¹Over two decades ago, the philanthropic world was turned upside down by the filing of a class action lawsuit that threatened to eliminate one of the foundational pillars of many charitable gift planning/planned giving programs with the potential of ultimately undermining the very existence of life income gifts. Indeed, had the plaintiff’s prevailed in 1994, this 32nd ACGA Conference would have a very different tenor, and those of us who toil today in the fields of charitable gift planning would have substantially different content to our jobs.

Time does indeed march on, and many of the people involved in the events of 1994 have either retired or passed away. Many of those involved then are now in their mid-career, with yet others nearing the end of their careers. An entire generation of gift planners was focused on things like getting their braces off, obtaining a driver’s license, and/or finding a prom date while this lawsuit was winding its way through the courts, and to them, it is as historical as the Tax Reform Act of 1969.

While the resolution of this lawsuit is ultimately an “all’s well that ends well” story, we must continue to heed the words of Edmund Burke, “Those who do not know history are doomed to repeat it.”²

This paper will examine the origins of these events, how they played themselves out in both the courts and the halls of Congress, the ultimate resolution of the lawsuit, and the ramifications these events have on gift planning practitioners today.

Background: Who was Louise T. Peter? Why was this lawsuit filed?

In 1854, John Kilian, a Lutheran pastor in Prussia, was called to lead a congregation of his former parishioners who had settled in Texas. Pastor Kilian had a great interest in being a missionary in a foreign land and accepted this call. He and the congregation settled just east of Austin. Historians view him as a leader in the creation of Lutheran education in Texas.³

On September 24, 1899, Pastor Kilian’s granddaughter, Louise T. Peter, was born.⁴ Ms. Peter was never married and spent most of her career as a secretary. One of her brothers owned land that sat on top of a vein of oil reserves, and he left approximately $2 million to Ms. Peter upon his death.⁵ The exact timing of this estate gift is not set forth in any of the court rulings or related news articles, but the United States Court of Appeals for the Fifth Circuit stated that Ms. Peter received this gift “late in life.”⁶

Ms. Peter became a philanthropist upon receiving this inheritance. In 1987, Concordia Lutheran College in Austin, Texas opened the doors to a brand new communications and fine arts complex “…named in honor for principal donor Louise T. Peter, granddaughter of Johann Kilian, pastor of the first German Wendish settlers in east Texas, a group that was instrumental in the beginnings of Lutheran higher education in Texas.”⁷ Included in this facility were offices, classrooms, a video studio and a performance hall. There is no reference to the amount of Ms. Peter’s gift for this facility.

Ms. Peter’s roots with many components of Texas Lutheranism ran deep. The initial building on the Concordia Lutheran College campus was named Kilian Hall, in memory of her grandfather⁸. On July 25, 1988, Ms. Peter created a revocable living trust, naming the Lutheran Foundation of Texas as trustee. Later that year she donated $200,000 to the Foundation in exchange for two charitable gift annuities (each paying 13.4% which was within the American Council on Gift Annuities’ recommended rates at that time). A little over a year later, in February 1990, she established an 8% net income charitable remainder unitrust with the Foundation. Several charities were named as remainder beneficiaries of the NICRUT.⁹ The total amount in the revocable trust and the NICRUT was $1.5 million.¹⁰

Ms. Peter, “who suffers from dementia and Alzheimer’s disease,”¹¹ was cared for over many years by her great-niece, Dorothy Ozee. A Texas probate court found that Ms. Peter was no longer able to manage her own affairs and named Boyd Richie as her guardian.¹²

In June 1994, Ms. Ozee informed the various Lutheran charities that she was suspicious of their activities with Ms. Peter and believed Ms. Peter was subjected to undue influence and pressured to give the vast majority of her estate to the Lutheran charities rather than her family. In response, the Lutheran charities commenced a lobbying effort with the Texas Legislature to introduce legislation which would confirm their ability to issue charitable gift annuities and to serve as trustee of revocable and irrevocable trusts.¹³ The stage was set for what was to become a four year battle waged throughout the Federal judiciary (reaching all the way to the United States Supreme Court) and in the halls of Congress.

