Judge issues preliminary rulings in Robertson Foundation lawsuit
Posted October 25, 2007; 03:50 p.m.
Two University motions granted; decisions shape the case for trial
New Jersey Superior Court Judge Neil Shuster today issued rulings on seven pretrial motions in the lawsuit brought against Princeton University by several members of the Robertson family in July 2002. His seven rulings totaled 355 pages. (View selected excerpts.)
Two of the motions, both brought by the University, were granted in their entirety. In one, Shuster agreed that the Robertson Foundation's Certificate of Incorporation permits the foundation to spend realized gains like other charities. In granting the University's motion, he rejected the plaintiffs' argument that spending should be limited to dividends and interest. In another he agreed that the court, rather than a jury, should hear and decide all remaining issues in the litigation, thereby denying plaintiffs' request for a jury trial.
Summary judgment motions are granted when there is no genuine issue of material fact and a decision can be made by application of the law. In its ruling on realized gains, the court rejected all of the plaintiffs' arguments and stated, in part, "[T]he Court has found there to be no 'genuine issue of material fact' on whether Article 11(c) is clear and unambiguous as to the ability to spend realized gains." Article 11(c) is a provision in the Robertson Foundation Certificate of Incorporation.
"These two decisions, along with the decisions on the other five summary judgment motions, significantly narrow and help shape the trial on the issues that remain in dispute," said Douglas S. Eakeley of Lowenstein Sandler PC, the law firm representing Princeton and the four University-designated trustees of the Robertson Foundation. "We are pleased with what has been accomplished through these decisions. This is a very complex case, and Judge Shuster's careful analysis identifies specific issues that need to be resolved at a full trial. His thoughtful and considered decisions provide a good road map for how the court anticipates the factual issues will be tried. He has set a very high evidentiary bar for the plaintiffs that we are confident they will not be able to clear and he has affirmed that Princeton and the individual defendants benefit from powerful legal presumptions in their favor. His decisions significantly move the case forward in a positive way, and we look forward to having an opportunity to address the issues when the case comes to trial.
"Under the University's stewardship, the foundation has achieved extraordinary success, growing the original $35 million gift that established the foundation to more than $880 million. These funds have been used solely for the purpose for which they were given: to support the graduate program of the Woodrow Wilson School of Public and International Affairs. Today the Woodrow Wilson School is one of the pre-eminent schools of public and international affairs in the world where students may, and do, prepare for positions of leadership in government and related fields," Eakeley added.
Shuster denied summary judgment on three motions and made divided rulings on two others, ruling that they presented factual issues that should await resolution at trial.
No trial date has been set.
"Our goal in requesting summary judgment was to present questions that we believed did not present issues of material fact that would need to be resolved at trial," Eakeley said of the issues on which summary judgment was not granted. "This is a rigorous standard and we fully respect Judge Shuster's identification of specific issues that must await a full trial for final resolution. We look forward to the opportunity to address them at that time."
In their complaint filed against Princeton in 2002, members of the Robertson family asked the court to sever the connection between Princeton and the Robertson Foundation and give them control of funds that Marie Robertson gave to Princeton University in 1961 for the purpose of supporting the expansion of the graduate program of the Woodrow Wilson School of Public and International Affairs at Princeton University. The family members asked the court to overturn the mechanism that Mrs. Robertson and her husband, Charles, put in place to administer their gift and to convert what is currently a "supporting organization" of Princeton University into a private foundation that the family would control, allowing them to divert their parents' gift and spend it on purposes other than the one specified by their parents. The governance mechanism was put in place to maximize the tax advantage to the donor in making the gift and to make sure that the University retained final control over its disposition.
Shuster ruled after reviewing extensive filings and after two days of hearings in November 2006, during which the parties presented evidence seeking resolution of various elements of the case before it proceeds to trial.
Rulings on the motions
1. Grants Princeton's motion for summary judgment that the foundation's Certificate of Incorporation authorizes the foundation to spend realized capital gains as well as other income.
