“It’s appalling to spend money to see whose version of charity is more appropriate, when those dollars could have been spent for real charity.”
a Princeton alumnus—says, “I was appalled by the lack of control over those costs.” He adds, “At the rate my entire class gave for annual giving, it would take more than 400 years to make up those fees.” Taking a broader view, Kramer observes,
“It’s appalling to spend money to see whose version of charity is more appropriate, when those dollars could have been spent for real charity.” Granting that the Robertson legal fees may
be atypical, cost is unquestionably a key incen- tive to avoid litigation. But, argues Kramer, “The news media and the public nature of the 990 (non-profit) tax return are the enforcers of the rules. They create more com- pliance and more efforts to avoid embarrass- ment than the rules themselves.” There’s also a plaintiff’s common law right
to have his or her case heard in a particular court of law. The so-called “Hershey Trust” cases are a prime example. In 1909, Milton and Catherine Hershey, the king and queen of chocolate candy, established the Milton Hershey School, a charitable institution for orphans. A deed of trust was the original agreement between the Hersheys, the Hershey Trust Company as trustee, and the managers of the trust.
Hometown business and chocolate complexity Further complexity followed in 1930 when, at Milton Hershey’s direction, school graduates and a former superintendent formed the Mil- ton Hershey School Alumni Association. The association was composed mostly of school grads, though it also included honorary and associate members. Significantly, the associa- tion was not a division of the school or the trust company. It was not named in the deed of trust and was not an intended beneficiary of the trust. Around 1990, the alumni association
believed the trust’s resources were being diverted from the purpose of helping orphaned children. The association contacted Pennsylvania’s attorney general, who inves- tigated and concurred. In 2002, the AG, the school, and the trust company at last entered
36 Today’sCampus
into an agreement governing the adminis- tration of the trust and the school. The alumni association seemed satisfied
with this result, but when the AG attempted to change the terms a year later, that satis- faction evaporated and the alums sued. By 2006 the case had climbed all the way to Pennsylvania’s supreme court, which ruled, “We find the Association did not have a spe- cial interest sufficient to vest it with standing. Nothing in this litigation would affect the Association itself; it loses nothing and gains nothing. The Association’s intensity of con- cern is real and commendable, but it is not a substitute for an actual interest.” Almost at the same time that the school’s
alumni were being told by the Keystone State’s supremes that they had no business in court, another judge in another of the state’s prestigious courts was saying some- thing very different. The Hershey trustees were attempting to diversity the school’s endowment investments by selling some or all of their controlling interest in Hershey Foods Corporation and buying other secu- rities. Senior Judge Warren Morgan wrote,
“The likelihood is great that these efficiencies will result in reduced work forces with a potential for plant location changes.” In other words, the townspeople of Hershey, Penn- sylvania stood to lose job security, perhaps even the Hershey chocolate factory itself. In his majority opinion and order Morgan
further wrote, “We hereby Order and Direct that… the Board of Managers of the Milton Hershey School and the Hershey Trust Com- pany as Trustee of the Milton S. and Cather- ine S, Hershey Trust… shall not enter into any agreement or other understanding that would or could commit the respondents to a sale or other disposition of any or all of the shares of the Hershey Foods Corpora- tion held as corpus of the trust.” While Don Kramer is right that endow-
ment suits remain few and far between, the outcome of this second Hershey Trust case bodes ill for trustees who assume that unan- ticipated third parties will be blocked at the courthouse doors.
Financial meltdown and chasing Madoff If the citizens of Hershey, Pennsylvania—or at least those who depend upon its chocolate factory for their livelihoods—have a recog- nizable interest in an endowment earmarked for orphaned kids, might not more donors be welcomed before the bench? “New york University, the largest private
university in the U.S. by number of students, lost $24 million in investments managed by Bernard Madoff, the institution said in a law- suit filed against J. Ezra Merkin, Gabriel Capital LP fund and Ariel Fund Ltd,” reported Bloomberg. NyU alleged that Defendant Merkin’s
hedge funds invested the school’s money with Madoff without telling investors or exercising appropriate due diligence. Due diligence has taken on added import in recent years, and 43 states have adopted the Uni- form Prudent Management of Institutional Funds Act. Christopher Klem, a partner at Boston’s
Ropes & Gray, who spoke at the NACUA conference in Washington said, “Universities have done a good job documenting spending decisions. New legislative standards of care for investments set the baseline for one’s investment process.” However, we may be seeing a lineup of
elements that make possible a perfect litigation storm. First, there is the threat of outrageous legal fees as in the Robertson case. Second, the Hershey Trust cases suggest a possible com- mon law trend that lowers the barriers at the courthouse doors; barriers that traditionally kept even donors from challenging the expen- diture of their largesse. The general public may even have a say, particularly through a state attorney general. While endowment suits may indeed be
rare today, their heyday may be just around the corner.
TC
Jim Castagnera, a university attorney and freelance journalist, is the author of Al Qaeda Goes to College (Praeger 2009) and Handbook for Student Law(Peter Lang 2010).
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