Early Stages of the Lawsuit

The United States District Court for the Northern District of Texas in Wichita Falls served as the origination point for the lawsuit which was filed by Dorothy Ozee and Boyd Richie in December 1994. The nine original defendants consisted of both organizations (American Council on Gift Annuities [ACGA], Lutheran Church-Missouri Synod, Lutheran Church-Missouri Synod Texas District, Lutheran Foundation of Texas, and Concordia Lutheran College) and individuals (three Lutheran pastors Gerald Bryan Kieschnick, the Foundation’s director of development, Carl A. Heckman and Glenn O’Shoney both members of the Foundation’s board; and Fred A. Bleeke, CEO of the Lutheran Foundation).¹⁴ The case was assigned to Judge Joe Kendall who been appointed to the federal bench in 1992, following 5 ½ years as a Texas State District Court Judge and six years as a practicing attorney.¹⁵

The causes of action were based on both Texas and Federal law. The alleged violations of Texas law were:¹⁶

• Engaging in the unauthorized business of insurance. Charitable gift annuities were alleged to be the same as issuing a commercial annuity or any other form of insurance. Texas law required the procurement of a certificate of authority from the State Board of Insurance before issuing any insurance product. The Lutheran Foundation of Texas did not hold such a certificate when they issued the charitable gift annuities to Ms. Peter.
• Engaging in an unauthorized trust business. It was alleged that the Lutheran Foundation of Texas did not meet the requirements of the Texas Trust Code to serve as a corporate trustee, and, as a result, its trusteeship of Ms. Peter’s two trusts violated Texas law.

The alleged violations of Federal law fell under two categories:¹⁷

• Federal securities laws: it was alleged that the Texas Lutheran Foundation, by commingling the assets of multiple trusts under its management into a common investment pool, violated the Investment Company Act of 1940 (which required registration with the Securities and Exchange Commission) as well as the Securities Act of 1933 and the Securities Exchange Act of 1934.
• Federal antitrust laws: it was alleged that the practice of using the suggested gift annuity rates of the American Council on Gift Annuities was an act of price fixing in violation of the Sherman Antitrust Act. It was also alleged that ACGA rates allowed charities to engage in deceptive trade practices by unjustly characterizing themselves as possessing high levels of investment expertise.

The first major ruling in the case was issued on May 3, 1995.¹⁸ Judge Kendall ruled in favor of Ms. Ozee and Mr. Richie on the two matters of Texas law by granting Summary Judgment on those two issues. In a Summary Judgment ruling, the judge declares that there are no material matters of fact or law to be litigated, thereby ruling in favor of the party to whom the ruling is granted. In other words, the Lutheran charities had lost the case related to the matters of Texas law, illegal issuance of an insurance product and illegally serving as trustee of Ms. Peter’s trust.

By June 1995, State of Texas had enacted laws that retroactively granted charitable organizations the ability to both issue charitable gift annuities and serve as trustee for all types of trusts.¹⁹

Later that summer and into the fall, both houses of Congress introduced separate pieces of legislation that would provide charitable organizations the ability to issue charitable gift annuities without violating Federal securities laws and to follow the recommended gift annuity rates of the ACGA without violating Federal antitrust laws. The Senate bill was introduced by Kay Bailey Hutchison of Texas, and the House bill was introduced by Henry Hyde of Illinois, who also served as Chair of the House Judiciary Committee.²⁰

In testimony before the Subcommittee on Telecommunications and Finance of the House Commerce Committee, Barry Barbash, Director of the SEC Division of Investment Management, strongly backed the proposed legislation. He stated that the legislation would reaffirm several SEC No-Action Letters issued over the previous twenty-three years. “Underlying the staff’s position with respect to charitable income funds is the view that the primary purpose of persons who transfer property to these funds is to make a charitable donation, and not to make an investment” which “…makes registration under the federal securities laws unnecessary…The Philanthropy Protection Act is designed to clarify the uncertainty created by the Texas litigation by codifying the approach taken in the staff’s no-action letters.”²¹ In addition, this legislation would not eliminate consumer anti-fraud protections and would add the safeguards of a written disclosure and limiting how solicitors would be compensated.

Growth of the Lawsuit

In October 1995, Judge Kendall granted the plaintiffs’ request to certify a class action. The list of potential plaintiffs was expanded to anyone who had made a gift in exchange for a charitable gift annuity under the ACGA recommended rates after December 30, 1990 to the time of this ruling. This also expanded the list of potential defendants to any charity who issued a charitable gift annuity using the ACGA recommended rates.²² There were 1500 charities who were ACGA sponsors at that time. In addition, the employers of each member of the ACGA Board of Directors were added as named defendants.

