To continue the Pemberton headed for scrap LOCKITY LOCK LOCK LOCK LOCK thread...


Infeasability, impossibility and frustration of purpose tend to unwind agreements. There's a special word for it in nonprofits.

Suppose I gave you an endowment. The purpose is to use the dividends to fund an awareness campaign to abolish slavery. (not meaning to incite a hot political discussion, it's just an example.) Well, suddenly it's 1866 and slavery is over. Now we have a bit of a problem. The endowment has no purpose.

That really happened and it went to some higher court or another, in a well known application of the common-law doctrine called called "cy-près". That's French for "quite close". Any interested party can go to a court and ask the gift to be re-tasked for a new purpose that is close to (or in that case follows from) the intended purpose. The abolition money was re-tasked to assist freedmen.

When you act in the nonprofit space, it's a real good idea to build "cy-pres" right into your structure. That way you don't have the expense of seeing a judge and having him do something random that makes sense to him but isn't the vision of the donors.

Something like "Group A, and if impracticable then group B, and if impracticable then operating railway museums in Pennsylvania, Maryland, West Virginia or northeast Ohio."

Now in the case of the Pemberton Trust, the group appears to be functionally defunct. If the Trust shocks everyone and raises the curtain on their new site (and survives the various "B.S" tests that many would demand)... that would have a significant affect on cy-pres, and could result in some deals now unwound to be re-wound.

Robert and the Board,

Most states have laws regarding donor-restricted funds and what you can and cannot do with them. In other words, if the donor gives you money for purpose X and purpose X only, you better not spend it on purpose Y. If the donation is large enough, you may be answering to your state's Attorney General.

Some donors, justifiably may not want to give you "wiggle room" for the donated money, item, etc. Court may be unavoidable.

This type of dispute is unfortunately far more common in the non-profit world than it should be. My Alma Mater, which has a substantial office building off-campus devoted to managing donated funds, is occasionally involved in disputes involving substantial (two comma) donations when the donor does not believe that the funds were used the way they were intended.

A recent such dispute between the donor and the University involving earmarked funds has moved in and out of the courts several times and the legal fees alone would have supported several students.

A new residential college was constructed a few years ago using earmarked funds from a single major donor. The money was given for that express purpose. If the University had signed the contract and then said, "Thank you for your money. We are going to buy several Matisses, Le Grande Jatte, and as many works by Degas, Monet and Cassatt as we can find for the Art Museum." there would have been Hell to pay.

Putting a condition on a donation of property or equipment is not uncommon, i.e.: Use [Donated Item] for [Specified Purpose]. If [Donated Item] ceases to be used for [Specified Purpose] or [Other Conditions (loss of property lease, bankruptcy et cetera)] title reverts to the donor.

Among the non-profit board's responsibilities are to insure that the conditions are met, that the organization's records accurately reflect the conditions under which the donation in question was accepted, and, especially with a 'hands on' organization, insure that this information is available to the membership at large. If this is not done, especially with a donation in kind the size of a boxcar, then the officers and the board have been negligent, possibly to the point of having breached their fiduciary duty. It is the responsibility of successor board members and officers to familiarize themselves with those records. If a new officer does not make a good faith effort to do so and relies on a sometimes faulty institutional memory that has not taken the time to read the contents of of the filing cabinet, then that new officer is also negligent.

I know all too well how boring long legal documents can be as does Brother Wilkins, after all we write the bloody things. The fact remains though that if you manage such an organization you have to read the leases, donation agreements, loan agreements and so forth and remember that what is actually written is what is meant, not what you want to think it really means.

I think much of this could have been avoided if the Trust's membership as a whole had been cognizant of the terms of the various agreements and made a good faith effort to comply with them. It would not have solved the problem of the mayor but it would have given him far less ammunition.

GME

Again the members of this board are taking pot shots in the dark. Any sadly it is because they find it necessary to comment on each and every post. And to do so they read a link to a newspaper that is so biased that in some countries in this world would have been shut down. Thank goodness in this country we have the freedom to bend the truth to suit one's needs and get it into newsprint without repercussions or printed retractions.

And although many suggestions by bona fide members of the preservation industry are welcome on the site, they can attest to the fact that you cannot dot every "i" and cross every "t" without having an attorney scrutinize each and every movement made by every member of a non profit organization. What non profit can afford that?

