Monday, December 22, 2014

Register v. The Nature Conservancy—$1 Million Donation Constituted a Restricted Charitable Gift

Register v TNC Griffith Woods copyIn Register v. The Nature Conservancy, 2014 WL 6909042, Civil Action No. 5:13–77–DCR (Dec. 9, 2014), the U.S. District Court for the Eastern District of Kentucky held that Mr. Layton Register’s $1 million donation to The Nature Conservancy (TNC) constituted a restricted charitable gift, TNC was bound to abide by the gift restrictions or return the donation, but factual issues remained regarding whether TNC had complied with the restrictions.


Mr. Register was a long time supporter of TNC, having made over three hundred monetary donations to the organization (totaling $1,061,846) and having contributed “sweat equity” by physically assisting with certain projects. Mr. Register attended regular TNC events, served as a Trustee TNC’s Kentucky Chapter, and even received the volunteer of the year award.

TNC identified a 735-acre farm in Harrison County, Kentucky, known as Griffith Woods, as a “top acquisition property” because of its conservation values (it was described as the best and most intact example of a bur oak, blue ash savannah in the inner Bluegrass). TNC engaged in discussions with the owner of Griffith Woods regarding conservation options over several years. During this time, a biologist and employee of TNC—Dr. Julian Campbell—took Mr. Register and other supporters to visit the property. TNC planned to purchase Griffith Woods for roughly $2 to $2.5 million, but to retain only about 25-50% of the property after reselling portions to agencies that would partner with TNC in conserving the property and perhaps conservation buyers.

Mr. Register, who apparently was quite taken with Griffith Woods, told TNC he wished to focus on preserving and managing that particular property. In his notes about Griffith Woods, Dr. Campbell indicated that Mr. Register indicated his willingness to donate about half of the total funds needed for the purchase of Griffith Woods, and should some of Mr. Register’s gift be freed up by TNC’s resale of some of the property, Mr. Register was willing to have the money put toward an endowment for stewardship at the site. Dr. Campbell testified at deposition that he intended his notes to memorialize Mr. Register’s intent with respect to the $1 million donation and any funds obtained from TNC’s resales of the property attributable to his donation.

In May 2002, Mr. Register wrote a letter to the Director of TNC’s Kentucky Chapter stating:

I pledge to the Kentucky Chapter of The Nature Conservancy a stock gift equal to the amount of $1,000,000.00 that is to be used for land acquisition. My first preference is for the purchase being negotiated for Griffith Woods. If The Nature Conservancy is unsuccessful in its pursuit of Griffith Woods, the same amount will be made available for another site to be determined.

In September 2002, Mr. Register wrote to his financial advisor and TNC:

I’d like to make now a gift to the Kentucky Chapter of The Nature Conservancy. I would like the gift to be in the form of stocks adding up to the equivalent of $1 million. I would prefer that the stocks be sold and the proceeds go toward the establishment and management of a nature preserve in the Bluegrass region, e.g. Griffith Woods. If the Griffith Woods project falls through, I trust that KNC will put to use the funds in a manner that will further help protect areas in Kentucky with unique and diverse plants and animals.

The gifts of stock were made to TNC in three installments, each with a cover letter stating that the gifts were for the Griffith Woods project. TNC placed the proceeds from the sale of the stock into an account to fund the purchase of Griffith Woods and designated the account as “temporarily restricted.”

In late 2002 and early 2003, TNC purchased Griffith Woods using Mr. Register’s donation and funds from TNC’s worldwide office. TNC then sold Griffith Woods in two transactions. The first tract was sold to the University of Kentucky (UK) in 2004, and UK conveyed a conservation easement on the tract to a state entity. This sale had been contemplated at the time of Mr. Register’s gift. The partnership between TNC and UK did not work as planned, however, and in 2011 TNC sold its remaining interest in Griffith Woods to the Kentucky Department of Fish and Wildlife Resources (KDFWR). Although this portion of the property was not placed under a conservation easement TNC indicated that other use restrictions applied.

