Synopsis

This Article examines the law and procedural considerations that apply when a charitable organization needs to make significant changes to its purposes or operations.  Ultimately, if there are good reasons and a sound basis for the changes, and a well crafted plan to implement them, the organization is likely to be successful in obtaining any required approvals and prevailing over any challenges by the public or state Attorney General.

Introduction

From the ancient to the not so ancient, philosophers and purported philosophers have stressed the importance of adapting to change.  A simple internet search yields numerous quotes.  One example, attributed to the Greek philosopher Heraclitus, in a paraphrasing of his philosophy of flux, is the well known saying:  “There is nothing permanent except change.”[1]  Jack Welch, the hard charging former CEO of General Electric, expressed the concept more bluntly:  “Change before you have to.”[2]  Charitable organizations are no different from people and for-profit businesses in this regard.  It is not unusual for a charitable organization, facing unanticipated circumstances, to have to make what is essentially a Hobbesian choice – either modify the mission, purposes, governance, or  operations, or dissolve and cease to exist altogether.  Often, the reason charitable organizations find themselves in this position is because of the specific, and perhaps idiosyncratic, nature of the settlor’s or founder’s wishes.

This article is intended to provide the reader with an overview of the analysis applied by courts, and relevant statutory law used, in determining whether a charity’s proposed changes are permissible, as well as the associated procedural considerations.  Specifically, this article discusses the doctrines of cy pres and deviation, the applicability of these doctrines to corporations recognized as tax exempt under section 501(c)(3) of the Internal Revenue Code (the “IRC”),  other types of restructuring, and the appropriate process and parties.[3]  This articles does not address uncontroversial changes of a relatively inconsequential nature which are not clearly inconsistent with the settlor’s or founder’s intent.

While there is general agreement among the jurisdictions concerning the applicable governing principles, there is some inconsistency in the application of those principles.  In light of the seriousness of potentially contravening the settlor’s or founder’s intent, all courts attempt to “read the tea leaves” to determine intent, closely examining the terms of the governing instrument and extrinsic evidence.  Otherwise, in some circumstances, the courts tread lightly in analyzing whether changes are warranted.  But in recent years, they have shown a greater willingness to be more liberal in approving sought after changes, with the goal of trying to prevent failures of charitable transfers and charitable organizations.

Although not addressed elsewhere in this article, it should be noted that the IRC is a relevant consideration in determining the types of changes that might be appropriate.  In order to be tax exempt under IRC section 501(c)(3), a charitable organization, whether it be a trust or a charitable corporation, must be organized and operated exclusively for charitable purposes, which, among other things, means that its assets cannot be diverted to noncharitable purposes and, upon dissolution, all remaining assets must be distributed to another organization that is tax exempt under IRC section 501(c)(3), or to a governmental entity.[4]

As is demonstrated below, the charities at issue tend to be beloved (at least by some), have long histories, be well known in the community or region, and have a fiercely loyal following.  As a result, the sought after changes can give rise to bitter, passionate public battles.  Accordingly, while the cases may be fact heavy and detailed, they tend to be anything but dull and dry.  With the representative small sampling of cases discussed below, this article is, therefore, also intended to give the reader a flavor for how sensitive the issues can be.

The Doctrine of Cy Pres

“Cy pres” is derived from “cy pres comme possible,” a Norman French phrase meaning “as near as possible,” and is pronounced as the French would, “see pray.”[5]  Cy pres is a rule ‘of construction, the object of which is “to permit the main purpose of the donor of a charitable trust to be carried out as nearly as may be where it cannot be done to the letter.”[6]  Until relatively recently, the Restatement of Trusts formulated the doctrine as follows:

If property is given in trust to be applied to a particular charitable purpose, and it is or becomes impossible or impracticable or illegal to carry out the particular purpose, and if the settlor manifested a more general intention to devote the property to charitable purposes, the trust will not fail but the court will direct the application of the property to some charitable purpose which falls within the general charitable intention of the settlor.[7]

So, in order to modify a charitable purpose by applying cy pres, historically, it was required that:  (i) the donation to the charitable trust be for a particular charitable purpose, (ii) the charitable purpose is or becomes impossible or impracticable or illegal to carry out, and (iii) the settlor manifested a general intention to devote the property to charitable purposes.  Impossibility, impracticability or illegality can arise from changes in the law or societal views, or from waste, such as where the resources of the trust outstrip the cost of meeting the needs for which the trust was established.  Impracticability can arise where it would be theoretically possible to implement the settlor’s charitable purpose, but not feasible because, for example, the recipient charitable organization’s policies, although not rising to the level of law, prevent it from benefiting from the trust.  The question of whether the settlor had a general charitable intention does not ask whether the settlor intended to benefit charity generally; rather, it asks whether, in light of the given impossibility, impracticability or illegality, the settlor would have preferred that the funds be devoted to a similar charitable purpose, or be withdrawn from charitable use altogether.[8]  In applying these concepts, one court noted that “charities are so highly favored in law that the rules of construction are more liberal to sustain them than would be employed if the gifts were to individuals.”[9]  That is, there is a presumption in favor of the former.

These principles are best understood by examining some cases.