The explosion of this case into a class-action accelerated the pace of the efforts in Washington to enact the proposed legislation. Both bills, the Philanthropy Protection Act of 1995 (PPA) and the Charitable Gift Annuity Antitrust Relief Act of 1995, were passed unanimously, in the House by a 427-0 vote and through unanimous consent in the Senate. President Bill Clinton signed the bills into law on December 8, 1995.²³

Following the enactment of these laws, the charitable defendants filed a motion to dismiss the entire case based on the new Federal and Texas laws. At the same time, the plaintiffs amended their complaint, for the fourth time, by adding non-charitable defendants, mostly the employers of the ACGA Board of Directors members who were not employed by charitable organizations. In addition, the amended complaint alleged a hybrid conspiracy between the for-profit and non-profit defendants which would fall outside of the recently-passed Federal laws. And the amended complaint alleged that some of the non-profit defendants had fraudulently procured their tax exemption letters.

Over a nine month period, Judge Kendall issued thirty-five orders in this case²⁴ in response to a variety of other procedural motions, culminating on September 30, 1996, when he issued rulings on five significant issues:²⁵

1. Plaintiff’s Fourth Amended Class Action Complaint – in addition to adding new defendants and causes of action, the amended complaint sought to abandon the Federal and Texas securities-related claims but would keep all Federal claims under the Sherman Antitrust Act as well as the Texas claims for illegal sale of annuities and illegally operating as a corporate trustee. Judge Kendall allowed the complaint to be so amended.
2. Philanthropy Protection Act of 1995 – In the beginning of his opinion, Judge Kendall acknowledged the enactment of this law, as well as the Charitable Gift Annuity Antitrust Protection Act of 1995. With no further mention of the PPA, and in a single sentence at the end of the opinion, he granted the defendants’ motion to dismiss the claims based on the alleged violation of the Investment Company Act of 1940. Additionally and with no further explanation, he dismissed the Texas-based antitrust claims.
3. Charitable Gift Annuity Antitrust Relief Act of 1995 – The bulk of Judge Kendall’s opinion focused on this law. The law stated that organizations that are “described in section 501(c)(3) of the Internal Revenue Code of 1986…that are exempt from taxation under section 501(a) of the Code” can use the same gift annuity rates, thereby allowing organizations to use the ACGA recommended rates. The defendants presented their IRS determination letters to prove that they were the types of organizations set forth in the new law. Judge Kendall stated that the IRS letters are “administrative determinations” which “do not necessarily establish that a Defendant is a bona fide organization” as set forth in the new law. In other words, Judge Kendall was going to require each organization to prove in court that it was indeed a qualified charitable organization. He recognized the chaos this would produce, so he ruled that the initial determination would be exclusively of the American Council on Gift Annuities. If the ACGA passed, then the other defendants would have to prove their exemption; if the ACGA did not pass, then all the charities that used the ACGA rates would be in violation of the new law whether or not they were exempt organizations. His ruling was based on a narrow interpretation of the specific language of the law and not of any Congressional intent that was shown in committee reports and other testimony. He quoted Justice Oliver Wendell Holmes, “we do not inquire what Congress meant; we only ask what it said.”
4. Motions to Dismiss Texas-based claims – Defendants Lutheran Foundation of Texas, Lutheran Church-Missouri Synod and American Council on Gift Annuities filed motions to dismiss the claims based on Texas insurance and trust laws due to laws that had been enacted shortly after the Court’s original May 3, 1995 ruling. Judge Kendall emphatically denied these motions and wrote, “The Texas Legislature explicitly stated that it was not changing the laws undergirding the May 3, 1995 Order, but merely ‘clarifying’ them. The Court considers the Texas legislature’s ‘clarifications’ irrelevant.” The Legislature “did not expressly state that they wanted to retroactively change pre-existing law.” Therefore the law upon which he based his earlier opinion had not been changed.
5. Northwestern’s Motion for Summary Judgment – Northwestern University had been added as a named defendant due to the fact that its Director of Planned Giving was a member of the ACGA Board of Directors. Northwestern filed its own, separate Reply to the Complaint and then moved for summary judgment for itself alone based on the enactment of the Federal legislation. For the same reasons as stated in paragraph 3 above, the Court denied this motion. Northwestern would have to prove in court that it was indeed a tax-exempt organization.

