“The Lawsuit”: Philanthropy on the Brink
Public Policy
Written by Bob Coffman, Lindsay Lapole and Frank Minton Ph.D.   
Sunday, November 01, 2020 10:56 AM

At first it was barely a blip on the radar screen.

Louise T. Peter was the granddaughter of a Lutheran minister from Prussia, commissioned to pastor a group of his former parishioners who had relocated in Texas. His ministry was instrumental in the evolution of Lutheran charitable activity, especially in regard to Lutheran higher education in the Lone Star state.

Ms. Peter never married and, after receiving a large inheritance from a brother, became a major donor to Lutheran charitable causes in Texas, including two gifts of $100,000 each for gift annuities issued by the Texas Lutheran Foundation. In the latter years of her life as her health was failing, she was cared for by her great-niece, Dorothy Ozee. Ms. Ozee came to believe her elderly aunt had been subjected to undue influence to commit most of her assets to charitable gifts while leaving little for her family. In 1994, she initiated a lawsuit against the Texas Lutheran Foundation, alleging violation of Texas insurance laws for issuing charitable gift annuities as well as functioning as a trustee improperly under Texas law.

In keeping with its long-standing commitment to responsible philanthropy that appropriately guards the interests of the donors and charitable organizations, the American Council on Gift Annuities (ACGA) became aware of Ms. Ozee’s lawsuit early on and began monitoring the situation. While any allegation of improper activity is troubling, the matter rose to a whole new level of urgency when Ms. Ozee amended the suit to add allege violations of the federal Sherman Anti-trust Act, claiming that charitable organizations had conspired to suppress rates offered by charities for charitable gift annuities by improperly agreeing to use maximum suggested rates issued by the ACGA. In addition, the plaintiffs also claimed that commingling trust funds and gift annuity proceeds in a common investment pool without registering the pool with the Securities and Exchange Committee was a violation of the Investment Company Act of 1940, as well as the Securities Act of 1933 and the Securities Exchange Act of 1934. Along with these additional claims, the ACGA also was named as a defendant.

The blip on the radar screen now was flashing red.

The developments in the United States District Court for the Northern District of Texas now had the undivided attention of the philanthropic community. With attorney Terry Simmons of the Baptist Foundation of Texas and of counsel to the Dallas firm of Thompson and Knight, providing tireless leadership, the community came together as Charitable Accord and mounted a major lobbying effort for Congressional action to address the issues. Quickly, legislation was introduced in both houses of Congress to make it clear that charities could issue gift annuities without violating federal securities laws and follow the ACGA suggested rates without running afoul of federal anti-trust law.

The scope of the lawsuit took a major leap forward in October of 1995 when the Texas District Court judge granted the plaintiffs’ motion to certify a class action. With a stroke of Judge Joe Kendall’s pen, the list of potential defendants expanded to include the approximately 1,500 ACGA members and any charity which had issued a gift annuity pursuant to the ACGA suggested maximum rates after December 30, 1990 – as well as expressly adding the organizations which employed ACGA board members as named defendants. It also expanded the potential class of plaintiffs to include anyone party to any such annuities issued during that time frame.

The ramifications for the charitable world were staggering. Pursuant to federal anti-trust law, successful plaintiffs would be entitled to recovery of treble damages – fully three times the amount of any gift annuity found to be in violation of the law. Just as significant, liability among the defendants would be “joint and several,” meaning the plaintiff class could pursue collection of any damages directly against any or all of the defendant class. With potential damages in the billions, a judgment in favor of the plaintiff class would have allowed them to go after whatever members of the defendant class they chose – and, most likely, they would target the deepest pockets first. Clearly, the entire American philanthropic world was teetering on the brink of a major catastrophe.

