Kansas Passes Law Clarifying Enforcement of Donor Restrictions
Kansas has adopted a statute, effective 1 July 2023, that purports to make it easier for donors to enforce gift restrictions. According to Philanthropy Today, which suggests the act is the first of its kind (but I would be surprised if that is true) the act was motivated by a few instances where charities violated donor restrictions, only to have those restrictions enforced, if at all, after complicated litigation:
Why the need for such laws? There have been unfortunate instances where donor intent has been violated, resulting in complicated legal battles.
In 2016, Westminster College in Fulton, Missouri, violated donors’ wishes for grants when it tried to get $12.6 million from an endowment to fund its general operating budget. In fact, the college president had already withdrawn funds and was asking for more money to repay what was already spent without authorization. In the end, Westminster was subjected to annual independent audit statements to the state attorney general’s office through the end of the 2019 fiscal year.
Another recent example is the case of Michael Moritz and The Ohio State University (OSU). Moritz donated $30.3 million to OSU in 2001 to establish a permanent endowment supporting law school scholarships. However, years later, it was discovered that the endowment held less than the agreed-upon amount, and the number of scholarships provided was significantly less than what was originally intended. This resulted in law graduates having to pay full price for their education, which should have been covered by the Moritz Merit Scholarship.
These two examples show how a breakdown of trust between donors and charities can have far-reaching impacts. These bad actors can undermine the foundation of philanthropy, generosity, and a thriving civil society. Donors need to have confidence their gifts will be used the way they intended.
Here are the operative sections of the Act:
Sec. 3. (a) Except where specifically required or authorized by federal or state law, including, but not limited to, K.S.A. 58-3616, and amendments thereto, no charitable organization that accepts a contribution of property of an endowment fund or to an endowment fund pursuant to an endowment agreement that imposes a written donor-imposed restriction shall violate the terms of that restriction.
(b) If a charitable organization violates a donor-imposed restriction contained in an endowment agreement, the donor, or the donor’s legal representative, may file a complaint within two years after discovery of the violation for breach of such agreement but not more than 40 years after the date of the endowment agreement that established the endowment fund. The complaint may be filed in a court of general jurisdiction in the county of this state where a charitable organization named as a party has its principal office or principal place of carrying out its charitable purpose or in the county of residence of the donor. The complaint may be filed whether or not the endowment agreement expressly reserves a right to sue or a right of enforcement. A complaint filed pursuant to sections 1 through 4, and amendments thereto, shall not seek, or result in, a judgment awarding damages to the plaintiff.
(c) (1) If the court determines that a charitable organization violated a donor-imposed restriction, the court may order any remedy in law or equity that is consistent with and restores, to the extent possible, the donor’s intent as expressed by the donor-imposed restrictions and conditions in the endowment agreement, including, but not limited to:
(A) Future compliance with or performance of donor-imposed restrictions or conditions on the use or expenditure of the gifted endowment property;
(B) restitution or restoration by the charitable organization of property to an endowment fund that has been expended or used by the charitable organization in contravention of donor-imposed restrictions;
(C) an accounting or the imposition of accounting requirements;
(D) restoration or a change to a name required by the donor imposed
restrictions;
(E) measures to preserve the property and value of the endowment fund;
(F) modification or release of a donor-imposed restriction or reformation or dissolution of the endowment agreement as permitted by Kansas law; or
(G) transfer of property from the endowment fund to another charitable organization as directed by the donor, but only if the transfer would not jeopardize or be inconsistent with the tax-exempt status of the original charitable organization.
Nothing in this section shall conflict with or affect section 3(b), and amendments thereto.
(2) The court shall not order the return of donated funds to the donor or the donor’s legal representative or estate.
Sec. 4. A charitable organization may obtain a judicial declaration of rights and duties expressed in an endowment agreement containing donor-imposed restrictions as to all of the actions that such agreement contemplates, including, but not limited to, the interpretation, performance and enforcement of the agreement and determination of its validity as provided in K.S.A. 58-3616, and amendments thereto. The charitable organization may also seek such declaration in any suit brought under this section.
. . . .
Nothing in this act affects the authority of the attorney general to enforce any restriction in an endowment agreement, limits the application of the judicial power of cy pres or alters the right of an institution to modify a restriction on the management, investment, purpose or use of an
endowment fund in a manner permitted by the endowment agreement.
darryll jones