A district court held that a donor to a donor-advised fund did not have standing to sue the fund's sponsor for breach of fiduciary duty with respect to the assets the donor contributed to the fund. The court found that by making an irrevocable contribution of the assets to the fund in exchange for an immediate charitable contribution tax deduction, the donor relinquished control of the assets and thus did not suffer a concrete injury from the conduct of the sponsor that he challenged, which would support standing to sue under Article III of the U.S. Constitution and California law.
Schwab Charitable Fund (SCF) sponsors a donor-advised fund. A donor-advised fund is defined in Sec. 4966(d)(2)(A) as:
a fund or account
(i) which is separately identified by reference to contributions of a donor or donors,
(ii) which is owned and controlled by a sponsoring organization, and
(iii) with respect to which a donor . . . has . . . advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor's status as a donor.
When a donor contributes to a donor-advised fund, the not-for-profit sponsor of the fund takes legal title to the assets. The sponsor of the fund holds a donor's contributions in separately identified accounts, and donors can direct how the funds are invested (from specified investment options offered by the fund) and ultimately distributed to charitable organizations.
A donor to a donor-advised fund may claim a tax deduction for a charitable donation made to the fund if he or she makes a "completed gift" and "relinquishe[s] dominion and control over the donated property" (Secs. 170(a), (c), and (f)(18); Viralam, 136 T.C. 151, 162 (2011)). The fund, in other words, must have "exclusive legal control" over the donated assets. Thus, while the fund will take recommendations from the donor about the investment and distribution of the donated assets, the fund is not required to follow those recommendations. In the case of the fund sponsored by SCF, when a donor makes a contribution, SCF informs the donor in a contemporaneous written document that the fund has assumed exclusive legal control over the assets contributed, allowing the donor to claim a charitable contribution deduction for the contribution.
The investment options available in the fund are selected by SCF's board of directors and investment oversight board, and there are 14 investment options of various types available. Donors can make nonbinding recommendations about how the money they contribute is invested in these investment options. SCF employs Charles Schwab & Co. to provide custodial and brokerage services to the donor-advised fund.
Philip Pinkert was a donor to SCF. He became disenchanted with the way SCF was running the donor-advised funds, objecting to SCF's choice of certain investment options (where funds of the same type that charged lower fees were available) and the payment of what he believed were excessive fees for custodial and brokerage services to Charles Schwab. He alleged that there were cheaper investment options available than those chosen by SCF and that SCF could have used its market power to obtain better rates from Charles Schwab for its custodial and brokerage services. Pinkert alleged that SCF's actions were causing the funds to incur excess expenses, which were diminishing the amount of his donations that were ultimately distributed to the charitable donees he chose.
Pinkert sued SCF for breach of fiduciary duty, Charles Schwab for aiding and abetting the breach of fiduciary duty, and both defendants for violating California's Unfair Competition Law by their acts. In response, SCF and Charles Schwab made a motion to dismiss for lack of standing. The defendants claimed that by making an irrevocable contribution to the fund in exchange for an immediate charitable tax deduction under Sec. 170, Pinkert relinquished control of his assets. Consequently, he did not suffer a concrete injury from the defendants' conduct that he challenged, and therefore lacked standing to sue under Article III of the Constitution.
The district court's decision
The district court granted the motion to dismiss, finding that, as the defendants argued, because Pinkert gave up legal control of his assets when he contributed them to the donor-advised fund, he did not suffer a harm from the defendants' actions and therefore did not have Article III standing.
Under Supreme Court precedent, to have standing, a plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision. In district court, the defendants argued that Pinkert did not have standing because he had not met the first requirement of injury in fact. To meet this requirement, the plaintiff must have suffered "an invasion of a legally protected interest" that is "concrete and particularized" and "actual or imminent, not conjectural or hypothetical" (Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1548 (2016), quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)).
The court agreed with the defendants that since Pinkert had given up title to and control of his donation to get an immediate tax deduction, the donor-advised fund controlled the donated assets and Pinkert could no longer be injured by what happened to the donated assets. Even though he did not control the donated assets, Pinkert contended he had standing because he advised the fund on their investment and directed how the donated assets were distributed to charities, the excess administrative fees reduced the value of his donated assets, and his reputation suffered because of the reduced funds available to be distributed to charitable organizations.
With regard to his first contention, the court found that the cases Pinkert pointed to in support of it involved interests that were not analogous to the right to designate investments in and direct donations of assets from a donor-advised fund and that no case supported the conclusion that this right is a contractual or contingent property interest that supported Article III standing to challenge the investment choices of a donor-advised fund or the administrative fees it paid. The court noted that the result might be different if the fund had broken specific promises about or otherwise harmed his advisory privileges, but this had not happened.
Addressing the second contention, the court noted that lost money can establish injury and standing. However, the court again observed that Pinkert had ceded control of his donation, so he had no property interest that could establish standing. Finally, the court rejected the third contention because the only cases Pinkert cited in support of it involved interests that were not analogous to the "reputational and expressive interests" he claimed he had in his account.
Standing under California law: California limits by statute the persons who can sue for mismanagement of a charitable corporation's assets. The court found that the claims raised by Pinkert for breach of a fiduciary duty for mismanagement of assets were claims for breach of a charitable trust. The court determined that under California law, a suit for breach of a charitable trust can be brought by the attorney general of California; persons granted relator status by the attorney general; the corporation; a member of the corporation acting in its name; a director or officer of the corporation; or a person with a reversionary, contractual, or property interest in the assets subject to the charitable trust.
The court concluded that Pinkert did not fall into any of these categories, so he did not have standing in California. With regard to the last category, it explained that to have such an interest, the person must have a definite interest in the property. Since SCF had exclusive legal control over the donated assets, Pinkert did not have any interest in the property to support standing.
Pinkert also argued that he had a special interest in the charitable trust that gave him standing under California common law. The court rejected this argument, finding that under common law, a person still only has standing if the person has a definite interest in the property. The court further found that the cases Pinkert cited in support of this claim again were not analogous to his situation because they involved specific broken promises about how the property donated by the plaintiff would be sold.
Taxpayers who would benefit from increasing deductions in a particular year are often encouraged to make contributions to donor-advised funds. This allows an immediate deduction for a charitable contribution of assets without having to actually distribute the funds to charity until later years.
However, as this case demonstrates, while the donor may make recommendations to the fund about the donated assets, the fund is generally not bound to follow them, either with respect to how the funds are invested or to whom they are ultimately distributed. If the donor believes that a fund is not being a proper steward of the donated assets, there may be little or nothing the donor can do about it. Thus, donors should be very careful in choosing a donor-advised fund.
Pinkert v. Schwab Charitable Fund, No. 20-cv-07657-LB (N.D. Cal. 6/17/21)