When Charitable Gift Agreements Go Bad: Why a Morals Clause Should be Contained in Every Charitable Gift Agreement
Tyco International was a small New Hampshire conglomerate in 1991. In 1992, Tyco appointed Dennis Kozlowski as CEO. He led the company for 10 years, during which Tyco became a global giant doing business in over 100 countries and having an annual revenue over $40 billion.1 Kozlowski was living the high life in a $31 million apartment on New York’s Fifth Avenue, which had $6,000 shower curtains in the two bathrooms.2 Kozlowski was a highly paid corporate officer with an extravagant lifestyle. In 2005, he was convicted in New York criminal court on multiple accounts of grand larceny, conspiracy, securities fraud, and falsifying business records.3 The judge sentenced Kozlowski to serve between eight years and four months to 25 years in prison.4
While Kozlowski was serving as the CEO of Tyco, he made numerous charitable donations. Three of his favorite charities were Seton Hall University (of which he was an alumnus); Berwick Academy (a historic private primary school in Maine where he was head of the board); and Cambridge University in England (where he donated approximately $4 million dollars [£2.5 million] for an endowment in corporate ethics).
Prior to the criminal conviction, Seton Hall University had named a classroom building Kozlowski Hall along with a rotunda at the university library. Berwick Academy in Maine named its athletic facility the Kozlowski Athletic Center. Cambridge University created the Kozlowski Endowed Professorship in Ethics. It is easy to imagine the charitable organizations were not pleased when the news of his criminal investigation broke. Imagine taking a business ethics course in a classroom named for a convicted felon.
Luckily for Seton Hall University, Dennis Kozlowski voluntarily agreed to remove his name from the building and the library at Seton Hall University via a telephone call in July 2005 with then university President Robert Sheeran.5 His voluntarily agreeing to this action suggests that Seton Hall did not have an automatic right to remove his name from the building based upon his criminal conviction.
Seton Hall University now has a two-page policy on naming opportunities that was enacted November 11, 2002.6 This policy is in addition to the separate gift acceptance policy for the university.
The case of Dennis Kozlowski is not a rare example. Other examples include Enron Professor of Economics at the University of Nebraska, Texas A&M, and the University of Southern California. The University of Missouri has an endowed chair in economics named for the former chief executive officer of Enron, Kenneth Lay.7 Kenneth Lay donated $1.1 million worth of Enron stock, which was sold by the university pursuant to their gift acceptance policy in 1999.8 The football field at Troy State University was named for former Healthsouth CEO Richard M. Scrushy who was acquitted on 36 criminal charges by the U.S. Securities and Exchange Commission.9 Northwestern University in Chicago still has a building on campus named for Arthur Anderson.10 Florida examples include Barry Kaye and his donations to the Florida Atlantic University School of Business; Nevin Shapiro and his donations to the University of Miami; and Scott Rothstein and his donations to a new women’s health facility at Holy Cross Hospital in Ft. Lauderdale. All of these examples included naming rights at the charitable facilities that were later revoked either voluntarily or by written agreement.
In the unpublished decision in the case of Stock v. Augsburg College, 2002 Minn. App. LEXIS 421, Elroy Stock donated $500,000 to Augsburg College in 1986 in order to have the communications wing of a new $25 million building named after himself. In 1988, the college discovered he had been mailing anonymous letters to families and individuals of mixed race and religion, denouncing mixed marriages, and decided not to name the communications wing in the building after him when the building opened in 1989. In March of 2000, Elroy Stock brought suit in district court against the college alleging breach of contract and misrepresentation. Because Stock did not bring suit within six years after the college’s breach of contract, the appellate court agreed with the district court that his lawsuit was time-barred. The court implied in its decision, that had the cause of action been timely filed, a different result was possible.
In the case of Tennessee Division of the United Daughters of the Confederacy v. Vanderbilt, 174 S.W.3d 98 (Tenn. Ct. App. 2005), the plaintiff’s organization donated $50,000 for the women’s dormitory at Peabody College. A 1913 gift agreement between the donor and Peabody College called for the dormitory to be named Confederate Memorial Hall. In 1979, Peabody College merged into Vanderbilt University. In 2002, Vanderbilt changed the name of the dormitory to Memorial Hall based largely on student protest of the dormitory’s former name. After much discussion, the appellate court determined that the 1913 gift agreement was still valid, and that the lower court erred in allowing Vanderbilt University to change the name. Vanderbilt was forced to pay monetary damages indexed for inflation and court costs to the plaintiff.
