Citations
- 286 F. Supp. 3d 949
Full opinion text
JAMES D. PETERSON, District Judge
In 1980, the Melvin Cohen Foundation created a trust to "benefit or carry out the charitable, education[al,] and religious purposes" of defendant Minneapolis Jewish Federation. Dkt. 132-1, at 2. For many years, the Federation distributed funds from the trust without incident, but the relationship between the Federation and the current trustees-plaintiffs Maryjo Cohen, Emanuel Kallina, and Frederic Fransen-has become increasingly acrimonious in recent years, leading to this lawsuit in which each side is suing the other on numerous grounds. (For the remainder of the opinion the court will refer to the plaintiffs as "the Trustees" and to the defendant as "the Federation.")
Jurisdiction is present under 28 U.S.C. § 1332 because the Trustees and the Federation are citizens of different states and the amount in controversy is greater than $75,000. The parties are seeking damages as well as declaratory and injunctive relief regarding a variety of issues about the purposes of the trust and the relative authority of the Trustees and the Federation over the distribution of funds. Both sides are also asserting claims for breach of fiduciary duty.
The Trustees have filed a motion for summary judgment on all claims and counterclaims, with the exception of the Trustees' breach of fiduciary duty claims. Dkt. 119. The Federation is seeking summary judgment on all claims. Dkt. 129.
The Trustees' view of the case rests on a fundamental misunderstanding of their relationship with the Federation. The Trustees see the Federation as a "conduit" through which they may support the charities of their choice, so long as those charities are not inconsistent with the Federation's basic purposes, as the Trustees understand them. Dkt. 159, at 6, 19, 23-24. But that view is inconsistent with the trust agreement, trust law, and the federal regulations that govern the trust. Under those sources of authority, serving the Federation is the primary duty of the Trustees, a duty the Trustees have breached in many ways.
For these reasons and those explained below, the court concludes that: (1) the original trust agreement did not give the Trustees the right to direct the Federation to donate the trust's annual gift to particular charities; (2) the Trustees are not entitled to substitute a new beneficiary; (3) the Trustees were not entitled to amend the agreement to give themselves more authority at the expense of the Federation; and (4) the Trustees breached their fiduciary duty to the Federation by appointing a new trustee without seeking input from the Federation or otherwise attempting to choose a trustee who would act for the benefit of the Federation. Disputed facts preclude summary judgment on the claims whether: (1) the Federation failed to distribute the trust's gifts as promised in 2005, 2006, and 2007; (2) Cohen used funds from the trust to pay an employee for work that was unrelated to the trust; and (3) Kallina charged the trust for legal services that were unrelated to the trust. The court will grant summary judgment to the Trustees on the Federation's claim under the Wisconsin Prudent Investor Act because that claim is untimely.
Also before the court is the Federation's motion to compel discovery. Dkt. 178. The court will grant this motion to require the Trustees to produce unredacted copies of legal invoices and to allow limited depositions of Kallina and Patricia Ellenson.
UNDISPUTED FACTS
A. Preliminary issues
Before setting forth the undisputed facts, the court will resolve one dispute about the parties' proposed findings of facts and address some problems related to those submissions.
1. The Trustees' motion to strike the Federation's "second supplemental proposed findings of fact"
The court will grant the Trustees' motion to strike a new set of "supplemental" facts that the Federation submitted with its reply brief but without seeking court approval. Dkt. 172 and Dkt. 174. The parties had two opportunities to submit their own proposed findings of fact (once with each side's own motion for summary judgment and once in response to the opposing side's motion) and each side took advantage of both opportunities, along with submitting responses to the other side's multiple sets of proposed findings of fact. This court's summary judgment procedures do not allow parties to submit yet another round of proposed findings of fact with their reply brief.
The Federation's only justification for submitting new proposed findings of fact is that the Trustees submitted new declarations with their reply brief. But submitting evidence with a reply brief is not necessarily a violation of the court's procedures. For example, it is appropriate to submit new evidence in order to dispute evidence that the other side submitted with its opposition brief. The problem arises when a party makes new factual allegations that are not directly responsive to facts already in the case, as the Federation has done with its new supplemental facts. The court has not considered new, nonresponsive facts that either side submitted with its reply briefs, regardless whether those facts were included in new proposed findings of fact or simply new declarations.
