We’ve all probably seen some coverage of a few recent highly publicized disputes about charitable gifts supposedly not being used for their intended purpose.  2012 opened with country-music legend Garth Brooks scoring a $1 million jury verdict against Integris Rural Health, Inc. over a donation that was allegedly not used for its intended purpose.  And, 2012 closed with another dispute involving a music legend getting resolved when Albany State University returned $1.2 million in donations from the Ray Charles Foundation because the school did not use the money to build a new performing arts center.

In these two thorny examples of gift-giving and gift-returning, the recipients of the gifts were accused of not following through on the donor’s intended use of the gift.  In other words, the donor accused the recipient of doing something wrong.  But what happens when the tables are turned and it is the donor accused of wrongdoing while the recipient is blameless?  Well, the recipient might not want to start spending that money just yet.

In Reinhardt University v. Castleberry, the Georgia Court of Appeals allowed a constructive trust claim alone to proceed against Reinhardt University when the school wasn’t accused of doing anything wrong other than being the recipient of a donation made with allegedly misappropriated funds.

James Hasty, Jr. pledged a $1.5 million donation to Reinhardt University.  Hasty was a trustee of Reinhardt University and was also named as trustee of one or more marital trusts established by the father of Joan Hasty Castleberry.  After Castleberry’s father’s death, Castleberry alleged that through a series of financial transactions, Hasty effectively transferred $1 million from the marital trust to the school to partially satisfy that pledge.

Based on these allegations, Castleberry contended that Reinhardt could not enjoy the beneficial interest in the $1 million without violating the principles of equity because it had received the money as a result of Hasty’s breaches of trust and fiduciary duty.  Castleberry, therefore, sought to impose upon the $1 million donation a constructive trust pursuant to the Georgia Trust Code.  Under O.C.G.A. § 53-12-132, “a constructive trust is a trust implied whenever circumstances are such that the person holding legal title to property, either from fraud or otherwise, cannot enjoy the beneficial interest in the property without violating some established principle of equity.”

The University sought to dismiss the action against it on the grounds that a constructive trust claim cannot stand alone as an independent cause of action – there must be some allegation of wrongdoing on the University’s part.  The University also argued that public policy requires that it keep the donation because it relies heavily on donations and a practice of investigating the sources of donated funds would be impractical and would impact charitable giving.  The trial court denied Reinhardt University’s attempt to get the case dismissed and the Georgia Court of Appeals agreed.

While it may be the right legal answer, it does interject additional uncertainty for gift recipients.  Surely, as Reinhardt pointed out, they can’t be expected to investigate every donation but charities will need to weigh the amount of diligence – if any – they put in before accepting a gift, especially if they have reason to believe that the gift is from a suspect source.  Like maybe from a Ponzi scheme king . . .

It looks like Reinhardt University intends to petition the Georgia Supreme Court for cert, so if anything changes we’ll try to keep you posted.