In the case of Courts v. Annie Penn Memorial Hosp., Inc., 111 N.C. App. 134 (1993), $65,000 worth of stock was donated to a hospital. The donor, Julia Courts, donated shares of stock to Annie Penn Memorial Hospital, but did not specify the future use of her donation at the time of the transfer. No gift agreement was prepared or signed, but the hospital sent a written letter acknowledging the gift and thanking the donor. Julia Courts’ preferences on how the assets should be used were not honored, and she filed a lawsuit seeking the return of the entire gift. The hospital made a motion for summary judgment. The court affirmed the grant of summary judgment in favor of the hospital because no gift agreement existed and it was, therefore, impossible to prove that the hospital violated the donative intent.
All of the above examples relate back to the charitable gift agreement the charity either used or should have used. A charitable gift agreement is a written contract between the charity and the donor that spells out the responsibilities and expectations of both parties. Traditionally, two originals of the agreement are signed, one for the donor to keep and one for the charity to keep. On the donor side, the agreement usually lists the assets that are being donated; the time frame for the donation; the donative intent of the donor; and for what area of interest the donation is intended to benefit. On the charity’s side, the agreement reflects the acceptance of the gift; a brief or detailed description of how the gift will be used; a description of how the donor will be recognized for the gift (if appropriate); and a statement on the value, if any, the charity has given back to the donor (especially true for part-sale, part-gift transactions). A good agreement includes a process for amendment, an effective date, a reporting and stewardship clause, a governing law clause, and a clause stating the agreement represents the entire agreement between the parties. A very good agreement should also include a morals clause (commonly referred to as a bad boys or misconduct clause). The charity’s failure to place a morals clause in an agreement can lead to bad publicity, awkward situations, and future litigation.
A sample morals clause could read as follows:
If at any time the donor fails to conduct himself or herself without due regard to public morals and decency, or if the donor commits any act or becomes involved in any situation, or occurrence tending to degrade the donor in the community, or which brings the donor into public contempt or scandal, or which materially and adversely affects the reputation or business of the charity, whether or not information in regard thereto becomes public, the charity shall have the right to remove donor’s recognition rights as required pursuant to this gift agreement.
Although the case does not involve a charity, the case of Nader v. ABC TV, Inc., 150 Fed. Appx. 54 (2d Cir. 2005), illustrates that courts will enforce the morals clause in a contract. Plaintiff Michael Nader, an actor in a daytime soap opera on ABC Television, was discharged by ABC because of a breach of the morals clause in his employment contract stemming from an arrest for sale of cocaine and resisting arrest. Nader brought various disability discrimination, contract, and tort claims against ABC Television as it related to its actions under the employment contract. The court held that appellant’s discharge for breach of the morals clause of the employment contract was justified.
Another example of courts enforcing a morals clause is the case of Scott v. RKO Radio Pictures, Inc., 240 F.2d 87(9th Cir. 1957). Plaintiff Scott, a screen director, was discharged by defendant because of a breach of the morals clause in his contract. Scott argued that his refusal to answer the questions of a committee of house representatives was not a breach of the clause. The court held that appellant’s discharge for breach of the morals clause of the contract was justified.
As yet another example, see the case of Galaviz v. Post-Newsweek Stations, San Antonio, Inc., 380 Fed. Appx. 457 (5th Cir. 2010). In this case, Vanessa Galaviz, a television news reporter, was fired after a fourth domestic dispute that resulted in her arrest and significant publicity by the local media. KSAT, the television station owned by the defendant, fired her relying on the morals clause in her contract. Galaviz argued that the morals clause of her employment contract was ambiguous and that the clause was being enforced in a discriminatory manner as three other employees had been arrested but were not terminated. The appellate court did not find these arguments to have any merit and upheld the lower court’s summary judgment ruling in favor the television station.
Although such a clause may seem impolite to include in such an agreement, charities need to understand the risks for not insisting on this language. Donors need to understand that charities need to protect themselves and that including a morals clause in the agreement is not a reflection upon them or a mistrust into the donors’ past, present, or future activities.
1 Catherine S. Neal, Dennis Kozlowski Was Not a Thief, Harvard Bus. Rev. (Jan. 7, 2014).
3 Ben White, Ex-Tyco Executives Convicted, Washington Post, June 18, 2005.
5 William A. Drennan, Surnamed Charitable Trusts: Immortality at Taxpayer Expense, 61 Ala. L. Rev. 225 (2010).
6 Seton Hall University, Policy on Naming Opportunities, http://shu.edu/offices/policies-procedures/naming-opportunities.cfm.
7 Ameet Sachdev, What’s a School To Do When Fallen CEO’s Name on Wall?, Chicago Tribune, October 14, 2003.
Adam Scott Goldberg practices tax, probate, and estate planning in Weston with Krause & Goldberg, P.A. He received his LL.M. in estate planning from the University of Miami and J.D. from Nova Southeastern University. He chairs the Tax Section Exempt Organizations Committee and is an adjunct professor at Nova Southeastern University College of Law.
This column is submitted on behalf of the Tax Law Section, James Herbert Barrett, chair, and Michael D. Miller and Benjamin Jablow, editors.