This decision was devastating to the charitable defendants. All of the time and resources that had been poured into the lobbying effort which resulted in two unanimously approved pieces of legislation, as well as the resources poured into the court case itself, appeared to be for naught. Even though the securities law portion of the case had been dismissed, the potential of ongoing antitrust litigation was daunting. The district court had flatly rejected the Congressional action that had been intended to end the antitrust portion of the case. The issue of damages hung like a proverbial Sword of Damocles over the charities. Were the charitable organizations to lose this portion of the case, antitrust laws provided that treble damages were to be paid to the winning plaintiffs. In other words, the charities would have to pay three times the amount of the actual damages. For example, a charity that had issued $1 million in charitable gift annuities between 1991 and 1994 would have to pay $3 million in damages. This had the potential of financially disabling, at best, and financially destroying, at worst, countless numbers of charitable organizations.

As the holiday season approached and the calendar flipped to 1997, the work resumed. Appeals were filed by the charitable defendants. Northwestern University filed a separate appeal. The plaintiffs filed a motion to dismiss those two appeals. The Texas Attorney General had been attempting to intervene in the case from the early days of the case; his attempts were rejected by Judge Kendall; and he appealed that ruling following the September 30 opinion. Efforts on the Congressional front continued with the introduction of a bill to remedy the defects in the Charitable Gift Annuity Antitrust Relief Act of 1995.

Denouement of the Lawsuit

On April 9, 1997, the United States Court of Appeals for the Fifth Circuit issued an opinion on the various appeals and motions that had been made following Judge Kendall’s September 30th ruling.²⁶ The Court rejected the defendants’ appeal, stating that there was not yet a final ruling from the District Court to appeal from. Northwestern University’s appeal was rejected on the same grounds. Plaintiff’s motion to dismiss the defendants’ appeals was granted. The defendants were also fined $15,000 for filing frivolous appeals, and that fine was to be paid directly to the plaintiffs to cover a portion of their legal fees. Finally, the Court overruled Judge Kendall’s refusal to allow the Texas Attorney General to join the case. The case was remanded back to the District Court for additional proceedings. 

It is interesting to note that both the Court of Appeals and the District Court did little in their opinions to hide their frustration with this litigation, particularly the actions of the charitable defendants. The Court of Appeals invoked a quote from Judge Kendall in its rebuke, “[T]he real issue has been, and continues to be, whether the defendants are genuine §501(c)(3) organizations within the meaning of the Act, and whether any agreements they may have made meet the test for exemption. The briefs in this case are voluminous, and the pleadings filed in the district court even more so. As the district court’s response to the petition for mandamus put it, ‘[T]he paper keeps flowing and the meter keeps running. There are 765 documents filed thus far in the district court and my docket sheet in this case rocks on for 116 pages.’ Yet nowhere do the defendants come to grips with the real issues.”²⁷ The Court expressed its frustration with the plaintiffs in a footnote stating, “Richie’s ever-expanding list of defendants includes a number of law firms, insurance companies, and commercial banks that apparently are associated with the administration of charitable gift annuities.”²⁸

Judge Kendall took the unusual step of venting his frustration in a footnote to his September 30, 1996 opinion. After quoting a statement made in the Congressional Record, Judge Kendall wrote, “Senator Pressler’s message has been received, and the Court is acutely aware that the new legislation was directed at this suit. The Court is also not unaware of or unsympathetic to the realities of the adverse effects this lawsuit may have on legitimate charities that do much good.” He went on to acknowledge the grumbling of the charities over the length of time it took him to issue this ruling, “In February, when the Court indicated that a ruling on these issues would be forthcoming in April, the Court meant what it said. Unfortunately, soon afterward, the Court was deluged with motions in the record-breaking number of cases filed this year. This time-crunch was exacerbated by the Court's criminal docket (which takes precedence), Congress's recent penchant for federalizing traditional state crimes, the hours involved in calculating sentencing guidelines, not to mention the six year vacancy of a judgeship position in the Northern District of Texas. All things considered, this case has been given exceptional attention, contrary to what is implied in footnote one of Defendants' Renewed Motion for Relief, e.g., no motion, of the hundreds of motions filed in this case, has had to be reported on the Court's six month pending motion list despite the fact that this case is only two years old and approximately half of the Court's other cases are older. Defendants can rest assured in the fact that the Court has not sat around staring out the window in boredom waiting for the next filing in the Richie matter to come in. Nonetheless, the Court will continue its efforts in the future to see that this case gets tried as soon as possible.”²⁹

The summer of 1997 brought a ray of sunshine for the charitable defendants. On July 3, President Clinton signed into law the Charitable Donation Antitrust Immunity Act of 1997. This law modified the 1995 antitrust law that had been picked apart by the courts. Its language was in direct response to the various court rulings and was intended to provide broad antitrust protection for the issuance of charitable gift annuities.³⁰ In November, the charitable defendants filed an appeal to the United States Supreme Court to review the case due to the enactment of this latest legislation.