But just for arguments sake, what if there is no agreement between a donor and a non profit? What if it was merely a hand shake and the article was loaded (onto a flat car; into the trunk of a car; into the back of a pick up) and taken to a museum for display. What do you do when the museum, for what ever reason, needs to move out? What do you do with the artifacts that were on display? If there is an agreement that the artifact was "on loan" then it must be returned to the person who lent it to the museum. The 501 (C) 3 says you can de-accession it by: donating it to another 501 (C) 3; selling it to another 501 (C) 3; or just sell it outright to anybody with the finances to do so. But since this process was taken out of the hands of the trust, who then is it up to to make sure that all of the artifacts are disposed of properly? In this case it sure wasn't the courts who did not advertise on any railroad preservation or museum sites that might have had any interest in the items. Yes, there was one or two locals who took an interest in seeing if that the equipment got into a museum or collection somewhere. But for the most part it was the courts and the township that dictated how fast the equipment was disposed of. What harm would it have done to allow the bidding process to be published in the appropriate locations that would almost assured the equipment went to other collections or museums? The harm was that certain members of government had the idea that the collection be broken up and moved as quickly as possible. Doesn't it make you wonder why?

But would having the equipment posted here or on one of the sites dedicated to finding a proper home for the equipment made any difference? I doubt it. I have read how many of the posters here purported to be in the railroad preservation industry have run the trust down for any reason they could come up with. Rather than gather together to try and find homes for the rolling stock, many here banded together to run the trust down as far as they could.

It has me scratching my head!

Later!
Mr. Ed

Unrelated to the institution but similar circumstance. If money is raised specifically for project "x", deposited into an account for project "x" which is on internal paperwork considered to be a "restricted" account..... then after circumstances change and project "x" is not viable the money lays around, lingers in an account for say 8 or 10 years and is then spent on something utterly unrelated. What does it should happen next?

Jason

Jason,

The matter of the restriction depends on who made the restriction. A board designated fund can be changed at any time by the board. Donor restrictions are another can of worms. As a result, our Museum is careful to limit financial campaigns to a very few current projects with a high likelihood of completion rather than carry a list of small balances for cars that will not see major work in the foreseeable or even distant future.

At my last job I crafted a sample wording for donor use in wills and trusts. It gave us some wiggle room for use of the initial gift designation and then laid out a line of succession should the organization merge or close. If I can find the paragraph I will post it here.

A Deed of Gift is also a handy form for donations of personal property. The form lists what is being donated and any terms or restrictions of use.
http://www.archivists.org/publications/deed_of_gift.asp

Wesley

Jason,

Earmarked donations are a form of a contract between the donor and the institution. 'If I give you $35M you will build a new Tudor-style fortress for the incarceration of students and put my name on it." Often a solicitation for an earmarked fund will have some form of bailout provision which the donor is presumed aware of aware of, i.e. 'If the project doesn't go [by date certain] then [the funds will be returned] or [the funds will go to project B or to the general fund].

If this was not provided for in advance than the options generally are: 1) to return the funds to the donors; 2) to approach the donors and ask that the restrictions be lifted; or, 3) go through the headache of petitioning the appropriate court for a release of the restrictions. While the precise rules vary from state to state, options 1) and 2) are generally preferable.

Again, this is one of the many reasons why the corporation needs to keep good records of both cash and in kind donations.

GME

Addendum - Wesley's post appeared while I was typing and he is absolutely correct about how to avoid the problem.

Ed,

As I type this there are several threads on the front page of RYPN which discuss the legal kerfuffles of three preservation efforts. All three are located within about two hours of each other. All three involve a number of good people working very hard for a cause that they feel is worthwhile. Non-profit v for-profit is not germane here. Two of the efforts are for-profits.

In all three cases the problems have come about or been severely aggravated because one or more of those good people was either unaware of the provisions of a contract which governed the use of land, material or money, or had developed a good faith though erroneous belief that for whatever reason the other party had no intention of enforcing the contract or that various provisions had been waived.

If you have ever seen the old John Houseman TV series, The Paper Chase, there is one episode at the end of the first season called the Scavenger Hunt. It is absolutely hilarious. It is also a commentary on the chaos which will result if as a society we do not honor the contracts we enter into. If your organization enters into an agreement which allows you the use of the property so long as no submarines are moored to the third Eucalyptus tree free from left do not tie the boat up there. If the annual rent is an axe and a shovel, plan to visit the hardware store.

What happened to you is a travesty. What good will come of it is that by analyzing the mistakes another group can avoid them. Nobody is taking blind pot shots at the Trust.

GME

This issue is all over the news in the Detroit area and has been mentioned in another thread in this forum.

The city is in the process of a chapter 9 bankruptcy and the issue is whether art from the DIA can be sold if it was given to the museum under restrictions which do not allow it to be sold.

It'll be interesting to see how it works out, meanwhile would any one in their right mind give them a signed O Winston Link print ? !!!

Bob H

Ed,

I know it is small consolation, but every piece of PTHT equipment that survives will only do so because you guys were proactive and gave it a home. Nothing can ever take that fact away.

However this all ends up, there will be historic rolling stock on display or maybe running that would likely have been kindling and razor blades years ago had the group not been there.

In the midst of legal wrangling and emotional outcomes, I think it is important to keep in mind what was accomplished.

Rob

Thank you gentlemen. It sometimes seems to be over but it really won't be until all of the equipment is gone from the site. There are a few legalities involving the actual location of some of the equipment. But by the time the state or federal courts get involved, the local courts and judge will have had their way and our rolling stock will be dispatched to other locations or to the big razor blade factory in China.

