DATELINE: November 7, 2010, Chicago
Last Wednesday, Chancellor Ellen Hobbs Lyle issued still another order in the dispute between the Tennessee Attorney General and Fisk University. Every lawyer in the country who advises clients on restricted gifts should make their clients read this opinion and all the others that came before. This case truly illustrates the nightmare that can come with seemingly well-intentioned restrictions.
Under Chancellor Lyle’s ruling, Fisk University will be allowed to
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sell a half-interest in the O’Keeffe collection for $30 million, but will be required to reserve $20 million of the proceeds to fund future maintenance costs for the collection. That leaves Fisk with $10 million to save itself from financial ruin. The court’s ruling allows Fisk to spend that money outright or use it to fund an endowment.
To date, we have agreed with many of Chancellor Lyle’s rulings. This one is hard for us to swallow. Chancellor Lyle refers to no legal authority or principles in the main portion of her decision. Although she undertakes a legal analysis after outlining her decision, that discussion is internally inconsistent. Rather than mixing the law and facts in such a way as to result in the reader saying, “Of course, this is the right decision,” the reader sees a judge’s heavy hand at work unsupported by the law or facts. Toto has pulled the curtain back and we see that the Wizard of Oz is just a mere mortal.
We suspect that Chancellor Lyle doesn’t expect Fisk to survive, even with the $10 million cash infusion. Specifically, she orders that $20 million in sale proceeds be transferred to an independent foundation, with the income being used to preserve the collection. Fisk is to have no access or management discretion with respect to these funds. Chancellor Lyle is clearly concerned about bankruptcy, writing:
The endowment fund also shall be set up to specify that if a bankruptcy petition is filed or Fisk goes out of business, the endowment shall not be used by Fisk or distributed to creditors, but is tied to the Collection and passed on to enable a successor custodian to continue to carry out the O’Keeffe charitable intention of providing Nashville and the South access to the Collection.
Whether this will work should there be a bankruptcy is open to some question. At the end of her opinion, Chancellor Lyle cites authority indicating that the $20 million will escape the clutches of Fisk’s creditors, but we suspect the law regarding how restricted assets are handled in bankruptcy isn’t quite so clear or predictable. See Evelyn Brody, The Charity in Bankruptcy and Ghosts of Donors Past, Present, and Future, 29 Seton Hall Leg. J. 471 (2005). Judge Lyle seems to be doing her best to structure the arrangement so that the funds are associated with the collection rather than Fisk, but should Fisk enter federal bankruptcy court, Fisk and the $20 million will find themselves in an entirely new realm.
After stating her decision, Chancellor Lyle back fills, offering some supposedly supporting legal authority. The authority she offers basically says that a judge, in crafting a solution, must take into account all the purposes behind the gift, not just one. Chancellor Lyle then cites testimony indicating that O’Keeffe made the gift to Fisk because it would permit everyone in Nashville to view the collection, not just Caucasians. If that is a key factor, then allowing the sale today makes no sense. Now that segregation has ended, moving the collection to the Frist Center would allow everyone in Nashville to view it year round. Permitting the sale would seem to unnecessarily defeat O’Keeffe’s intent.
As we have noted, it is clear to us that Chancellor Lyle entertains serious doubt as to whether Fisk will survive. The Tennessean reports that Fisk runs an annual $2 million deficit, meaning that $10 million buys Fisk some time, but not a lot. Jennifer Brooks, Fisk Art Ruling Upsets Both Sides (November 4, 2010). Lost in the fight over the collection and the money it represents is the larger question: Can Fisk implement the sort of structural reforms necessary to right its ship? There is no discussion of that in the court’s opinion. We can’t help but wonder whether Chancellor Lyle is throwing $10 million to Fisk, saying, “I’ll let you experiment with this, but that is it.” Although $10 million is a large dollar amount, it represents just 13.5% of the collection’s value. In a sense, Fisk is taking the role of arbs and hedge fund speculators in bankruptcies of publicly held companies. Chancellor Lyle can be viewed as paying Fisk its nuisance value.
We don’t want to be critical of Chancellor Lyle, but we think her decision is a compromise that achieves less than nothing. She should have just made the hard choice. Give Fisk the money or give the collection to the Frist Center. In her opinion, Chancellor Lyle states, “there was no general charitable intent by Georgia O’Keeffe to perpetuate the existence of Fisk.” Therein lies the answer, making the compromise reached by Chancellor Lyle an inappropriate one.
In her decision, Chancellor Lyle wrote, “The case is in its last phase.” Not exactly. The Tennessean reports that both sides are not entirely happy with the decision, making an appeal likely. In one sense, that suggests Chancellor Lyle crafted a good solution—nobody is happy usually means both sides got something and gave something else up. Yet, we suspect the appeals court will take a new approach, resulting in a remand with instructions and an entirely new round of proceedings.
At the end of the day, Rome and Paris are burning. This is a good reason people should avoid imposing restrictions when making gifts to charitable institutions. When donors must impose restrictions, they should also impose an alternative dispute resolution procedure that results in a resolution within a finite amount of time.
In Chancellor Lyle’s defense, we find ourselves being somewhat inconsistent in our thinking on this case. That’s the problem when you chase your tail trying to ascertain a dead donor’s intent. The argumentation becomes much like a Mobius strip.
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