In a terse ruling, issued on December 8, 1997, the Supreme Court vacated the judgment of the Fifth Circuit Court of Appeals and remanded the case back to the Fifth Circuit “for further consideration in light of the Charitable Donation Antitrust Immunity Act of 1997.”³¹

On June 12, 1998 the Fifth Circuit Court of Appeals issued what would become the final significant ruling in this case.³² The number of defendants had grown from nine in Judge Kendall’s original decision to thirty-one, all of which were corporate entities. Thirty-nine individual attorneys were listed as participating in this case with seven representing the plaintiffs, twenty-four representing the defendants, two representing the United States Congress, two representing the Texas Attorney General, and four individual pro se (person’s advocating on their own behalf) appearances. Three of the individuals representing themselves pro se were members of the Texas Legislature (one of those three is a Member of Congress in 2014) while the fourth was in the private practice of law (he is a United States District Court Judge in 2014).

In what was music to the ears of charitable organizations and gift planners from coast to coast, the 5th Circuit held, “The motion to dismiss plaintiff’s antitrust claims is GRANTED, and a judgment of dismissal of that claim is hereby RENDERED…and the case is REMANDED for the purposes of determining whether any state law claims survive.”³³ The court also upheld the $15,000 fine against the defendants for filing a frivolous appeal which was to be paid directly to the plaintiffs.

The Court found that the 1997 antitrust immunity law clarified any remaining question of fact, stating, “Richie concedes that the Immunity Act applies to the instant case. We agree…The defendants are covered by the plain language of the amended statute.” It also rejected the plaintiffs’ request to remand the case to the District Court for a consideration of the new law, stating in part, “Richie urges us to postpone the inevitable…”
Interestingly, there is no record of how the District Court ruled on the remanded issues of Texas state law. Perhaps the plaintiffs determined that the cost of continuing the litigation was too high.

The struggle was over…four years…countless hours of charitable staff and board time focused on this issue…untold hours spent in the halls of Congress…too many lawyer hours to count…too many resources dedicated to waging this battle rather than in pursuit of the important missions of the charities. But there were positives that emerged: there was no longer any uncertainty over the issuance of charitable gift annuities using the ACGA’s recommended rates nor the ability of charities to commingle trust assets under their management…additional consumer protections were added by the new laws…the charitable community came together to speak with one voice, something that many thought was an impossibility.

The Man in the White Hat

Lest any reader think that our elected officials rose up of their own volition to pass three bills in merely eighteen months, these laws were pushed through Congress as the result of the work of a dedicated group of individuals. The leader of that “charitable militia” was Terry L. Simmons.

Terry was the Vice President and General Counsel of the Baptist Foundation of Texas at the time the lawsuit was filed. Terry’s boss, the Foundation’s CEO Tal Roberts, also served as the Chair of the American Council on Gift Annuities Board of Directors. Tal turned Terry loose, and Mr. Simmons went to Washington. Terry pulled together a group of like-minded gift planners from across the country and formed Charitable Accord, an organization dedicated to promoting America’s philanthropic system through activities with Congress and state legislatures.

Stewarding a piece of legislation through the Congress to passage is a very difficult endeavor, and it often takes multiple Congressional sessions to do so. To have three bills newly-introduced and passed in such a short period of time is nearly impossible. Some would even call it miraculous. But Terry Simmons pulled off this miracle. He also led the effort to pass the various state laws which were related to this lawsuit in the Texas Legislature.

Any recitation of the facts of this case would be incomplete without a tip of the hat and bow to Terry Simmons.

The Rest of the Story

As with many such cases, there was no follow up in the press following the termination of the lawsuit about the how the pursuit of this case and the resulting ruling affected the lives of those involved. No record exists of how Ms. Peter’s relationship with the various Lutheran charities evolved, or devolved, how Ms. Ozee continued to care for, or not care for, Ms. Peter, and how this case impacted the ongoing philanthropic programs of the Lutheran charities. Ms. Peter died on December 25, 2001 at the age of 102.³⁴ Ms. Ozee died on May 16, 2004 at the age of 83.³⁵

Details of the Laws Enacted as a Result of the Lawsuit

Both the Charitable Gift Annuity Antitrust Relief Act of 1995 and the Charitable Donation Antitrust Immunity Act of 1997 were straight-forward pieces of legislation with the sole purpose of exempting the use of the ACGA’s suggested gift annuity rates from antitrust laws. These laws imposed no on-going requirements on charitable organizations that follow the ACGA rates.

