National Heritage Foundation Files for Bankruptcy After Court Orders Payout

The National Heritage Foundation, a Virginia charity ordered last fall to pay millions of dollars to donors who said they had been misled by the organization, last month filed for bankruptcy.

Jan H. Ridgely, vice president of the National Heritage Foundation, says the organization, which manages thousands of donor-advised funds, is “a solid entity that just needed to hit the pause button.”

The organization filed a voluntary Chapter 11 bankruptcy petition in federal court, citing the $6.2-million court judgment as its largest outstanding debt.

Ms. Ridgely says the National Heritage Foundation has appealed the judgment, but in the meantime must post a bond to cover the potential cost of the damages.

She says raising the cash to pay for the bond is what ultimately forced the group, already in financial difficulty, to file for bankruptcy.

Donations to the group had dropped by more than half from 2006 to 2007, and probably fell by another 25 percent last year, Ms. Ridgely estimated.

Losses in the group’s investment portfolio due to the poor economy are stacking up, too, she says, and the group spent $1-million to reorganize many of its donor-advised funds to comply with new federal rules in the Pension Protection Act of 2006.

National Heritage Foundation’s financial statements for 2007, the latest available, show the organization had $232-million in assets and less than $24-million in liabilities.

But Ms. Ridgely says that liquidity became an issue. The group is now trying to renegotiate the terms of a $6.5-million loan it took from a Virginia bank, and to extend its $1-million line of credit with the bank to $2-million. The organization is also, she says, trying to push up the payback schedule for a $14-million loan it made as an investment in a private company.

National Heritage Foundation’s bankruptcy filing, which includes a list of the group’s top 20 creditors, lists 19 donors to whom the organization makes monthly or quarterly annuity payments.

The donors — whose payments total about $100,000 each month — are among as many as 5,000 donors who have set up donor-advised funds at the National Heritage Foundation.

Donors typically make a lump-sum, tax-deductible contribution to the organization, sometimes in the form of a charitable gift annuity.

The National Heritage Foundation takes 2.5 percent of the gift, and then a quarterly 0.5-percent fee to manage the money, which it invests. In response to recommendations from donors, the organization then parcels out portions of the money to charity.

‘In Compliance’

Over the years, the National Heritage Foundation and its founder, John T. (Dock) Houk, have attracted the attention of critics who say the organization has helped donors help themselves to improper tax breaks.

But Ms. Ridgely denies such accusations and says that the organization, which, she says, distributes $20-million a year to charity, has been unfairly labeled controversial.

“We comply with the laws,” she says. “We have always been in compliance with the laws.”

In 2006, the Pension Protection Act made illegal a common practice at the National Heritage Foundation whereby donors would give money to the organization to set up a foundation, take a tax break, and then draw a salary from the new foundation to run its charitable programs.

The National Heritage Foundation was also a leading promoter of a controversial giving technique, called charitable-split dollar, that was effectively abolished by a 1999 law. Under the plan, donors would make tax-deductible donations to the National Heritage Foundation, which then used those donations to pay premiums on life-insurance policies.

The beneficiaries of the policies were primarily the donors’ heirs, but a smaller portion of the death benefit would go to a charity chosen by the donors. Critics of such plans said the split-dollar deals allowed donors to use tax-deductible dollars to generate a disproportionately high private benefit.

In October, a Texas state court sided with Juan J. and Silvia Mancillas, donors who said that the National Heritage Foundation did not take proper action with regard to their split-dollar arrangement when the approach was deemed illegal, thus failing to carry out their financial plans and follow their charitable intent.

“I put the blame right on the Mancillas case,” says Mr. Houk, referring to the need to file for bankruptcy. “Our balance sheet already looked like it’d been hit by the same bomb that hit Hiroshima.”

In a statement, Mr. Houk said that his group will make every effort to continue its normal operations.

“Despite the cataclysmic events of the last year,” he said, “NHF expects to use Chapter 11 protection to take positive steps to ensure continued administrative services to its donors and programs.”