2. Problems with the proposed findings of fact
The court also notes two problems with the proposed findings of fact. First, the Federation repeatedly cited evidence that did not support the particular proposed finding of fact at issue. E.g. , Dkt. 171, ¶¶ 44-49, 53, 64, 66, 74, 82, 119-20. After the Trustees pointed out the problem in their responses, the Federation did not acknowledge the mistake but instead provided a boilerplate response that the Trustees' response "raises no genuine dispute of proposed fact, but rather responds with arguments on the merits or facts that are not directly responsive to the proposed fact." Id. In most instances, the Federation would then provide a different citation for the original proposed fact.
That was not an appropriate response. If a party's cited evidence does not support a proposed fact, the other side is entitled to object and it is not appropriate for the party to disregard the objection and simply provide a new citation in reply without seeking a stipulation from the other side or permission from the court to make corrections. In some instances, the Trustees anticipated what the Federation meant to cite and responded accordingly. But the court disregarded proposed facts when the other side did not have a fair opportunity to dispute the underlying evidence.
Second, in its responses to the Trustees' proposed findings of fact, the Federation often raised boilerplate objections without explaining why they applied. In many instances, it was clear that the objection did not apply. For example, the Federation consistently objected to any proposed finding of fact that relied on Cohen's testimony on the ground that she did not have personal knowledge of the circumstances surrounding the creation of the trust, even when contemporaneous documents were also cited (sometimes the Federation's own documents) and even when the proposed fact had nothing to do with creation of the trust. E.g. , Dkt. 160, ¶ 69 (objecting on this ground to proposed finding of fact that cited contemporaneous letter to prove communication about trust's first annual gift to the Federation); id. ¶¶ 73, 78, 82, 84, 98, 102 (objecting on this ground to proposed facts about communications received from Federation).
In some instances, it was not even clear what the Federation's objection meant. For example, one boilerplate objection included the following language or something similar: "[the proposed fact is] disputed to the extent the proposed fact and cited evidence mischaracterize the document and statements contained therein."E.g. , Dkt. 160, ¶¶ 50, 108 and Dkt. 171, ¶¶ 25, 35-36, 54, 57. But the Federation did not explain how a particular proposed fact mischaracterized the evidence. See also Dkt. 160, ¶ 171 (objecting to proposed finding of fact about Maryjo Cohen's conduct and that cited Cohen's declaration on ground that "the cited evidence does not support the proposed fact with admissible evidence, but rather cites legal argument and characterization," without explaining basis for objection); id. ¶ 173 (objecting to proposed finding of fact that quoted Federation's own letter).
Although the court's procedures do not prohibit the use of boilerplate objections, the court discourages their use. When responding to proposed findings of fact, a party should consider carefully whether an objection applies and tailor its response to the particular proposed fact. The court disregarded objections to proposed findings of fact when the party failed to explain the grounds for the objection and the grounds were not otherwise clear.
B. Parties
Maryjo Cohen, Emanuel Kallina, and Frederic Fransen are trustees of the Melvin S. Cohen Trust for the Minneapolis Federation for Jewish Service. (When the trust was created, the Federation was called the Minneapolis Federation for Jewish Service rather than the Minneapolis Jewish Federation.) The Trustees are citizens of Wisconsin, Maryland, and Indiana, respectively.
The trust was created in 1980 through the execution of a trust agreement between the Cohen Foundation and the three initial trustees: Melvin Cohen, Gerald Schwartz, and Stephen Lieberman. Wisconsin is the situs of the trust and the location of its business office. Melvin Cohen was a trustee from 1981 until his death in 2008, when his daughter Maryjo replaced him. (The court will refer to Melvin Cohen by his full name and to Maryjo Cohen as simply "Cohen.") Emanuel Kallina and Frederic Fransen became trustees in August 2015 and November 2015, respectively. The trust currently has approximately $70 million in assets.
The Federation is a nonprofit corporation. Minnesota is the Federation's state of incorporation and the location of its principal place of business.
