October 5, 2000 | Read Time: 5 minutes
By GRANT WILLIAMS
In a case of national significance, a New York appeals court has handed a charity a victory and a defeat in its long-running fight with the New York Community Trust that involves the amount of control community foundations can exercise over donors’ gifts.
The Appellate Division of the New York Supreme Court in Manhattan agreed with a lower court that the New York Community Trust, the nation’s largest community foundation, overstepped its authority in 1971 when it redirected money earmarked for a specific charity, the Community Service Society of New York, to other causes. The New York courts are the first to define a community foundation’s “variance power” — its authority to depart from a donor’s instructions.
But the Appellate Division reversed the lower court on another key point by ruling that the Community Service Society waited too long to assert its rights against the New York Community Trust and is barred under the statute of limitations from claiming millions of dollars that it apparently otherwise could have received over several years.
Possible Further Appeal
The New York Court of Appeals, the state’s highest court, may be asked by the parties involved in the case to review the latest court ruling.
The Community Service Society filed the lawsuit against the New York Community Trust in 1995. The social-service charity argued that the community foundation had insufficient reason for cutting off payments that the society had regularly received from six trusts dating back to 1929 that the community fund oversaw. The donors of each of the funds named the Community Service Society as a beneficiary for all or for a specified percentage of the fund’s income.
Community foundations solicit gifts from many donors, usually within a specific geographic region, and then distribute them as grants to local charities. Most community funds, including the New York Community Trust, require donors to agree to a “variance clause” as a condition of accepting their gifts.
The New York Community Trust’s governing document says that the organization can use its variance power when “circumstances have so changed” since a gift was made “as to render unnecessary, undesirable, impractical, or impossible a literal compliance with the terms” of the donation.
The New York Community Trust said that its decision in 1971 to redirect money from the Community Service Society was justified because it believed that the charity was changing its approach to helping the poor by working more with other organizations and providing fewer direct services. The Community Service Society said its mission has never varied and includes many programs that serve the poor.
No Compelling Reason
Surrogate Court Judge Eve Preminger ruled last year that the New York Community Trust had failed to establish a compelling reason for redirecting money from the Community Service Society.
The community foundation’s decision to use its variance power “must be grounded in a change of circumstance that negatively affects the designated charity to such a degree that it would be likely to prompt a donor of the fund to redirect it,” Judge Preminger wrote.
She said the New York Community Trust did not uncover enough negative information to support its decision, and she rejected the organization’s argument that uncertainty about the charity’s future could constitute “undesirability.”
‘Virtually Meaningless’
The new opinion of the Appellate Division of the Supreme Court in Manhattan backed Judge Preminger’s position.
The court said the various creators of the trusts clearly intended that the Community Service Society receive distributions of money from the funds.
“Community Trust, arguably unhappy with mandated allocations, claims that the change in CSS’s approach from being a direct provider to one affiliated with community organizations was an ‘undesirable’ change in circumstances,” the court said. “That distinction, however, appears to be virtually meaningless, since there is no claim that CSS has retreated from its overriding purpose of serving the needy.”
As a result, said the Appellate Division, Judge Preminger “reasonably found that Community Trust abused its discretion, since there is no showing that CSS deviated from its primary purpose.”
The court said that Judge Preminger’s conclusion — that exercise of the variance power should be limited to those situations where identifiable negative details may be offered to substantiate the undesirability of continued payments — “appears to be an equitable and definable standard.”
Thus, in a given case, the court said, “if it were shown that the designated charity, for whatever reason, was no longer carrying out its stated purpose, then a finding of undesirability might be made.” In this case, however, the court said, “while designated funding of community-based approaches might be undesirable from the Trust’s viewpoint, it cannot be said that such an approach compromises the intention of the trust creators, which is the determinative factor.”
A Victory for the Trust
But in a victory for the New York Community Trust, the Appellate Division of the Supreme Court rejected Judge Preminger’s ruling that the Community Service Society could recover six years’ worth of lost gifts from the trusts under a statute of limitations.
Judge Preminger said that the community foundation did not give the charity clear and unequivocal notice that its interests in the trust income would cease — the charity actually continued to receive money from the six trusts well after 1971 — so the Community Service Society could sue for some money it should have received.
But the Appellate Division said that an official of the Community Service Society had been told by the New York Community Trust back in the 1970’s that the charity would no longer receive automatic gifts but would have to make specific proposals for grants. “It is evident that Community Trust’s repudiation of designated payments,” the Appellate Division said, “had clearly been conveyed” to the charity, which meant that the charity had long ago run out of time to recover any money under the law.
