Last month, the United States Court of Appeals for the Ninth Circuit reinstated a portion of a lawsuit that had been brought by Julio Romero and other similarly situated plaintiffs against the Minnesota-based Northwest Area Foundation. This decision partially reversed an earlier order and decision by the Federal District Court for the Eastern District of Washington (Judge Edward F. Shea presiding) dismissing the original lawsuit. At the heart of the lawsuit is a claim...
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by Mr. Romero that the Northwest Foundation breached an alleged obligation to
fund a grant for exploratory planning, the obligation having been
created when members of the community undertook work to obtain a
"poverty-reduction" grant from the Foundation. The lawsuit was originally filed in state court, but the Northwest Area Foundation successfully had it removed to Federal court.
The Northwest Area Foundation works with communities in rural areas in an effort to reduce poverty. As a condition to funding, the Foundation requires that representative community groups work together to create a single poverty-reduction plan. In 1998, the Foundation allocated $150 million to implement partnerships with ten communities over a 10-year period. The Foundation approached Yakima Valley, Washington community groups about possible participation in the required planning process that would lead to a decision as to whether the Foundation would provide longer-term assistance to Yakima Valley.
The plaintiff, Mr. Romero, asserts that the Foundation
made and repeated a clear, unequivocal and binding promise to Plaintiff Julio Romero and to the other unpaid participants in the Yakima community planning process (hereinafter "Plaintiffs"). Defendant promised to provide $750,000 to Plaintiffs to use in hiring technical consultants to assist in developing their community plan, and to additionally provide $500,000 worth of technical and logistical assistance to support Plaintiffs in the planning efforts...
See Plaintiff's February 21, 2003 Memorandum filed with the district court. Mr. Romero then asserts that in March 2002 the Foundation suspended the planning process and froze the expenditure of funds, formally terminating the process in August 2002. The Foundation contends that it terminated the planning process because it determined that the various community groups in Yakima Valley would be unable to coalesce to the degree that the Foundation would require before making the "poverty-reduction" grant. See, Defendant's February 10, 2003 Memorandum filed with the district court and various newspaper accounts.
Mr. Romero's attorneys put forth several legal theories to support Mr. Romero's claim. The plaintiff's attorneys argued a number of contract theories, including promissory estoppel, detrimental reliance, and quantum meruit. They also argued that a Washington consumer protection statute provided the plaintiff's relief (treble damages).
Mr. Romero's attorney rejected the defendant's assertion that Mr. Romero was seeking to find a charitable trust. Nevertheless, that theory became an issue in the lawsuit. Of course that argument would pose standing issues because if
there were a charitable trust, the Washington State Attorney General
would be the party with standing to enforce it. That may be exactly why the defendant's attorney framed plaintiff's claim in that fashion.
We could go through a long analysis of each the arguments, but anyone reading the complaint and other documents will quickly conclude that the only arguments with any possible merit are the ones rooted in the law of contract. This is essentially the conclusion reached by the 9th Circuit Court of Appeals when it reinstated the promissory estoppel claim. The court states:
The allegation is undisputed that plaintiffs relied on this assurance, and from the pleadings, it appears that this reliance was reasonable. As per the Second Restatement of Contracts, which has been adopted by Washington courts, estoppel may be limited as justice requires to the resources actually expended by plaintiffs to participate in the planning process.
The court then reversed the district court, remanding the case for development of the record on the promissory estoppel claim. So we will have to await hearings or a trial to see how the district court resolved the matter. Whether a trial will be necessary to develop the record is unclear, but if we were the district court, we would be inclined to limit any recovery to unreimbursed costs directly incurred in the planning process (e.g. renting meeting rooms and hiring consultants), and this assumes a finding of justifiable reliance. Under no circumstances would we allow damages for lost time, baby-stting expenses, or mileage. Those are the costs of volunteering and the 9th Circuit rejected the notion that disappointed volunteers are entitled to any compensation.
