10:55 - 11:50 Other Issues that May Trigger AG Involvement

Case Study A: Olin B. and Desta Schwab Foundation, Inc. Facts: In 1989, Olin B. Schwab established the non-profit public benefit corporation Olin B. and Desta Schwab Foundation, Inc. to support programs for counseling young people to assist them in finding careers matching both their skills and interests. Beginning in 2002, under the principal leadership of the Foundation’s President, Attorney Richard H. Blaich, the Foundation’s Board of Directors reduced its number to three, eliminated the Foundation’s staff, merged into a newly-formed Nevada non-profit corporation (governed by the same directors as the Indiana Foundation), transferred the former Indiana Foundation’s assets to the Nevada corporation, and purchased a $1.5 million home in a Las Vegas, Nevada resort, which Blaich used as a personal residence. The Foundation’s investment income dropped from $250,000 per year to $159,000 per year, its operating and administrative expenses increased after it eliminated its paid staff, and its travel expenses increased from $3,500 to over $50,000 per year. AG Action: In 2005 the Attorney General filed his civil action to rescind the unlawful merger of the Indiana Foundation into the Nevada corporation and to return assets wrongfully taken by the Nevada corporation from the Indiana Foundation during and after the merger. The Attorney General brought his action under his statutory authority to regulate the activities of non-profit corporations under circumstances involving the wasting of corporate assets and other malfeasance. To preempt a possible jurisdictional challenge and the transfer of funds from either the Indiana or Nevada corporations, the Attorney General enlisted the assistance of the Nevada Attorney General’s office, which filed a parallel action in Nevada. Outcome: The Attorney General secured the resignation of Richard H. Blaich (the other two directors had resigned before the Attorney General filed suit), the appointment of a temporary receiver for the Nevada corporation, the merger of the Nevada corporation into a new Indiana corporation, and restoration of the assets of the original Indiana Foundation to the new Indiana corporation. Tools: 1. Indiana Attorney General’s Verified Complaint for Nullification of

Corporate Merger, Restitution of Wrongfully Appropriated Corporate Assets, and Preliminary and Permanent Injunctions

2. Indiana Attorney General’s Motion for Temporary Restraining Order and Preliminary Injunction

Authority: Indiana Code § 23-17-24-1

Case Study B: Earlham College, trustee of the public charitable trusts created by Eli Lilly to operate and maintain Conner Prairie Facts: In 1964, Eli Lilly, grandson of the founder of Eli Lilly and Company, created a public charitable trust to benefit the Conner Prairie outdoor living-history museum and Earlham College, a non-profit corporation and educational institution, both located in Indiana. Earlham was designated as the trustee of the trust. The terms of the trust required Earlham to apply income from the trust first to support the annual operating budget of Conner Prairie, with the remainder to be used as Earlham deemed appropriate for its functioning as a liberal arts college. The trust’s terms also prohibited the invasion of principal, except as necessary for capital improvements to Conner Prairie. The Conner Prairie museum community grew significantly from its creation, successfully fulfilling its purpose of educating the public about pioneer history in Indiana. Unfortunately, a financial dispute arose between the museum’s local board and Earlham – the local board felt that trust expenditures favored Earlham, contrary to the terms of the trust. The Attorney General intervened in the dispute to address the inherent conflict of Earlham serving as both trustee and beneficiary under this particular trust. AG Action: In 2004, the Attorney General filed his Petition for Accounting, seeking a court order requiring Earlham to file verified statements of accounts for the period 1964 through 2004, which the Attorney General had learned Earlham had failed to do. The Attorney General’s civil action served as a means to open negotiations with Earlham to determine the appropriate distribution of trust income between Earlham and Conner Prairie. Outcome: Through negotiations, the Attorney General secured Earlham’s agreement to divide the corpus of the trust between itself and the museum, and to create two separate non-profit corporations – one to serve as the trustee of the reformed trust to benefit the museum, and one to manage the operations of the museum. Tools: 1. Petition for Accounting Authority: Indiana Code § 30-4-5-12(c)

Case Study C: Sargent Museum

Facts: In 1994, the Sargent Museum in Manchester, NH was created as a 501 (c)(3) charitable entity. The Museum’s assets included 900 boxes containing Native American artifacts, books, documents and equipment from archaeology sites in New Hampshire. The Museum was incorporated with 5 board members and bought - for $1.00 - a historical building from the City of Manchester to renovate and convert into a museum. Everyone expected the museum to be a success. By 2005, the board was ineffective, the

building was in disrepair and vandalized, and the 900 boxes lay untouched, uncatalogued.

AG Authority: This case is a good example of when an AG should intervene to protect charitable assets for the benefit of the public. Under its common law authority, the AG had full authority to do so in this case, since the board failed to fulfill its duty of care to the organization. The Probate Court granted the “Petition to Remove the Board and the Appointment of a Receiver.” The AG's Office then worked closely with the Receiver (i) to select a suitable museum to receive the entire collection, (ii) to sell the building to maximize the charitable assets, and (iii) to take the proceeds of the sale and place them into a trust fund to pay for the maintenance of the collection.

Mediation: The case eventually ended in mediation, when disputes arose over which museum should be selected.

Tools: 1. New Hampshire Attorney General’s Petition to Remove the Board and Appoint Receiver

Authority: Common law and statutory law

NCCUSL (now Uniform Law Commission)Regulation of Charities Report

Case Study D: Nashua Public Library – Chandler Case

Facts: In 1959, Mabel Chandler left her stately Victorian home to the City of Nashua to be used as a public library forever. It was used as a library until 2006, when the library trustees decided to sell the building. (A new library had been built in the 1970’s.) Mabel Chandler’s heirs disapproved of the sale – as did several community leaders who wanted her intent to be enforced. Both her heirs and the community activists pointed to the words in her deed that said: "to be used as a library forever."

Legal Issues: This case involves important questions of legal standing: Should community activists have standing in court when the AG’s Office represents the public interest? Should the activists be included in mediation sessions when they lack legal standing in the court process? Is mediation a preferred method of dealing with charitable trust issues? What are the dangers in permitting community activists inside the mediation process? Do heirs have legal standing under the Uniform Trust Code (Section 4-413)?

What does the word “forever” mean in a bequest? Under what circumstances can a restriction be modified?

Discussion: The law provides mechanisms to modify donor-imposed restrictions. Under the common law of trusts, the doctrines of deviation and cy pres permit a court to modify a restriction under certain circumstances: The Uniform Trust Code has codified these

doctrines in Section 412 (deviation) and Section 413 (cy pres). Using deviation, a court may remove a purpose or an administrative restriction if, because of unanticipated circumstances, a modification will further the purpose of the trust. The modification must be made in accordance with the settlor’s probable intent. Using cy pres, a court can modify a purpose restriction in a manner consistent with the settlor’s charitable purposes, if the restriction has become unlawful, impracticable, impossible to achieve or wasteful. If a trust provision creates a substitute gift in a noncharitable beneficiary, and if a restriction meets the cy pres standard, cy pres will prevail over the substitute gift unless fewer than 21 years have elapsed since the trust’s creation.

UPMIFA applies these rules to charities organized as nonprofit corporations. Section 6(b) applies deviation to restrictions on investment or management of charitable funds, and Section 6(c) applies cy pres to purpose restrictions.

Tools: 1. New Hampshire Attorney General’s Objection to Granting of Standing

2. Uniform Trust Code, Sections 412-413

3. Uniform Prudent Management of Institutional Funds Act, Section 6

4. Restatement (Third) of Trusts, Section 67

Case Study E: When Should the AG Intervene in a “religious dispute?” St. Francis Xavier Church

Facts: In 2005, the Catholic Diocese closed and deconsecrated St. Francis Xavier Church, despite protests from some parishioners devoted to that church. The Catholic Church then sold the land and buildings to the Armenian Orthodox Church; and a dispute arose between the Church and the parishioners over a restrictive covenant in the deed that provided that the land and buildings were donated solely to be used for “religious and pious purposes.” The AG’s Office stepped into the dispute because the charitable bequest (the land) was given with certain restrictions.