TNC used a portion of the sales proceeds to pay-off a debt on another land acquisition project and deposited the remainder in its general operating fund, a portion of which was intended to help fund stewardship activities at Griffith Woods. In November of 2012, TNC disclosed to Mr. Register that it was not using or planning to use any of the remaining proceeds from the sales of Griffith Woods for the management of that property.

Mr. Register maintained that it was his intent that the sales proceeds attributable to his donation would be used for the ongoing management of Griffith Woods. He filed suit against TNC alleging breach of contract, unjust enrichment, imposition of a constructive trust, fraud in the inducement, and constructive fraud.

The US District Court divided its opinion into seven separate holdings.

1. Donation Was A Restricted Gift

TNC argued that Mr. Register's 2002 letters did not suffice as written contracts and, thus, no contract existed. In the alternative, TNC argued that the gift was subject to enforcement according to the terms of Mr. Register’s September 2002 letter and, once the donation was used for the purchase of Griffith Woods and that property was protected, the purpose of the gift was satisfied and TNC had no further obligation to use the resale proceeds for the protection or management of Griffith Woods.

Mr. Register agreed that the parties did not enter into a written contract but he maintained that TNC was bound by an oral agreement to devote his $1 million donation to the purchase and, after resale, management of Griffith Woods.

The court held that Mr. Register had made a restricted gift to TNC and, while a precise written agreement was not present, it was not required.

The court found no evidence that Mr. Register intended to make a general (unrestricted) donation to TNC that it could use as it saw fit in furtherance of its charitable mission. It noted:

[Mr.] Register’s testimony, the writings between the parties, the testimony of the other individuals involved and the circumstances surrounding the donation…support the conclusion that Register’s donation was restricted to Griffith Woods as a matter of law. Because TNC accepted the donation knowing that it was to perform certain duties with respect to the donation, ‘its acceptance thereof and reliance thereon and promise to carry out the wishes of the donor supply the consideration.’

TNC argued that Mr. Register’s 2002 letters indicated that he merely preferred that the donated funds be used for Griffith Woods because he used “precatory” language—i.e., “like” and “prefer.” The court disagreed and found the letters to be consistent with Mr. Register’s intent to restrict his gift. While acknowledging that precatory words are presumptively not binding, the court explained that such words can impose a legal and enforceable obligation if the context indicates that the donor intended to impose such an obligation. The court found that Mr. Register’s letters “compelled the conclusion” that his use of “prefer” was mandatory rather than precatory because his letters dictated what was to occur if the Griffith Woods project did not materialize.

Other evidence indicating that Mr. Register intended his donation to be restricted to Griffith Woods included (i) the cover letters for the stock gifts to TNC, which contained language specifying that the funds were to be limited to Griffith Woods, (ii) testimony of TNC employees that, at the time the gift was made, they understood the gift was to be used for the purpose of Griffith Woods (i.e., restricted), and (iii) TNC’s initial designation of the funds as restricted and continued treatment of the funds as restricted for some time in their own internal processes.

The court concluded:

At the time the donation was made, no one appeared to believe that the funds were not restricted to Griffith Woods. Time has passed, and Register is now faced with a number of TNC employees who were not privy to the discussions at the time of his donation. Nonetheless, they are bound by the restrictions made by Register and accepted by TNC. The recipient of a conditional gift is “not at liberty to ignore or materially modify the expressed purpose underlying the donor’s decision to give.” … This is true even if the conditions at the time of the gift have materially changed, “making the fulfillment of the donor’s condition either impossible or highly impractical.” The Court is “not at liberty to relieve the parties from contractual obligations simply because these obligations later prove to be burdensome or unwise” (citations omitted).