The plaintiffs argued that the foundation's expenditures should be restricted to dividends and interest earned in its investment portfolio, an approach that most nonprofit organizations abandoned in the 1970s. Princeton pointed out that the amended Certificate of Incorporation clearly authorizes the foundation to spend realized capital gains in addition to dividends and interest, and that this authorization is fully supported by current law governing nonprofit organizations.
In a detailed ruling, the court rejected every argument advanced by the Robertson plaintiffs, siding with Princeton on every point. Although plaintiffs had attempted to cloud the issues by relying on complex and irrelevant tax issues, the court refused to be "lure[d]" into the "usual tax melange." Rather, the court found "there to be no 'genuine issue of material fact' on whether Article 11(c) authorizes the spending of realized gains." The court further agreed with Princeton that the Uniform Management of Institutional Funds Act, which governs spending by nonprofit organizations, also authorizes the foundation to spend realized gains. Shuster rejected plaintiffs' efforts to seek "shelter in the confines of equity" in the face of the clear result mandated by law.
"We were on solid ground here, based on the language of the foundation's Certificate of Incorporation and also current law governing spending by nonprofit organizations," Eakeley said. "While this outcome was clear as a matter of law, we expect there will be relief throughout the philanthropic community that this ruling confirms the legality and propriety of the way charitable organizations manage and spend their investment earnings."
2. Denies Princeton's motion for summary judgment that, as a matter of law, the University is and will remain the sole beneficiary of the Robertson Foundation.
In their complaint filed against Princeton, members of the Robertson family asked the court to amend the foundation's Certificate of Incorporation and Bylaws to remove the University from any control or involvement with the foundation and to remove the University from its position of being the sole charitable organization that can be supported by the foundation. Princeton argued that the foundation's Certificate of Incorporation clearly establishes that Princeton is to be the only recipient (the "sole beneficiary") of foundation funding.
Shuster agreed with Princeton's position, finding that "Article 3 of the Foundation's Certificate of Incorporation is clear and unambiguous as to the University being the sole institution to which Foundation funds are to be directed." However, he denied defendants' motion for summary judgment on the grounds that, as a court of equity, he should not "foreclose an equitable remedy prior to having the full facts," i.e., until after a trial. In this connection, the judge cautioned that the relief sought by the plaintiffs is "only ... appropriate to remedy the most egregious and nefarious of circumstances" and noted that "before this Court ordains a particular type of relief, it should have the full facts before it."
Addressing plaintiffs' argument that the equitable doctrines of cy pres and deviation should apply to permit a redirection of the assets of the foundation, the court again declined to rule at this time, but expressed reservations about whether the doctrines could be applied to the Robertson Foundation as a matter of law. Shuster also expressed reservations about whether the Robertsons could prevail on these doctrines even if they could be applied here, declaring that the court "is not satisfied, at this stage in the litigation, that there has been a sufficient showing of a legal or practical impediment to the accomplishment of the Foundation's mission as set forth in the Foundation's Certificate of Incorporation."
Eakeley said, "We look forward to further showing that the Robertson Foundation has been devoted to its purpose of supporting and developing the Woodrow Wilson graduate school into one of the pre-eminent schools of public and international affairs in the world. There is no legal or factual basis for severing the foundation from the University that it was implemented to support and has supported so well, and we will prove that at trial."
3. Denies Princeton's motion for summary judgment declaring that the decision of the foundation's University-designated trustees to accept the recommendation of the foundation's investment committee to retain the Princeton University Investment Co. (PRINCO) to manage the foundation's investment portfolio was a valid exercise of "business judgment."