Legal Issues: When should an AG intervene in a “religious” dispute between a religious hierarchy and its parishioners? Because of the First Amendment, these cases are very sensitive. However, where deeds and “secular documents” are involved, the AG’s Office may step into the court proceedings to enforce the donor’s intent and protect the charitable asset. In the “St. Francis Xavier” case, the “secular documents” were the restrictive deeds, not religious doctrine, and the issues were charitable trust issues.

Case Study F: Questionable fundraising activity: misleading direct mail/appeals; pressure tactics; exhorbitant fundraising costs

Facts: A professional fundraiser has a contract with a charity that provides for solicitation of charitable dollars. The professional fundraiser will retain 80% of the proceeds as its expense, and citizens complain about the solicitation. What role does the AG’s Office have under federal and state case law?

Legal Issues: Under three U.S. Supreme Court cases (Schaumberg, Munson and Riley, as well as under the more recent Madigan case), the AG’s Office is restricted in its ability to intervene in such fundraising cases. State law may compel the registration of the professional fundraiser and may compel the filing of a financial report on the solicitation. In addition, if a citizen asks, the professional fundraiser must disclose the percentage going to fundraiser, but there is no prohibition on fundraising costs beyond a certain percentage. An AG must allege and prove fraud/misrepresentation in the solicitation.

Commentary: In 2008, the House Committee on Oversight and Reform in Washington held hearings on charitable solicitation abuses, excessive compensation for fundraisers, substantial loans by charities to fundraisers, and minimal spending on charitable purposes. Federal legislation is being discussed to deal with this issue on a national level. Oregon is also considering legislation.

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PANEL #2: Triggers EXHIBIT to Case Study C:

Petition for Receivership

THE STATE OF NEW HAMPSHIRE

HILLSBOROUGH, ss PROBATE COURT

STATE OF NEW HAMPSHIRE THROUGH THE ATTORNEY GENERAL’S OFFICE

CHARITABLE TRUSTS UNIT

v.

The Sargent Museum f/k/a The Friends of the Sargent Museum of Archaeology Wesley R. Stinson, President Karen Carter, Board Member Harry Umen, Board Member

PETITION FOR THE REMOVAL OF THE BOARD AND

APPOINTMENT OF A RECEIVER

NOW comes the State of New Hampshire through the Attorney General’s

Office Charitable Trusts Unit, by and through its counsel, the Attorney General

Director of Charitable Trusts, and petitions for the removal of the board of directors

and the appointment of a Receiver over the assets of The Sargent Museum f/k/a The

Friends of the Sargent Museum of Archaeology. In support of this Petition, the State

says as follows:

PARTIES

1. The Attorney General’s Charitable Trusts Unit, through the Director,

Michael S. DeLucia, exercises all the common law and statutory rights, duties, and

powers of the Attorney General in connection with the supervision, administration

and enforcement of charitable trusts, charitable solicitations, and charitable sales

promotions pursuant to RSA 7:19 – 7:32-l and has the duty to see that the rights of the

public in a charitable trust are protected and properly executed. See Attorney General

v. Rochester Trust Company et. al., 115 N.H. 74 (1975).

The Attorney General Director of Charitable Trusts’ address is Department of

Justice, 33 Capitol Street, Concord, New Hampshire 03301.

2. Defendant The Sargent Museum f/k/a The Friends of the Sargent Museum

of Archaeology is a New Hampshire nonprofit corporation registered with the

Secretary of State (Exhibit A), recognized by the Internal Revenue Service as a

501(c)(3) organization (Exhibit B), and is a charitable trust registered with and under

the supervision of the Attorney General and the Director of Charitable Trusts pursuant

to RSA 7:19 – 7:32-l. (Exhibit C)

The last known address of The Sargent Museum f/k/a The Friends of the

Sargent Museum of Archaeology is PO Box 4212, Concord, NH 03302.

3. Defendant Wesley R. Stinson is the current President of the Board of

Directors and Executive Director of The Sargent Museum f/k/a The Friends of the

Sargent Museum of Archaeology and has executed numerous documents on behalf of

the Board of Directors. Defendant Stinson’s address is 15 New Castle Street,

Concord, NH 03301.

4. Defendant Karen Carter is a current board member of The Sargent Museum

f/k/a The Friends of the Sargent Museum of Archaeology. Defendant Carter’s

address is 1267 Elm Street, Manchester, NH 03101.

5. Defendant Harry Umen is a current board member of The Sargent Museum

f/k/a The Friends of the Sargent Museum of Archaeology. Defendant Umen’s

address is 250 N. Bay Street, Manchester, NH 03101.

JURISDICTION

6. This Court has jurisdiction over charitable trusts in accordance with RSA

547:3.

LEGAL STANDARDS AND UNDISPUTED FACTS

7. The Sargent Museum f/k/a The Friends of the Sargent Museum of

Archaeology is defined as a charitable trust under RSA 7:21, II and is subject to the

jurisdiction of the Attorney General, Director of Charitable Trusts under the

provisions of RSA 7:19. The Sargent Museum f/k/a The Friends of the Sargent

Museum of Archaeology was incorporated with the Secretary of State as The Friends

of the Sargent Museum of Archaeology on July 8, 1994, as a nonprofit corporation.

(Exhibit D) The Articles of Agreement were amended on August 17, 1995 changing

the name to The Sargent Museum and amending the purpose of the corporation.

(Exhibit E)

8. The amended mission of The Sargent Museum f/k/a The Friends of the

Sargent Museum of Archaeology is as follows: “The General purpose shall be to

promote, through educational exhibits, events, and fundraising activities, the

establishment and maintenance of The Sargent Museum. The museum shall be

named in honor of New Hampshire’s best known professional archaeologist, Howard

R. Sargent, formerly of Georges Mills, New Hampshire. The museum shall be

dedicated to continuing Howard Sargent’s research and teaching efforts in

archaeology, anthropology, and history. The organization will promote public

education and, by bringing a museum of cultural and natural history to the State of

New Hampshire, teach the importance of preserving and maintaining collections,

sites, and data for future generations, by fostering public appreciation of our rich

archaeological resources and their role in deciphering our history, disseminating

information and stimulating public understanding of and interest in archaeology

through educational activities, interpretive displays and scholarly research,

cooperating with and encouraging other organizations having similar purpose,

acquiring fee and lesser interests in property. . . .and promoting, preserving, and

maintaining this property.” (Exhibits D and E)

9. The individual members of the Board of Directors of The Sargent Museum

f/k/a The Friends of the Sargent Museum of Archaeology, a charitable nonprofit

corporation, are deemed to be fiduciaries acting in a fiduciary capacity. RSA 7:28-e.

10. RSA 292:6-a states “In the interest of encouraging diversity of discussion,

connection with the public, and public confidence, the board of directors of a

charitable nonprofit corporation shall have at least 5 voting members, who are not of

the same immediate family or related by blood or marriage. No employee of a

charitable nonprofit corporation shall hold the position of chairperson or presiding

officer of the board.”

11. The By-Laws of the Sargent Museum, Article III, Section 2 states: “The

number of Trustees of the corporation shall at all times be at least five (5) voting

members in accordance with RSA 292:6-a with the maximum number as is deemed

necessary by the Board.” (Exhibit F)

12. The latest financial report filed under oath with the Attorney General by

The Sargent Museum for the year ending December 31, 2004 (Exhibit G), and the

latest form 990 EZ filed with the Internal Revenue Service foe the year ending

December 31, 2004 (Exhibit H) lists the Officers and Directors of The Sargent

Museum as follows: Wesley R. Stinson, President, Ron Boufford, Vice-President,

Board Members: Al Girard, Walter Stiles, Karen Carter, and Harry Umen.

13. The Sargent Museum’s assets include land and a building located at 88

Lowell Street, Manchester, NH (Exhibit I), an extensive collection of artifacts, books,

documents, and equipment located in the Sargent Museum’s corporate office, Chase

Building, 1045 Elm Street, Room 303, Manchester, New Hampshire, and in a facility

known as the Archaeological Collections Management and Curation Facility owned

and operated by the State of New Hampshire and located at 99 Airport Road,

Concord, New Hampshire subject to a Storage and Services Agreement between the

State of New Hampshire Department of Cultural Affairs and The Sargent Museum

dated February 27th, 1998 (Exhibit J), and a bank account in Citizens Bank, PO Box

789, Providence, RI, current balance unknown.

