A Guide to Charitable Trust Case Review

I.                  The legal meaning of the term Acharity.@

II.               What is considered a charitable entity/organization?

III.           The Attorney General=s standing to enforce the public=s interest in charities.

IV.            Factors considered in 123 case evaluation and AG intervention determination.

V.                Case Selection Criteria for Investigations.

I.                  The Legal Meaning of the term Acharity.@:

First, it is important to understand that the legal meaning of the term Acharity@

is broader than the usual lay meaning applied to it.

The term Acharity@ is used in a popular sense to mean any act of kindness to another; in a legal sense, a charity is a gift to general public use.

12 Tex. Jur. 3d Charities ' 1 (1993).

It is true that in a popular sense a charity contemplates relief of the poor, but in its legal connotation a charity is not confined to alleviation of the needs of the poor; it may embrace fulfillment of the needs of either the rich or the poor. Charity has a significance broad enough to include practical enterprises for the good of humanity operated at a moderate cost to those who receive the benefit.

Id. The legal meaning of charity has also been described as follows:

...it is a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, by bringing their hearts under the influence of education or religion, by relieving their bodies of disease, suffering, or constraint, by assisting them to establish themselves for life, or by erecting or maintaining public buildings or works, or otherwise lessening the burdens of government. It is immaterial whether the purpose is called charitable in the gift itself, if it is so described as to show that it is charitable in nature within the above concept.

15 Am. Jur. 2d charities ' 3. (1976)

II.               What is considered a charitable entity/organization?

A Acharitable entity@ is defined by statute under Tex. Prop. Code Ann. '

123.001(1) (Vernon 1995):

ACharitable entity@ means a corporation, trust, community chest, fund, foundation, or other entity organized for scientific, educational, philanthropic, or environmental purposes, social welfare, the arts and humanities, or another civic or public purpose described by Section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)).

In addition, Acharitable organization@ is defined under the Civ. Prac. & Rem. Code section 84.003(1) as:

...any organization exempt from federal income tax under Section 501(a) of the Internal Revenue Code of 1986 by being listed as an exempt organization in Section 501(c)(3) or 501(c)(4) of the code, if it is a nonprofit corporation, foundation, community chest, or fund organized and operated exclusively for charitable, religious, prevention of cruelty to children or animals, youth sports and youth recreational, or educational purposes . . . or is organized and operated exclusively for the promotion of social welfare by being primarily engaged in promoting the common good and general welfare of the people in a community . . .

III.           The Attorney General=s standing to enforce the public=s interest in charities.

Tex. Prop. Code Ann. ' 123.002 (Vernon 1995), provides the Attorney General with standing to intervene in any proceeding involving a charitable trust:

For and on behalf of the interest of the general public of this state in charitable trusts, the attorney general is a proper party and may intervene in a proceeding involving a charitable trust. The attorney general may join and enter into a compromise, settlement agreement, contract, or judgment relating to a proceeding involving a charitable trust.

IV.            Factors considered in 123 case evaluation and AG intervention determination.

1.                   What kind of instrument is involved?

A.                 A Will that bequeaths a charitable gift?

B.                 A Will that establishes a Trust?

C.                 A Trust (also known as an Indenture of Trust)?

2.                  What kind of action is requested? Look at the Petition. Some examples include:

A.                 Petition to Probate a Will;

B.                 Protest to Probate of a Will (otherwise known as a Will Contest), This can also be                        in the form of an Answer and/or Special Exception to the Probate of the Will;

C.                 Petition for Resignation of Trustee and for Appointment of a Successor Trustee; and

D.                Petition for Declaratory Judgment to construe a Will or a Trust.

3.                  Who are the Charitable Beneficiaries involved? Consider the following:

A.                 Does the document name the charitable beneficiaries?

B.                 Are the charitable beneficiaries specifically named or are they described as a Aclass@? Examples:

Specifically named = The Salvation Army

Class description = Needy Students

C.                 Are the named charitable beneficiaries aware of their interests?

Notice -Charitable beneficiaries that are specifically named in a Trust instrument shall be made a party to the action under the code and served with citation, Tex. Prop. Code Ann. ' 115.011(b). When a party files an application to probate a Will, charitable beneficiaries named in a Will should be provided with notice of their respective interests. Charitable beneficiaries named as a class are not required to be provided with notice.