United States ex rel. United States Coast Guard v. Cerio

The court in Cerio held that a gift that would fail due to impracticability should be modified to save the gift and further the testator’s general charitable intent.  The testator, a retired Coast Guard captain, left a gift of over $1 million to the United States Coast Guard Academy (the “Academy”) to establish a trust fund, the purpose of which was to make a distribution from its annual income to the graduating cadet who earned the highest grade point average in chemistry and physics.  The expected annual award to the lucky cadet would be $65,000 to $130,000.  The Academy’s position was that it would refuse the gift unless the trust was modified because the size of the award would disrupt its operations and interfere with its mission (e.g., by creating unhealthy competition among cadets, eroding esprit de corps, incentivizing monetary reward over personal satisfaction from public service).  The defendants in the case were the decedent’s heirs-at-law, who argued that the bequest should be implemented as written, or, if not, it should fail, in which case the bequest would lapse and pass to them as the intestate heirs.[10]

While the Academy could have carried out the terms of the trust, it would not do so because the terms violated its policies.  In the court’s view, this rendered the gift impracticable, preventing performance.[11]

The court then considered whether general charitable intent was present.  The court noted that charitable gifts are viewed favorably such that courts “endeavor to find, a general charitable intent whenever possible”  and doubts are resolved in favor of preserving a trust’s charitable character.[12]  Given that the gift to the Academy would fail without modification, the analysis was whether the testator would have preferred that the bequest be used for a like charitable purpose, or instead that the funds pass to distant relatives.  The court considered evidence of the testator’s fondness for the Academy and the absence of a relationship with members of his family (he was unmarried and had no children), concluding that the testator had a general charitable intent.  Accordingly, the court applied cy pres to modify the terms of the bequest.  The modifications included substantially reduced awards to graduating cadets, creation of a graduate teaching fellowship, and distributions for other Academy educational purposes.[13]

In the Matter of the Estate of Beryl H. Buck

Buck is a case in which the petitioning parties sought application of cy pres based on an argument that amounted to a claim of waste.  The court ruled that they failed to meet their burden to demonstrate that contravening settlor intent by the proposed change in purpose was warranted.  The San Francisco Foundation (the “Foundation”), serving as a trustee of a trust created under the will of Beryl H. Buck (the “Buck Trust”), and a group of 46 intervening parties unsuccessfully petitioned for modification of geographic restrictions on distributions contained in Mrs. Buck’s will.[14]

Under the terms of the will, the Buck Trust was “to be held and used for exclusively non-profit charitable, religious or educational purposes in providing care for the needy in Marin County, California, and for other non-profit charitable, religious or educational purposes in that county.”[15] Between the time Mrs. Buck executed her will and the funding of the Buck Trust after her death, the value of the assets constituting the Buck Trust increased exponentially.  The primary asset had been stock in a privately held oil company, which was subsequently purchased by Shell Oil Company.  At the time the will was executed, the value of the stock was uncertain; when the Buck Trust was funded, the bequest had a value of approximately $260 million.  In light of the size of the trust, the affluence of Marin County, and the relative needs of other counties in the Bay Area, the Foundation sought to modify the geographic restriction to permit distributions to benefit organizations and residents in those other counties.

The court’s analysis was careful and thorough.  It considered extrinsic evidence supporting Mrs. Buck’s intent to benefit Marin County residents.  The court found that the Foundation’s internal policies had the effect of limiting its ability to maximize use of the Buck Trust in a manner consistent with Mrs. Buck’s intent (e.g., policies against the provision of support for operations, against supporting medical research, and against funding programs that were traditionally the responsibility of government agencies).  It also found that there were substantial unmet needs in Marin County.

Relying on the Restatement (Second), the court described “impracticability” as follows:

“The doctrine of cy pres is applicable even though it is possible to carry out the particular purpose of the settlor, if to carry it out would fail to accomplish the general charitable intention of the settlor.  In such case it is ‘impracticable’ to carry out the particular purpose.”[16]

The court held that claims of “[i]neffective philanthropy, inefficiency and relative inefficiency, that is, inefficiency of trust expenditures in one location given greater relative needs or benefits elsewhere, do not constitute impracticability requiring a change in purposes,” nor is it the equivalent of impossibility; there was no threat that operation of the trust consistent with the terms of Mrs. Buck’s will would fail to fulfill her general charitable intention.[17]  According to the court, although waste can be the basis for applying cy pres, the petitioners had not demonstrated that there were inadequate needs in Marin County for the Buck Trust distributions to satisfy.

Evans v. Abney

In a case that might have had a different outcome had it been decided in later years, the United State Supreme Court (hereinafter, the “U.S. Supreme Court” or the “Court”) in Evans affirmed a ruling by the Georgia Supreme Court that a charitable trust failed due to illegality, and, since general charitable intent was absent, the assets should pass to heirs-at-law.  In his 1911 will, Senator Augustus Bacon of Georgia left land to the City of Macon to be used as a park exclusively for the benefit and enjoyment of “‘the white women, white girls, white boys and white children of the City of Macon,’” with the further requirement that “‘under no circumstances … [is the property] to be … at any time for any reason devoted to any other purpose.’”[18]  The will provided that the park was to be controlled and overseen by a Board of Managers consisting of “‘seven persons, all of whom were to be white.’”[19]  For a period of time after Senator Bacon’s death, the City kept the park segregated, but eventually it expanded access, allowing the park to become integrated, since it could not constitutionally maintain a public facility on a segregated basis.  The Board of Managers sued to have the City removed as trustee in favor of a private trustee.  Black residents of Macon intervened, alleging that the racial restriction violated United States law and policy, and asked that a private trustee not be appointed.  Heirs of Senator Bacon also intervened, asking that the property revert to the estate if a private trustee was not appointed.[20]

