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Emerging issue: When is a pledge legally binding?

February 27, 2001

When is a pledge legally binding?

Most of the time. But should you sue to collect?

This article is excerpted from the July/August 2000 issue of Advancing Philanthropy.

By J. Lloyd Horton, FAHP; Chair, AFP Ethics Committee 2000

 

 

 

In April of this year, Phil Knight, founder of the shoe company Nike, announced that he would withdraw a $30 million pledge to his alma mater, the University of Oregon. That situation compelled the staffs at many charitable institutions, and many others in the sector, to consider the legality of pledges and what charities should do (if anything) to try to collect them.

Of their own free will, out of the goodness of their hearts, people make pledges to give money at some future time. They promise now to pay up later. So far, so good. But what if, when 'later' arrives, an intended charitable gift is subject to reinterpretation by the donor's heirs? Or what if 'later' never happens, and a living donor decides not to follow through with a pledge at all?

Gifts are serious business

According to law, a pledge may be a legal contract; state laws differ as to how enforceable philanthropic promises are. Often the intent of the parties and the degree of formality of the pledge will control the outcome of a dispute. Donors should take care to specify when and how pledges are to be paid, structured, and used. Courts have shown a willingness to enforce pledges, especially when some sort of consideration is involved -- say that a charity will name a building after a donor in exchange for a pledge. The legal definition of when sufficient consideration has been received is frequently a subject for the courts to determine.

Further complicating matters, as part of the drive toward greater accountability, nonprofits are now required by the Financial Accounting and Standards Board (FASB) to report pledges on their accounting statements as a way to show all assets and resources. Charities that don't move to collect on pledges could show a serious deficit in their financial accounting books, which might affect future contributions. Charity boards, with their responsibility to ensure their organizations' financial stability, may feel compelled to proceed with legal action to procure the gift that was not given.

To sue or not to sue

Although a nonprofit may have legal rights to sue donors who renege on a pledge, many charities are understandably reluctant to do so. According to 'Pledges to nonprofit organizations: are they enforceable and must they be enforced?' (Topics in Philanthropy, Budig, Butler, and Murphy, 1993, NYU School of Law), there's some irony in the reluctance of charities to sue living donors who default:

When it comes to enforcing pledges, charities have demonstrated a timidity not characteristic of their solicitation practices. Charities seem to fear the loss of subscribers if it became practice to sue to enforce the subscriptions. Indeed, a review of the reported cases shows that the great majority of such actions were brought only after the death of the subscriber, when the charity was willing to dispute with the heirs over the assets....

But don't legal battles over pledges make a charity seem greedy rather than grateful? Shouldn't charities be above playing hardball? Won't potential donors think twice before making a major pledge if they see a widow being hounded to honor her husband's bequest -- even though his estate suffered reversals just before his death?

Well, yes. Exactly. That's the lesson lawsuits are intended to teach: Pledges should not be made lightly. Charities can't afford to lose the millions of dollars they stand to each year when wills are contested. In fact, courts tend to support charities in enforcing both oral and written bequests; courts are even more likely to rule for charities with documentation that programs were put into place and other donations were solicited on the strength of the disputed gift -- and that unanticipated liabilities will ensue if the gift is lost. A charity that took out a loan to begin construction on a new facility based on money pledged would be relying on the pledge in a substantial way. That charity would clearly incur substantial liabilities if the pledge were not honored.

One case at a time

So what should a charity do when a major donor or, in the case of death, his or her heirs decide not to follow through with a pledge? There are no hard-and-fast policies for when this situation occurs; fortunately, it happens so infrequently that most charities will never have to address it. Every organization should consider these factors before taking legal action, which, it's to be hoped, will be a last resort:

  • Consider the overall impact of the gift upon your organization. One $10,000 pledge in the midst of a hundred million-dollar campaign may not have much of an effect upon the charity.
  • Consider the donor -- does he or she have a history of giving to the organization? A long-time donor might have a legitimate reason for dropping the pledge, and the charity might not want to risk alienating the donor and jeopardizing future gifts. A donor who simply shows up one day, pledges to give money, and then disappears is a different story.
  • Consider the reaction of the charity's board as a good indicator of how the organization should proceed. An effective and diverse board will represent various segments of the surrounding community and give the charity a strong idea of how trying to enforce a pledge will be perceived. A unanimous decision is the ideal outcome.
  • Consider changing public attitudes about the operation of nonprofit organizations. Many donors are now looking for the charities they support to be more accountable, while others are demanding that charities look and act like for-profit entities. Some may be more likely to support organizations that try to enforce pledges; others may indeed perceive the charity to be greedy.

A final look at ethics

A look at the AFP Code of Ethical Principles and Standards of Professional Practice may prove helpful. While the Code does not specifically mention pledges, it's clear that ethical fundraising is donor-centered. A donor's wishes should be followed to the extent possible. If a donor has legitimate reasons for not being able to honor the pledge, then it may be reasonable for the charity to take no action.

However, fundraisers also have an obligation to the charities they serve. If a charity has been open and communicative --that is, if the donor is aware that the charity has moved forward based on the pledge -- then enforcing the pledge is the only action to take. After all, keeping the nonprofit organization funded is the only way that critically needed services can continue to be provided. It's a situation we hope that most charities will never find themselves in.



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