The Federation's articles of incorporation in effect in 1980 identified two "purposes and objects":
1. To plan with and coordinate Jewish philanthropic, educational and communal activities and agencies; to foster cooperation among all Jewish organizations in the Twin Cities Metropolitan area; to engage in philanthropic, cultural and other group activities which will contribute to the welfare of Jews; to coordinate fundraising activities for local, national and overseas Jewish causes; to raise, collect and distribute funds for the advancement of the welfare of Jews, either directly or through presently or hereafter established agencies; to cooperate with the United Way of Hennepin County and with other intersectarian and communal groups engaged in promoting the welfare of the Twin Cities Metropolitan community, to the end that the happiness, well-being and cultural life of the community may be enriched.
2. To receive, hold, invest, manage and disburse devises, bequests and gifts designated for the Federation's endowment fund or for any philanthropic fund under the control of the Federation; and to utilize the corpus and/or income of such bequests or gifts for charitable, religious or educational purposes in the Jewish or general communities which qualify as recipients of tax-deductible contributions under the United States Internal Revenue Code of 1954, as amended, and the applicable laws of the State of Minnesota.
As of 2006, the Federation broadened its purposes to include the following:
A. To serve as the central communal organization for the metropolitan Minneapolis Jewish Community;
B. By itself and in cooperation with other Jewish communal institutions, to preserve, enhance, and perpetuate Jewish identity locally, nationally, and through the world;
C. To foster and promote cooperation among and between Jewish organizations and communities throughout the Twin Cities metropolitan area;
D. To foster and promote understanding and cooperation between the Jewish and general communities;
E. By itself and in cooperation with other Jewish communal organizations, to plan, coordinate, and engage in Jewish philanthropic, educational, social, cultural, and other communal activities to preserve, enhance, and advance the welfare of Jews and Jewish communities wherever they may be;
F. To raise, collect, and distribute funds for the benefit and welfare of Jews and Jewish communities directly or through existing and future local, national, and overseas Jewish organizations and institutions; and
G. To cooperate with inter-sectarian and non-Jewish organizations promoting the goods and welfare of the general Twin Cities metropolitan community.
In addition to contributing to various causes directly related to the Jewish community, the Federation has contributed to Planned Parenthood, the Minnesota Center for Environmental Advocacy, Minnesota Public Radio, the University of Minnesota Foundation, Carlton College, and the Greater Twin Cities United Way. None of these contributions included funds from the trust.
C. Summary of the trust agreement
Under the trust agreement, the basic purpose of the trust is to "benefit or carry out the charitable, education[al,] and religious purposes" of the Federation. Dkt. 132-1, at 2. See also id. at 4 ("All such uses [of the trust] shall exclusively benefit or carry out the charitable, educational and religious purposes of the Federation...."). The agreement also expresses the settlor's intent that the trust qualify as a "supporting organization" under Section 509(a)(3) of the federal tax code. Id. at 2.
The agreement directs the Trustees to "distribute 'substantially all' ... of the net income of the trust each year for the support of the foregoing purposes of the Federation" and it allows the Trustees to designate "a particular function, activity, or grant program of the Federation, for the benefit of which the trust's annual distribution, or any designated portion of it, shall be applied." Id. at 4. If the Trustees do not designate "any particular use" for the annual distribution, the Federation may treat it as an unrestricted gift. The agreement also sets out a process for appointing successor trustees and for amending or terminating the trust. The court will discuss relevant provisions of the agreement in more detail in the court's analysis of the parties' claims.
D. Operation of the trust
1. 1981 to 2015
Beginning in 1981, the trust made an annual gift to the Federation. Each year, the trust would send the Federation a letter accompanied by a check. The Federation would then write checks to different recipients. The parties have highlighted certain incidents that they contend are pertinent to the issues in this case, particularly the intent of the settlor and the genesis of the underlying dispute.
In November 1981, Melvin Cohen wrote to then-trustee Lieberman about his intent to "send[ ] a check to the Federation ... with the usual instructions that the entire amount be dedicated to the Emergency Fund in Israel." Melvin Cohen also wrote that "some nominal sum might be carved out for another specific purpose, such as the Talmud Torah in Minneapolis." Dkt. 128-11.
In 1982, the trustees "request[ed]" that the Federation use a portion of the annual gift for the Torah Academy of Minneapolis, a Jewish lecture series at the University of Minnesota, and the Emergency Fund in Israel. Dkt. 128-28. The Federation agreed to comply with these requests.
