DATELINE: August 14, 2008, Chicago
Memories of St. Mary's College came rushing back this morning when we read in the Chronicle of Philanthropy's Elsewhere Online column about Westminster College's recent disappointment over what now appears to be a worthless $3.4 million pledge from am ostensible entrepreneur. According to Brian Maffly of the Salt Lake Tribune, Warren Kyle Foote, a 28-year old real estate developer, made the pledge to finance the Warren Kyle Foote Institute for New Enterprise. Once Hailed by College as Philanthropist-Entrepreneur Foote Spun Web of Deceit, August 12, 2008. According to Maffly, within a few months of his pledge, Foote...
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"faced three felony cases alleging multiple counts of fraud and bad-check writing involving numerous victims."
According to the article, a spokesperson for the college indicated that Westminster typically does not perform background checks on donors. She told Maffly, "We don't grill people, [by asking] 'Where did you get your money and how are you going to pay us?'" The college terminated the arrangement after Foote failed to make the first $1 million payment sometime last year.
Foote had attended the college for one semester in 1998, but apparently left to participate in an LDS Church mission in Brazil. An associate of Foote's told Maffly that Foote hoped the gift would build creditability for him with the business community.
Westminster eventually launched the institute, but with money from the college's President's Innovation Network. Certainly the size of the apparent default pales in comparison to the default under the $100+ million pledge to St. Mary's College, but like St. Mary's College, Westminster failed to do adequate due diligence on its donor. It now claims that it is changing it practices.
We offer the following observations:
A. Background Checks are Critical. Unless Warren Buffet or Bill Gates walks into the development office with a pledge agreement, charities should do background checks on donors who make large pledges. Legitimate donors should not be offended, particularly if this is standard practice. It should signal to the donor that she is making a pledge to an institution that is not going to waste the resources being pledged. In the Westminster case, Foote apparently had come out of a Chapter 7 bankruptcy two or so years prior to the time that Westminster announced the pledge. A background check might have picked up that fact, leading to more probing questions on the part of the college and a demand for more money upfront.
In this particular case, the institute was to be named for the donor. That makes a background check even more important. No institution wants to learn after it has named a scholarship fund, building, program, or school after a donor if the donor's reputation is tarnished by his past or future behavior. This is particularly true if the institution does not have the foresight to insist on a "bad boy" clause which would permit it to remove the donor's name in the event of criminal or immoral activity.
B. Duty to Enforce Unpaid Pledges. Charities and their boards often ask whether a charity has a duty to enforce overdue pledges. The answer that most boards seek is that there is no duty. They fear that enforcing a pledge might chill pledges by others. Unfortunately for these boards, the general consensus is that a pledge is an asset and boards cannot adopt a blanket rule to simply ignore or write off unpaid pledges. At the same time, everyone seems to agree that there are instances where a board need not enforce a pledge if based on its business judgment, the board determines that any collection efforts will be fruitless. Although it is impossible to say for sure in the case of the Foote—Westminster pledge, this does look like a case where the board need not have gone to the ends of the earth to collect the pledge once the problems became apparent. The beginning of the Salt Lake Union Tribune story places Foote in the back of a police car apparently because of an alleged "a rash of bad check charges last November." It turns out that Foote apparently was not as successful as he may have suggested. The story paints a rather bleak picture. So we can't argue with Westminster or its board's decision to simply terminate the agreement and move forward.
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