Don't Forget the Fine Print: Another Case of a Restricted Gift Gone Wrong

Recently, the New York Times reported the story of a philanthropist suing the University of Alabama. The thesis of the story was that the university, after receiving the last payment due from the man’s private foundation, wrote to say the program he was funding was being discontinued.

Those of you who follow my posts know that this is the type of story that gets my blood boiling. Especially when it is the academic industry apparently failing to play fair with the donor. So I decided to investigate a little more.

Eric Suder and his wife Deborah created the Suder Foundation in 2008. The mission of this charitable entity is to support first-generation college students to improve the graduation rate of these individuals. The program they developed is called the First Scholars program and it provides scholarship funding as well support for the universities conducting the program.

The Times article mentioned that eight universities were chosen to receive $1 to $2 million over four years and that his money was to fund scholarships and create a mentoring and support system for the beneficiaries. The article indicates that the universities agreed they would take over the programs after the funding ran out. It goes on:

Three universities have stopped the program and the University of Alabama, which has received over $1.3 million from the Foundation, canceled the program two weeks after cashing the final check for $250,000. Mr. Suder has filed a lawsuit against Alabama for breach of contract and is seeking return of the $1.3 million, plus interest and damages for the harm done to the First Scholars brand. The university has denied that it was in default on any agreements.

While the remainder of the Times article is written from the Suders' viewpoint, referring to the abrupt terminations of the agreements, it is unclear to me what agreements actually existed. The article says that Alabama indicated in their application for the funding that it had “designated an endowed support fund” to be used to continue the Suder Scholars program once the Suder Foundation funding was completed in 2015.

This application will be the key to the dispute. Were the Suder Foundation funds to be used to establish an endowment fund for which the income was restricted to the First Scholars program? Or, did the university say it would designate some of its existing endowment funds for the support of the First Scholars program? There is a significant difference between the two, and frequently donors ignore the subtle differences.

Donating money for the establishment of a restricted-purpose endowment fund establishes a contractual obligation on the part of the charity. But when a charity indicates that it will designate a portion of its general endowment (not otherwise restricted as to purpose) for a specific program, the charity is free to change its mind and un-designate those funds at any time.

I analyzed the Suder Foundation tax returns for the seven years from inception through 2014. None of the donations to any of the eight participating universities indicated that the money was for the establishment of a restricted endowment fund. Over those seven years, the foundation’s wording for the purposes of the donated funds were as follows: planning; scholarships; operating funds; scholarships and operating funds; scholarships, operating funds and professional development. (The wording is inconsistent from return to return as the years go by.)

Nothing in the Suder Foundation tax returns gives me the impression that the eight universities received restricted endowment funding. In the description of the foundation’s charitable activities—in its own words, on their own tax return—it speaks about the First Scholars program serving as a laboratory to develop and establish the effectiveness of best practices for first-generation student success and for identifying proven strategies that can be adapted and scaled into broader initiatives. There is nothing about an endowed program.

The lesson here appears to be one for donors. They need to understand the language of the restricted funding contract and engage a professional or otherwise ensure that the written agreement signed with the recipient charity contains exactly what is intended. One must not rely on anything said during verbal meetings or discussions of the potential of the program and its future.

I will be surprised if the University of Alabama does not easily prevail in defending itself from the Suder lawsuit. The University of Utah, Southern Illinois University Carbondale and the University of Kentucky are also ending their First Scholars programs. None apparently believe they have a long-term commitment to the program.

The University of Memphis, on the other hand, believes it has learned some valuable lessons for assisting first-generation students and is continuing the program without further financial support from the Suder Foundation. It appears that the Suders have good intentions, developed a good program, but did not have a clear, concise contractual understanding with the charities they financially supported. At the University of Memphis, the program envisioned by the Suders appears to have taken root. The fact that it did not survive at all eight universities does not appear to be a broken contract issue to this writer.