ARGUMENT

14. Pursuant to RSA 292:6-a and the By Laws of The Sargent Museum the

board of a nonprofit corporation must consist of at least five members.

15. Petitioner has obtained verbal confirmation (telephone conversation with

Terry M. Knowles, Assistant Director Charitable Trusts Unit) of the resignation of

Walter Stiles, 226 Sagamore Street, Manchester, NH 03104; written confirmation of

the resignation of Ron Boufford, 42 Pine Crest, Bedford, NH 03110, (Exhibit K) and

has confirmed the death of a third board member, Al Girard of Amherst, NH, on April

14, 2005 (Exhibit L).

16. Based upon information and belief it is alleged the Sargent Museum f/k/a

The Friends of the Sargent Museum of Archaeology currently has a Board of

Directors consisting of three people; it is further alleged by the Attorney General

Director of Charitable Trusts that the Board of Directors of The Sargent Museum

f/k/a The Friends of the Sargent Museum of Archaeology does not meet the statutory

requirements of the minimum 5 members nor the requirements of the organization’s

bylaws and therefore lacks the capacity to legally convene meetings of the board

and/or to transact the business of the corporation.

17. The individual members of the Board of Directors of The Sargent

Museum f/k/a The Friends of the Sargent Museum of Archaeology are deemed to be

fiduciaries acting in a fiduciary capacity. RSA 7:28-e. It is alleged by the Attorney

General Director of Charitable Trusts that defendants Stinson, Carter, and Umen have

failed to carry out their fiduciary duty with respect to the operation and administration

of the charitable assets of The Sargent Museum f/k/a The Friends of the Sargent

Museum of Archaeology.

18. In support of the foregoing allegations the Attorney General Director of

Charitable Trusts states as follows:

(a) The Sargent Museum is the owner of premises located at 88 Lowell Street,

Manchester, New Hampshire. The Sargent Museum applied for a grant from the

Land and Community Heritage Investment Program (LCHIP), of Concord, New

Hampshire and was awarded a grant in the sum of $70,230 on April 8, 2005 for

purposes of “protect[ing] the historic character and preservation values of the Old

High School (88 Lowell Street) located in Manchester, Hillsborough County, New

Hampshire.” And for stabilizing and securing the “severely fire damaged building”.

(Exhibit M) The Land and Community Heritage Program issued a check in the sum

of $35,115.00 to The Sargent Museum on April 8, 2005 pursuant to an agreement

signed by Wesley R. Stinson on August 25, 2004. (Exhibit N) Based upon

information and belief it is alleged no work has been done on the building located at

88 Lowell Street, Manchester, New Hampshire, the building remains boarded up and

derelict, and the Attorney General has no accounting for the $35,115.00 in LCHIP

grant funding.

(b) Based upon information and belief it is alleged defendants Stinson, Carter,

and Umen breached their fiduciary responsibility to carry out the mission of The

Sargent Museum f/k/a The Friends of the Sargent Museum of Archaeology as

follows: defendants Stinson, Carter, and Umen have failed to establish a museum of

archaeology, have failed and continue to fail to provide public education, have failed

and continue to fail to disseminate public information, and have failed and continue to

fail to promote, preserve, and maintain the property and artifacts belonging to The

Sargent Museum.

(c) Based upon information and belief it is alleged defendants Stinson, Carter, and

Umen are in violation of RSA 292:6-a and their fiduciary responsibilities by failing to

have 5 members of the Board of Directors, by failing to elect a treasurer, by failing to

have board meetings, and by failing to carry out their fiduciary responsibility to

properly safeguard and administer the assets of The Sargent Museum f/k/a The

Friends of the Sargent Museum of Archaeology.

(d) Officers and directors have a fiduciary duty to properly manage the assets of a

charitable corporation and to utilize those assets in carrying out the mission of the

organization. Based upon information and belief it is alleged defendants Stinson,

Carter, and Umen have failed to fully preserve and maintain the artifacts owned by

the Sargent Museum stored in the facility located at 99 Airport Road, Concord, NH,

said collection being uncataloged and stored in several hundred cardboard boxes

located in said facility.

(e) Based upon information and belief it is alleged defendants Stinson, Carter, and

Umen have failed to carry out their fiduciary responsibility to properly maintain and

utilize the office located at Chase Block, 1045 Elm Street, Manchester, New

Hampshire and have received a notice to vacate the premises and to remove the

contents thereof no later than June 30, 2006. (Exhibit O)

19. Based upon information and belief it is alleged the Sargent Museum f/k/a

The Friends of the Sargent Museum of Archaeology does not have the requisite

number of board members required by New Hampshire Statutes and required by its

own bylaws.

20. Based upon information and belief it is alleged defendants Stinson,

Carter, and Umen have failed and continue to fail to carry out their fiduciary

responsibility to properly manage and safeguard the assets of The Sargent Museum.

21. The Attorney General Director of Charitable Trusts has duty to protect the

public interest and to protect charitable assets in cases involving charitable trusts.

22. The Attorney General, Director of Charitable Trusts, alleges and believes

the assets of The Sargent Museum are in imminent jeopardy stating as follows:

defendant The Sargent Museum f/k/a The Friends of the Sargent Museum of

Archaeology lacks a legally constituted and elected governing body and lacks a

treasurer; defendants Stinson, Carter, and Umen have failed and continue to fail to

carry out the mission of The Sargent Museum; defendants Stinson, Carter, and Umen

have failed and continue to fail to property maintain and utilize the premises located

at 1045 Elm Street, Manchester, New Hampshire and as a result of this failure will be

required to vacate said premises and to remove all artifacts, records, equipment and

furniture on or before June 30, 2006; and defendants Stinson, Carter, and Umen have

failed and continue to fail to properly safeguard the assets of The Sargent Museum

f/k/a The Friends of the Sargent Museum of Archaeology.

WHEREFORE Petitioner respectfully requests that this honorable Court:

A. Issue an order removing defendants Wesley Stinson, Karen Carter, and

Harry Umen as Board Members of the Sargent Museum.

B. Appoint Attorney Todd Fahey of Concord, New Hampshire as the

Receiver over the assets of The Sargent Museum.

C. Award Petitioner its reasonable costs and attorneys’ fees in connection

with this matter.

D. Order such other relief as may be just and equitable.

Respectfully submitted, STATE OF NEW HAMPSHIRE

THROUGH THE ATTORNEY GENERAL’S CHARITABLE TRUST UNIT By its counsel, KELLY A. AYOTTE, ATTORNEY GENERAL

Dated: June 14, 2005 By:_______________________________

Michael S. DeLucia, Director of Charitable Trusts

Department of the Attorney General 33 Capitol Street Concord, NH 03301 603-271-3591

VERIFICATION ________________________________ Michael S. DeLucia, Director Personally appeared before me, Michael S. DeLucia , who swore, under the pains and penalties of perjury, that the facts contained in this Petition, which he signed, are true and accurate to the best of his knowledge and belief. _________________________________ Notary Public/Justice of the Peace My Commission expires:

PANEL #2: Triggers EXHIBIT to Case Study C:

Regulation of Charities Report

National Conference of Commissioners on Uniform State Laws Study Committee on the Regulation of Charities

January 2007

Description of Project

The NCCUSL Study Committee on the Regulation of Charities proposes to replace the 1954 Uniform Supervision of Trustees for Charitable Purposes Act with a new Uniform or Model Act to clarify and facilitate the role of state Attorneys General in the oversight of charities and to establish effective registration and reporting requirements in aid of the Attorney General supervisory role. In particular, a new Act would incorporate the following elements: 1. Codify and articulate state attorney general authority to protect assets that have been dedicated to charitable purposes, whether those assets are held in trust or owned outright by charitable corporations A new uniform act ought to clarify and codify, but not substantially modify, our longtime understanding of attorney general powers and authority, which is derived from common law parens patriae power to protect charitable assets on behalf of the public. A revised act will eliminate uncertainty about whether attorney general authority extends to charitable assets held in corporate form by clearly articulating that corporate charities are subject to the act. Careful consideration will be given to whether categorical exclusions from the act altogether or from its registration and reporting requirements are justified and prudent. 2. Specify which transactions and legal proceedings involving a charity require notice to the attorney general, and when the attorney general is a necessary or proper party to a legal action involving a charity In aid of the supervisory function, a new uniform or model act will expand upon and clearly specify which transactions and legal proceedings require notice to the attorney general, and when the attorney general is a necessary or proper party to an action involving a charity. Likewise, a revised act will clearly articulate the attorney general’s investigative powers. The attorney general’s role in the conversion of a charitable endeavor to for-profit form by sale of the charity’s assets, joint venture, or merger is one important area to be addressed in this section of the act. 3. Articulate the attorney general’s investigatory powers and catalog remedies available to the attorney general