The Philanthropy Protection Act of 1995, on the other hand, was a complex, comprehensive statute that was intended to address myriad issues of securities law and charitable fundraising. It codified the existing opinion of the Securities Exchange Commission as set forth through a series of no-action letters issued over a twenty-three year period.³⁶ The primary purpose of the various securities laws is the protection of consumers by providing purchasers of a wide variety of financial instruments with information about what they are buying and from whom they are buying it. Charitable organizations must recognize that they are subject to the various securities laws and that it is quite easy to unwittingly violate them. Charities must be vigilant to remain within the safeguards and exemptions provided by the PPA.

The PPA exempted charitable organizations by amending sections of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940.³⁷ These exemptions fall into two categories, exempt charitable income funds and exempt individuals affiliated with charitable income funds.³⁸

Exempt charitable income funds are those maintained by a charitable organization for the collective investment and reinvestment of:

• Assets of a general endowment fund
• Assets of a pooled income fund
• Assets contributed to a charitable organization in exchange for the issuance of charitable gift annuities
• Assets of a charitable remainder trust or of any other trust, the remainder interests of which are irrevocably dedicated to any charitable organization (emphasis added)
• Assets of a charitable lead trust
• Assets of a trust, the remainder interests of which are revocably dedicated to or for the benefit of one or more charitable organizations, if the ability to revoke the dedication is limited to one or both of the following circumstances:
• An adverse change in the financial circumstances of a settlor or an income beneficiary of the trust; and
• A change in the identity of the charitable organization or organizations having the remainder interest, provided that the new beneficiary also is a charitable organization (emphasis added)
• Such assets as the SEC may prescribe by rule, regulation, or order

The primary factor here is the collective investment, or commingling, of assets held by the charitable organization. For example, if a charity serves as trustee of a charitable remainder unitrust and invests that trust’s assets independently without commingling them with other assets it has under management, that particular trust is not subject to securities law.

Exempt individuals affiliated with charitable income funds are defined under the PPA as a charitable organization and its trustees, directors, officers, employees, and volunteers who are acting within the scope of their employment or duties. These individuals will be exempt from licensing as brokers or dealers so long as each person who solicits donations to one of the exempt charitable income funds listed above either is a volunteer or is engaged in the overall fundraising activities of the charitable organization and receives no commission or other special compensation based on the number of donations or the value of the donations collected. 

Rarely, if ever, do charitable organizations pay a commission or other incentive-based compensation to gift officers or volunteers. An increasing number of organizations, however, are following the corporate model of executive compensation and are paying a year-end bonus based on the attainment of certain metrics. Does this executive compensation practice violate the PPA? If it does, the payment of such compensation to even one person would trigger the requirement that every volunteer and member of the development staff undergo the SEC broker-dealer licensing procedure.

The PPA applies not only to Federal securities law but also to state blue sky laws. States were given until November 7, 1998 to opt out of this provision. The states of Arkansas, Connecticut, Florida, Mississippi, Nebraska, Tennessee, Vermont and Virginia opted out of the PPA pre-emption of their blue sky laws.³⁹ Charities must be aware of this when issuing charitable gift annuities or other planned gift instruments in these states.

Continuing Requirements for All Charities

The PPA continues to impact the day-to-day work of charitable gift planners by the disclosure statements it requires. Each donor who makes a contribution to one of the exempt charitable income funds listed above must receive written documentation from the charitable organization that describes the material terms of the operation of the fund to which they have contributed. This documentation must be given to the donor before the gift is made.⁴⁰

Specifics of what should be included in a charitable disclosure statement are absent from the PPA, and the SEC has been silent on this topic. Charitable organizations should rely on their legal counsel for the drafting of the required disclosure statements. Items that should be addressed in the disclosure statement include: a description of the charity, a description of the type of gift agreement (gift annuity, charitable remainder trust, etc.), the fact that the donor’s gift will be commingled with other such gifts for investment purposes, how those funds may be invested, the fact that the gift was intended to be primarily a charitable contribution and not a commercial investment, the charity’s participation in ACGA recommended rates (for gift annuities), and the fact that the commingled gift fund is exempt from federal and state securities laws. In addition, certain states require specific language in gift annuity agreements and disclosure statements. This language can be found on the ACGA’s website.⁴¹

Not long after the enactment of the PPA, a commentator considered the question of whether a disclosure statement would be required for any donor who made an outright gift to a charity’s endowment, given the plain language of the law.⁴² After reviewing the basic test for the existence of a security,⁴³ the commentator concluded that a direct gift to an endowment would not be considered a security, and, therefore, disclosure would not be required.