After a prior decision of the U.S. Supreme Court, the Georgia Supreme Court determined that the park was required to be operated on a nondiscriminatory basis.  The petitioning parties and the state Attorney General argued that cy pres should be applied to amend the terms of the will by striking the racial restrictions.  In affirming the lower court, the U.S. Supreme Court  concluded that the doctrine was not applicable because the segregated character was an essential and inseparable part of the testator’s plan.[21]

According to the Court, cy pres is not applicable if “‘the accomplishment of the particular purpose and only that purpose was desired by the testator and . . . he had no more general charitable intent and . . . he would presumably have preferred to have the whole trust fail if the particular purpose is impossible of accomplishment.’”[22]

In his will, the testator was very specific about his intent, stating that “‘in their social relations the two races … should be forever separate and … they should not have pleasure or recreation grounds to be used or enjoyed, together and in common.’”[23]  Given this clear language, the Court concluded that Senator Bacon did not have a general charitable intent, and, therefore, the gift failed due to illegality and the property should pass to Senator Bacon’s heirs.[24]

In re Certain Scholarship Funds

Contrast the outcome in Evans with that in Certain Scholarship Funds, where decedents in their wills left funds in trust to be used for scholarship funds for male graduates of a high school in Keene, New Hampshire.  The New Hampshire Supreme Court held that cy pres should be applied to remove the discriminatory provision due to its illegality and the presence of general charitable intent.[25]

Each will called for recommendation of the recipient by the school principal and approval by the Board of Education.  The funds were held by the City of Keene Trustees of Trust Funds.  After the testators’ respective deaths in 1929 and 1970, the City operated the scholarship funds consistent with the terms of their wills, until 1987 when the School Board instituted a lawsuit seeking removal of the discriminatory provisions out of concern that they were unconstitutional under state law.  The state Attorney General contested the petition, seeking replacement of the public trustee with a private trustee.  The court affirmed the lower court holding that the restriction was unconstitutional and cy pres should be applied to replace the word “boy” with “student.”  Since there was no evidence that the testators “would not have responded to the changes in attitudes experienced by society,” and the language of the wills did not indicate any particular discriminatory intent, the lower court determined that the primary intent was not to discriminate against women, but to assist students in their pursuit of higher education; that is, the  testators had “a general intention to devote the property to a charitable purpose.”[26]

It should be noted that the court did not actually offer evidence of a general charitable intent; it essentially took the position that there was no evidence that the testator did not have a general charitable intent.  That was enough to indicate a desire to prevent failure of the charitable purpose.  This is reflective of the modern liberal approach of seeking to preserve and further charitable purposes.

Deemphasis of the General Charitable Intent Requirement

Certain Scholarship Funds also reflects the modern trend in the doctrine of cy pres towards elimination of the precondition that general charitable intent be present.  Thus, the Uniform Trust Code (the “UTC”), which has been adopted in the majority of states, provides:

[I]f a particular charitable purpose becomes unlawful, impracticable, impossible to achieve, or wasteful: (1) the trust does not fail in whole or in part; (2) the trust property does not revert to the settlor or the settlor’s successors in interest; and (3) the court may apply cy pres to modify or terminate the trust by directing that the trust property be applied or distributed, in whole or in part, in a manner consistent with the settlor’s charitable purposes.[27]

A somewhat different approach, adopted by the Restatement (Third) of the Law of Trusts (hereinafter, the “Restatement (Third”)) and followed by other states, is to have a rebuttable presumption in favor of cy pres and the presence of a general charitable intent.  As stated by the Restatement (Third), cy pres should be applied to avoid return of the property to the settlor’s heirs “unless the terms of the trust . . . express a contrary intention.”[28]

The Doctrine of Deviation

While the doctrine of cy pres is applied by the courts to modify the settlor’s charitable purposes, the doctrine of deviation is applied to alter “the manner or means by which the settlor’s charitable purpose is carried out” in the event of unanticipated circumstances.[29]  Stated differently, the doctrine of deviation is invoked solely to modify the administrative terms of a trust (whether it be a charitable trust or a noncharitable trust) if necessary to further the purposes of the trust and avoid frustration of the settlor’s primary objectives.[30]

In re Barnes Foundation

Barnes Foundation involves a classic application of the doctrine of deviation.[31]  There, the court ruled that changes to administrative provisions contained in the trust instrument and foundation charter and bylaws were appropriate under the circumstances.  The changes related to an expansion of the board of trustees, the process for their nomination, and relocation of the majority of The Barnes Foundation’s (hereinafter, the “Foundation”) artwork from a suburb to downtown Philadelphia.