. Specification of attorney general investigative tools and a catalog of remedies available to the attorney general adds little to the substance of existing law, because they are inherent in the attorney general's common law powers. However, codifying these matters and presenting them in a logical and convenient place will be helpful to both the regulators and the regulated. 4. Develop and codify principles to guide attorneys general in their decisions about when and how to proceed in cases of interstate and multi-state problems and to enable and encourage collaborative efforts to oversee charities that operate in multiple states Established conflict of laws principles apply to corporation and trust law issues that arise across state lines.1 Each of these frameworks offers some guidelines, but neither one alone nor the two together settle how we ought to approach the interstate and multi-state issues that arise in the context of charitable organizations. A uniform or model act should include a system of principles to guide attorneys general in their decisions about when and how to proceed in these interstate and multi-state situations, and to enable and encourage collaborative efforts to oversee charities that operate in more than one state. 5. Create a scheme for registration and periodic reporting for charities The original Act’s attention to registration and reporting obligations for charities will be carried through into a new act, because access to sufficient, timely information about the existence and operations of charitable organizations remains essential to effectuate the attorney general’s supervisory role. A new act must provide an effective reporting scheme while leaving room for state-to-state particularities in regulatory needs and desires. The act would also be designed to encourage coordination among the states to minimize, where possible, the compliance burden on charities that operate in more than one state. Establishment of reporting requirements should be accompanied by careful consideration of which information ought to be subject to public disclosure.

Need for the Project

The Uniform Supervision of Trustees for Charitable Purposes Act was adopted by the Commissioners in 1954, modeled on a New Hampshire statute that had been enacted

1 Marion Fremont-Smith, Governing Nonprofit Organizations: Federal and State Law and Regulation 323-324 (2004), and Evelyn Brody, Whose Public? Parochialism and Paternalism in State Charity Law Enforcement, 79 Indiana L. J. 938, 979-984 (2004), summarize relevant corporation and trust law conflict of laws principles. See also, Eugene F. Scoles, Peter Hay, et al., Conflict of Laws 1027-1038, 1102-1116 (3d ed., 2000).

in 1943 and largely copied in Rhode Island, South Carolina, and Ohio. 2 The Prefatory Note to the Act noted that

[m]ost Attorneys General now have the power and duty to compel the proper administration of funds held by trustees and others for charitable purposes. However, there has been no practical method of carrying out this responsibility. This is true because, in most states, there is no agency to which the existence and administration of charitable trusts and grants must be reported.3

Thus, the purpose of the Act was to provide the “practical machinery”4 that would facilitate the existing supervisory role of state attorneys general.5 The machinery the Act creates is not particularly complex – it provides for the attorney general to establish and maintain a register of trustees subject to the Act (§ 4); requires trustees to file copies of the instrument creating the charitable trust relationship (§ 5) and to file periodic written reports providing information on the nature and administration of assets held for charitable purposes, with the attorney general to specify the process for and contents of the filings by regulation (§ 6); and describes in general terms attorney general investigation, discovery, and enforcement powers (§§ 8, 9, 11). The Uniform Act was adopted by a handful of states; a few more enacted registry and reporting statutes that resembled the legislation on which the Act was modeled. Although the various state provisions share core features, they were not entirely uniform from the outset, and amendments over the last fifty years have introduced further divergence in the details. 6 Given its sparse adoption and barebones approach, the Uniform Act fails to reach many charities.7 Even in states that have adopted the Uniform Act or something like it, many charitable organizations are not affected by its requirements. The Uniform Act 2 The history of the Uniform Act is thoroughly chronicled in Fremont-Smith, supra note 1, at 311-313 (2004). 3 Uniform Supervision of Trustees for Charitable Purposes act References and Annotations, 2000 Main Volume. 4 Id. 5 See generally George G. Bogert, Proposed Legislation regarding State Supervision of Charities, 52 Mich. L. Rev. 633 (1954). 6 Fremont-Smith, supra note 1, at 312-316. 7 However, the states that do have the Act, or a more sophisticated version, include those that account for a substantial proportion of the country’s charitable organizations – California, New York, Ohio, Massachusetts, and Illinois are among them.

does not explicitly include charitable corporations in its coverage - it is at best ambiguous as to whether a charitable corporation that holds property neither in trust nor subject to explicit restrictions on its use is subject to the registration and reporting requirements and the other oversight mechanisms provided by the Act. Several of the states that have adopted the Act or something like it have recognized and resolved the ambiguity (in at least one instance, after the attorney general’s authority under the Act to supervise charitable corporations was successfully challenged8). But the Uniform Act itself has not been amended to fix the problem, and the South Carolina and Rhode Island versions of the statute are applicable only to charitable trusts.9 Furthermore, some state acts exempt various categories of organizations from the registration and reporting requirements that are at the heart of the statutes. Religious organizations are frequently excluded, and states variously exempt schools, hospitals, small organizations, cemetery corporations, and a number of other kinds of organizations.10 The assumption that the watchfulness of their particular constituencies is a sufficient substitute for regular reporting to the state attorney general may not be warranted. Exempting these organizations from some or all of the attorney general’s specified oversight and supervision functions leaves a large hole in the regulatory scheme. The existing Uniform Act’s ambitions are very modest. Intended to alert the attorney general of the existence of charitable assets and to provide the attorney general periodically with information on the administration of those assets, the Uniform Act makes no attempt to delineate the attorney general role generally or to provide guidance on a number of oversight issues that might profitably be encompassed in state law. The Act does not specify when the attorney general is either a “necessary” or “proper” party to an action concerning a charity. Its reporting provisions are slim – it asks for periodic financial information (with the particulars to be specified by attorney general rules), but it does not require notice to the attorney general of particular transactions and legal proceedings. Many state statutes require notice of dissolution of a charitable corporation to be filed with the secretary of state, resulting in most states in “no oversight by a state official interested in preserving the assets of the terminating charity.”11

Finally, it is clear that the 52-year-old Uniform Act has not kept up with the times. In the years since the Act’s adoption by NCCUSL, related law has rather dramatically changed around it. The regulatory function of tax exemption law has

8 See People ex rel. Scott v. George F. Harding Museum,58 Ill. App. 3d 408, 416-417 (1978). 9 Fremont-Smith, supra note 1, at 313-314. 10 Id. at 315-316. 11 Id. at 318.

evolved significantly – the 1969 private foundation rules and the intermediate sanctions provisions are the most notable examples. Nonprofit corporate governance law has changed, too. The Model Act, the Revised Model Act, and various more incremental changes in the statutes, as well as developments in case law, have altered the landscape since the Uniform Act was formulated. Many states have adopted detailed charitable solicitation registration and reporting regimes, and some have responded to particular pressures, for example, the pitfalls of hospital conversions, with specialized statutes. The Uniform Trust Act and UMIFA (now UPMIFA) have undergone revision, and the Restatement (Third) of Trusts has articulated a reshaped understanding of some of the background rules. The Uniform Act is seriously outdated. The consequences of these shortcomings are many. The Act cannot possibly accomplish even its limited mission in its current form. The gaps are too many and too big, and the ambiguities lead to unprincipled distinctions in oversight based on organizational form. The absence of clear specification of the reach of attorney general authority has sometimes led state regulators to conclude they have no power to intervene, even though their common law powers almost certainly provide sufficient authority. On the other hand, lack of clear specification of the scope and limits of attorney general authority has sometimes invited, or at least enabled, overreaching. This becomes particularly significant when those who govern a charitable corporation propose an organic change of some sort – a significant change in purpose, a conversion from ongoing charitable operations to a cash fund (as when a hospital sells out to a for-profit corporation), or dissolution. A related problem arises in the context of interstate and multi-state issues. Marion Fremont-Smith notes that “[t]he extent of the power of an attorney general to affect disposition of charitable property in a state other than his own is undecided.”12 This lack of clarity leaves room for the collision of two attorneys general, each bringing an expansive view of his own reach and a sense that it is right and fair to manipulate the malleable standards he is bound to apply in his protection of charitable assets.