2. Compliance With Restriction Unclear

While the court determined that Mr. Register’s donation was a restricted gift as a matter of law, it also held that material issues of fact remained regarding whether TNC had complied with the restrictions. On the one hand, Dr. Campbell and Mr. Register’s testimony indicated that Mr. Register had considered TNC’s possible resale of Griffith Woods and had intended to restrict TNC’s use of the resale proceeds attributable to his donation to the management of that property. On the other hand, certain other factors prevented the court from finding, as a matter of law, that Mr. Register intended his donation to continue to be restricted after the resale. In addition, the court noted that TNC’s management efforts at Griffith Woods included prescribed burning, cane restoration, and planting native species. Accordingly, whether TNC had fully complied with the gift restrictions was a matter for a jury to determine.

The court dismissed TNC’s attempts to minimize Dr. Campbell’s authority to bind TNC and to question Dr. Campbell's credibility due to his friendship with Mr. Register. The court explained that TNC became bound, not by Dr. Campbell’s representations to Mr. Register, but by TNC’s acceptance of the donation, which it knew to be restricted.

3. Reversion as Proper Remedy for Breach of Contract

The court determined that, should the jury find that TNC breached its contract with Mr. Register, then reversion would be the proper remedy under Kentucky law. On the other hand, if the jury were to find that the terms of the restricted gift had been met, there would be no breach and Mr. Register would not be entitled to recover his donation.

TNC contended that, should it be required to return the gift, there are genuine issues of material fact regarding the amount of the donation that had been used for Register’s intended purpose (and, thus, presumably was not recoverable).

4. Estoppel

TNC argued that Mr. Register was estopped from claiming breach of contract because he had acquiesced to TNC’s sale of a portion of Griffith Woods to KDFWR and to future management of the property by that entity. The court held that TNC’s argument failed because (i) TNC’s breach of the condition on the gift was not its sale of the property to KDFWR, but its use of the proceeds attributable to Mr. Register’s donation for purposes other than Griffith Woods, and (ii) the court found no evidence that TNC had disclosed its plans to use the proceeds for purposes other than Griffith Woods until after sale had already occurred.

5. Unjust Enrichment and Constructive Trust

The court dismissed Mr. Register’s claims for unjust enrichment and the imposition of a constructive trust. Under Kentucky law, the doctrine of unjust enrichment does not apply where there is an explicit contract and the court found that there was an explicit contract in this case. In addition, because constructive trusts are imposed as a remedy for unjust enrichment and the court found that unjust enrichment did not apply in this case, the court also dismissed the constructive trust claim.

6. Fraudulent Inducement

Mr. Register alleged that he was fraudulently induced to make his $1 million donation because TNC had no intention of continuing to be involved in the management of Griffith Woods after it was resold. The court held that Mr. Register could not prevail on this claim as a matter of law because he did not identify any specific material misstatement upon which he relied. The Court noted the high burden of proof required—clear and convincing evidence—for fraud claims.

7. Constructive Fraud

Mr. Register also argued that TNC owed a fiduciary duty to him and that its violation of that duty constituted constructive fraud. Mr. Register, however, was unable to point to any Kentucky case holding that a charitable organization has a fiduciary relationship with its donors. Moreover, the case Mr. Register cited in support of his argument—Adler v. Save, 74 A.3d 41 (Sup. Ct. N.J. App. Div. 2013)—stated only that the “analytical paradigm” outlined by the court was “consistent with the principles governing a fiduciary relationship” under New Jersey law, and the case did not address the theory of constructive fraud. Accordingly, the court declined to extend the doctrine of constructive fraud, which has not been “very favorably received” in Kentucky, to this case.

Leaf copy

The parties have reportedly settled this case, and TNC notes the following regarding settlement:

The Nature Conservancy respects the court’s decisions with respect to the facts of this case. Although the court determined that a jury should decide the extent to which the Conservancy complied with the terms of the gift, TNC decided that a full refund of the disputed portion of the gift to this valuable donor in settlement of the dispute was most in keeping with TNC’s relationship with him and reflective of the fact that without his help Griffith Woods would not be protected the way it is today. The refunded amount represents funds that were initially used for other important conservation work in Kentucky, but were ultimately derived from the sales of Griffith Woods to TNC’s conservation partners. Mr. Register can take pride in his critical role in securing long-standing protection for this important habitat.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law

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