In 1922, Dr. Barnes established the Foundation to “promote the advancement of education and the appreciation of fine arts;” to construct and maintain in Lower Merion, Pennsylvania, an art gallery and other buildings to exhibit artwork, and to maintain an arboretum “for the study and for the encouragement of aboriculture and forestry.”[32]  Dr. Barnes entered into a trust indenture pursuant to which he donated to the Foundation his virtually priceless collection of art and an endowment of approximately $6 million.  Dr. Barnes’s wishes concerning the Foundation were very specific.  Among other things:  (i) the organization was to be governed by a board of five trustees, one nominated by Girard Trust Company (later Mellon Bank) and four nominated by Lincoln University, with none being faculty or leadership of the University of Pennsylvania, Temple University, Bryn Mawr College, Haverford College, Swarthmore College, or Pennsylvania Academy of the Fine Arts, (ii) the paintings were to remain exactly as Dr. Barnes had left them at the time of his death, and in the facility in Lower Merion Township, and (iii) since he considered the organization to be an educational institution, the gallery was not to be open to the public, but, rather, only to students taking classes at the Foundation.

By the 1990s, the endowment had been substantially consumed, partly due to extensive litigation and partly due to restrictions on visitors (not only as a result of Dr. Barnes’s restrictions but also due to the Township’s opposition to policies that would result in a significant increase in the number of visitors), and it was operating at annual deficits, such that its long term viability was threatened.  Two leading Philadelphia philanthropic institutions – the Pew Charitable Trusts and the LenFest Foundation – offered to step in and help the Foundation raise $150 million, on the condition that the art collection be moved to a new site in Philadelphia and the board of trustees be expanded.  The board petitioned to amend the trust indenture and the organization’s charter and bylaws to allow the desired changes, while three students challenged.  The state Attorney General was also a party to the suit.

The court, in two separate opinions dividing the issues at hand, closely examined the detailed evidence presented, including (i) how expansion of the board from five to fifteen was necessary to increase fundraising capabilities, to increase the expertise present on the board and to align the board with modern principles of nonprofit governance, and (ii) whether sufficient funds could be raised by property and art sales to support the organization without implementing  the more drastic proposed changes.  The court also considered extrinsic evidence of Dr. Barnes’s intent.

The court, applying the doctrine of deviation, concluded that in order to ensure the long term health and viability of the organization, and, therefore, further Dr. Barnes’s primary purpose, expansion of the board and relocation of the artwork was needed.[33]  In other words, he would have preferred the changes over closure.

Arguably, the change in location should have been analyzed under the principles of cy pres rather than deviation.  It was Dr. Barnes’s intent that the Foundation be an educational organization with students who, as part of their study of art, would gain an understanding and appreciation of the reasoning for maintenance of the art in Lower Merion and its exhibition on the gallery walls as Dr. Barnes had directed.  In that sense, the change in location was a change in purpose.

Hitz v. Hoekstra

As indicated in above Barnes Foundation, the courts occasionally muddy the waters, confusing the doctrines of cy pres and deviation.  For example, the court in Hitz, which involved a male only college, purportedly applied the doctrine of deviation, not cy pres, to make the applicable reference gender neutral.  Deep Springs College, founded in 1917 was a college formed  “‘for the education and development of promising young men.’”[34]  It operated a cattle ranch, raised most of the food consumed on site, and was the smallest institution of higher learning in the country, having only 26 students. Students were required to devote four hours each day to ranch work and they were involved in governance of the college.  Before his death, the settlor established a trust governing application and administration of the assets used by the college.  The trust instrument contained the male only reference.  The chairman of the board of trustees, on behalf of the board, petitioned the court to allow the admission of female students.  The objecting parties were dissenting members of the board.  The court, recognizing the changes in gender roles and the adverse affect the single sex policy had on the quality of the applicant pool and on the ability to recruit and retain quality faculty and staff, concluded that it was appropriate to replace the word “men” with “people.”  In contrast to the decision in Certain Scholarship Funds, which was faced with the same gender limitation, the Hitz court characterized the modification as being based on the doctrine of deviation.[35]

Applicability of the Doctrines of Deviation and Cy Pres to Charitable Corporations

As the foregoing discussion indicates, the doctrines of cy pres and deviation developed in the context of trusts.  However, as noted in the UTC and Restatement of the Law, Charitable Nonprofit Organizations (hereinafter, “Restatement (Charitable Organizations”)), these doctrines have generally, but with some exceptions, been extended to charitable corporations, which is the dominant entity form for charitable organizations.[36]

The Uniform Prudent Management of Institutional Funds Act (hereinafter, “UPMIFA”), which has been enacted in nearly every state, provides that under certain circumstances, a “restriction . . . regarding the management or investment of an institutional fund” may be modified (i.e., the doctrine of deviation) or the charitable purpose may be modified (i.e., the doctrine of cy pres).[37]  UPMIFA applies to “institutions,” which is defined in a manner that includes trusts and corporations.  However, it only applies to “institutional funds” held by institutions, meaning endowment funds held primarily for investment but not (i) assets held to accomplish the organization’s charitable purposes, or (ii) funds that are freely expendable on a current basis.  Accordingly, UPMIFA would not have applied to modifications relating to the manner of delivering services or the class of people served discussed in some of the cases described in this article that did not involve endowment funds (e.g., Evans and Hitz, discussed supra, and Multiple Sclerosis and Hahnemann Hospital, discussed infra).

