight on charitable gifts with 'strings attached'

In the summer of 1961 - in the wake of newly inaugurated President John F. Kennedy's exhortation to "ask not what your country can do for you, ask what you can do for your country" - an anonymous group of donors gave Princeton University an almost inconceivably generous gift of $35 million.

The endowment, the largest of its kind at the time, was to be used by the school's Woodrow Wilson School of Public and International Affairs to train young men and women for government service in international relations.

The donors and the university agreed to a governing structure that would manage the fund - a nonprofit corporation with a seven- member board of trustees, with the university holding four of the seats.

But 45 years later, the endowment, now worth $750 million, is at the center of a heated legal battle that could significantly influence the future of restricted charitable giving in the U.S.

"This could be a very important case for universities," said Leslie Lenkowsky, a professor of public affairs and philanthropic studies at Indiana University. "We take donor intentions very seriously in the U.S."

According to the Council for Aid to Education (CAE), a nonprofit organization that monitors private giving in education, contributions to colleges and universities are escalating sharply. CAE said that overall giving to colleges and universities in 2005 totaled $25.6 billion, an increase of 4.9 percent over the previous year.

But a greater percentage of these gifts are now being given with strings attached. According to CAE, 80 to 90 percent of charitable gifts to colleges and universities are now restricted in some fashion.

Princeton case

The donors in the Princeton case are members of the Robertson family, heirs to the A&P grocery fortune, and they claim the university is spending their endowment for purposes other than was originally intended. They are seeking the right to handle the funds directly, as well as the return of more than $500 million they believe has been misspent by the school.

Princeton, anxious to protect what comprises about 6 percent of its total endowment, is arguing that the family is construing the language of intent within the certificate of incorporation far too narrowly.

"This is an attempt to grab control, 45 years after the entire transaction was negotiated and agreed to," said Douglas S. Eakeley, a partner in the Roseland, N.J. firm of Lowenstein Sandler and chief legal counsel for Princeton and the individual defendants in the case.

Eakeley contended that the language in the certificate of incorporation clearly states that the money is to be used so that students "may prepare for careers in government service." He argues that the use of "may" is the key part of this phrase, and that Princeton has correctly interpreted that language as speaking to a broader "public service" mission, including research.

"The strategic issue that various deans and faculty of the Woodrow Wilson School have had to wrestle with over the decades is: how do you best prepare students for careers in public service and government service as things change?" Eakeley said.

Times have changed, he noted.

"The federal government several times has stopped hiring. It's delegated a great deal of authority to the nongovernmental- organization sector and to state and local government. The nature of governmental service and the best way to prepare for it have changed over time."

But Ronald Malone, lead counsel for the plaintiffs, countered that the university has knowingly betrayed the trust of the Robertson family in its spending decisions.

He cited as evidence a 2002 e-mail to then-new university president (and ex officio president of the foundation) Shirley Tilghman from Thomas Wright, the university secretary and former general counsel, who informed her that $750,000 of Robertson money was being used for the tuition of graduate students outside the Wilson School.

"This is new, and has never been mentioned before to the Robertsons," said the e-mail. Further, said Wright, the acting dean, James Trussell, believed that if the Robertsons heard about that expenditure, "it will greatly upset them."

Malone said that Tilghman and other Princeton officials reacted to the news by covering up the information in subsequent reports to the foundation.

"If that happened in the corporate world, someone would go to jail," said Malone, a partner in the San Francisco law firm of Shartsis Friese.

"The question people are asking is whether Princeton will be held accountable," he said. "I think a lot of people are concerned about that. They're saying, 'If you can't trust Princeton, who can you trust?'"

Both sides have moved for summary judgment, and New Jersey Superior Court Judge Neil H. Shuster heard oral arguments in late November. If the case goes forward, Malone thinks a trial could start next spring.

Both parties have already turned to the court of public opinion in their escalating battle.

In early 2006, the Robertsons launched a website, www.robertsonvprinceton.org, which argues their side of the case and provides links to various court documents. Princeton has responded by posting information about the case, including court filings, on its own website throughout the year. (For a related article, see "Trial in the press: Duke lacrosse case latest example of a growing trend," Lawyers USA, July 17, 2006. Search words for Lawyers USA Archives: Dahl and lacrosse).

A litany of complaints

In Robertson Foundation v. Princeton, the trial court ultimately must answer a simple question: To what degree may a recipient exercise autonomy over the use of a restricted gift?

"The legal question involved is a basis one: How far can a change be made from the intentions of the donor or settlor?" said Texas Tech University School of Law professor Gerry W. Beyer, who teaches wills and trusts and estate planning. "In talking with others, I can say there's not much disagreement on the legal issues. It's 'what do you do now to fix all this?'"