D.                Have any of the charitable beneficiaries= names changed or were their organizations dissolved prior to the filing date of the present action? If this is the case, the equitable Doctrine of Cy Pres may be applicable.

Doctrine of Cy Pres - Cy Pres means Aas near as possible.@ In many instances, a trust for charitable purposes is intended to be perpetual. In this case it is not unlikely that a specific beneficiary named by the settlor may cease to exist or the purpose expressed by the settlor may become impracticable. Under these circumstances, the appropriate party may petition the court to amend the trust pursuant to the equitable Doctrine of Cy Pres. This doctrine dictates that the trust property be applied to another charitable purpose that is as similar to the original one as possible. This objective is preferable to permitting the trust to fail and becoming a resulting trust. The theory is that the settlor has the primary intent of achieving a stated charitable purpose. The secondary intent is the agent chosen by the settlor to achieve this purpose. If the secondary intent fails to

achieve the primary intent of the settlor, then the court should select another agent to effectuate the settlor=s primary intent.

4.                  What is the Estate worth?

5.                  What is the amount bequeathed or provided to each charitable beneficiary under the Will or Trust? Consider the following:

A.                 Does the charitable beneficiary receive a specific amount? For example:

Specific bequest = AI bequeath to The Salvation Army $5,000.00"

B.                 Or does the charitable beneficiary receive a portion of the estate or residuary?

For example:

Residuary bequest = AThe Cancer Society shall receive 2 of the rest and residue of my estate@ (This will be what remains after all of the debts and specific bequests have been paid.)

C.                 Is the charitable beneficiary=s bequest contingent on the occurrence of a prior event? In other words, how remote it the possibility that the charitable beneficiary will someday be able to receive the bequest? For example:

AI bequeath $10,000.00 to my brother Bob Wire, but if he should predecease me, then I bequeath the money to my sister Iona Trailer and when she dies the money shall go to her issue. However, if she should die without issue, then the money shall go to Hedda Lettuce, but if she should enter into a partnership with our cousin Lawn Moore, and Lawn strikes oil on his five acre track of land located in Dryville, Texas, then the money shall go to the Church of St. Basil.@ (There is a very remote chance that the Church of St. Basil will ever receive this bequest.)

6.                  Does the estate contain enough assets to provide for the charitable bequest? Sometimes debts and expenses can consume a great deal of the estate or Trust assets. When this occurs, the public interest in charity may diminish or cease to exist altogether.

7.                  Does the case involve a Will contest? If so, consider the following:

A.                 How many Wills are the parties attempting to probate?

B.                 In what year was each Will drafted?

C.                 Does each Will contain bequests to charitable beneficiaries?

D.                Are the charitable beneficiaries the same in each Will ?

E.                 Are the amounts bequeathed to charity the same in each Will ?

F.                 Are the charitable bequests specific or residuary bequests?

G.                Are the charitable bequests contingent on a condition precedent /prior event ?

H.                Are the charitable beneficiaries located within Texas or are they out-of- state or in another country?

I.                   What are the parties alleging? For example:

1)  Undue influence over the testator or settlor?

2)  Fraud?

3)  Breach of fiduciary duty by the executor or trustee?

4)  Misrepresentation?

5)  Conversion of estate or trust property?

8.                 Do we possess a copy of all pertinent instruments in the file? These include all Wills at issue, Trust instruments, notice letters to charitable beneficiaries and/or evidence of notice, Answers or Waivers of Citation filed by charitable beneficiaries, court orders, if any, pertinent pleadings to our evaluation, etc.

9.                  Has the Petitioning party provided the Attorney General with the required notice under Tex. Prop. Code Ann. ' 123? This statute mandates that a copy of the Petition be forwarded to the Attorney General within 30 days of the date it is filed with the court, but no less than 10 days notice before any hearing.

The consequence of failing to provide the Attorney General with the required notice can                        result in the action being voidable by the Attorney General. This includes a                        Settlement, Judgment, Court Order, etc.

10.              A Statue of Limitations does not apply to the Attorney General in this instance nor does the doctrine of laches. The Attorney General may intervene at any time after the action has been filed and void such action if it finds that it unjustly dilutes or dissolves the public=s interest in the charitable trust created by the underlying instrument.

V.                Case Selection Criteria for Investigations.

1.                   Nature and Extent of the Harm

General Principle: We should select those cases involving the largest economic loss to prospective donors.