Supervision of charities is not evenly or adequately covered elsewhere in the law. State nonprofit corporation laws do not, for the most part, delineate the attorney general’s role in the supervision of charitable organizations, although some of them do specify particular situations when an organization must notify or involve the attorney general or a court.13 Questions about the relationship between an organization and its assets and, therefore, the role of the attorney general (and the courts) with respect to supervision of the organization and its assets are not answered very clearly or thoroughly by nonprofit corporation statutes, even when they seem to try. At least 39 states regulate charitable

12 Fremont-Smith, supra note 1, at 308. 13 See id. at 319-320. Some states have enacted statutes that regulate health care conversions; some of these provisions specify a role for the attorney general. Id. At 319-321. See also Brody, supra note 1, at 962-967.

solicitation.14 These laws assist with the most clear-cut consumer protection function of the attorney general, but do not address the many other aspects of attorney general oversight of charity.

The Value of Uniformity

States with elaborate supervision provisions in place (California and New York, for instance) will not likely be interested in adopting a new uniform or model approach, although they might find some pieces useful. On the other side of the coin, many states would not likely want provisions as elaborate and extensive as those of the most active states (California and New York, for instance), although some of the better-developed state statutes might provide a starting place for a revised uniform or model act. But as pressures increase to create and improve meaningful regulatory programs in the states, an updated, well-conceived revised act would provide an easy avenue for states with nothing on the books or with statutes modeled on the antiquated 1954 Act to amend their statutes to correct the deficiencies in the old act and to comport with the more complex, multifaceted legal framework that now applies to charitable organizations. A well-drafted uniform or model act would facilitate effective oversight of charitable assets, a matter of significant public importance. In addition, charitable resources now expended by organizations that operate in more than one state on compliance with multiple state regimes could be spared. A uniform or model act would be a logical place to set out principles for dealing with interstate or multi-state issues, because uniformity is, of course, essential if the rules address how the adopters will deal across state lines. The NASCO Charleston Principles, developed by state charity officials to address charitable solicitation – specifically internet solicitation – that crosses state lines, illustrate the recognition by state charity regulators of the need to address multi-state issues, and might provide a helpful template for thinking about a broader array of interstate and multi-state charity regulation issues. A uniform act would have to fit smoothly into the entire body of state law relevant to the oversight of charities. Given the variations in the content and organization of state laws in related areas (e.g., nonprofit corporation law, specific provisions relating to conversions, and assignment of some monitoring (or at least information collection) functions to state officers or agencies other than the attorney general), it might be difficult to shape a uniform act that fits easily into the puzzle in some states. Crafting a statute that is based on solid policy choices, yet sufficiently adaptable to the particular circumstances of various states is a challenge, but should be solvable.

14 Fremont-Smith, supra note 1, at 55 and Appendix, Table 1, column 15. In the early 1980’s the National Association of Attorneys General and the National Association of State Charity Officials developed a uniform registration form for soliciting charities and fundraisers. Id. Several states that use the form require additional information or filings. See NASCO web site.

Existing State Law and Trends There is too much variation among the states that have some version of a charities supervision act to detail here, although some of the variation is described above under “Need for the Project.”15 The differences among states, for the most part, tend to be more in the details than in the central concepts. A notable exception to this observation would be the modifications to California’s version of the Uniform Act that were added by the Nonprofit Integrity Act of 2000. The Act imposes on charities with annual gross revenues of $2 million or more requirements for audits, audit committees, public disclosure of audited statements, and board review of CEO and CFO compensation. The Act also appends detailed regulation of charitable fundraising and fundraisers to the supervision provisions that are derived from the Uniform Act.16 In other states, conversion provisions and charitable solicitation registration and reporting requirements are placed elsewhere in the code. A few states have existing laws that require attorney general notification of essentially all lawsuits involving the disposition or administration of charitable funds. A number of other states specify attorney general notification of a more limited array of suits, and many require notification only for cy pres petitions and petitions for dissolution. Many states require notice of dissolution to be filed with the Secretary of State or other state official, but require no notification to the attorney general. The National Association of Attorneys General produced a Model Act for Nonprofit Healthcare Conversion in 1998, and about half the states have adopted some sort of conversion statute (many of them modeled after the NAAG Model Act). Most, although not all, are addressed particularly to conversions in the context of health care entities. An example of a statute that is not limited to the health care context is Ohio Revised Code section 1702.39 (as amended in 2000), which requires a public benefit corporation to notify the attorney general and get prior approval from either a court or the organization’s members when it disposes of more than half of its assets over a 36-month period. Section 1702.39 cross-references the Ohio version of the Supervision of Charitable Trustees Act to specify that the attorney general may demand documents and engage experts as needed (at the organization’s expense) “to provide assistance in reviewing a proposed transaction.” Some conversion statutes locate exclusive regulatory authority in the attorney general, while others specify attorney general authority shared with another state official or agency. A new uniform or model act could draw, as appropriate, on the NAAG Model Act and the several individual state laws that have been enacted to deal with such transactions, but should not be limited to the health care context. 15 For a more complete description of the variations, see Fremont-Smith, supra note 1, at 311-321 and Appendix, Table 1. 16 Thomas Silk and Rosemary Fei, Explanation of California’s Nonprofit Integrity Act of 2004 (Oct 11, 2004).

The ongoing American Law Institute Project on Nonprofit Organizations considers (or will consider) a number of areas addressed in this proposal. The availability of background research generated in connection with that project, as well as the opportunity to coordinate, as appropriate, with the ALI work would undoubtedly enhance a NCCUSL project undertaken at this time. Particularly if a NCCUSL draft statute and the ALI project commentary align on issues to be addressed here, there is great potential to influence the development of the law in this area. Well-crafted commentary in support of a draft uniform or model law, especially taken together with a consistent position in the ALI project, could influence the application and interpretation of existing provisions even in states that choose not to amend their statutes. Impact of Federal Laws and Regulations on the Proposed Subject

The Internal Revenue Code most certainly plays an important role in the regulation and oversight of charities.17 The Form 990 information collected and made widely available contributes importantly to accomplishing the disclosure that the Uniform Act set out to promote.18 Nonetheless, tax exemption law is nowhere near coextensive with the state oversight and supervision role, and some have characterized proposals to extend its reach beyond the subject matter and menu of remedies it now encompasses as an inappropriate intrusion into traditional state regulatory territory. 19 Recent suggestions by some in the nonprofit sector for creation of a new, separate federal agency to regulate charitable organizations have met with similar criticism.20 Creation of new uniform or model law to address the state charities oversight function would not require any modification of federal law, and should decrease attempts to preempt state law.

Support for the Project

Consultation with a task force from the National Association of State Charities Officials* established that all the members of this group believe that the project is worthwhile and that they would support the development and adoption of provisions that could be used by states with inadequate statutes addressing attorney general authority to 17 See John G. Simon, Harvey P. Dale, and Laura B. Chisolm, The Federal Tax Treatment of Charitable Organizations, in The Nonprofit Sector: A Research Handbook (R. Steinberg and W. Powell eds. 2006). 18 See Peter Swords, The Form 990 as an Accountability Tool, in NYU Tax Planning for 501(c)(3) Organizations, Vol. 25 (1997). 19 See, e.g., Evelyn Brody, Symposium: Who Guards the Guardians? Monitoring and Enforcement of Charity Governance: What’s Trust Law Got to Do With It? 80 Chi-Kent L. Rev. 641, 684, describing the Senate Finance Committee staff’s 2004 discussion draft proposal to give the IRS equity powers over exempt organizations. 20 See M.Z. Hemingway, “Nonprofit leaders propose a new agency,” Federaltimes.com, November 24, 2006.

supervise charities. In particular, they expressed enthusiasm for the prospect of introducing clarity and uniformity into the law, offering a platform to engage state attorneys general who might not otherwise pursue this area as a political priority, addressing the conflict of laws issues, and developing and maintaining an effective vehicle for state supervision in this traditionally state-based area of the law in the face of increasing interest at the federal level. Conversations with some leading members of the nonprofit bar indicate that they believe that articulation of attorney general supervisory authority over charities in a uniform or model act would be a useful project. The academic commitment involved with this area is believed to be supportive. The recent successfully concluded revision of the prior Management of Institutional Funds Act with active participation of the charitable community will assist in obtaining their active participation in this project.

