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Wednesday, April 30, 2014

Article on Fiduciary Duties and Charities

Desert

Johnny Rex Buckles (Professor of Law and Law Foundation Professor, University of Houston Law Center) recently published an article entitled, How Deep Are the Springs of Obedience Norms That Bind the Overseers of Charities?, 62 Cath. U. L. Rev. 913 (Summer 2013).  Provided below is the beginning of his article: 

Deep Springs College offers a unique educational experience. Founded in 1917, the college sits on a cattle ranch and alfalfa farm in the High Desert of California. The intellectually-gifted students of Deep Springs combine rigorous academic study, manual labor, and self-governance to prepare for lives of service and leadership. However, bright, young high school seniors seeking the singular brand of liberal arts education offered by Deep Springs need not apply if they are women. Who is responsible for this policy? It is not the overseers of the college, who have determined that the school should admit students of both sexes. Instead, a California court recently enjoined the school from admitting female students in the first phase of lengthy litigation. 

The court issued the injunction after rejecting the college's argument that coeducation was permissible under a liberal construction of the 1923 Deed of Trust (the Trust) that endowed the school with a small fortune and described the school's charitable purposes as being “for the education of promising young men.” Further complicating the situation, a nonprofit corporation formed in 1967 began operating the school in 1996 after it received liquid assets and real property from the original trust. The case, therefore, raises not only a trust construction issue, but also issues concerning the degree to which the corporation is bound by the original trust instrument, and whether (if the corporation is bound) the trustees have established grounds for judicially modifying the terms of trust. More broadly, the Deep Springs litigation raises the poignant question of to what degree the law should require charity managers to obey the precise charitable purposes historically advanced by the charities that they govern. 

The trustees of Deep Springs College, like directors and trustees of other charitable organizations, are subject to two familiar fiduciary duties: the duty of loyalty and the duty of care (or prudent administration in the case of charitable trusts). The law of trusts, including charitable trusts, also generally requires trustees to obey the terms of their trust. Essentially extending this trust law requirement into charitable nonprofit corporate law, some commentators, joined by at least one court, recognize a third distinct fiduciary duty owed by fiduciaries of charitable nonprofit corporations: the duty of obedience.

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