DATELINE: December 11, 2008, New York City
When we learned yesterday from CNBC that the Robertson Family lawsuit against Princeton University had settled, we jumped on a plane to the East Coast so that we could bask in the zeitgeist. Our conclusion after learning the terms of the settlement: The Robertson Family took a page out of Hillary Clinton’s playbook. First, spend a fortune kicking the...
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something out your opponent. Then, when you lose, ask your opponent to reimburse you for the cost of breaking his face. That is the upshot of what happened yesterday.
William Robertson and the other plaintiffs agreed to drop their lawsuit. In exchange --
1. Princeton reimburses (over a 3-year periond) the Banbury Fund for up to $40 million in litigation costs. The Banbury Fund is a tax-exempt foundation controlled by the Robertson Family that funded their side of the litigation. The reimbursement will be funded with money from the Robertson Foundation, the entity that currently supports the Woodrow Wilson School.
2. The Robertson Foundation will transfer $50 million to a foundation to be created by the plaintiffs. The new charity’s mission will be to prepare students for careers in government service. The transfer will take place over a ten-year period.
3. The Robertson Foundation will be dissolved and its remaining assets will be administered as a restricted endowment. That endowment was reported to be worth $900 million as of June 30, 2008. Reports indicate that it is currently worth between $600 and $700 million.
Princeton University apparently incurred somewhere around $40 million in defense costs. The university will be able to recover those costs from the Robertson Foundation.
The attorney for the Robertsons, Ron Malone, told the Chronicle of Philanthropy that the family settled because:
Princeton has a 1000-year view of the world…. The family was facing spending the rest of their lives litigating against Princeton and using up all the Banbury dollars to do that.
There is one problem with that logic: Princeton presumably had that same world view back in 2002 when the family filed the lawsuit. It was perfectly foreseeable that the litigation costs would be crushing. In that sense, the entire folly was irresponsible, particularly given some of the facts that have come out. In particular, as we recall the facts, the senior Mr. Robertson was involved with the Robertson Foundation when some of the changes that his children objected to were made.
What is truly galling about this settlement is that for $80 million, we don’t even get a judicial decision that advances the ball on such questions as donor standing. Which leads to today’s lessons:
A. Institutions Should Keep Children Off Boards. Large colleges and other philanthropic organizations should fight like hell to convince donors that once the donor is dead, other family members should have no input into how the money is administered. It’s one thing for donors to be on the board of a supporting organization; it is quite another to have subsequent generations and their baggage on the board of the organization. The old adage holds: Children should be seen, but not heard.
B. Provide for ADR. Both the donor and the institution should provide that any disputes over the administration of a restricted fund, including assessing donor intent, should be resolved through a private alternative dispute resolution process. The agreement should provide a time limit on the process and provide that no expenses will be reimbursed from the donated funds. It should also cap the expenses that both parties can spend on the process (with adjustments for inflation).
C. Legislatures Need to Clarify Standing. We need to move away from revolving questions of standing under the common law. Anybody can file a lawsuit and then spend years arguing over whether they have standing. That becomes a bargaining chip, as we assume it was in this case. We need clear statements from legislatures defining when and who other than the state attorney general can challenge a charity’s compliance with the terms of a restricted gift. The statutes also should provide clear rules about how members of the public (including family members) can bring non-compliance to the attorney general’s attention and how the attorney general should respond. Uncertainty breeds this sort of litigation.
The other two branches of government fell way short in this case. The New Jersey Attorney General was missing in action. It is the AG’s responsibility to intervene to protect charitable assets. Yet, the record is devoid of any action by the New Jersey Attorney General. Separately, the court should not have allowed this case to drag on. The 350 pages in opinions from just over a year ago fueled the litigation and the costs. A probate court is supposed to do equity, and one of its considerations should be to prevent charitable assets from being frittered away. Courts should stop indulging litigants in big dollar cases. Just because big dollars are involved doesn't mean justice can only be done by devoting years and tens of millions of dollars to the dispute.
D. Donors Should Check Their Egos. Donors should stop telling institutions that they know more about running institutions than the professionals who run the institutions. Complex restrictions lead to waste. Times change. Donors, who will die, are simply unable to predict what life will be like 20 or 40 years after they are rotting in the ground. There is a reason for the rules against perpetuity. The dead should not control the future.
To this end, serious consideration should be given to charging donors for the waste and inefficiency that restricted gifts create. One approach would be change Section 170 and the correponding gift and estate tax provisions of the Internal Revenue Code. Give a charity an unrestricted gift and you get a 100% deduction for the gift. Give a charity a restricted gift and you only get a 50% deduction. Economics would cure the arrogance of some large donors very quickly. Before the world goes ballastic, we acknowledge that this proposal needs work, but at some point, we need to eliminate the wastefulness that results from trying to tie the hands of charities that don't have the self-restraint to say "No."
We are disgusted by William Robertson's sanctimonious statement reported by the Chronicle of Philanthropy:
This is a message to nonprofit organizations of all kinds and throughout our country that donors expect them to abide by the terms of designated gifts or suffer the consequences.
Ah, the grand crusade. As we read the outcome of this suit, Robertson achieved nothing except to waste somewhere around $80 million on lawyers and the other costs of litigation. The $50 million that will go to the new foundation will be used for purposes that strike us as not all that much different than they would have been had they remained at Princeton. We do have one bit of advice for Robertson and the universities that will apparently be the beneficiaries of the new charity: Don't put your own children on the board.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
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