MONTANA SUPREME COURT DELIVERS LANDMARK OPINION: 13 STATE ATTORNEYS GENERAL INTERVENE
DATELINE: April 30, 2008, Chicago
We read the e-mail alert (courtesy of Google) at 5AM this morning. Stephanie Strom and Jim Robbins of the New York Times reported in Montana Museum Board Breached Duty, Court Says that the Montana Supreme Court had delivered a decisive defeat to the board of advisors to The Charles M. Bair Family Trust, removing the entire board and instructing that it be replaced. The dispute centered on the board's decision to close the Charles M. Bair Family Museum in 2003.
The Bair Family Trust was created by Alberta M. Bair, the daughter of Charles M. Bair. There were two provisions in the trust agreement that lead to the dispute in this case. The first...
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was a general purposes clause, which stated that the trust's purposes "are to devote and apply the property and the income to be derived therefrom for charitable, religious, scientific, literary, or educational purposes." What this provision was really designed to do was assure that the trust was classified as Section 501(c)(3) entity. The operative provision of the agreement focused on the creation and operation of the museum. After stating that the museum was "cherished aim and foremost desire" of Alberta Bair, the trust agreement stated:
It is therefore [Alberta Bair's] will that the Board of Advisors devote [her] entire residence, together with all personal property of lasting historical and artistic value located therein, and together with surrounding grounds and outbuildings necessary for such purpose, to the establishment of a museum to be named the Charles M. Bair Family Museum [("the Museum")] which shall be open for the educational benefit of the general public.
The trust agreement further directed the board to use "whatever principal and income" of the trust is "necessary to establish, improve and maintain the museum." In 1994, shortly after the trust was funded, the board established what the court describes as a working relationship with CTA Architects Engineers, which eventually resulted in a proposal for the conversion of Bair's house into a museum. CTA recommended installing a fire-sprinkler system, installing electrical and plumbing upgrades, constructing a climate-controlled enclosure with precise temperature and humidity controls for the archives, constructing an additional building for a visitor center, and general repainting and landscaping. CTA's preliminary cost analysis estimated the costs at $1,023,200.
The board rejected many of these suggestions, opting to spend $328,000 on the conversion—that amount eventually grew to $600,000. The museum opened to the public in May 1996, drawing 14,000 visitors during its first season. That number eventually declined to 4,357 visitors during the 2002, the museum's final year.
The Friends of Bair, a local group, threatened a lawsuit against the trustee of the Bair Family Trust if the trustee did not reopen the museum. That led to the current lawsuit and the eventual intervention of the Montana Attorney General as a party to the dispute.
The Montana Supreme Court hit the nail on the head in ruling against the board, which had concluded that the language in the Bair Family Trust agreement didn't say that all income had to go to the museum and that some of it could be sprinkled to other charitable causes. Putting the board's decision in its most favorable light, we believe the board looked at the museum, its dwindling attendance, and its high operating costs, and then came to the conclusion that there were better uses for the money. They may be right, but that was not their call. Alberta Bair said that she wanted a museum, going so far as to instruct the board that invasion of principal was permissible if that was necessary. Bottom line: The board did not adhere to the donor's intent.
The court really did not have much trouble reaching its decision. The board hoisted itself by its own petard, as evidenced by the following passage of the court's opinion:
Though the Board ultimately spent approximately $600,000 on converting the Bair Ranch to the Museum, the Board failed to remedy the inadequate fire-protection system, the inadequate air-handling system, and to maintain an adequate security system. The Board also failed to construct additional buildings for the Museum. However, the Board cited to the absence of each of these items to support its decision to permanently close the Museum: according to the Board and the Trustee, the decision to close the Museum was based on multiple considerations, including the "risk of theft;" the "risk of damage to fine art by keeping it in a house without proper environmental controls;" the "risk of fire and limited fire protection in the area associated;" and "space limitation[s] in the home that made it difficult to rotate and display the art and artifacts . . . ." Though a security system initially was installed at the Museum, the record reveals that the Board later specifically rejected the installation of surveillance cameras at the Museum, and the Board's reliance on the risk of theft as a justification to close the Museum indicates that the Board failed to properly maintain the security system. By relying on these factors to justify closing the Museum, the Board implicitly acknowledged that addressing these deficiencies at the outset was necessary to properly establish and maintain the Museum.
