On August 24, 2016, it was widely reported in the business media that Duke University had filed a claim against the estate of Aubrey McLendon, the former CEO of Chesapeake Energy Corp., who died in March 2016. The claim was for payment of nearly $10 million in outstanding charitable pledges made by McLendon, once again raising the question of whether and to what extent charitable pledges are legally enforceable.
The McLendon pledges were reported to have been documented in writing. One expert, Richard Marker, a professor of philanthropy at the University of Pennsylvania and New York University, was quoted in The Wall Street Journal as saying that “[i]f there’s a signed letter of commitment, generally speaking, that’s considered legally binding”. We do not know which state law governs the McLendon pledges, but in some states, merely putting the pledge in writing is insufficient to make it legally binding. In New York, for example, a written pledge by itself is not enough.
Contract Theories of Enforceability
States typically rely on one of three theories to find that a charitable pledge is enforceable. Under contract theory, a pledge may be enforceable as a bilateral contract. In a typical transaction, a donor will pledge a sum of money in exchange for the charity’s naming a building or a scholarship fund after the donor. A second theory of enforceability holds that a charitable pledge is the unilateral contract in which a donor offers to make a gift in the future, which only ripens into a binding contract when accepted by the incurring of liability or detriment by the donee charity. In the absence of a true contract, i.e., in a case where the charity provides no consideration in return for the pledge, a pledge may be considered enforceable under the doctrine of promissory estoppel, an equitable remedy where the charity would suffer damages if the pledge were not enforced.
Enforcement of Charitable Pledges in New York
In New York, a charitable pledge is generally considered to be a unilateral contract requiring some action by the charity to show that it is counting on the pledge. It does not need to be much, but it needs to be more than nothing.
The seminal case was Allegheny College v. National Chautauqua Co. Bank of Jamestown, which made clear that charitable pledges should be generally enforceable as a matter of public policy. Since then, New York courts have usually bent over backwards to find the requisite liability or detriment that makes a pledge enforceable. [T]he “trend of judicial decision during the last century has been towards the enforcement of charitable pledges almost as a matter of public policy.” Thus, a charitable pledge was found to be binding based on the nonprofit’s record of borrowing heavily from banks in advance of collecting the pledges it received. Even though the charity may have taken out loans of an equal or substantially similar amount with or without the pledge, the Court still found reliance. Even pledges for failed or abandoned projects have been deemed binding in New York.
These pro-enforcement precedents laid the groundwork for more recent decisions, which continued the trend in favor of nonprofit organizations seeking to collect their pledges. In Central Suffolk Hosp. Found. v. North Fork Radiology, P.C., a medical center secured a judgment against North Fork by simply demonstrating that its pledge agreement had been signed in connection with a major expansion of the hospital that had been in progress for years and continued after the agreement was signed. Using a pledge in order to obtain other pledges also makes a pledge binding. Finally, in one case, a charity accepted a pledge and carried on with its usual charitable activities. Taking a finding of consideration to the extreme, the court found that this was sufficient to make the pledge binding.
The Appellate Division Rules in Matter of Kramer
Certainly New York charities have had every expectation of the trend towards enforceability continuing and many consider a written pledge binding when made. However, the trend towards enforceability was recently delivered a sharp setback. The Brooklyn-based educational institute Oholei Torah-Oholei Menachem in June learned that lesson the hard way in Matter of Kramer, losing its appeal of a summary judgment denying enforcement of a $1.8 million pledge. It did not matter that the institute’s claim was based on a pledge card and a promissory note. The Kramer court found that the institute failed to demonstrate that it accepted the pledge by incurring liability in reliance on the pledge, and therefore had no claim to the money.
The long history in New York of decisions in favor of enforcement makes the Kramer decision a bit of a surprise. The distinguishing feature of the Kramer case is that Oholei made the mistake of ignoring the pledge after receiving it. Rather than relying on it to advance a new project, continue an old one, or even mention it to other donors as part of a larger fundraising campaign, the educational institute did nothing beyond carrying on with its usual charitable activities (which at least one court had previously held was sufficient to make a pledge binding).
The educational institute might not have run into this problem at all if Kramer had not died after making the pledge. The possibility of the donor’s death before a pledge is paid in full presents another reason both the charity and the donor might wish the pledge to be legally binding. The pledge is then deductible for Federal and state estate tax purposes as a debt of the decedent. A charitable pledge evidenced by a promissory note, even if enforceable against the estate, is deductible only if the liability was contracted for adequate and full consideration and it would have constituted an allowable charitable deduction if it had been made as a bequest.
Are There Ways to Think About Charitable Pledges?
A requirement of some form of consideration, or the remedy of promissory estoppel, is not the only option available to states who want to enforce charitable pledges as a matter of public policy. In Louisiana, for example, charitable pledges have been legally enforceable going back to 1836. There has been unbroken jurisprudence in the state since then, endorsing the policy that “in contracts of beneficence, the intention to confer a benefit is a sufficient consideration.” Ohio is another state for which reliance by a charitable donee has not been required to enforce a written pledge as far back as the late 19th century. Promises made to help institutions and organizations that promote education, religion or philanthropy must be held valid. In Iowa, terms like “hereby subscribe and promise to pay” are deemed sufficiently obligatory to make the pledge enforceable. In New Jersey, it is considered a matter of sound public policy to benefit public welfare and one who has voluntarily made a valid “subscription to a charity of his choice should not be permitted to evade it.”
Even when some “action or forbearance” is required in a state like New York, a broader interpretation of what qualifies as consideration might give courts more reason to enforce unfulfilled charitable pledges. Behavioral law and economics suggests that self-esteem and self-image can be strong motivating factors in how people spend their money. A charitable donation may bring feelings of satisfaction, enhance the donor’s public image or offer social benefits. Therefore, just by making the donation, the donor receives a benefit which might support a finding of consideration and a binding contract.
Ultimately, most nonprofit organizations are likely to be reluctant to go after delinquent donors in court (especially those they hope will give more money in the future). Nevertheless, many would want to make sure pledges are binding in case of unforeseen circumstances, particularly if the donor dies and there is no expectation of further beneficence. To achieve this end, non-profit organizations in New York must be vigilant and give pledges proper attention and care. New York courts may give charities the benefit of the doubt when it comes to reliance, but charitable organizations have to give the courts something with which to work. Each pledge should be evidenced in writing and tied to a specific action by the charity, such as a naming opportunity or a specific project, that would support a finding of consideration and an enforceable contract.