In Trustees of the Corcoran Gallery of Art v. District of Columbia, discussed in more detail infra, the court, although describing the law of cy pres as relating to modification of trusts, proceeded to apply the doctrine to the corporation at issue as a given, without comment or explanation concerning the basis for doing so.[38]  The court in Barnes Foundation, discussed supra, involving a corporation and a trust indenture, did the same, applying the doctrine of deviation.

Nevertheless, judicial analysis of whether charitable corporations should be treated as charitable trusts has lacked uniformity and clarity.  In Dodge v. Trustees of Randolph-Macon Woman’s College, the plaintiffs (several students and donors) sued to prevent a Virginia women’s college, a charitable corporation, from becoming coeducational, amending its articles of incorporation as necessary to do so, and potentially selling assets (including artwork) to raise funds to make the associated campus changes.  The plaintiffs took the position that the college should be treated as a trust subject to the UTC, relying on a Virginia statute providing that (i) the assets of a charitable corporation are deemed to be held in trust for the public for the purposes set forth in its governing documents, and (ii) the Attorney General has the same authority to act on behalf of the public with respect to the assets of a charitable corporation as he has with respect to charitable trusts.  The court rejected the plaintiffs’ argument, holding that the College was not a charitable trust subject to the UTC or other trust law, and that the referenced statute merely conferred upon the Attorney General the authority to act on behalf of the public to protect the public’s interest in assets held by charitable corporations.[39]

Another Virginia court, in Commonwealth of Virginia, ex rel. Ellen Bowyer v. Sweet Briar, applied a different analysis to support the proposition that trust law can be brought to bear upon charitable corporations.  In this case, involving the planned closure of a women’s college organized as a corporation, the court held that when assets are transferred to a charitable corporation, the corporation should be deemed to be a trustee with fiduciary obligations, and, as such, is subject to trust law as a fiduciary rather than itself being treated as a trust.[40]

Based on that logic, which has been adopted by some courts, whenever a gift is made to a charitable corporation, the entity, although not transformed into a trust, becomes subject to fiduciary obligations akin to those imposed upon trustees of charitable trusts.  From a policy perspective, this makes sense since founders and donors have certain expectations and understandings concerning how their contributions will be utilized.  Nevertheless, the distinction between being a corporation that is deemed to be a trust and a corporation that has the fiduciary obligations of a trustee would seem to be virtually meaningless.

The Massachusetts Supreme Judicial Court, in Attorney General v. Hahnemann Hospital, discussed in more detail infra, ruled similarly to the court in Sweet Briar.  The court rejected the argument that trust law should be applied to limit the corporation’s ability to make the proposed changes to its organizational documents, but, nonetheless, held that the hospital had a fiduciary duty to use even unrestricted donations for its original purposes if those donations were made before the changes were made to its organizational documents.[41]

Other authorities have drawn a distinction between the effect of receiving restricted versus unrestricted gifts.  Thus, the Restatement (Third) provides that “[a]n outright devise or donation to . . . a charitable institution, expressly or impliedly to be used for its general purposes, is charitable but does not create a trust . . . .  A disposition to such an institution for a specific purpose, however, … creates a charitable trust of which the institution is the trustee . . . ”.[42]

The New York Court of Appeals, in In re Multiple Sclerosis Service Organization of New York, Inc., discussed in more detail infra, applied a somewhat different analysis, but the effect is essentially the same as that of the Restatement (Third).  According to the court, even if a charitable corporation receives assets subject to the direction that they be used for a specified purpose, or for a purpose set forth in its governing documents, the corporation is not deemed to be a trustee with respect to the transferred assets, but it is required to comply with the direction.[43]

Given that part of the allure of the corporate form is the flexibility it affords, the approach of the Restatement (Third) seems to be an appropriate compromise.

Organizational Restructuring

On occasion, a charitable organization has no viable path to continue operating at all, or at least not in its then present form.  It might be due to a combination of inadequate resources and no realistic means to generate the needed financial support, or a change in the law that adversely affects its service model, or the rise of competing organizations or governmental agencies that deplete its customer base.  In these situations, dissolution or some other form of restructuring is the only feasible way forward.[44]

The District of Columbia Superior Court, in Corcoran Gallery of Art, applied cy pres in approving a plan involving far reaching operational changes that amounted to dissolution – the transfer of the artwork and the art school of the Corcoran Gallery of Art (the “Corcoran”) to other institutions.  The Corcoran was originally created in 1869 under a deed of trust created by William Corcoran, but it was later incorporated in 1870 by an act of Congress.  The Corcoran established an art gallery and art college.  By the 2000s, the Corcoran found itself in such dire financial straits that its future was in doubt:  it was operating at annual deficits, had a frozen bank account and a loan in default, it was expecting to be unable to make payroll, it was threatened with loss of accreditation by the Middle States Commission on Higher Education and the American Alliance of Museums, its facilities were falling into disrepair, and it was utilizing questionable methods to raise funds (e.g., borrowing from its deaccessioning account).   Accordingly, the trustees settled on an arrangement with George Washington University (“GWU”) and the National Gallery of Art (“NGA”) involving, among other things:  (i) the acquisition by GWU of certain of its buildings, property and works of art, (ii) the acquisition and operation by GWU of its college of art; and (iii) the acquisition by NGA of the bulk of the Corcoran’s art collection.[45]