On the "PRINCO issue," Shuster rejected as having "no basis" plaintiffs' assertion that defendants had a disqualifying conflict of interest that prevented application of the "business judgment rule" which provides for judicial deference to trustee decision-making. Instead, he concluded that the court should and would defer to the business judgment of the University-designated trustees "unless Plaintiffs can show that Defendants violated their duties of care, loyalty and good faith." In this connection, Shuster concluded his opinion by noting: "While it may well be that Defendants will ultimately succeed on the merits of the issue, the factual setting presented precludes summary judgment."
Eakeley said, "Plaintiffs are now on notice that they must marshal facts, not innuendo, at trial in order to prevail on these claims. They will be unable to meet that burden, and we welcome the opportunity at trial to further demonstrate the wisdom and thoughtfulness that went into the selection of PRINCO. PRINCO was selected only after extensive review and consideration of nine potential management firms. The evidence of the financial prudence of that decision is the exceptional record of the endowment's performance under the company's management."
As Princeton noted in its motion papers, PRINCO offered the foundation access to more diverse investment opportunities and a professional level of managerial expertise that would not otherwise have been available at a comparable cost. The foundation's corpus, valued at $561 million when the foundation retained PRINCO in 2004, is now worth more than $880 million -- even after providing nearly $50 million to support the Woodrow Wilson School graduate program during the same period.
4. Grants, in part, Princeton's motion to apply a six-year statute of limitations and/or an analogous equitable doctrine of "laches" (doctrines that preclude judicial review of old, stale claims) to preclude judicial review of most pre-1996 foundation spending -- spending that was plainly known, or with the exercise of reasonable diligence should have been known, to plaintiffs and yet went unquestioned by them for decades prior to the filing of this lawsuit, with resulting prejudice to Princeton's ability to defend against the claims.
Many of plaintiffs' claims challenged expenditures that were made by the foundation decades ago, some as early as 1965. While it has not admitted to any misspending, Princeton argued that the plaintiffs' claims related to five categories of these expenditures should be dismissed because plaintiffs' "unreasonable" delay is unjustified and has substantially prejudiced the University's ability to litigate the claims, as key witnesses are deceased and key records are no longer available. Moreover, plaintiffs William Robertson and Robert Halligan have served on the foundation board since 1974 and 1982, respectively, yet did not object to the foundation's spending until filing their lawsuit in 2002.
The court rejected plaintiffs' legal argument that the doctrine of laches should not be applied to charities, such as Princeton and the foundation, or to confidential or fiduciary relationships. The court then examined the record before it to determine whether the doctrine should be applied at this stage of the litigation to the five categories of expenditures at issue. The court granted Princeton's motion with regard to equipment depreciation. The court also ruled that with regard to any claim by plaintiffs to recover for building depreciation charged prior to fiscal year 1996, laches should apply because the court found that "building depreciation -- whatever it may have constituted -- was disclosed in every year." Finally, the court ruled that there were disputes of material fact that precluded it from determining at this stage of the litigation whether the doctrine applied to the other categories of expenditures at issue.
5. Grants Princeton's motion to strike plaintiffs' demand for a jury trial, which was filed by members of the Robertson family long after they initiated the litigation in July 2002, and which is inconsistent with the practice in equity court, where plaintiffs chose to bring this action.
More than two years after bringing suit, the plaintiffs added the request for a jury trial after amending their complaint. In its motion to strike this demand, Princeton noted that the plaintiffs are not entitled to a jury trial when their complaint alleges predominantly equitable claims and seeks equitable relief.
In his ruling, the judge agreed with Princeton, stating: that "New Jersey's judicial system gives primacy to equitable claims." He then observed that plaintiffs' legal claims arise out of the foundation's Certificate of Incorporation, which "leads to the inescapable conclusion that the legal claims are inextricably intertwined with [p]laintiffs' equitable claims." Consequently, the court granted defendants' motion, deciding to retain jurisdiction over this entire matter and not to empanel a jury.
6. Denies the Robertson family's "fiduciary duties motion" which had asked the court to declare that the University-appointed trustees are not entitled to the deference ordinarily granted to the judgment of trustees and directors.
