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Bad Nonprofit Breakups: Universities and Their Supporting Foundations

Marian Conway
May 10, 2019
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May 7, 2019; News Tribune (Jefferson City, MO)

Even as we reported yesterday on the planned establishment of a separate foundation to help fund a new nonprofit version of the Salt Lake Tribune, we thought about the recent pattern of fallouts we have been tracking between universities and their foundations.

And just a few days later here we are reporting on yet another apparent divorce between a state university and its support foundation, and their custody fight over the dollars, donor list, and financial information.

A lawsuit was filed by the 62nd and 65th Regiments Legacy Foundation (formerly the Lincoln University Foundation) against Lincoln University to recover “all Foundation documents, information, and assets, including the $667,173.05 in Foundation special-purpose funds that the University wrongfully retains in breach of its agreements with the Foundation and donors and in breach of the covenant of good faith and fair dealing.” Cole County Judge Daniel Green held the first hearing Thursday morning.

Lincoln University is a Missouri public institution and one of the nation’s Historically Black Colleges and Universities (HBCU). On December 31st, the school separated from the foundation, and the foundation has subsequently changed its name to honor the Black Civil War soldiers who gathered and pledged over $6,000 to start the school in Jefferson City. (The EIN number still lists the former name on the IRS website.) It is not apparent what the mission will be, or whether it can remain a support foundation.

The judge will likely take into consideration the priority regulation list for a support foundation—that it, who they answer to. First and foremost, as a separate tax-exempt organization, they answer to the IRS, followed closely by the all-powerful donor intent that governs charitable gifts. Then, and only then, do they answer to the organization they support.

Misty Young, spokesperson for the University, told the News Tribune, “We don’t think this litigation is a good use of the University funds held by the Foundation and as to which it is a fiduciary. The University will continue to focus on furthering our mission, which is to provide excellent educational opportunities to our students.”

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Some may find Young’s language a bit incorrect. Funds held by a foundation are the responsibility of that foundation and its board, as mentioned above; they are not the university’s funds until they are gifted over through programs and scholarships, following donor wishes.

As of June 2017, the Lincoln University Foundation had net assets of $9.5 million. There have been various written agreements since the formation of the foundation in 1970, and the last amendment in 2015 stated the university would continue to provide administrative and support services to the foundation as it raised and disbursed donor funds.

The relationship between the foundation and school began to sour under the Lincoln’s new president, Jerrold Jones Woolfolk, who took office June 1, 2018. Woolfolk wanted to change the agreement; according to the lawsuit, he wanted to “transfer funds from the Foundation to the University.”

Woolfolk proposed a new agreement just months into his new position that included a pledge that the foundation “earmark annually 50 percent of its unrestricted funds for use by the (LU) President and shall transfer those funds annually to the President’s discretionary fund.” The foundation balked at this and asked for a meeting. The university’s board (called the Board of Curators) notified the foundation the agreement would be terminated at the end of December. The foundation did not give in. The school then cut off administrative services to the foundation March 22nd of this year.

The lawsuit contends that during this period, “$667,173.05 was transferred from Foundation bank accounts to the University in consultation with a Foundation Board Member.” This money, moved with four written checks, was unusual for the foundation and did not follow longstanding policy and procedures.

The lawsuit raised four counts, including:

    • “Breach of donor agreements for the establishment of special-purpose funds to be held within the Foundation” for the transfer of the more than $667,000 from the foundation to the university.
    • Breach of agreement with the foundation “to provide the Foundation administrative support for the purpose of fundraising for the benefit of the University and its students.” The lawsuit claims the foundation “performed all of its duties” under that agreement, but “the University failed to perform its obligations when it unilaterally terminated its agreement with the Foundation and failed to provide the administrative support necessary to transfer the documents and information belonging to the Foundation, as the Foundation requested in letters of March 22, 2019 and April 29, 2019.”
    • Breach of implied covenant of good faith and fair dealing which, the lawsuit argues, the university violated “by unilaterally terminating its agreement with the Foundation failing to provide the administrative support necessary to transfer the documents and information belonging to the Foundation” and by “seeking to retain and use Foundation donor information and documents.”
    • Violation of the Missouri Uniform Trade Secrets Act, a state law, by acquiring the foundation’s donor lists, donor information, and donor history, as well as the computer database the foundation used to manage the donor information, “without the Foundation’s express or implied consent,” and then refusing the foundation’s “demand that they return the donor information and cease any use of the donor information.”

Divorce can be messy, and the IRS can weigh in on this one.—Marian Conway

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About the author
Marian Conway

Marian Conway, the executive director of the NY Community Bank Foundation, has a Masters in Interdisciplinary Studies, Writing and a Ph.D. in Public Policy, Nonprofit Management. She has discovered that her job and education have made her a popular person with nonprofits and a prime candidate for their boards. Marian keeps things in perspective, not allowing all that to go to her head, but it is difficult to say no to a challenge, especially participating in change, in remaking a board. She is currently on eleven boards of various sizes and has learned to say no.

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