Once again, we have a case where e-mail came back to haunt the litigants. In an e-mail to the other board members, the chairman of the board of advisors described the museum as "never really made 'museum ready' in 1995 when it opened." The court immediately concluded that the failure to make the museum "museum ready" constituted a breach of the board's duty to the Bair Family Trust.
You might argue that operating this museum was impossible, impracticable, or wasteful. In such case, the trustee could have brought a cy pres action. But we are not at all convinced that the action would have succeeded and we do not think it should have. Alberta Bair's instructions in the trust were not to run a popular museum, but one that was educational and which promoted scholarship. To say that it was impossible or wasteful to continue operating the Bair museum is to say that it is impossible or wasteful to operate any museum that doesn't break even through admissions, food sales, gift shop purchases, and parking. That would result in a lot of museums that are dependent on endowment closing their doors.
There are several interesting aspects of the decision that have more general application.
Trustee and Board Relationship—Duality of Interests. As we understand the structure, there was a single corporate trustee of the trust. Its functions were purely administrative. According to the Times, the trustee apparently had the authority to appoint four of the five members of the board of advisors, which was also a creature of the Bair Family Trust. The Montana Supreme Court refused to hold the corporate trustee responsible, stating:
The Trust Agreement directed the Board to spend the necessary principal and income to establish, improve, and maintain the Museum, and the Trust Agreement granted the Board the decision-making power to close the Museum, subject to the standard set forth in the Trust Agreement. Though the Trust Administrator appears to have played a part in the Board's decision to close the Museum, the Board made the decisions regarding the Museum. The Board, not the Trustee, breached its fiduciary duties to the Trust by failing to spend "whatever principal and income" of the Trust that was "necessary to establish, improve and maintain" the Museum. The Board, not the Trustee, breached its fiduciary duties to the Trust by closing the Museum without determining that the Museum had "ceased to serve the purposes thereof so as to make it inadvisable to continue the museum for public and educational purposes . . . ." We conclude that removing the Trustee from the Trust is unnecessary considering that the Trustee breached no duty to the Trust.
Although we may be reading more into this language than the court intended, the language strikes us as addressing duality of interests and, at least in Montana, providing a resolution to a basic issue that faces those who are appointed to an nonprofit's board by individuals or another nonprofit that controls the appointment through its relationship with the controlled nonprofit. When discharging her duties, does the appointee owe a duty to the individuals or entity that appointed her, or just to the entity on whose board the appointee serves? The language—particularly the reference to the fact that the trust administrator may have influenced the board of advisors' decision—suggests that a board member cannot take the preferences of the appointer into account.
Know Your Trustees. Alberta Bair appears to shares some of the blame for this litigation. It appears that she really didn't know the people who served on the board of advisors and they don't seem to have known her. The lesson is clear: Know who will be administering your charitable gift. There is often discretion in how a gift is administered. If those administering the gift after the donor is dead knew the donor, they are much more likely to honor the donor's true intent.
The brief submitted by the State of Montana supports our suspicions. According to the brief, neither the president of U.S. Bank nor the chairman of the advisory board had ever visited the museum when it was functioning. In fact, the brief points to a transcript (presumably from a deposition) that the chairman of the board wasn't even aware of the museum's existence for his first year and a half on the board.
The board of advisors had other spending priorities, according to the State of Montana's brief. The telling portion of the brief states:
Each year, the Board budgeted its expenditures on the Museum and reported its charitable grants on an annual basis. In the Trust's first full year, while the Board was negotiating the bare minimum for renovations of the Museum, the Board committed $1 million to renovate a student center at Rocky Mountain College, and $550,000 to capital improvements at the Yellowstone Art Museum. Later in 2001 and 2002, years after major restoration work on the Museum had ceased, the Board granted $300,000 to restore the Billings Depot. For the fiscal years ending 1995, 1997, 1998, 2000, 2002, 2004 and 2005, the Board spent more Trust income on a single grant recipient than it did on the Museum. When the Museum was open, the Board spent more Trust income to support other museums through grants ($1,044,120) than it paid the Russell to run the Museum in Martinsdale ($727,780.44).