Charitable organizations, employees, and volunteers were not exempted by the PPA from the anti-fraud provisions of the various Federal securities laws.⁴⁴ These provisions are found mainly in SEC Rule 10b-5, the Investment Company Act of 1940, and the Investment Advisors Act of 1940. The anti-fraud prohibitions include untrue statements, failure to state a material fact, failure to provide required disclosures, or engaging in any fraudulent, deceptive, or manipulative act, practice, or course of business. Penalties for violation of the anti-fraud rules can be levied against both the organization and any individual who participated in the violation. The most severe penalties are individual fines of up to $10,000, five years in prison, or both. In addition, a charitable organization and its board, volunteers and employees could face a civil lawsuit from a disgruntled donor (or his/her heirs), not to mention the negative publicity associated with any such action.⁴⁵

The easiest way for a charitable organization to run afoul of the anti-fraud provisions is to neglect to provide the required disclosure statement to a donor prior to the donor’s gift.

Are We “Doomed to Repeat It”?

It is very easy to dismiss the events of 1994-1998 as a once in a millennium occurrence. After all, Congressional action cut off the basis of the lawsuit. However, Edmund Burke’s quote still rings true, and there are lessons to be learned.

Lessons to be learned from Louise Peter’s philanthropy: If any gift officer were to be introduced to an 85 year old person who had never been married, had only distant relatives, had a net worth of over $2 million, and had a long relationship with the gift officer’s organization, how would a typical gift officer react? The lawsuit filed by Ms. Peter’s great-niece and guardian should teach all gift officers that there is precious little that can be done to prevent a disgruntled relative from filing such a lawsuit. However, there are many actions that gift officers can take to thwart a lawsuit, and those actions are part of the everyday relationship with an elderly donor:

• Learn who the elderly donor is close to and who his/her advisors are. Over time, develop a relationship with those people so that there is no question of the gift officer and organization’s motives. Even if the elderly donor has immediate family, he or she may be closer to a neighbor or advisor than the family. This is often easier said than done, but it can prevent hard feelings, accusations of impropriety, and even lawsuits.
• Document everything…everything. Contact reports are often the bane of a gift officer’s existence, but in working with elderly donors, they can become a gift officer’s best friend. Very few people can remember the specific details of a conversation within weeks after it occurred, not to mention years later. A detailed recitation of what was discussed, including the elderly donor’s calmness or agitation in discussing a particular topic or person, can be an effective defense when a lawyer later accuses the gift officer of unduly influencing the actions of the elderly donor.

Lessons to be learned from the Philanthropy Protection Act of 1995: The potential criminal penalties for violating the anti-fraud provisions of securities law should give pause to every gift officer, board member and volunteer fundraiser. Does your gift planning office have a detailed check list of items that should be completed for every planned gift? Does it include distribution of the PPA-required disclosure statement? Do you send this disclosure statement prior to the gift? Do you send it when a long-time donor adds an additional gift to an existing CRUT? Do you send it to every gift annuity donor, even those who have established annuities in the past?

Many law professors are fond of the saying, “Bad facts make bad law.” While the facts of the Louise Peter case may have been bad (particularly the allegations against the Lutheran charities of undue influence and pressure against a frail, feeble 89 year old), the resulting Philanthropy Protection Act was actually very positive for both donors and charitable organizations. Organizations and gift officers who diligently follow the PPA’s provisions, as well as being very precise in their relationships with elderly donors, can prevent themselves from being part of future “bad facts” while assuring that donors are well aware of the impact their philanthropy has on their financial situation and assisting donors in supporting the important work of their favorite charitable organizations. 