The trustees petitioned for approval of the plan, while nine current students, as well as faculty and staff, were permitted to intervene (donors, former students, former faculty and former staff were excluded).  The court applied cy pres in holding that impracticability in the form of insufficient funds warranted the proposed changes, which allowed the Corcoran’s purposes to be furthered in a manner as near as possible to Mr. Corcoran’s primary intent – retention of the collection in the District of Columbia and operation of the art college in the District.  For all intents and purposes, though, the Corcoran effectively dissolved as an independent entity, with just the Corcoran name continuing.[46]

In Multiple Sclerosis, the court remitted to the lower court for further consideration the proposed plan of dissolution.  The organization was a charitable corporation whose purpose was to provide services to persons suffering from multiple sclerosis.  Eventually, faced with dwindling finances and a reduced, aging membership, the board determined that the organization could no longer continue, so it voted to sell its facility and distribute its remaining assets to other charitable organizations that did not primarily serve persons with multiple sclerosis.  The board sought judicial approval, which was opposed by the Attorney General and the New York City Chapter of the National Multiple Sclerosis Society.  The four proposed charitable distributees also intervened in the suit.  The lower court was directed to consider whether the purposes of the selected recipients were similar to those of the dissolving entity, and, as noted supra, whether there was evidence that donors had donated funds, or the organization had solicited funds, to be used for a particular purpose rather than its general purposes.[47]

Another form of restructuring, as distinguished from dissolution, is where an organization, frequently a hospital, sells all of its assets and converts to a grantmaking institution.  In  HahnemannHospital, the hospital (a corporation) had been formed in 1892 to provide care consistent “‘with the principles of homeopathy as promulgated by Samuel Hahnemann.’”[48]  The hospital proposed to enter into an arrangement to sell all of its assets, convert to a grantmaking institution, and make the necessary changes to its organizational documents.  The hospital filed a complaint for a declaratory judgement, while the Attorney General filed for an injunction.  As noted supra, the court prohibited the hospital from applying to the new purposes funds (whether restricted or unrestricted) received prior to the changes to its organizational documents, but permitted such use with respect to funds received after the amendment.

Procedural Considerations

Appropriate Process

Under UPMIFA, with the exception of very small endowments or where donor consent is given, court approval is required for changes affecting endowment funds held by charitable trusts and charitable corporations, and the Attorney General must be given notice and the opportunity to object.[49]  For charitable trusts, the UTC requires judicial approval of deviation, application of cy pres, or termination.[50]  The UTC does not require participation of the Attorney General, but courts nevertheless may require it, and a cautious approach dictates giving notice to the Attorney General.

But what about charitable corporations that do not have an endowment?  Arguably, the board of directors has the authority to make whatever changes it wishes to its governing documents, including material changes in purposes, by merely adopting amendments and submitting them for what is essentially perfunctory review by the applicable state agency that oversees corporations (e.g., the secretary of state or state corporation commission).  The courts and state law lack uniformity on this issue.  As indicated in the cases discussed above, some charitable corporations act on their own (in which case the courts might become involved due to opposition from interested parties) while others affirmatively seek judicial approval.

The Virginia Supreme Court, in Commonwealth of Virginia, ex rel. The Honorable Randolph A. Beales, Attorney General v. JOCO Foundation, held, in essence, that Attorney General approval was not required.  There, the foundation’s original purpose was to benefit charitable organizations located in the United States, primarily in the Roanoke, Virginia, area.  The board amended the articles of incorporation to enable the foundation to construct a school in the Dominican Republic.  The court, although not directly addressing the board’s authority to make this change, held that Virginia’s State Corporation Commission, not the Attorney General, had exclusive oversight authority with respect to corporations, including charitable corporations, and, therefore, the court lacked subject matter jurisdiction.[51]

In Hahnemann Hospital, discussed supra, the court rejected the notion that charitable corporations have “unfettered discretion to apply funds to any charitable purposes … [b]y simply amending [their] … charter purposes … without any requirement that the new purposes be similar and not contradictory.”[52]  Although it specifically refrained from ruling on whether Attorney General or judicial approval was required, such a requirement would seem to be the necessary result of its ruling.  Whether it be the Attorney General or the courts, only a governmental party can serve as a check against the potential exercise of “unfettered discretion.”

Similarly, the New York Court of Appeals in Multiple Sclerosis, based on New York statutory law, ruled that, at least in the context of the termination of a charitable corporation, the entity must submit its plan for distribution to the courts.

For its part, the Restatement (Charitable Organizations) takes the position that, in the interest of consistency, the procedures required for changes to charitable trusts should apply to charitable corporations, and judicial approval should be required.[53]

Appropriate Parties

Although members of the public are the beneficiaries of charitable organizations, private citizens generally lack standing to require that a charitable organization act in accordance with its  originalcharitable purposes.  Instead, the Attorney General, as representative of the public interest, is considered the appropriate party to intervene, whether in support of or opposition to the given changes.[54]  Conceptually, the role of the Attorney General is to protect charitable assets by bringing “actions to the court for interpretation and application of the law.”[55]