Courts traditionally defer to the business judgments made by trustees and corporate directors, and make exceptions only when they might have been motivated by considerations other than the best interests of the corporation. In opposing plaintiffs' motion, the Princeton defendants pointed to the absence of such conflicts in this case.
The court agreed with Princeton that decisions made by the trustees of the Robertson Foundation will be reviewed under this deferential business judgment standard unless plaintiffs can show that a particular transaction was tainted by conflict of interest. Absent such a conflict of interest, Shuster ruled, plaintiffs will have to prove that the expenditures they challenge are completely beyond the scope of activities authorized by the foundation's Certificate of Incorporation. As he put it: "If Plaintiffs' true motive in the present matter is to have the burden shifted to Defendants … it would seem that such an attempt is misplaced."
In rejecting plaintiffs' claims, the court placed great significance on the fact that the foundation is not a private, family-controlled foundation but instead is what federal tax law calls a Type 1 "supporting organization" of Princeton. "Plaintiffs attempt to discount the significance of the [supporting organization] model, but any such attempt ignores the main purpose of supporting organizations -- to be responsible to the public charities they support." The court further emphasized the critical fact that the governance structure was adopted at the inception of the foundation, finding that "it was decided at the creation of the Foundation that the University would control the Foundation Board." Under these circumstances, the court concluded, the delegation of functions like bookkeeping and calculation of the foundation's annual expenditures was not negligent but "consistent with expectations and requirements of the Type 1 supporting organization model."
The court found the spending decisions plaintiffs challenged "fundamentally distinguishable from the line of cases" they asked the court to follow. "[S]o long as the course of action taken by the fiduciaries is consistent with the Foundation's mission, the Foundation benefits to an equal degree. In such instances, it can hardly be said that the University receives a benefit to the exclusion and detriment of the Foundation."
"This is a far-reaching and very positive opinion," Eakeley said. "Judge Shuster has ruled that the system the plaintiffs' parents and the University agreed upon in 1961 does not create an inherent conflict of interest. By doing so, he has affirmed the law and regulations that have given rise not only to the Robertson Foundation but also to more than 44,000 other supporting organizations nationwide. This ruling leaves plaintiffs with the heavy burden of proving, transaction-by-transaction, that any given decision by the foundation board was ultra vires (beyond the scope of activity permitted by the foundation's charter)."
7. Denies in large part the Robertson family's "spending and offsets motion," which asked for partial summary judgment with respect to specific historical spending that took place between 1965 and 2003. Plaintiffs' motion asked the court to declare that there can be no "offsets" that can be taken into consideration when calculating any ultimate damage award based upon any contention by the University that Princeton voluntarily "undercharged" the foundation for other items over the years.
Shuster denied virtually all of plaintiffs' motion seeking $17.5 million from the University relating to certain categories of alleged overcharges. The judge determined that plaintiffs had failed to sufficiently establish at this time any of the overcharges regarding four entire categories of claimed overcharges, including charges relating to the undergraduate program, faculty salaries and benefits, and equipment depreciation. For example, in rejecting plaintiffs' claims for summary judgment pertaining to $757,426 of alleged improper charges for "non-labor undergraduate program expenditures," Shuster noted that a critical portion of "[p]laintiffs' proofs, when viewed in a light most favorable to Defendants, amount[s] to nothing more than conjecture at this stage." Regarding the category of income transfers, plaintiffs sought summary judgment with regard to a $62,500 transfer, which the University admitted occurred in error; thus, the court granted summary judgment as to that amount.
In response to plaintiffs' motion, the University claimed that the court should consider the University's long course of conferring financial benefits on the foundation. Shuster agreed, ruling that the facts and circumstances pertaining to those financial benefits will be considered by the court in evaluating the overall equities of the case.
Download a copy (.pdf) of the decisions released Oct. 25, 2007, by New Jersey Superior Court Judge Neil Shuster.