Supplemental Article

• Philanthropy Protection Act of 1995 - Time for a Review

Footnotes:

1. ©2014 Joseph O. Bull
2. Edmund Burke, BrainyQuote.com, Xplore Inc, 2014, http://www.brainyquote.com/quotes/quotes/e/edmundburk382368.html , accessed August 26, 2014.
3. Brief History of the Wendish Immigration to Texas, Texas Wendish Society, www.texaswendish.org/BriefHistory.aspx, accessed August 26, 2014
4. Louise T. Peter, U.S. Social Security Death Index, www.MyHeritage.com/research/collection, accessed September 22, 2014
5. Arenson, Karen W., “House Acts to Protect Gift Arrangement Used by Charities”, The New York Times, November 29, 1995, www.nytimes.com/1995/11/29/us, accessed September 3, 2014
6. Ozee v. American Council on Gift Annuities, et al., 110 F3d 1082 (1997)
7. “Today in History: September 20”, Concordia Historical Institute-Department of Archives and History of The Lutheran Church-Missouri Synod, www.lutheranhistory.org/history/tih0920, accessed September 3, 2014
8. Brief History of the Wendish Immigration to Texas, supra
9. Ozee, et al. v. The American Council on Gift Annuities, et al., 888 F.Supp. 1318 (N.D. Tex. 1995) 
10. 110 F3d 1082, supra
11. id
12. Arenson, supra
13. “Key Events in Gift Annuity Lawsuit: a Chronology,” The Chronicle of Philanthropy, January 15, 1998, www.philanthropy.com/article/Key-Events-in-Gift-Annuity, accessed March 4, 2014
14. 888 F.Supp. 1318, supra
15. Joe Kendall profile, Kendall Law Group, LLP, www.kendalllawgroup.com/attorneys/joe-kendall, accessed September 4, 2014
16. id
17. Rubin, Janice E. and Seitzinger, Michael V., “Securities/Antittrust Treatment of Charitable Gift Annuities: Richie v. American Council on Gift Annuities, Inc.”, CRS Report for Congress, Washington, DC, Congressional Research Service, Library of Congress (1997)
18. 888 F.Supp. 1318, supra
19. Vernon’s Texas Banking Code Ann. art. 342-1113(3)
20. “Key Events in Gift Annuity Lawsuit: a Chronology” supra
21. Testimony of Barry P. Barbash, US House of Representatives, October 31, 1995, www.sec.gov/news/testimony/testarchive/1995/spch062.txt, accessed March 4, 2014.
22. Rubin and Seitzinger, supra
23. “Key Events in Gift Annuity Lawsuit: a Chronology” supra 
24. 110 F3d 1082, supra
25. Richie, et al v. American Council on Gift Annuities, et al, 943 F.Supp. 685 (N.D. Tex. 1996)
26. 110 F3d 1082 (1997), supra
27. id
28. id
29. 943 F.Supp. 685 supra
30. “Charitable Donation Antitrust Immunity Act of 1997”, Report of the Committee on the Judiciary, United States House of Representatives, 105th Congress, Report 105-146, Washington, DC (June 23, 1997)
31. American Bible Society v. Richie, 522 U.S. 1011, 118 S.Ct. 596, 139 L.Ed.2d 486 (1997)
32. Ozee, et al. v. American Council on Gift Annuities, et al., 143 F.3d 937 (1998)
33. id
34. Louise T. Peter, Find A Grave Memorial, http://www.findagrave.com/cgi-bin/fg.cgi?page=GRid=95474689, accessed September 22, 2014
35. Dorothy L. Ozee obituary, Ft. Worth Star-Telegram, http://www.legacy.com/obituaries/dfw/obituary-print.aspx?n=dorothy-l-ozee&pid=2239889, accessed September 22, 2014
36. Horner, Timothy L. and Makens, Hugh H., “Securities Regulation of Fundraising Activities of Religious and Other Nonprofit Organizations”, 27 Stetson Law Review 473 (1997) 
37. id 
38. Public Law 104-62, 109 Stat. 682
39. Humann, Kirstin L. and Wommack, Susan J., “Legal Issues in Fundraising Management”, ACCA 2001 Annual Meeting, American Corporate Counsel Association (2001)
40. Public Law 104-62, 109 Stat. 682
41. http://www.acga-web.org/state-regulations
42. Hamann, Charles M., “Philanthropy Protection Act of 1995”, ACTEC Notes, 22 ACTEC Notes 92 (1996)
43. Goodman v. Epstein, 582 F.2e 388 (7th Cir. 1978)
44. Horner and Makens, supra
45. id