However, as indicated in the cases discussed above, the courts occasionally permit other private parties to intervene or be parties to the judicial action, particularly when the Attorney General or other governmental representative is not actively involved.  These may be fiduciaries associated with the organization or parties who, as distinguished from the community at large, would more directly benefit from or be affected by the changes or from the status quo – e.g., the “objector-beneficiaries” in Buck, the heirs-at-law in Cerio, the Black residents of Macon in Evans, the School Board in Certain Scholarship Funds, dissenting members of the board of trustees in Hitz, certain affected students in Barnes Foundation and Corcoran Gallery of Art, donors and certain affected students in Dodge, and the New York Chapter of the Multiple Sclerosis Society in Multiple Sclerosis.[56]

As for settlors and donors, it depends on whether the organization is a trust or a corporation, and whether an endowment is involved.  Under the UTC, settlors can maintain a proceeding to modify or enforce a charitable trust, at least in connection with application of the doctrine of cy pres.[57]  UPMIFA requires donor consent, if living.[58]

In contrast, as a general rule, donors to charitable corporations that do not have endowments lack standing.[59]  But, once again, there is a lack of uniformity on the issue.  Thus, some courts, such as that in Dodge, consider donors to be interested parties with standing.

Conclusion

When charitable organizations need to make significant changes to their purposes or operations, whether because the world has changed around them or because some inherent element of the organization is flawed due to limitations imposed by settlors or founders, they have tools available to them to effect the necessary changes.  They can rely on the doctrine of cy pres for changes in purpose, or the doctrine of deviation for administrative changes.  If there is no realistic alternative, other options are dissolution or an overhaul in purposes and operations even if it amounts to the organization transforming itself into something virtually unrecognizable vis-à-vis its original form.

Whether state Attorney General approval or judicial approval is required depends upon the type of organization and state law.  Accordingly, state law must be consulted on the issue.  Even if such approval is not required, the prudent course of action is to seek it.

The more substantial the nature of the proposed changes, the more likely they will draw publicity, public interest, and Attorney General scrutiny.  Accordingly, a charitable organization intending to make significant changes should have good reasons for doing so, it should have a well considered strategy, it should proceed carefully, and it should be prepared with strong evidence to support its reasoning and plan.  With this approach, an organization increases the likelihood of securing approval and overcoming opposition, especially in light of the courts’ greater willingness in recent years to be lenient in approving changes.

David Kamer is a member in the Norfolk, Virginia, office of Kaufman & Canoles, P.C., where he is part of the firm’s Estates, Trusts and Wealth Transfer Group and Business Taxation Group.  David’s practice is concentrated in the areas of tax exempt organizations, estate and tax planning, and trust and estate administration.  David has served as an adjunct professor at William & Mary Law School, teaching nonprofit organizations law.  He is a member of various professional associations and committees, including the Hampton Roads Estate Planning Council and the Legislative Committee of the Virginia Bar Association’s Wills, Trusts and Estates Section.  David is active in the community, with experience serving on the boards of, or as general counsel to, several Hampton Roads, Virginia, based charitable organizations.  He is listed in The Best Lawyers in America^© and was named “Lawyer of the Year” by that publication for 2023.  David has also been recognized by Virginia Business magazine as being among Virginia’s “Legal Elite” and by Coastal Virginia magazine as being a “Top Lawyer.”  David earned his law degree from Stanford Law School, his master of laws degree in taxation from the University of Florida College of Law, and his bachelor of arts degree, with distinction, from the University of Virginia.  David is admitted to practice in Virginia, Florida and Pennsylvania.

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[1] Marisa Lascala, “30+ Inspiring Quotes About Change, Because We Never Stop Evolving,” https://goodhousekeeping.com/life/g25383377/quotes-about-change/?slide=22 (Sept. 7, 2021) (others quoted include Lao Tzu, Charles Darwin, George Bernard Shaw, and Henri Bergson).

[2] Jack Welch and Janet Lowe, Jack Welch Speaks:  Wit and Wisdom from the World’s Greatest Business Leader, at 113 (2nd ed. 2007).

[3] As used in this article, the term “charitable corporations” refers to corporations recognized as tax exempt under IRC § 501(c)(3), while the term “charitable organization” is used to refer both to charitable trusts and charitable corporations.

[4] IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(b)(1), -1(b)(4), -1(c)(2).

[5] Bogert’s The Law of Trusts and Trustees § 431

[6] In the Matter of the Estate of Beryl H. Buck, No. 23259 (Cal. Super. Ct. Marin Cnty. Aug. 15, 1986), reprinted in full, 21 U.S.F. L. Rev. 691, 747 (quoting Soc’y of Cal. Pioneers v. McElroy 63 Cal. App.2d 332, 337 (1944) (citation omitted)).

[7] Restatement (Second) of Trusts, § 399 (hereinafter, the “Restatement (Second)”).

[8] Howard Sav. Inst. v. Peep, 170 A.2d 39, 43 (N.J. 1961) (citing 4 Scott, Trusts § 399, at 2824 (1956)).

[9] Wooten v. Fitz-Gerald, 440 S.W.2d 719, 724 (Tex. Civ. App. 1969) (citation omitted) (affirming lower court application of cy pres to remove discriminatory restriction in decedent’s will bequeathing property to be used for a home “for aged white men”).

[10] 831 F. Supp 530 (E.D. Va. 1993).

[11] Id. at 540.

[12] Id. at 537 (citations omitted).