* NASCO participants in this task force are Terry M. Knowles, (New Hampshire),Mark A. Pacella, (Pennsylvania), Tracy McCurdy, (Pennsylvania), Karl Emerson, (Pennsylvania), Susan A. Miller, (Oregon), Therese M. Harris, (Illinois), Karin Kunstler Goldman, (New York), Ted Ross, (Texas), Chris Cash, (Colorado), Jody Wahl, (Minnesota), Eric Carriker, (Massachusetts), Sandra Cardone, (Massachusetts), Karen Denvir, (California), Rebecca Sherrell, (Washington), Joe Kylman, (Michigan), and Tracy Sonneborn, (Michigan). All participated in a conference call with NCCUSL Committee Chair K. King Burnett and the Reporter after receiving an earlier draft of this memorandum.

Submitted by: Laura B. Chisolm Reporter to the Study Committee on the Regulation of Charities

PANEL #2: Triggers EXHIBIT to Case Study D:

Objection: Legal Standing

THE STATE OF NEW HAMPSHIRE

HILLSBOROUGH, SS PROBATE COURT

Board of Trustees of The Public Library of Nashua

v.

Attorney General, Director of Charitable Trusts

Docket #2006-1418

DIRECTOR OF CHARITABLE TRUSTS’ OBJECTION TO GRANTING OF STANDING

NOW COMES the Attorney General of the State of New Hampshire, by and

through the Director of Charitable Trusts (“Director”), and objects to the granting of

standing to the potential intervenors, Meri Goyette (“Goyette”) and John Louis

Malkowski (“Malkowski”), or to any other person on the Court’s notification list, and

to the numerous Chandler family heirs (“Chandler heirs”). The Director states the

following:

1. There is no basis for granting Goyette or Malkowski, or to any other person

on the Court’s notification list, standing since none has demonstrated a “direct and

apparent interest” in the proposed transaction.

2. The Court order issued by Judge Raymond Cloutier in the Optima Health

case in Hillsborough Probate Court clearly sets forth who has standing in cases

involving charitable trusts. (Hillsborough Probate Court Docket #99-339). The

Optima Health analysis is based upon the New Hampshire Supreme Court decision in

Clipper Affiliates, Inc. v. Chechovich, 138 N.H. 271, 277 (1994) (standing for the

proposition that a person who seeks to intervene in a case must have an interest that is

“direct and apparent; such as would suffer, if not indeed be sacrificed, were the court

to deny the privilege”). Judge Cloutier’s Optima Health decision granted standing to

those parties that had a “direct and apparent” interest in the case so as to warrant their

inclusion or intervention. Judge Cloutier also applied the Clipper Affiliates analysis

to In Re Hillcrest Terrace (Hillsborough Probate Court Docket #2005-647), where he

denied standing to a number of individuals, finding that none had demonstrated a

“direct and apparent” interest. In Judge Cloutier’s words, “Their interests and

concerns are general in nature and not different than the public at large and have no

specific or direct identifiable interest.” Because Goyette and Malkowski (and others

on the Court’s notification list) have only demonstrated an indirect interest in the

transaction, no different from any other member of the public, their request for

standing should be denied.

3. There is no basis for granting standing to the heirs of Mabel Chandler,

pursuant to RSA 564-B:4-413(b). According to New Hampshire’s adaptation of the

Uniform Trust Code (UTC) cy pres provision:

(b) A provision in the terms of a charitable trust that would result in distribution of the trust property to a noncharitable beneficiary prevails over the power of the court under subsection (a) to apply cy pres to modify or terminate the trust only if, when the provision takes effect:

(i) the trust property is to revert to the settlor and the settlor is still living; or

(ii) fewer than 21 years have elapsed since the date of the trust's creation.

4. In the present case, RSA 564-B:4-413(b) does not permit noncharitable

beneficiaries (such as the Chandler heirs) to claim a reversionary interest if more than

21 years have elapsed since the creation of the trust. Mabel Chandler died in 1959,

and the Chandler Memorial Library was opened as a branch of the Nashua Public

Library in September 1960. Because more than 45 years have elapsed since the

creation of the trust, the beneficiaries’ interest has been extinguished.

5. Further, RSA 564-B:11-1104 provides that the UTC “applies to all trusts

created before, on, or after its effective date.”

6. Although Mabel Chandler may not have considered this caveat when

creating the provision in her will for the Chandler Memorial Library, the UTC is

retroactive and applies to this case. Coincidentally, the Rockingham Probate Court

recently reached the same conclusion regarding RSA 564-B:4-413. According to an

order in The Mark H. Wentworth Home for Chronic Invalids case (Rockingham

Probate Court Docket #2006-1202), “The application of Cy Pres renders the deed’s

reverter clause void and of no force and effect as of February 24, 1940, the date of

[donor’s] death.” (See attached Exhibit A).

WHEREFORE, the Attorney General, by and through the Director of

Charitable Trusts, respectfully requests that this Court do the following:

A. Deny standing to Goyette and Malkowski and any other person on the

Court’s notification list, because none has demonstrated a direct interest beyond that

of a member of the general public; and

B. Deny standing to the Chandler heirs, because their reversionary interest has

been extinguished with the passing of more than 21 years since the creation

of the trust; and

C. Grant any other relief that is just and equitable.

Respectfully submitted,

DIRECTOR OF CHARITABLE TRUSTS

By its attorneys,

Kelly A. Ayotte Attorney General Michael S. DeLucia, Director Charitable Trusts Unit 33 Capitol Street Concord, NH 03301-6397 (603) 271-3591

November 22, 2006 159503

PANEL #2: Triggers EXHIBIT to Case Study D:

Uniform Trust Code §§ 412, 413

Uniform Trust Code (2000, as last amended in 2005)

SECTION 412. MODIFICATION OR TERMINATION BECAUSE OF

UNANTICIPATED CIRCUMSTANCES OR INABILITY TO ADMINISTER

TRUST EFFECTIVELY.

(a) The court may modify the administrative or dispositive terms of a trust or

terminate the trust if, because of circumstances not anticipated by the settlor,

modification or termination will further the purposes of the trust. To the extent

practicable, the modification must be made in accordance with the settlor’s probable

intention.

(b) The court may modify the administrative terms of a trust if continuation of the

trust on its existing terms would be impracticable or wasteful or impair the trust’s

administration.

(c) Upon termination of a trust under this section, the trustee shall distribute the

trust property in a manner consistent with the purposes of the trust.

Comment This section broadens the court’s ability to apply equitable deviation to terminate or modify a trust. Subsection (a) allows a court to modify the dispositive provisions of the trust as well as its administrative terms. For example, modification of the dispositive provisions to increase support of a beneficiary might be appropriate if the beneficiary has become unable to provide for support due to poor health or serious injury. Subsection (a)

