The Danger of Misusing Designated Gifts

Problems can arise if a designated gift is not used for the donor’s intended purpose.

Background. Most churches have established funds for specific purposes. Common examples include building funds and vehicle funds. Members are encouraged to donate funds for such projects, and donations are accumulated until the project is funded. Occasionally, donors will ask to have their contributions returned, often because the fund’s purpose has not been implemented. Is a church required to return contributions to donors who request them under such circumstances? Very few courts have addressed this question, and so definitive guidance is lacking. A California court addressed this issue in a recent case. While the case involved a public university, the court’s ruling is directly relevant to churches and any other charity.

A state university asked a wealthy individual (the “donor”) if he would donate $1.5 million to the university to “endow” a professorship in his name to support young, untenured researchers in the field of gerontology. The donor agreed, and donated $1.5 million. A short time later the university named the first holder of the professorship. However, it did not inform the donor that it had not used his donation to fund the position. Three years later, the university selected the second holder of the professorship. Unknown to the donor, this individual was ineligible because she was not a young researcher just beginning her career, but instead was an existing faculty member due to receive tenure within six months.

The donor eventually discovered how his donation had been mishandled, and he sued the school for breach of contract. He claimed that the university had made promises in connection with the gift that it never intended to honor. It also alleged that the university had breached its contract with the donor by not funding the professorship as promised.

The university claimed that it could not be liable for breach of contract since the donor had made a gift, and not entered into a contract. A trial court dismissed the case, and the donor appealed.

The court’s ruling. The appeals court began its opinion by noting that “the donor alleges he performed under the contract when he transferred $1.5 million to the university. He alleges the university breached the contract by not funding the professorship and by selecting an ineligible recipient. Finally, he alleges the university’s breach damaged him because he could have put his money to uses other than giving it to the school.”

The court concluded that the donor could sue the university on the following two grounds:

(1) Promissory fraud. The court noted that promissory fraud occurs when someone “promises to do something without intending to do it.” The elements of promissory fraud are “(1) a knowing misrepresentation, (2) made with the intent to induce another’s reliance, (3) the other’s justifiable reliance, and (4) damages.” The court noted that “the donor alleges that the university promised to fund the professorship immediately without intending to do so. He alleges the university made the promise to encourage him to endow the position, and in giving $1.5 million to the university he justifiably relied on that promise. Based on these allegations, the donor has pleaded a cause of action for promissory fraud.”

(2) Breach of contract. The court rejected the university’s claim that it could not be sued for breach of contract based on its failure to honor the specific conditions set forth both orally and in writing between the parties.

Relevance to church treasurers. While this case has no precedential value outside of California, it is one of the few cases to address the question of a donor’s remedies when a charity diverts a designated contribution to some other use and so the court’s opinion may be given greater weight in other jurisdictions. The court concluded that the donor could sue the university on the basis of “promissory fraud” and breach of contract as a result of the university’s failure to honor the express terms of the donation. Glenn v. University of Southern California, 2002 WL 31022068 (Cal. App. 2003).

This article first appeared in Church Treasurer Alert, November 2003.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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