After closing the Museum, in the fiscal years ending in 2004 and 2005 the Board made a total of $4,325,402 in grants, or over $1 million more than the total funding the Board had given to support the Museum since the Trust's creation. These grants included $1,100,000 to the Boys & Girls Club of Billings and Yellowstone County (where Board member and U.S. Bank President Wayne Hirsch, who voted on the grant, also serves as Foundation President) and $1,050,000 to the Alberta Bair Theater, more than the Board had ever spent to support the Museum in a single year. The grants also included two gifts to the Yellowstone Art Museum totaling $510,000, including a gift of $395,000, which is more than the Bair Family Museum had received in a single year since its opening. The Board gave all three of these organizations more money in a single year than Alberta Bair had given them in the last six years of her life. In total, the Board has spent more than $14 million for charitable purposes, and the Museum has received less than a quarter of that amount. Other than the initial value of the contribution of the Museum collection, the Board never spent more than the Trust's annual income to support the Museum.
Most recently, the Board committed another $2.15 million to endow the Yellowstone Art Museum after trial, despite the Trustee's complaints that any commitment of such size would leave the Trust unable to fund its annual grants at normal levels. Without notice to the other parties or prior court approval, the Board also agreed to split up the Collection and moved part of it to the Yellowstone Art Museum. While the gift of the partial Collection is premised on the Board prevailing in this case, there is no such restriction on the multimillion dollar endowment. The Board never offered such an endowment to support Alberta Bair's Museum. Instead, the Yellowstone Art Museum, located in the hometown of the 'Trustee U.S. Bank and four of the five Board members, is now the single largest beneficiary of her trust, with a total of $3.47 million of trust assets including this most recent pledge.
Notwithstanding the Trustee's ambivalent view of its grantmaking capacity--generous when supporting hometown organizations, frugal when supporting the Museum--the Board would have been able to be equally generous with the trust funds had the Museum remained opened.
[References to trial materials removed]
People should think long and hard when selecting the people who will oversee their assets when they are deceased. The alleged conduct certainly suggests that many people would be better off making major gifts while still alive rather than relying on institutional and apparently unknown overseers.
NAAG-NASCO, a Force to be Reckoned With. Recently, commentators have focused on the IRS's role in governance. There obviously is a role for the IRS, but nobody should count out state charity regulators and attorneys general. That is evidenced by the fact that 13 state attorneys general joined in filing an amici curiae brief in this matter. The amici were the states of Michigan, California, Iowa, Illinois, Indiana, Missouri, New Hampshire, North Dakota, Oregon, Pennsylvania, Tennessee, Washington, and West Virginia. Their brief focused on one question: May a charitable trustee use a "sole discretion" clause to evade public accountability and deny meaningful judicial review of alleged fiduciary duty breaches?
When we attended the 2006 NAAG-NASCO meeting in Nashville, Tennessee, Montana Assistant Attorney General Anthony Johnstone, who argued the Bair Family Trust case, discussed it. He obviously caught some people's attention. As an apparent consequence, we have thirteen states banding together to participate in a case that raises serious questions regarding fiduciary duties owed to charitable entities. It is clear that the states view themselves as having a role in charitable regulation that goes well beyond enforcing charitable solicitation statutes. We now have even more of a reason to closely track NAAG-NASCO's activities.
Status of a Leading Commentator is Elevated. Marion Fremont-Smith has been a longtime and important participant in the development of nonprofit law, regulation, and oversight. We were therefore pleased to see the amici curiae brief filed by the thirteen attorneys general refer to her 2006 Treatise--Governing Nonprofit Organizations (Belknap Harvard)--in very close proximity to the great English jurist, William Blackstone, the author of Commentaries on the Laws of England (3d Ed. 1768). Blackstone has finally met his equal.
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