In the face of these grim prospects, the heroic work of Terry Simmons and Charitable Accord bore fruit just in the nick of time. Both bills introduced in Congress – the Philanthropy Protection Act of 1995 to exempt commingled funds from being classified as securities and exempt employees of charities from classification as brokers or dealers, and the Charitable Gift Annuity Antitrust Relief Act of 1995 to address the price-fixing allegations – were passed 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.

The celebration was short-lived, however. The plaintiffs convinced Judge Kendall that legislation only protected charities in their dealings with other charities. He accepted their argument that the process of promulgating suggested maximum gift annuity rates, issuing gift annuities and managing gift annuities could and did involve non-charitable entities, breathing new life into their lawsuit. Undaunted, the charitable community returned to Capitol Hill, redoubling their efforts to secure Congressional assistance.

Again, Congress responded by unanimously passing the Charitable Donation Antitrust Immunity Act of 1997, signed into law by President Clinton on July 3, 1997. That act resolved all federal issues in favor of the defendants. In December of that year, the Supreme Court remanded the case to the Fifth Circuit Court of Appeals for disposition in light of the new legislation. Finally, on June 12, 1998, the Fifth Circuit brought the four-year marathon to a close, triggering wide-spread relief throughout the charitable community.

The ACGA, along with other named defendants, had sustained substantial legal expenses in defending the lawsuit. Fortunately, a $1 million insurance policy covered a portion of the costs, but the excess went well beyond that and threatened the continued existence of the ACGA – especially as the number of dues-paying members was rapidly decreasing out of concern of being drawn into the fray. The ACGA took its story to multiple potential funding sources and had some success with grants – especially a $100,000 operating grant from the Kellogg Foundation. Other organizations were able to help with interest-free loans and Thompson and Knight, ACGA’s legal counsel, exhibited unprecedented grace and patience in minimizing fees and granting the organization extended time to cover its obligations. Finally, in December 2004, ACGA was able to make its final payment and turn to the future debt-free.

Catalyst For Enhanced Advocacy

Ozee v. ACGA sounded a clarion call to a new level of action and advocacy for the ACGA. As the potentially devastating ramifications – not just for the ACGA but for the entire American charitable community – became increasingly clear, there was no mistaking the need for bold, immediate action.
This was the catalyst for the creation of Charitable Accord to carry the case for the ACGA and the charitable community to the United States Congress, and ACGA was in the vanguard of these efforts. Terry Simmons, who became the chief organizing force in the movement, served at that time as legal counsel for the Baptist Foundation of Texas, an organization led by the ACGA chief executive, Tal Roberts. Roberts placed his full support for this work behind Simmons who also served as of counsel to the Dallas law firm of Thompson and Knight, which served as the ACGA’s counsel throughout the lawsuit. Eventually, Simmons became a partner at Thompson and Knight and became a member of the board of the ACGA himself.

As noted above, those efforts resulted in the Philanthropy Protection Act of 1995 and the Charitable Gift Annuity Antitrust Relief Act of 1995 being passed unanimously through Congress. And, when the plaintiffs were able to persuade the federal district court judge there was a loophole in the legislation that allowed them to proceed, that advocacy resulted in the Charitable Donation Antitrust Immunity Act in 1997 that settled all the federal issues in favor of the ACGA and the charitable community.

However, there were still unresolved issues under Texas state law. Simmons was instrumental in helping to draft legislation in Texas that exempted charities from insurance regulations in issuing charitable gift annuities, setting out the standards for qualifying for that exemption and which granted immunity to charities that had issued gift annuities in Texas. Lindsay Lapole, who would be future long-term chief executive of the ACGA, had significant involvement in this process as a representative of multiple Salvation Army divisions impacted by the unresolved Texas state law issues.

Even though the major federal and Texas issues had been resolved, the lawsuit had caught the attention of regulators in many states, particularly state insurance commissioners, and raised questions about if, and how, the issuing of charitable gift annuities in their states should be regulated. Based on the ACGA’s long history of monitoring instances of default or other improper activities by charities related to issuing charitable gift annuities, the ACGA knew that such instances were exceedingly rare. Accordingly, amid a stirring for increased state regulation nationally, the ACGA discerned an immediate need to add its voice to those discussions.