[13] Id. at 541-43.

[14] The case generated a great deal of public interest.  Aside from the California Attorney General, other parties intervening in the case or filing amicus curiae briefs included a group of 46 “objector-beneficiaries” consisting of 28 charities and 18 Marin County residents, Marin County, the Marin Council of Agencies, the Marin County Bar and the Pacific Legal Foundation.  Buck, 21 U.S.F. L. Rev. 691, 692 (1987).  See also San Francisco Found. v. Superior Ct. of Marin Cnty., 690 P.2d 1 (Cal. 1984) (further identifying the 46 objector-beneficiaries).

[15] Buck, 21 U.S.F. L. Rev. at 693 (quoting Mrs. Buck’s will).

[16] Id. at 751 (quoting Restatement (Second), (1959) § 399, cmt. q at 306) (emphasis added by court).

[17] Id.

[18] 396 U.S. 435, 441-42 (1970) (quoting Senator Bacon’s will).

[19] Id. at 437.

[20] Id. at 437-38.

[21] Id. at 438-39.

[22] Id. at 441 (quoting 4 A. Scott, The Law of Trusts § 399, p. 3085 (3d ed. 1967)).

[23] Id. at 442 (quoting Senator Bacon’s will).

[24] Id. at 444.

[25] 575 A.2d 1325 (N.H. 1990).

[26] Id. at 1328.

[27] Unif. Tr. Code § 413(a) (Unif. L. Comm’n 2000).

[28] Restatement (Third) (2003) §67 cmt. b.

[29] Bogert’s, supra, § 396.

[30] Daloia v. Franciscan Health Sys. of Cent. Ohio, 679 N.E.2d 1084, 1092 (Ohio 1997) (citations omitted).  See also In re Barnes Found. 24 Fiduc. Rep.2d 94, 2004 WL1960204 (Pa. Com. Pl. 2004).

[31] Barnes Found. The case also demonstrates the depth of public feeling and emotion that can arise in cases involving changes to charitable organizations, with the court itself commenting on the “unprecedent public interest” in the form of unsolicited communications received from politicians, art scholars, former students, legal scholars, law professors and lawyers not involved in the case.  2004 WL 1960204, at *1.  Litigation concerning sought-after administrative changes to operations of the Foundation occurred in multiple cases over two decades.

[32] Id. (quoting the Foundation’s charter)

[33] Id. at *6. See also In re Barnes Found., 69 Pa. D. & C.4^th 129 (Com. Pl. 2004) (quoting the Foundation charter).

[34] Hitz v. Hoekstra, No. E058293, 2017 WL 1366066, at *2 (Cal. Ct. App. 2017) (quoting settlor’s deed of trust).

[35] Id. at *6.

[36] UTC, § 413 cmt.  See also Restatement (Charitable Organizations) (2021) §§ 3.02 cmt. b, 3.03 cmt. b.

[37] UPMIFA (2006) § 6(b) and (c).

[38] 2014 WL 5080058 (D.C. Super. Ct. Aug. 18, 2014).

[39] 661 S.E.2d 805 (Va. 2008); Va. Code Ann. § 2.2-507.1.  See also YWCA v. Morgan, 189 S.E.2d 169, 174-175 (N.C. 1972) (if the gift is required to be used by the recipient charitable corporation for a purpose within the scope of its powers and consistent with the purposes for which it was formed, then the gift is “absolute” and a trust is not created).

[40] No. 150619, 2015 Va. Unpub. Lexis 22, at *3-4 (Va. June 9, 2015).

[41] 494 N.E.2d 1011 (Mass. 1986).

[42] Restatement (Third) § 28 cmt. a.  See also St. Joseph’s Hosp. v. Bennett, 22 N.E.2d 305, 308 (N.Y. 1939) (while a restricted gift does not create a trust, the restriction is enforceable in the sense that the charitable corporation cannot divert its use to a different corporate purpose).

[43] 496 N.E.2d 861, 864 n.5 (N.Y. 1986)

[44] A discussion of mergers and joint ventures is beyond the scope of this article.

[45] Corcoran Gallery of Art v. District of Columbia, No. 2014CA003745B, 2014 D.C. Super. Lexis 17, at *27-30 (D.C. Super. Ct. Aug. 18, 2014).

[46] Id. at *84

[47] 496 N.E.2d 861, 867-69 (1986).

[48] 494 N.E.2d at 823 (citation omitted in original).

[49] UPMIFA § 6.

[50] UTC §§ 410(b), 412(a) and (b), 413(a).

[51] 263 Va. 151 (2002).  Virginia’s General Assembly responded by enacting Section 2.2-507.1, cited supra in note 39.  While that statute addresses Attorney General authority with respect to assets held by charitable corporations, it does not require notification of the Attorney General or judicial approval.

[52] 494 N.E.2d at 1021.

[53] Restatement (Charitable Organizations) § 3.01 cmt. a.

[54] Bogert’s § 414.

[55] Restatement (Charitable Organizations) §5.01.

[56] See also Bogert’s § 411 (courts have expanded standing as a result of laxity in enforcement by state Attorneys General).

[57] UTC § 410(b).

[58] UPMIFA § 6(a).

[59] Restatement (Charitable Organizations) §6.04 cmt. b(2)(B).