is similar to Restatement (Third) of Trusts Section 66(1) (Tentative Draft No. 3, approved 2001), except that this section, unlike the Restatement, does not impose a duty on the trustee to petition the court if the trustee is aware of circumstances justifying judicial modification. The purpose of the “equitable deviation” authorized by subsection (a) is not to disregard the settlor’s intent but to modify inopportune details to effectuate better the settlor’s broader purposes. Among other things, equitable deviation may be used to modify administrative or dispositive terms due to the failure to anticipate economic change or the incapacity of a beneficiary. For numerous illustrations, see Restatement (Third) of Trusts Section 66 cmt. b (Tentative Draft No. 3, approved 2001). While it is necessary that there be circumstances not anticipated by the settlor before the court may grant relief under subsection (a), the circumstances may have been in existence when the trust was created. This section thus complements Section 415, which allows for reformation of a trust based on mistake of fact or law at the creation of the trust. Subsection (b) broadens the court’s ability to modify the administrative terms of a trust. The standard under subsection (b) is similar to the standard for applying cy pres to a charitable trust. See Section 413(a). Just as a charitable trust may be modified if its particular charitable purpose becomes impracticable or wasteful, so can the administrative terms of any trust, charitable or noncharitable. Subsections (a) and (b) are not mutually exclusive. Many situations justifying modification of administrative terms under subsection (a) will also justify modification under subsection (b). Subsection (b) is also an application of the requirement in Section 404 that a trust and its terms must be for the benefit of its beneficiaries. See also Restatement (Third) of Trusts Section 27(2) & cmt. b (Tentative Draft No. 2, approved 1999). Although the settlor is granted considerable latitude in defining the purposes of the trust, the principle that a trust have a purpose which is for the benefit of its beneficiaries precludes unreasonable restrictions on the use of trust property. An owner’s freedom to be capricious about the use of the owner’s own property ends when the property is impressed with a trust for the benefit of others. See Restatement (Second) of Trusts Section 124 cmt. g (1959). Thus, attempts to impose unreasonable restrictions on the use of trust property will fail. See Restatement (Third) of Trusts Section 27 Reporter’s Notes to cmt. b (Tentative Draft No. 2, approved 1999). Subsection (b), unlike subsection (a), does not have a direct precedent in the common law, but various states have insisted on such a measure by statute. See, e.g., Mo. Rev. Stat. Section456.590.1. Upon termination of a trust under this section, subsection (c) requires that the trust be distributed in a manner consistent with the purposes of the trust. As under the doctrine of cy pres, effectuating a distribution consistent with the purposes of the trust requires an examination of what the settlor would have intended had the settlor been aware of the unanticipated circumstances. Typically, such terminating distributions will be made to the qualified beneficiaries, often in proportion to the actuarial value of their interests, although the section does not so prescribe. For the definition of qualified beneficiary, see Section 103(13). Modification under this section, because it does not require beneficiary action, is not precluded by a spendthrift provision.

SECTION 413. CY PRES.

(a) Except as otherwise provided in subsection (b), if 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.

(b) A provision in the terms of a charitable trust that would result in distribution

of the trust property to a noncharitable beneficiary prevails over the power of the court

under subsection (a) to apply cy pres to modify or terminate the trust only if, when the

provision takes effect:

(1) the trust property is to revert to the settlor and the settlor is still living; or

(2) fewer than 21 years have elapsed since the date of the trust’s creation.

Comment Subsection (a) codifies the court’s inherent authority to apply cy pres. The power may be applied to modify an administrative or dispositive term. The court may order the trust terminated and distributed to other charitable entities. Partial termination may also be ordered if the trust property is more than sufficient to satisfy the trust’s current purposes. Subsection (a), which is similar to Restatement (Third) of Trusts § 67 (Tentative Draft No. 3, approved 2001), modifies the doctrine of cy pres by presuming that the settlor had a general charitable intent when a particular charitable purpose becomes impossible or impracticable to achieve. Traditional doctrine did not supply that presumption, leaving it to the courts to determine whether the settlor had a general

charitable intent. If such an intent is found, the trust property is applied to other charitable purposes. If not, the charitable trust fails. See Restatement (Second) of Trusts § 399 (1959). In the great majority of cases the settlor would prefer that the property be used for other charitable purposes. Courts are usually able to find a general charitable purpose to which to apply the property, no matter how vaguely such purpose may have been expressed by the settlor. Under subsection (a), if the particular purpose for which the trust was created becomes impracticable, unlawful, impossible to achieve, or wasteful, the trust does not fail. The court instead must either modify the terms of the trust or distribute the property of the trust in a manner consistent with the settlor’s charitable purposes. The settlor, with one exception, may mandate that the trust property pass to a noncharitable beneficiary upon failure of a particular charitable purpose. Responding to concerns about the clogging of title and other administrative problems caused by remote default provisions upon failure of a charitable purpose, subsection (b) invalidates a gift over to a noncharitable beneficiary upon failure of a particular charitable purpose unless the trust property is to revert to a living settlor or fewer than 21 years have elapsed since the trust’s creation. Subsection (b) will not apply to a charitable lead trust, under which a charity receives payments for a term certain with a remainder to a noncharity. In the case of a charitable lead trust, the settlor’s particular charitable purpose does not fail upon completion of the specified trust term and distribution of the remainder to the noncharity. Upon completion of the specified trust term, the settlor’s particular charitable purpose has instead been fulfilled. For a discussion of the reasons for a provision such as subsection (b), see Ronald Chester, Cy Pres of Gift Over: The Search for Coherence in Judicial Reform of Failed Charitable Trusts, 23 Suffolk U. L. Rev. 41 (1989). The doctrine of cy pres is applied not only to trusts, but also to other types of charitable dispositions, including those to charitable corporations. This section does not control dispositions made in nontrust form. However, in formulating rules for such dispositions, the courts often refer to the principles governing charitable trusts, which would include this Code. For the definition of charitable purpose, see Section 405(a). Pursuant to Sections 405(c) and 410(b), a petition requesting a court to enforce a charitable trust or to apply cy pres may be maintained by a settlor. Such actions can also be maintained by a cotrustee, the state attorney general, or by a person having a special interest in the charitable disposition. See Restatement (Second) of Trusts § 391 (1959).

PANEL #2: Triggers EXHIBIT to Case Study D:

UPMIFA Modification Provisions

Uniform Prudent Management of Institutional Funds Act (2006)

SECTION 6. RELEASE OR MODIFICATION OF RESTRICTIONS ON

MANAGEMENT, INVESTMENT, OR PURPOSE.

(a) If the donor consents in a record, an institution may release or modify, in

whole or in part, a restriction contained in a gift instrument on the management,

investment, or purpose of an institutional fund. A release or modification may not allow a

fund to be used for a purpose other than a charitable purpose of the institution.

(b) The court, upon application of an institution, may modify a restriction

contained in a gift instrument regarding the management or investment of an institutional

fund if the restriction has become impracticable or wasteful, if it impairs the management

or investment of the fund, or if, because of circumstances not anticipated by the donor, a

modification of a restriction will further the purposes of the fund. The institution shall

notify the [Attorney General] of the application, and the [Attorney General] must be

given an opportunity to be heard. To the extent practicable, any modification must be

made in accordance with the donor’s probable intention.

(c) If a particular charitable purpose or a restriction contained in a gift instrument

on the use of an institutional fund becomes unlawful, impracticable, impossible to

achieve, or wasteful, the court, upon application of an institution, may modify the

purpose of the fund or the restriction on the use of the fund in a manner consistent with

the charitable purposes expressed in the gift instrument. The institution shall notify the

[Attorney General] of the application, and the [Attorney General] must be given an

opportunity to be heard.

(d) If an institution determines that a restriction contained in a gift instrument on

the management, investment, or purpose of an institutional fund is unlawful,

impracticable, impossible to achieve, or wasteful, the institution, [60 days] after

notification to the [Attorney General], may release or modify the restriction, in whole or

part, if:

(1) the institutional fund subject to the restriction has a total value of less

than [$25,000];

(2) more than [20] years have elapsed since the fund was established; and

(3) the institution uses the property in a manner consistent with the

charitable purposes expressed in the gift instrument.

Comment Section 6 expands the rules on releasing or modifying restrictions that are found in Section 7 of UMIFA. Subsection (a) restates the rule from UMIFA allowing the release of a restriction with donor consent. Subsections (b) and (c) make clear that an institution can always ask a court to apply equitable deviation or cy pres to modify or release a restriction, under appropriate circumstances. Subsection (d), a new provision, permits an institution to apply cy pres on its own for small funds that have existed for a substantial period of time, after giving notice to the state attorney general. Although UMIFA stated that it did not “limit the application of the doctrine of cy pres”, UMIFA § 7(d), what that statement meant under the Act was unclear. UMIFA itself appeared to permit only a release of a restriction and not a modification. That all-or-nothing approach did not adequately protect donor intent. See Yale Univ. v. Blumenthal, 621 A.2d 1304 (Conn. 1993). By expressly including deviation and cy pres, UPMIFA requires an institution to seek modifications that are “in accordance with the donor’s probable intention” for deviation and “in a manner consistent with the charitable purposes expressed in the gift instrument” for cy pres. Individual Funds. The rules on modification require that the institution, or a court applying a court-ordered doctrine, review each institutional fund separately.

