Illinois Attorney General Lisa Madigan and the defendants in
the long simmering dispute involving the Bielfeldt Foundation settled their
differences today. We first wrote
about the dispute in 2004 when the lawsuit was filed.
One thing is for sure: Unlike New Jersey’s current attorney general, General Madigan is...
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willing
to stay the course until she extracts monetary damages from the defendants—at
least that is the message we take from the settlement agreement. The original complaint against
Gary Bielfeldt and members of his family sought over $35 million in
damages. Over $30 million of that
amount was attributable to investment losses and somewhere around $9 million
appears to have been attributable to investment management and director
fees. The case raised classic
issues involving self-dealing and prudent investment practices.
Whether the settlement is a complete victory for General Madigan is hard to say. Because the case never saw the light of a courtroom and the protracted settlement negotiations were private, we are unable to assess who had the better case or whether Madigan’s $35 million demand was a trumped up to aid negotiations. At the end of the day, the defendants are required to make $2 million in payments to the Bielfeldt Foundation over an 8-year period.
For most people, $2 million in payments would sting a whole lot. Yet the amount is nowhere near the $35 million that General Madigan originally demanded. Moreover, the Bielfeldt’s have been generous when it comes to charity, so an average annual $250,000 non-deductible (we assume) payment to the foundation actually may be a pretty good deal given the alternatives that the family faced. If the Bielfeldt’s annually give $250,000 to charitable causes, they can take advantage of the fungibility of money, making the $250,000 payment to the foundation instead.
The Bielfeldts apparently no longer
exercise direct control over the foundation so there may be limitations on
their ability to direct the funds to charities of their choice. Mrs.
Bielfeldt, however, remains the foundation’s executive director so the family has some input--this last statement is based on the most recent tax return filing available through GuideStar--the 2007 Form 990-PF.
But to General Madigan’s credit, she extracted monetary
damages, something most charity regulators either choose or fail to do. That makes the settlement an important
signpost. In Illinois, charity
insiders should think long and hard before entering into transactions with
charities if there are conflicts of interest. Caveat Conflictitor. Just maybe General Madigan will inspire regulators around
the country to go to the mat more often.
The settlement agreement also provides the Illinois Attorney General an interest in litigation pending between Gary Bielfeldt and KPMG, LLP. Gary Bielfeldt must pay over to the foundation the lesser of $3 million or 50% of the net amount that he receives from the suit. The net amount is determined after subtraction of all reasonable fees and costs and state and federal taxes. We have no idea how that lawsuit relates to the facts underlying General Madigan’s lawsuit against Bielfeldts. What must annoy KPMG is that the settlement agreement appears to require Gary Bielfeldt to exhaust all appeals—although it also seems to allow for a settlement.
The Bielfeldt Foundation is a private foundation. As is typical in these cases, we don’t know the extent of IRS involvement in the matter because the IRS is precluded from disclosing taxpayer information, but the Bielfeldts may have already made significant payments as a result of IRS action. If so, then they may end up paying considerably more than $2 million to resolve the matter. We hope attorneys general start requiring the defendants in breach of duty suits to disclose as part of the settlement information about the resolution of tax controversies stemming from the underlying facts. That way other nonprofit directors will better understand the potential monetary liability that they face when they breach their duties.
The settlement agreement precludes the defendants from
seeking indemnification from the foundation, which makes sense. It does not, however, say anything
about recoveries under D&O insurance, if any was in place. Those procuring D&O insurance policies should take a lesson from the settlement terms. If there was D&O insurance in place, the settlement could preclude the Bielfeldts from accessing it if the coverage runs only to the foundation, covering only amounts paid out by the foundation as indemnities. On the other hand, if the policy runs directly to the Bielfeldts, then they may be able to recover from the insurance company depending on what other provisions of the policy say about settlements. Lesson: Carefully Read the policy.
The settlement also permanently enjoins the defendants from
serving as trustees (this apparently includes serving as directors) with
respect to charitable assets. The
agreement provides a number of exceptions that will permit the defendants to
remain on boards on which they currently serve. After one year, the defendants can seek the consent of the
General Madigan to serve on other boards. The settlement also limits the defendant's involvement in financial and investment matters when they do serve on charitable boards.
Finally, the defendants will have to undergo board training at
their cost unless they resign from all charitable boards.
Under the terms of the settlement, the defendants admit no wrongdoing by entering into the
settlement.
And so there you have it. Two big cases settle in one week.
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