Who can forget Shirley Ellis’ The Name Game, that classic '60s pop tune debuting with a bullet on Billboard’s December 12, 1964 Top 100 chart (topping out at number 3). This wasn’t Shirley’s first hit, as the late Beatle George Harrison could testify to. Her earlier success, “The Nitty Gritty,” was a Harrison favorite.
Well, when we heard about the Michigan Court of Appeals
February 10, 2005 decision in Prentis Family Foundation vs. Barbara Ann Karmanos Cancer Center, all we could think of was lovely Shirley performing The Name Game on Hullabaloo (Tuesday, January 26, 1965) and Shindig (Wednesday, March 24, 1965).
So what was all the hullabaloo...
| Our Guide, Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer, includes an extensive discussion the legal issues arising from restricted gifts and naming rights. You should buy a copy of our Guide today so that you can adequately deal these issues. Call us at 773-325-2124 for additional information, or visit our website at http://www.charitygovernance.com. We also do on site training. |
about
in the Prentis Family Foundation case? It boils down to a dispute
between two donors over the name of the largest Cancer Center in
Detroit, Michigan. There are lots of lessons to be learned from this
case.
THE FACTS: Our story begins in 1985, when the Meyer and Anna Prentis Family
Foundation gave $1.5 million to the Michigan Cancer Foundation. The
gift was memorialized through a written contract that provided:
The fund is established according to the following provisions:
1. The Prentis Foundation hereby agrees to establish the Fund by contributing to Wayne State University (“University”) $1,500,000 in annual installments of not less than $300,000 over a period of not more than five years. The first annual contribution shall be made in 1985. The Fund shall be used solely for the support of cancer research.
2. In recognition of the significant and long-standing commitment of and leadership and support by the Prentis Foundation in the fields of cancer education, detection and research and the generous financial contributions made over many years by the Prentis Foundation in furtherance thereof; and in further recognition of and appreciation to the Prentis Foundation for the fund it is hereby creating, the University, Center and the Michigan Cancer Foundation (“Foundation”) do hereby agree that Center shall be renamed and henceforth be known as the Meyer L. Prentis Comprehensive Cancer Center of Metropolitan Detroit. Mr. Meyer was treasurer of General Motors for most of the first half of the Twentieth Century.
According to a September 9, 2000 article in the Detroit Free Press
("Battle to Rename Cancer Institute Leads to Lawsuit: At Stake is the
Legacy of 2 Prominent Families"), the law firm—who represented the Institute—failed to file papers with the State of
Michigan to change the name of the entity. The court's opinion is a little bit cryptic on this point because it assumes the reader knows the facts, but the opinion is consistent with the Detroit Free Press story.
Now fast forward to 1994, when according to Crain’s Detroit Business
(April 21, 2000), the Michigan Cancer Foundation was merged with the
Prentis Center and the cancer programs of Wayne State University and
the Detroit Medical Center to create a new institute. Then in 1995,
Peter Karmanos gave $15 million to what appears to be the merged
entity, at which time it was renamed the Barbara Ann Karmanos Cancer
Institute, in honor of Mr. Karmanos’ late wife, Barbara. Some of the
news reports suggest that this gift was made to the pre-merger Michigan
Cancer Foundation, but the dates used in the articles suggest that the
contribution was made after the merger—anybody that can clarify this
point should drop us an e-mail.
In any event, Mr. Meyer L.
Prentis’ heirs were not pleased to see how the Prentis name became
overshadowed by the Karmanos name over the years—although the Institute
still uses the Prentis name in what it claims to be a prominent way.
As you can guess, the resulting dispute resulted in a lawsuit and the
February 10, 2005 Michigan Appeals Court decision.
The appeals
court decision rules in favor of the Karmanos Institute, rejecting the
claim by the Prentis heirs. If we were the Prentis heirs we would not
be happy with the court’s reasoning. The first portion of the opinion
devotes considerable attention to the law firm involved in the various
transactions and whether it owed the Prentis interests any duties.
This portion of the opinion is quite technical and is of limited
interest to us, but it does indicate why donors should always be represented by independent legal counsel rather than relying on the charity's legal counsel for advice. As friendly as the parties may be and as well as the donor (who may be a board member) may know the charity's counsel, the charity's counsel's legal obligations run to the charity, not the donor.
The decision then focuses on whether the
Prentis interests had standing to bring the suit for damages arising
from the alleged failure to honor the Prentis name. The court
concludes that the Prentis interests lacked standing because the
transaction was a charitable gift, not a contract. The court states:
The decision indicated that if a donation was devoted to a charitable purpose, then a charitable trust was created; the motive behind the gift was irrelevant. Id. Here, the language of the endowment agreement indicated that the funds were donated for a charitable purpose. The attorney general, a co-trustee, or a person with a special interest may enforce the terms of a charitable trust, but not the settlor or his heirs. St John’s-St Luke Evangelical Church v National Bank of Detroit, 92 Mich App 1, 14-15; 283 NW2d 852 (1979), citing Restatement Trusts 2d, §391, pp 278-280.
This
is not a surprising statement. The law generally vests the attorney
general with the exclusive power to protect charitable assets. If the
court really believed this was a question of protecting assets, it
should have ended the discussion after it found that the Prentis
interests lacked standing. Yet the court goes on to discuss the
Karmanos Institute’s alternative argument as to why the Prentis
interests should not prevail. The Institute argued that there was no
consideration, and therefore, no contract.
In our view, the court’s
standing analysis blurred two issues, which is why it continued on.
There was not a standing issue, but the court used the charitable
enforcement argument to help it eliminate the contractual nature of the
agreement between the parties. The attorney general may have exclusive
authority to protect charitable assets and make sure that they are
properly applied, but the issue here was one of contractual rights—such
rights and the attorney general’s authority not being mutually
exclusive or incompatible.