Although an institution may manage institutional funds collectively, for purposes of this Section each fund must be considered individually. Subsection (a). Donor Release. Subsection (a) permits the release of a restriction if the donor consents. A release with donor consent cannot change the charitable beneficiary of the fund. Although the donor has the power to consent to a release of a restriction, this section does not create a power in the donor that will cause a federal tax problem for the donor. The gift to the institution is a completed gift for tax purposes, the property cannot be diverted from the charitable beneficiary, and the donor cannot redirect the property to another use by the charity. The donor has no retained interest in the fund. Subsection (b). Equitable Deviation. Subsection (b) applies the rule of equitable deviation, adapting the language of UTC § 412 to this section. See also Restatement (Third) of Trusts § 66 (2003). Under the deviation doctrine, a court may modify restrictions on the way an institution manages or administers a fund in a manner that furthers the purposes of the fund. Deviation implements the donor’s intent. A donor commonly has a predominating purpose for a gift and, secondarily, an intent that the purpose be carried out in a particular manner. Deviation does not alter the purpose but rather modifies the means in order to carry out the purpose. Sometimes deviation is needed on account of circumstances unanticipated when the donor created the restriction. In other situations the restriction may impair the management or investment of the fund. Modification of the restriction may permit the institution to carry out the donor’s purposes in a more effective manner. A court applying deviation should attempt to follow the donor’s probable intention in deciding how to modify the restriction. Consistent with the doctrine of equitable deviation in trust law, subsection (b) does not require an institution to notify donors of the proposed modification. Good practice dictates notifying any donors who are alive and can be located with a reasonable expenditure of time and money. Consistent with the doctrine of deviation under trust law, the institution must notify the attorney general who may choose to participate in the court proceeding. The attorney general protects donor intent as well as the public’s interest in charitable assets. Attorney general is in brackets in the Act because in some states another official enforces the law of charities. Subsection (c). Cy Pres. Subsection (c) applies the rule of cy pres from trust law, authorizing the court to modify the purpose of an institutional fund. The term “modify” encompasses the release of a restriction as well as an alteration of a restriction and also permits a court to order that the fund be paid to another institution. A court can apply the doctrine of cy pres only if the restriction in question has become unlawful, impracticable, impossible to achieve, or wasteful. This standard, which comes from UTC § 413, updates the circumstances under which cy pres may be applied by adding “wasteful” to the usual common law articulation of the doctrine. Any change must be made in a manner consistent with the charitable purposes expressed in the gift instrument. See also Restatement (Third) of Trusts § 67 (2003). Consistent with the doctrine of cy pres, subsection (c) does not require an institution seeking cy pres to notify

donors. Good practice will be to notify donors whenever possible. As with deviation, the institution must notify the attorney general who must have the opportunity to be heard in the proceeding. Subsection (d). Modification of Small, Old Funds. Subsection (d) permits an institution to release or modify a restriction according to cy pres principles but without court approval if the amount of the institutional fund involved is small and if the institutional fund has been in existence for more than 20 years. The rationale is that under some circumstances a restriction may no longer make sense but the cost of a judicial cy pres proceeding will be too great to warrant a change in the restriction. The Drafting Committee discussed at length the parameters for allowing an institution to apply cy pres without court supervision. The Committee drafted subsection (d) to balance the needs of an institution to serve its charitable purposes efficiently with the policy of enforcing donor intent. The Committee concluded that an institutional fund with a value of $25,000 or less is sufficiently small that the cost of a judicial proceeding will be out of proportion to its protective purpose. The Committee included a requirement that the institutional fund be in existence at least 20 years, as a further safeguard for fidelity to donor intent. The 20-year period begins to run from the date of inception of the fund and not from the date of each gift to the fund. The amount and the number of years have been placed in brackets to signal to an enacting jurisdiction that it may wish to designate a higher or lower figure. Because the amount should reflect the cost of a judicial proceeding to obtain a modification, the number may be higher in some states and lower in others. As under judicial cy pres, an institution acting under subsection (d) must change the restriction in a manner that is in keeping with the intent of the donor and the purpose of the fund. For example, if the value of a fund is too small to justify the cost of administration of the fund as a separate fund, the term “wasteful” would allow the institution to combine the fund with another fund with similar purposes. If a fund has been created for nursing scholarships and the institution closes its nursing school, the institution might appropriately decide to use the fund for other scholarships at the institution. In using the authority granted under subsection (d), the institution must determine which alternative use for the fund reasonably approximates the original intent of the donor. The institution cannot divert the fund to an entirely different use. For example, the fund for nursing scholarships could not be used to build a football stadium. An institution seeking to modify a provision under subsection (d) must notify the attorney general of the planned modification. The institution must wait 60 days before proceeding; the attorney general may take action if the proposed modification appears inappropriate. Notice to Donors. The Drafting Committee decided not to require notification of donors under subsections (b), (c), and (d). The trust law rules of equitable deviation and cy pres do not require donor notification and instead depend on the court and the attorney general to protect donor intent and the public’s interest in charitable assets.

With regard to subsection (d), the Drafting Committee concluded that an institution should not be required to give notice to donors. Subsection (d) can only be used for an old and small fund. Locating a donor who contributed to the fund more than 20 years earlier may be difficult and expensive. If multiple donors each gave a small amount to create a fund 20 years earlier, the task of locating all of those donors would be harder still. The Drafting Committee concluded that an institution’s concern for donor relations would serve as a sufficient incentive for notifying donors when donors can be located.

PANEL #2: Triggers EXHIBIT to Case Study D:

Restatement of Trusts, § 67

Restatement (Third) of Trusts Current through June 2007

Copyright © 2003-2008 by the American Law Institute

Part 5. Modification and Termination of Trusts Chapter 13. Modification and Termination of Trusts

§ 67. Failure of Designated Charitable Purpose: The Doctrine Of Cy Pres

Unless the terms of the trust provide otherwise, where property is placed in trust to be applied to a designated charitable purpose and it is or becomes unlawful, impossible, or impracticable to carry out that purpose, or to the extent it is or becomes wasteful to apply all of the property to the designated purpose, the charitable trust will not fail but the court will direct application of the property or appropriate portion thereof to a charitable purpose that reasonably approximates the designated purpose. Comment:

a. The cy pres doctrine: background and scope of the rule. The rule stated in this Section is called the doctrine of cy pres. The expression indicates the principle that, when the exact intention of the settlor is not to be carried out, the intention will be given effect “as nearly” as may be.

At common law in England, a prerogative power of cy pres, exercisable by the Crown in certain circumstances and without regard to the settlor's intent, developed in addition to the judicial power in the Chancellor. The prerogative power (or legislative counterpart) has not been recognized in the United States, although legislation may reasonably regulate the extent and exercise of the cy pres power of courts. The judicial power of cy pres has evolved in this country along lines generally similar to the equity power under English common law. See Reporter's Notes.

The cy pres doctrine's modern rationale rests primarily in the perpetual duration allowed charitable trusts and in the resulting risk that designated charitable purposes may become obsolete as the needs and circumstances of society evolve over time, not to mention the sometimes unanticipated extent of decrease or increase in the funds available from a given trust. Nevertheless, the doctrine may also apply to a charitable trust if, at the time of its creation, the particular purpose of the trust has been fully accomplished or cannot possibly or practicably be accomplished. On the other hand, if at the time of the trust's creation its intended purpose is of no value at all to the community, or is otherwise not charitable by its nature, the trust is not enforceable as a charitable trust and is not subject to the rule of this Section.

The cy pres doctrine is not applicable to private trusts. There are, however, narrower but analogous principles that apply to both private and charitable trusts, as particularly illustrated by the rule of equitable deviation in § 66 in allowing courts, in certain circumstances, to modify the means of accomplishing a trust purpose. Also compare § 29, Comment g, and also Comment i (on consequences of invalidity), and §§ 45-47 (adaptation of certain intended trusts). (Occasionally, the term “cy pres” is casually used to refer to reformations or judicial modifications in other contexts in which some modified effect is given to dispositions that would otherwise exceed what the law allows, such as under the rule against perpetuities.)