In 1987, Melvin Cohen asked the Federation to use a portion of the annual gift for the National Workshop on Christian-Jewish Relations. The Federation agreed to make the donation.
In 1992, the trustees at the time "request[ed]" that the Federation use a portion of the annual gift for the Rachel Liba Cardozo Children's Foundation, which Melvin Cohen had created as a memorial to a family member who had died at a young age. In an internal memo, the Federation concluded that it could "[v]ery liberally justify the distribution" and it would "do whatever Mel Cohen wants," in part because "no one could talk Mel out of the recommendation and to attempt to do so would be counterproductive." Dkt. 128-34. The Federation distributed the money to the foundation as requested.
In 1997, Melvin Cohen wrote to the Federation that he was "most surprised" to learn that the trust was listed in the Federation's annual report as supporting a charity serving the Minneapolis community. He wrote that he believed that "all funds distributed to [the Federation], each year, are strictly for use in Israel." Dkt. 128-20, at 2. In response, the Federation wrote that its purpose was to "support activities for the 'Jewish community' wherever in the Jewish world these activities take place" and they suggested that the trust "earmark[ ]" particular contributions "for Israel." Dkt. 128-21. In another response, Melvin Cohen wrote, "as a suggestion only," that the Federation could create a category in its annual report called "Supporting Trusts With Funds Primarily Designated for Israel." Dkt. 128-22.
In 1998, the Federation donated money to Bridges for Peace-an organization devoted to improving relations between Christians and Jews-using funds from the trust and at Melvin Cohen's request. Dkt. 128-41. The Federation did not have a previous relationship with that organization.
In 1999, Melvin Cohen asked then-trustee Lieberman whether "we can direct up to $100,000 of our next remittance" for the Middle East Media & Research Institute (MEMRI), which Cohen stated "has effectively influenced the political debate and directed it to what should be of utmost importance viz., the intentions and motivations of the Arab side." Dkt. 128-43. The Federation informed Cohen that it determined that MEMRI was registered as a nonprofit corporation and the Federation would make the donation.
In 2002, Melvin Cohen asked the Federation to inform the trustees "of the ultimate distribution of the funds sent each year to the United Jewish Communities. While we know that presumably causes in Israel are the beneficiaries, we have no information as to what those causes may be." Dkt. 160, ¶ 58.
In 2004, Melvin Cohen "ask[ed]" that the Federation donate a specified portion of a $750,000 gift to MEMRI ($110,000), Bridges for Peace ($50,000), and the Torah Academy of Minnesota ($7,000). He also "ask[ed]" that the remaining portion be used for "apparent needs in Israel." Dkt. 132-12.
In 2011, the Federation agreed to an "emergency" contribution to MEMRI, using funds from the trust. Although the Federation stated that MEMRI "is not a beneficiary partner" of the Federation, the Federation agreed that "Israel is under siege, and in need of the tremendous work that MEMRI performs" and concluded that the donation was "within [the Federation's] mandate." Dkt. 128-26.
In 2013, the Trustees and the Federation had a dispute about then-trustee Harold Roitenberg's successor. The dispute was resolved by Roitenberg deciding to remain a trustee for the time being.
From 1981 until 2015, the Federation confirmed to the Trustees that it had honored every designation the Trustees made.
2. 2015 to the present
In March 2015, in accordance with a provision of the trust agreement, Roitenberg named Fransen as his potential successor, but Roitenberg did not step down at that time. Fransen did not have a relationship with the Federation and Roitenberg knew nothing about Fransen. Roitenberg chose Fransen because Cohen recommended him.
In November 2015, Cohen and Roitenberg provided a check on behalf of the trust to the Federation and designated for MEMRI. The Federation did not comply with the request to distribute the money on the ground that the Federation had "some questions" about the gift. Dkt. 160, ¶ 159.
During a November 24, 2015 telephone conference between the Trustees and Federation representatives, the parties discussed each side's relative authority to choose recipients for the trust's annual gift to the Federation. Without reaching agreement about the underlying dispute, the parties agreed to an in-person meeting in April 2016.