The family has reportedly spent more than $10 million to date in their legal fight against Princeton. Some displeasure with the university's use of the money was already evident in statements made by family members as far back the 1970s, and the unhappiness has generally escalated since then.

The complaint contains a litany of examples. For instance, in 2001, university trustees on the foundation board withdrew $13 million from the fund to pay for a new building, Wallace Hall, without informing the family, according to the complaint. The plaintiffs contend that the uses of Wallace Hall don't adhere to the foundation's mission.

But the last straw, apparently, was the decision by Princeton in 2001 to dissolve the foundation's investment committee and place the funds in the Princeton Investment Corp. (PRINCO), a separate investment corporation - thus commingling foundation dollars with those of the university.

Malone contends that the foundation must be dissolved before the money can be used in that way - this is one of the central arguments in the case, he said.

If the plaintiffs prevail, they intend to become a full-fledged private foundation that would give multiple restricted gifts - with strings firmly attached - to a variety of colleges and universities.

Closely-watched suit

As the fight in the Princeton suit has escalated, it has captured the attention of the national trusts and estates bar and other observers with interests in charitable giving.

Kathryn W. Miree, a Birmingham, Ala. lawyer who operates a philanthropic advisory service for donor organizations, said that donors who simply make charitable gifts that schools or charities can use as they see fit are "a disappearing breed."

Instead, she said, most donors today are like the Robertsons: individuals and groups with specific visions of how they want the money to be used.

This makes things more difficult for the recipients.

"While it is the donor's vision that drives the gift - resulting in an increasing number of large charitable gifts - charities have found the clearer the vision, the sharper the gift's edge," said Miree.

The Princeton case is not the first of its kind, noted Miree. Recent conflicts between donor intent and charitable recipients include:

In 2005, the Tennessee Court of Appeals ruled that Vanderbilt University could not change the name of its Confederate Memorial Hall dormitory to Memorial Hall unless it returned money donated by the Tennessee Division of the United Daughters of the Confederacy for the construction of the building in 1933. (Tennessee Division of the United Daughters of the Confederacy v. Vanderbilt University, 174 S.W.3d 98)

In 2004, a Pennsylvania state court allowed the Barnes Foundation to move its extensive art collection from Merion, Pa. to a new building in Philadelphia - contrary to the restrictions placed on the collection by the foundation's creator, Dr. Albert C. Barnes, in 1922. The court's opinion acknowledged that the move ran counter to the terms of the charter, but said that there was no other "viable alternative" left for the foundation, which was financially strapped.

In 2002, the Catherine Reynolds Foundation withdrew the bulk of a $38 million pledge it had made to the Smithsonian's National Museum of American History, ending a controversial public fight about how the money was to be used. The purpose of the money was to recognize the power of inspirational individuals, but the foundation wanted to influence the selection of those individuals, and the museum balked.

In the mid-1970s, Beryl Buck, the widow of a wealthy oilman, left a relatively modest eight-figure donation to the San Francisco Foundation for the benefit of people in affluent Marin County, her home. After her death, the value of the endowment had grown to nine figures and the foundation went to court, seeking to use the money in poorer communities, such as Oakland. The case went to trial, but in 1986 the foundation settled before a verdict, ceding control of the money to a new Marin-based organization.

The importance of planning

Observers cite the Princeton case as a prime example of a nasty fight that could have been preempted by better planning.

The case "highlights the magnitude of the importance of donors ensuring that 'strings' attached to gifts to charity are clearly spelled out and charities fully considering whether they are ceding too much control to a donor," said Richard L. Fox, a partner in the Philadelphia firm of Dilworth Paxson.

"Donors should protect themselves by providing alternative uses of contributed funds in the event the charity fails to adhere to restrictions, including the possibility of having an alternative charity waiting in the wings, and charities should seek maximum flexibility while still preserving donor intent," he said.

Miree said she has a standard recommendation for nonprofits and foundations embarking on planned-giving programs.

"I tell them it's important to have a Plan A, a Plan B and a Plan C," she said. "You can't envision how the world will evolve. Needs change over time."

In other words, gift agreements need to envision changing circumstances. Miree said that lawyers working to craft these agreements should ask donors and recipients a series of questions about the future, including:

What if the program is discontinued?

What if the recipient organization dissolves or merges with another?

If the fund produces more money than is required for the original gift purpose, what should be done with the excess?

If changes are made, who makes the decision?

Meanwhile, all eyes are on the Princeton case.

From the university perspective, Lenkowsky said that schools are well aware that charitable giving - with strings usually attached - is increasing. But how far will they go in accepting being told what to do in exchange for the money?

"You have to strike a mean that the intent is unmistakable but not so narrowly defined that you have to go to court to broaden it," he said. "Do you want millions of dollars sitting idly by if someone made a mistake?"