Given the court’s decision on
standing, it is not at all surprising that the court found no contract
between the Prentis Foundation and Wayne State University. The problem
is that there was a contract under any definition of the term
“contract.” The court asserts that there was no contract because the
parties did not use the term “consideration.” This is a wooden
analysis that has long been rejected by the common law. As every
first year law student learns within weeks of starting law school,
there are four elements to a contract—(i) mutual agreement and
understanding; (ii) consideration; (iii) capacity to contract; and (iv)
legality. Under the statute of frauds, certain contracts must be in
writing to be enforceable. Nowhere is there a requirement that the
parties use magic words to create a contract. All you have to do is go
back to standard hornbooks and read the example about the person who
walks past somebody's house and the homeowner says "I'll give you
twenty dollars if you paint my house." The person performs and the
homeowner says, "I don't owe you anything because we didn't use the
magic words." The courts will still find a contract. There is no
question that the naming rights were granted in consideration of the
$1.5 million gift. This was reduced to a writing signed by both
parties. Certainly people who gave $25 to the center didn’t receive naming
rights. Nor did those people enter into written agreements.
To defend this wooden analysis, the Michigan Appeals Court writes:
Although plaintiff may have expected that the naming provision was bargained for consideration in exchange for the $1,500,000, courts are not permitted to discern the parties’ reasonable expectations and rewrite contracts accordingly. Wilkie v Auto-Owners Ins Co, 469 Mich 41, 51; 664 NW2d 776 (2003). “[T]he unilateral subjective intent of one party cannot control the terms of a contract.”
The
problem is that neither parties’ intent was subjective or unilateral.
The contract provided for naming rights and apparently the only reason
the legal name was not changed was due to an oversight by the firm
representing Wayne State University. If this was only the Prentis Foundation's subjective intent, why did the Institute sign the agreement that expressly addresses naming rights?
Rarely
does legal doctrine determine the outcome of a dispute. It is simply
used to explain the court’s decision. In this case, the court appears
to have tipped its hat earlier in the decision when it wrote:
Here, HMSC presented evidence that plaintiff’s designee on the board of trustees was present when the merger between the center and the Michigan Cancer Foundation was discussed in 1994, and was present when the Karmanos gift and renaming was discussed and voted on in 1995. This indicated that plaintiff should have been aware of a possible cause of action at least by 1995. The “possible cause of action” standard encourages claimants to diligently investigate and pursue causes of action.
The 2000 Crain's Detroit Business article confirms that the Prentis family representative had access, but did not act, providing:
Asked why the Prentis family waited five years to take issue with the Karmanos sponsorship of the cancer institute, Marvin Frenkel said the family only recently realized the extent to which the Meyer L. Prentis name had fallen from visibility.
Frenkel, however, has been active in the affairs of the cancer institute. He has been a trustee of the institute and its predecessor organization, the Michigan Cancer Foundation, since at least 1971.
Frenkel, whose permanent residence is in Florida, said he could not recall whether he publicly voiced his concerns about the Karmanos name change at trustee meetings. He said the Meyer Prentis name just disappeared gradually from mention at trustee meetings.
If the court wanted to rely strictly on legal doctrine to justify its decision, it would have been more accurate to raise a "laches-styled" analysis (you can't sit on your rights to long and expect relief from a court). This would have better reflected the likely basis for the court's decision. Had we been the court, we would have taken a more Solomon-like approach to the problem—renaming the Center the Karmanos-Prentis Cancer Center.
LESSONS:
So the technical lesson from this case is that lawyers should add the
phrase “in consideration for” to agreements granting naming rights—and
lay people wonder why lawyers use four words where one should do. But
there are more important lessons to be drawn from the entire incident.
LESSONS FOR DONORS AND THEIR LAWYERS:
If you expect something in return for your charitable gift, put the
agreement in writing and be sure to add whatever language is necessary
to create a legally binding contract. Of course, courts don’t seem to
have a lot of trouble ignoring contracts when they want to so you might
consider some other practical protection, including the following:
A. Creating an express right of reverter (or a gift-over to an alternative charity) in case the benefits aren’t forthcoming or as negotiated.
B. In the case of building-naming rights, opting for chiseled names rather than easily replaced signage.
C. In the case of building-naming rights, filing an appropriate deed that requires any building associated with the land to carry the specified name.
D. Holding back a portion of the contribution, making it contingent on compliance with the terms of the gift.
E. Addressing merger and asset sales in the agreement. While the hospital may have an air of permanence to it, institutions do change hands.
F. Retaining separate legal counsel rather than relying on the charity's legal counsel to document the transaction.
G. Undertaking post-transfer due diligence to make sure required acts have been properly completed.
LESSONS FOR INSTITUTIONS: Donors take this “naming” stuff very seriously. The 2000 Crain’s Detroit Business article quotes a Prentis-family representative as having said:
How would you feel if they changed the name on an ancestor's tombstone? It was meant to memorialize the name of Meyer L. Prentis.
That this dispute ended in a lawsuit is not surprising given those feelings. Institutions should not give these rights out without carefully considering the implications and expectations of the donor. While we don’t know the Prentis family's plans, we can all but guarantee that there are families who would never give another nickel to an institution that dashed their expectations as apparently occurred in this case. We suspect that this sort of publicity is not helpful in terms of getting other donors to make contributions when the donors are looking to long-term benefits flowing from their donations.
Furthermore, charities should never permit donor's to rely on the charity's legal counsel, but rather, require the donor be represented by separate counsel.
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THE
FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL
ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD
SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