On November 30, 2015, Roitenberg informed Cohen's assistant that he was resigning. Cohen contacted Fransen to confirm that he would succeed Roitenberg as a trustee and to obtain approval for the distributions to the Federation, which were due that day. Cohen also spoke with Kallina to discuss designations for the trust. After that discussion, Cohen emailed Fransen with a list of proposed designations and Fransen approved the list in full.
The same day, the Trustees sent the Federation the trust's annual gift and a letter stating that the gift "should be distributed" to the various specified organizations in specified dollar amounts. Dkt. 133-25. Of the $2,425,000 designated, the Donors Trust, Inc. for the Jewish Education and Support Fund was to receive $1,693,500. That organization's website states that it is "the only fund committed to supporting and promoting the principles of liberty. We make grants to charities that do not rely on government funding but do promote the foundations of civil society: limited government, personal responsibility, and free enterprise." Dkt. 171, ¶ 90. The Donors Trust donor's guide states : "All grant recommendations are subject to approval by Donors Trust's Board of Directors (or its Officers acting on their behalf) and must be for grants to public charities that do not contradict Donors Trust's mission to promote liberty through limited government, personal responsibility, and free enterprise." Dkt. 161. Cohen is a libertarian and the account holder of the Jewish Education and Support Fund at Donors Trust.
In response to Cohen's letter, the Federation wrote a letter that included the following passage:
Some of your recommended distributions are for functions, activities or grant programs of the [Federation], and so we will of course make those distributions. Others are not but may be distributions consistent with the Federation's mission that the Federation is willing to make. The remaining funds will be distributed in accordance with the Federation's normal allocation process.
In a letter to the Federation dated December 9, 2015, Cohen stated that "[a]ll of the proposed distributions do in fact support both Jewish causes and the Federation's stated mission" and that the Federation "does not have the right or authority to alter the ... designated charities." Dkt. 128-67. She asked the Federation to make the distributions or discuss any questions with the Trustees.
In a letter to Cohen dated December 15, 2015, the Federation expressed its willingness to meet with the Trustees to resolve their differences. In the meantime, the Federation stated that it was "holding the funds received from the Trust in reserve pending resolution." Dkt. 128-68.
In a letter to the Federation dated December 17, 2015, Cohen asked the Federation to identify particular designated charities to which it objected and to explain each objection. In a letter to Cohen dated January 11, 2016, the Federation listed the charities it approved and those it rejected, but it did not give reasons, instead stating that it had "multiple and varied reasons" that it would discuss with the Trustees if they wanted. Dkt. 128-70.
After Cohen sent another letter explaining her understanding of the mission of each of the rejected charities, the Federation again asked for a meeting with the Trustees and stated its position that the Trustees do not have the right under the trust agreement to designate specific charities. It also explained its objections regarding each charity it rejected. In a letter dated February 2, 2016, Cohen wrote that she could not "comprehend [the Federation's] strained reading and interpretation of the English language." Dkt. 128-73. She asked the Federation to discuss all of the Trustees' designated charities at an upcoming Federation board meeting.
At the Federation's February 2016 board meeting, the board voted to have the trust's gift "held in reserve and not allocated to any beneficiaries until there is resolution of the issue concerning the relative authority of the Federation and the Trust to determine the allocation and the disagreements between the Federation and the Trust as to which organizations should receive the allocations." Dkt. 160, ¶ 189. In a letter dated February 19, 2016, the Federation informed the Trustees of this decision.
In February 2016, the Trustees voted to amend various provisions of the trust agreement, including the following:
• in Article IV, they added the sentence that a designation "may be made to any charity within the purpose of the Federation or the Federation's donor advised fund" and that the designation "need not be restricted to prior donee charities of the Federation";
• in Article VII, they removed any reference to a "Federation Trusteeship" and they removed the Federation's right to appoint a successor for that trusteeship when the outgoing trustee failed to choose one;
• in Article XI, they added a sentence that allows the Trustees to "elect" to become a private foundation; and
• in Article XI, they removed the requirement that amendments to the agreement be made "by unanimous agreement."
On April 19, 2016, the Trustees and three representatives of the Federation met in Eau Claire, Wisconsin. The Trustees did not tell the Federation that they had amended the trust agreement or that they were planning to sue to remove the Federation as the trust beneficiary. The parties did not reach an agreement at the meeting and this lawsuit followed.
