This article was originally published in the Nonprofit Association of Oregon's members-only newsletter.
Charities and nonprofit organizations rely heavily on contributions from their constituents for financial support. Donations take many forms—from ticket sales to subscriptions to fundraising auctions. Often, however, patrons make significant donations through pledges to be fulfilled after death by their trusts or estates. Depending on the magnitude of the pledge, an organization may include it as an asset in its publicly-available financial reporting and rely on it for planning and budgeting purposes. But is a charitable pledge legally enforceable if the donor's trustee or personal representative refuses to honor it?
Legal authorities are split, but generally enforce pledge agreements if certain requirements are met. From a legal perspective, a pledge is viewed as a contract between the donor and the organization. Under contract-law principles, courts require either consideration—a bargained-for exchange—or detrimental reliance in order to enforce a pledge. Most courts, however, have relaxed the requirements for charitable pledges by making it easier to find consideration and reliance. As explained by one court: "The trend of judicial decisions during the last century * * * has been toward enforcement of charitable pledges as a means of encouraging philanthropy and of promoting religious, educational and social enterprises." i The motivation to enforce charitable pledges stems from a desire to give "stability and security to institutions dependent on charitable gifts" and because "[s]ound public policy requires that one who has voluntarily made a valid and binding subscription to a charity *** should not be permitted to evade it." ii
A majority of states follow this view, recognizing the fundamental difference between a traditional commercial contract, which is the product of arm's-length negotiations, and a pledge agreement, which reflects the organization's and the donor's shared vision or commitment to a cause as embodied in the work of the organization, be it charitable, spiritual, educational, or artistic. "Charities depend on donations for their existence, whereas their donors may give personal property on conditions they choose, with or without imposing conditions or demanding consideration." iii Some courts, however, still analyze charitable pledges under the standards applicable to commercial contracts, taking the view that contract law should not be "disregarded or modified so as to bestow a preferred status upon charitable organizations." iv
The Restatement (Second) of Contracts, which many courts look to for guidance, goes a step beyond the relaxation of traditional contract requirements and provides that charitable pledges are binding without consideration or detrimental reliance. v This view has been adopted in at least two states on public policy grounds: "The real basis for enforcing a charitable subscription is one of public policy—that enforcement of a charitable subscription is a desirable social goal." vi
The only Oregon decision to touch on the issue was decided in 1876. In that case, the Oregon Supreme Court found a charitable agreement unenforceable, noting that "something more than [a] naked promise to give is necessary, and that the public advantage is not of itself a sufficient consideration to support a promise." vii The Court, however, also took a relaxed view of contractual requirements for charitable pledges, observing that if the pledge includes a request "to do any act, or to incur any expense, or to undergo any inconvenience, and such institution does the act, or incurs the expense, or submits to the inconvenience, this request and performance on the behalf of the institution is a sufficient consideration to support the promise." viii Given changes in the law applicable to charitable pledges since 1876, Oregon's appellate courts will likely take a fresh look at the issue when it is next presented.
Nonprofits can strengthen the case for enforceability through their donor communications and the language of their pledge agreements. The discussions between a nonprofit and a potential donor are the polar opposite of contract negotiations. The organization is wooing the donor and genuinely grateful for a gift to help support the organization's mission—raising issues about a pledge's legal enforceability is the last thing the organization wants to do. A nonprofit, however, can take nonadversarial steps to build the best case for enforceability if a pledge agreement is challenged:
Nonprofits should address concerns about negative publicity and donor relations on a case-by-case basis. Charitable organizations and nonprofits are typically concerned about any potentially negative publicity resulting from a dispute about the enforceability of a charitable pledge. This is a fact-specific issue to be addressed on a case-by-case basis. But when an organization is confident that the donor fully intended to make the pledge, and the challenge is based on legal enforceability issues (as opposed to the sufficiency of assets in the estate or trust), the nonprofit should not automatically assume that it would be unable to enforce the pledge, or that some inherent impropriety exists in seeking to enforce an obligation willingly undertaken by the donor.
i In re Morton Shoe Co., 40 BR 948, 949-50 (Bankr D Mass 1984).
ii 73 Am Jur 2d Subscriptions § 10 (WL database updated May 2018).
iii King v. Trs. of Boston Univ., 647 NE2d 1196, 1202 (Mass 1995).
iv Maryland Nat'l Bank v. United Jewish Appeal Fed'n of Greater Washington, Inc., 407 A2d 1130, 1136 (Md 1979).
v Restatement (Second) of Contracts § 90(2) (1981).
vi Jewish Fed'n of Cent. N.J. v. Barondess, 560 A2d 1353, 1354 (NJ Super Ct Law Div 1989); see also Salsbury v. Nw. Bell Tel. Co., 221 NW2d 609, 613 (Iowa 1974).
vii Philomath Coll. v. Hartless, 6 Or 158, 164 (1876).
viii Philomath Coll., 6 Or at 165.