Anybody want a 1926 Flying "A" tank car?

Later!
Mr. Ed

Oh, you're not gonna like it.

The answer is, the organization has to put the money back.

I study quite a lot of railroad museums, and yes, I look under the hood. I am personally aware of at least 3 instances where this very thing has happened.

Most spectacularly at the _______ _______ Museum, where their highly competent treasurer departed. The job fell to people who simply deposited the farebox and paid bills for a number of years. They felt everything was OK because the account balances were large. Unbeknownst, they were running a deficit, and over the years they burned through the Restricted Funds. When a proper accounting was done, they found they could not "cover" the restricted funds: they were shy by a cool half mill. So what did they do? They tightened their belts, cranked their money machine for all it's worth, and through great effort, repaid their own restricted funds.

THAT is how you undo that thing. Try not to do that thing :)

Assume at any time that a judge could order you to IMMEDIATELY transfer all of your restricted funds to another organization.

Normally in accounting, all your accounts are considered to be merged and interchangeable, like valences in a benzene ring, with funds merely needing to total up to the same total amount. This only works if your accounting is tip top. One way to hedge yourself against blunders is to locate restricted funds in a separate bank account. So that a specific action is needed to breach those funds, i.e. doing a money transfer, and that action would have to be justified. I like going one better than that, putting the RF's in a separate organization. The reason is: as you well know, a personal 401(k) is immune from being taken in a lawsuit or bankruptcy. I think RF's should be the same way, but I am not confident in the courts' willingness to do so, or a mechanism by which they might. What happens when a judgement creditor hands your bank a garnishment? The bank will hand over your funds. It will not ask you "hey, are these donor-restricted?" Blink your eye and you'll be "underwater" and in violation of the laws protecting RF's, a more serious problem than merely having a money judgment. When you go to court to get the creditor to give the RF back, you'll run smack into the First Rule of Acquisition. Separate organization = separate corporate veil, they have no chance to pierce it unless it's a Type I supporting org, and even then, their argument could only be that the Type I had an obligation to to bail you out, and the RF issue would be forced into the forefront early in litigation. I don't think a judge would order a Type I to breach an RF unless the RF fit the debt.

Obligatory RYPN disclaimer: Everyhing I know about the law came from watching Ally McBeal.

Our church did just that and successfully so for many years. All of the designated funds: flower fund, choir robe fund, carpet replacement fund, gifts in memory of Aunt Minnie, etc. were kept in the "exchange account" and the regular offering and expenses were paid out of the main checking account.

Wesley

There are Federal accounting standards related to tracking restricted funds that non profits usually follow; any organization not capable of doing this is more likely than not to encounter other more serious financial issues and using a separate bank account to track restricted funds ranks with putting money in envelopes to manage a budget.

While this type of system might work, it's hard to call it "efficient".

Bob H

Sure, if you only have to convince other accountants. And assuming you are following those accounting standards flawlessly. And you never get whipsaw'ed by legal changes such as UMIFA-UPMIFA. That's awesome if you can afford to hire and retain better-than-average accountants and never have a bad one.

If not, simple-stupid ideas like "separate accounts" can save your butt.

There's also the matter of trust. Coupled with the matter of edumacating simple-stupid Board members. I've been on boards where the accounting propeller-heads gave absolutely incomprehensible reports, and then stood there, demanding that we trust them. Which is what Boards do, because they don't have time to deep-dive into the complexity. Needless to say, this is fertile soil for embezzlement, and it was made that way on purpose. What's a director to conclude?

Did I mention investment blend. By law, Restricted FUNDS must be invested very conservatively, and endowment FUNDS must be invested very aggressively. How the hell do you plan to do that in the same ACCOUNT? The answer is, you don't.
Investment advisors manage accounts, not funds. They cannot possibly know your Restricted FUNDS' aromaticity in that ACCOUNT. So how do you oversee that as a Board member? You don't. Been there, tried it.
You cannot know if your endowment is invested correctly if your accountants don't know how much of the investment account is endowment. When you ask, they don't care because if all accounts add up to all funds, their work is done. The investment advisors don't care because they don't deal in funds. They both agree you shouldn't care. But yet, you're responsible for how these things interact. And your donors do care. So how do you convince a donor your money handling is tight? You don't.

So the reason you do simple-stupid, is well, the same as the whole point of accounting, which is fundamentally to create confidence in your organization's finances. Which is vitally important because it creates wealth.

Seriously, people don't get that. Remember all the small computer stores in the 80s? My family's lasted 5 years longer than everybody else's because we knew exactly where the money was every night. Consider the emotional difference between "I know we have a lot of debt" to "I know we have $47,151,33 in debt." It's like that.

I'm not a big fan of Keynes, but I do believe in his animal spirits. That's why accounting is magic.