Sunday, March 7, 2021
A federal district court has ruled in favor of Fidelity's donor advised fund sponsor organization ("Fidelity Charitable") in a lawsuit brought by donors upset with how the organization handled a large stock donation. A few thoughts on the February 26th decision in Emily Fairbairn et al. v. Fidelity Investments Charitable Gift Fund:
The case shows how important the DAFs associated with commercial investment firms have become. It is disputes involving donors for these DAFs that are likely to be the primary source of litigation in this area going forward, as the attention this case garnered illustrates. The court even stated that DAFs are housed at "a 501(c)(3) nonprofit organization that has usually been created by a for-profit financial institution" (top of page 3). I am not sure the "usually" is correct, but that is clearly the court's perception, and likely the current perception of much of the public.
The case shows the importance of clear and well communicated written policies for DAF sponsors. The Fairbairns lost in part because some of their allegations contradicted Fidelity Charitable's written policies regarding how non-monetary donations would be handled that had been repeatedly shared with them. For example, the court found that the Fairbairns failed to prove by a preponderance of the evidence that Fidelity Charitable had promised to not sell any shares until January 2018, in large part because even if an oral promise along those lines had been made it was unreasonably to rely on it given the written materials provided (top of page 8). The court also found that even if Fidelity Charitable had a duty to the Fairbairns, Fidelity Charitable did not violate that duty in part because because the immediate sale of donated shares was consistent with Fidelity Charitable's published policies (bottom of page 15).
The case leaves for another day whether DAF sponsors owe a duty of care to DAF donors. The court concluded that if a duty was owed under California law it is not the same as the duty owed by an investment advisor to an investor who owns the relevant securities (page 18). But more importantly, the court decided to "not finally resolve whether Fidelity Charitable owed the Fairbairns a duty of care under California law" as doing so was not necessary for it to rule in favor of Fidelity Charitable. So it will be left to future courts, including in California, to resolve that important issue.