Having learned of an initiative by the National Association of Insurance Commissioners (NAIC) to draft a model statute for state regulation that would have imposed stringent requirements on charities, Frank Minton and Clint Schroeder, both ACGA board members and both future ACGA chief executives, were able to secure a meeting with NAIC. Minton and Schroeder were instrumental in demonstrating that, in light of the evidence showing virtually no improper behavior on the part of charities, such stringent regulation could put unneeded administrative burdens on charities which could lead to diminished financial support for the causes they represented and, therefore, an increased burden on the public to address those needs. Their advocacy won the day, resulting in a model statute designed to protect the interests of donors without undue burden on charities. While differences exist among state regulations of charitable gift annuities, the majority of states have regulations based on the NAIC model statute.

Lessons Learned from Ozee vs American Council on Gift Annuities

Charitable fundraising is a privilege granted by federal and state governmental bodies to organizations with a valid mission and that are willing to play by the rules. The lawsuit is a strong reminder to charities of the importance not only of following those rules but also to hold themselves to the highest of ethical standards.

Living up to the first part of that is fairly straight-forward for charities who want to issue charitable gift annuities:

  • Registration. Many states require charitable organizations to register in order to do business – your organization’s state of domicile as well as other states in which your organization operates. In addition, almost all states require some level of additional registration, annual reporting and accountability from organizations who propose to issue Charitable Gift Annuities to donors in their state. Typically, a charity’s auditing firm will require substantiation of compliance with such requirements.
  • Maintaining Reserves. Similarly, many states require that a specified percentage of gift annuity proceeds is held in reserve by the issuing charity. This process sometimes applies not only to the organization’s state of domicile but also to the home state of the donor or annuitants. Here again, your auditing firm generally will require documentation that your charity is complying with reserve requirements, if any, in your home state and other states in which you issue gift annuities.
  • Philanthropy Protection Act of 1995. This legislation not only was instrumental in helping to bring the lawsuit to a conclusion, it also serves as a road map for charities to be sure they are operating in a manner that will secure exemption from important federal securities and anti-trust laws. Critical provisions of this law include:
    • Provide a Charitable Disclosure Letter to all prospective charitable gift annuity or charitable trust donors, giving them key information on how their contributions will be used and managed. A sample disclosure letter can be found here. NOTE: A charity wishing to serve as trustee should be sure it has met requirements to do so in any state in which it intends to act as trustee.
    • Finders fees and performance-based payments to vendors or staff are prohibited. Staff compensation is an issue in an era when budgets are limited, and performance-based salaries are in vogue. Payments of any type to third parties for referrals are prohibited.

Beyond these objective requirements, adherence to the highest level of ethical standards and business practices is essential to establishing a successful charitable gift annuity program that meets the needs of the donor and the charity and avoids potential problems down the road.

  • Present gift annuities to donors as a creative way of making a meaningful charitable gift rather than as an “investment.” 
  • Encourage donors to seek their own independent counsel in the course of considering a charitable gift annuity contribution. Involve those professionals in the process whenever appropriate.
  • While a disclosure letter required by the Philanthropy Protection Act of 1995 is important, be sure to supplement that with any additional information that seems relevant for the donor to know. Take care to make sure to address any questions or concerns a donor may have. In short, treat donors as you would want your loved ones treated.
  • Be proactive in advocating for the interests of charity. The ACGA monitors legislative and regulatory developments through its committee on Rates and State Regulation. You can help the ACGA in those efforts by advocating in your own states and by providing information to the ACGA about current developments.

NOTE: We wish to thank Joe Bull for graciously making the text of his presentation at the 32nd ACGA Conference on Planned Giving, “Forgotten, But Not Gone: The Philanthropy Protection Act of 1995,” available for reference in the preparation of this summary.