We are not sympathetic to the plaintiffs. We have reviewed a significant portion of the record. Although the plaintiff need only assert a claim in the pre-trial process, the plaintiff referred to very little evidence in its complaint and memorandums that point to a clear promise by the Foundation to fund planning costs--a Foundation representative saying that the Foundation is still committed to the planning process does not strike us as sufficient or definite enough. Certainly no one would expect proposed testimony or extensive documentary evidence to be referred to in the plaintiff's complaint. At the same time, if there were a "smoking gun" letter or statement, we would have expected the plaintiff's attorney to work that evidence into its complaint. "SHOW ME THE MONEY," so to speak. Even in the transcript of the 12(b)(6) hearing—motion to dismiss for failure to state a cause of action--the plaintiff's attorney offered no concrete evidentiary basis establishing a clear basis for reasonable reliance. Sadly, the plaintiff's lawyer resorted to economic injustice arguments toward the end of the hearing—"the migrant workers and, you know, the lower economic quartile, which was the focus of this project, those are the people that have been done wrong, not the foundation."
From a policy standpoint, this is a very dangerous lawsuit in terms of the harm that a decision favorable to the plaintiff could produce for other foundations. People who volunteer their time to help an organization apply for a grant are not entitled to compensation for their time should their efforts turn out to be unfruitful. For courts to start looking behind the grant-approval process opens foundations and other grantmakers (potentially including government agencies making grants) to endless litigation. Courts would hear arguments that the Foundation only spent five hours reviewing the application, but it should have spent ten hours, or that an assistant grantmaker reviewed the application rather than the head grantmaker. While defense counsel's charitable trust straw man was just that, this argument nevertheless encapsulates the reasons why the law generally does not grant standing to charitable beneficiaries and why those same considerations should create a heavy burden in the context of a promissory estoppel argument for enforcement against a charity by a disappointed applicant of what is at best an imaginary contract against a charity.
The promissory estoppel argument is also a dangerous one. Nobody who applies for money from a charitable grantmaker should have any expectation that they will receive it. Applicants must understand that the process is in the grantmaker's control and discretion. Of course people will say encouraging things during the process--"You have as good a chance as anybody;" "That is a very professional job;" etc. But those sorts of statements are in the nature of "puffing." There needs to be something far more concrete and definite before a court should be able to find a contract. Even if there were a schedule saying "we will release X dollars to repay expenses when Y is completed" it should only result in a requirement that X dollars be released if the task if completed as scheduled. There should be no claim to other scheduled payments further down the line if the charity decides to terminate the process; otherwise the charity is put in the position of "throwing good money after bad." In our view, the Foundation would have been far more culpable if it had continued the process just to keep up appearances while wasting the time of the volunteers.
LESSONS FOR OTHER GRANTMAKERS: Other grantmakers need not wait for a final resolution of this case to draw important lessons from it. Grantmakers must take actions to protect themselves against the sort of claims made by Mr. Romero against the Northwest Area Foundation. Specifically,
A. Grant applications and instructions should contain clear language that applying for a grant does not create an obligation on the part of the grantmaker to make the grant or even review the application. The "no review" statement may seem a bit extreme, but the grantmaker does not want to provide the applicant with any basis for arguing that the grantmaker didn't devote enough time or review to the particular application.
B. The application and instructions should specifically advise applicants not to make any plans or expenditures on the assumption that the application will be approved.
C. If a portion of the grant funds (if approved) can be used to cover planning or other costs that went into the preparation of the application, the application and instructions should make clear that those expenditures will only be covered if the application is approved, with such approval being in the sole, arbitrary and unreasonable discretion of the grankmaker
C. Grant applications should state that the applicant is expending its time and resources for the applicant's own benefit, and that under no circumstances does the grantmaker have any obligation to reimburse the applicant for its direct or indirect application costs.
D. The grantmaker's employees charged with interacting with applicants should be given a clear script stating what it means to apply for grant money. The script should clearly state that the entire process is conducted at grantmaker's sole discretion and that the grantmaker reserves the right to terminate the process at any time and for any reason. Employees should be instructed that under no circumstances are they to create any expectations through comments like "You have a good chance."
E. The application and instruction should recite the benefits derived by the applicant from participation in the process even if the application is denied. "Our application process provides you with the opportunity to focus the organization's efforts and long-range planning. Even if you do not receive a grant, the process will still have produced benefits to your organization."
F. Grant applications that provide seed money should clearly state that the grantmaker reserves the right to cut off the seed money at any time and for any reason.
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