Factors to consider:

A.                 Is the injury strictly monetary, or are there health and safety issues?

B.                 How much money is involved?

C.                 How many donors are there?

2.                  Deterrent Value:

General Principle: We should select those cases with the greatest deterrent value. Factors to consider:

A.                 Will this case have high public visibility and therefore deter similar conduct?

B.                 Will this case have deterrent value in this particular industry, either because of the identity of the defendant or the nature of the practice?

C.                 Does this case involve a new or emerging problem, where aggressive enforcement now will deter future violations?

3.                  Characteristics of the Victims

General Principle: We should select those cases involving the most vulnerable victims.

Factors to consider:

A.                 Are the victims peculiarly vulnerable, such as senior citizens or low- income people?

B.                 Are the victims located in our state?

C.                 Do the victims have private remedies available to obtain redress?

D.                Are the victims themselves partially culpable?

4.                  Nature of the Violation

General Principle: We should select those cases involving the most significant violations of state laws.

Factors to Consider:

A.                 Is this an isolated violation, or is there a pattern of illegal conduct?

B.                 Is the violation Atechnical,@ or is the conduct inherently fraudulent?

C.                 Does the public care about this issue?

D.                Is this conduct common or customary in this industry?

E.                 Is this a new deceptive practice that can be eliminated before it becomes widespread?

F.                 Have we taken action against this kind of conduct in the past?

5.                  Identity of the Defendant

General principle: We should select those cases involving defendants with significant presence in the community or with prior histories of misconduct.

Factors to consider:

A.                 Is the defendant an individual or a corporation?

B.                 How large is the defendant, and how significant are the defendant=s actions in the community?

C.                 Has the defendant engaged in other deceptive practices?

D.                Does the defendant have a history of fraudulent conduct?

E.                 Is the defendant located in Texas?

6.                  Defendant=s Intent

General principle: We should select those cases involving the most intentional violations of law or intent to defraud the public.

Factors to consider:

A.                 Was the defendant genuinely ignorant of the law, or confused about its application?

B.                 Is there evidence the defendant violated the law willfully?

C.                 Is the defendant=s conduct targeted at particularly vulnerable citizens?

7.                  The Cost to the Office

General principle: We should select those cases that best utilize our limited enforcement resources.

Factors to consider:

A.                 How great a commitment of staff time will be required?

B.                 What cases will we have to forego in order to prosecute this case?

C.                 What out-of-pocket expenses will be required for travel, expert witnesses, depositions, etc?

D.                Is the defendant unusually litigious and likely to drain our resources?

E.                 Have we so committed ourselves to this case or issue that failure to proceed will hurt our credibility?

8.                 Likelihood of Success on the Legal Issues

General principle: We should select those cases that involve the greatest likelihood of success, or that present the best opportunity for establishing helpful precedent.

Factors to consider:

A.                 Are the legal issues cut-and-dried, or is this a matter of first impression?

B.                 Are there proof problems with our witnesses, exhibits or other evidence?

C.                 If we litigate and fail, will the outcome set back our effectiveness elsewhere?

D.                If we hope to make a new law, does this case present a good set of facts for doing so?

9.                  Likelihood of Effective Relief

General principle: We should select those cases involving the greatest likelihood of obtaining meaningful relief.

Factors to consider:

A.                 Are we likely to remove funds that should have been used for a charitable purpose?

B.                 Has the defendant all ready halted the process? Will an injunction be effective?

C.                 Is the defendant likely to flee?

D.                If the defendant is located elsewhere, can we successfully enforce an injunction or collect a judgment?

E.                 Is the defendant bankrupt or judgment-proof?

F.                 Can this problem be solved through a civil action, or is criminal prosecution the only meaningful approach?

10.              Availability of Relief Through Other Means

General principle: We should select those cases where victims have the least access to private remedies or other forms of relief.

Factors to consider:

A.                 Can relief be obtained effectively through private litigation, either by board members or by charitable beneficiaries?

B.                 Are there other charities with an incentive and standing to litigate the case?

C.                 Is there a potential for action by other state or federal regulatory agencies or criminal prosecutors that may remedy the situation?

D.                Could a Acease and desist@ letter achieve acceptable results?

E.                 Could public exposure of the defendant=s practices without litigation achieve comparable results?

F.                 If some alternate form of relief is available, will it be available quickly enough to be meaningful?

11.               Staff Considerations