If my father promises to give me money to buy a grand piano for my birthday and then reneges, can I sue him for the money? Is a promise to make a gift legally enforceable? In general, no, I cannot sue him to force him to give me the money for the grand piano.
But what if after he makes the promise I go to the piano store and sign a contract with the store to buy the piano? I relied on his promise. When a person reasonably relies to his or her detriment on another’s promise to make a gift, the promise becomes enforceable. Then I can sue him.
The same analysis applies in the context of a pledge to a charity. When we think of a charitable contribution, we think of a contribution that is freely given. However, most courts view charitable pledges as legally enforceable commitments. Whether or not the pledge is enforceable is a matter of state law.
Under general principals of contract law, a charitable pledge is enforceable if it is a legally
binding contract. There must be an agreement between the donor and the charity, and there must be "consideration" given in exchange for the pledge. That is, the charity must agree to do something (or not do something) in exchange for the promised donation.
It is also "consideration" if a charity has relied on a pledge to its detriment even though that reliance was not requested by the donor as consideration. The legal doctrine applied here is called "promissory estoppel." In the law of contracts, the doctrine of promissory estoppel provides that if a party changes his or her position substantially either by acting or forbearing from acting in reliance upon a gratuitous promise, then that party can enforce the promise although the essential elements of a contract are not present.
Actions that constitute such reliance based on the pledge include soliciting other donors, incurring costs, entering into contracts, or borrowing money based on the expectation that the donor’s promise will be kept. Promises by other donors can be the consideration for the pledge that the charity seeks to enforce. Courts have been very liberal in finding reliance such as where there are specific fund-raising goals for pledges or naming opportunities.
In some states, a charitable pledge is enforceable even without consideration or detrimental reliance as a matter of public policy. For example, in Ohio, a pledge is considered to be just like a promissory note.
In Pennsylvania, any written promise is enforceable despite the absence of consideration or reliance if the writing states that the maker intends to be legally bound. (33 P.S.§6)
According to the Financial Accounting Standards Board, unconditional promises must be listed as assets on the charities financial statements and reported as revenue when the pledge is made. Lenders will often use pledges as collateral for a loan to the charity.
The directors of a nonprofit corporation or the trustees of a charitable trust may have a duty to pursue the collection of legally enforceable pledges. In general, directors and trustees have a
fiduciary duty to protect and preserve assets. If a donor has declined to fulfill a pledge and clearly has adequate resources to fulfill the pledge, the charity may have a fiduciary duty to enforce the pledge. A breach of fiduciary liability can result in personal liability for the director or trustee.
There are tax issues as well. Charities enjoy tax exemption granted by the IRS. One of the conditions is that a charity not give its assets away except to another charity. Forgiving a pledge could be construed as a gift back to the donor – obviously an improper action for a charity. Forgiving a pledge could be a prohibited benefit for which sanctions could be imposed on the organization for giving a disqualified person an excess benefit.
While charities have the right to sue donors who default on pledges and while the directors owe duties to the charity to conserve its assets, they probably do not have an absolute duty to sue defaulting donors. So far, no court has held a charity liable for refusing to enforce a pledge. The costs of pursuing such legal action and the damage such a lawsuit might do to relationships with other donors are appropriate for the board to consider.
Most charities routinely file claims in a deceased donor’s estate to secure payment of a pledge. This is considered to be routine and is not seen in the same way as a suit against a living donor. Suing living donors in default has pubic relations ramifications.
As with any contract, a charitable pledge will not be enforced if certain defenses to recovery exist such as where the donor was a victim of undue influence or fraud. If a pledge is small or the debtor is in financial trouble, the prudent course may be not to seek to enforce the pledge.
Directors and trustees are placed in the unenviable position of deciding whether to accept a significant write-off of the charitable organization’s assets or putting pressure on donors to honor their pledges which, in turn, may jeopardize future donations.