In November 2016, the Trustees made their annual gift to the Federation, again designating specific charities and amounts for each charity. Again, the Federation decided to hold the funds in reserve pending resolution of the parties' dispute.
E. Trust finances
1. Trustees' investment strategy
The trust is "invested conservatively," mostly in treasury bills, certificates of deposit, and other fixed-interest investments. Dkt. 171, ¶ 39. Each year since 1981, the Trustees have provided the Federation the trust's financial statement, along with a copy of its income tax return and the Federation has acknowledged receiving this information. Dkt. 160, ¶¶ 76-79.
In April 2014, the Federation's chief financial officer analyzed the trust's gift history since 2011. He concluded that the "[t]he precipitous decline in the grant amounts is a function of the extremely conservative investment strategy followed by the Trust." Dkt. 160, ¶ 154. In a letter dated May 15, 2015, a lawyer for the Federation wrote that he "see[s] a need for a better diversification in the current investments of the Trust and a portfolio more likely to deliver income in amounts sufficient to make a minimum required distribution." Id. ¶ 152.
2. Patricia Ellenson salary
Patricia Ellenson provides accounting and other services for the trust and five other charitable organizations operated by the Cohen family. Fifty percent of Ellenson's compensation is allocated to the trust. In 2015, that amount was approximately $80,000.
After reviewing Ellenson's deposition testimony regarding the scope of her accounting work for the trust in 2015, the Federation's accounting expert concluded that the work was worth approximately $20,000. Ellenson testified in her deposition that she "do[es] everything" for the Cohen family, including paying their bills and driving Cohen on long trips, Dkt. 110 (Ellenson Dep. 230:1-23), but the Trustees have provided no evidence that Cohen has allocated any portion of Ellenson's salary to the personal errands that she performs for Cohen.
3. Legal services
In 2014, the trust hired Kallina's law firm to perform legal services. Since then, Kallina has billed the trust more than $200,000 in legal expenses. The law firm bills submitted to the trust including the following line items:
• 7/24/15 Review and modify letter to BSA.
• 7/27/15 Email to Pat and Maryjo regarding letter from BSA.
• 8/6/15 Meet with Emil multiple times regarding treatment of present holdings for Cohen Supporting Organizations and private foundations and needed research regarding creation of Limited Liability Company.
• 9/4/15 Review 2% de minimis exception to excess business holding rules and current holdings of Presto Foundation, L.E. Phillips Family Foundation and M.S. Cohen Foundation.
• 10/13/15 Review and read all documents in Outlook and F'Work regarding Melvin Cohen Supporting Organization and Boy Scouts Supporting Organization in preparation for discussion with Emil.
• 11/20/15 Review DAF agreement of L.E. Phillips Family Foundation.
• 2/3/16 Review excess business holding code and regulations; work on summary of excess business holding issues concerning various Cohen/Phillips supporting organizations and private foundations.
• 2/10/16 Address pending issues facing Phillips Foundation, Cohen BSA, Cohen Trust, Cohen Foundation, etc.; conversation with Darren; plan out strategy.
• 2/15/16 Work on memorandum analyzing excess business holding issues among the various Cohen tax-exempt entities.
• 2/25/16 Work on draft of excess business holdings memorandum.
• 4/5/16 Review emails, file and Guidestar regarding the 6 Cohen charitable organizations; work on excess business holdings memorandum.
• 4/11/16 Work on draft of memorandum summarizing excess business holding issues affecting the various Cohen/Phillips charities.
• 4/12/16 Review 2012, 2013, 2014 Form 990s for L.E. Phillips Family Foundation, M.S. Cohen Foundation, L.E. Phillips Boy Scout Camp Trust, Boy Scout Camp Trust under the Will of L.E. Phillips and Presto Foundation.
• 4/13/16 Draft review and revise excess business holdings memorandum regarding Cohen and Phillips tax-exempt organizations; multiple email exchanges with Pat Ellenson regarding M.S. Cohen Foundation, Presto Foundation and L.E. Phillips Scout Camp Trust organization documents; review Melvin S. Cohen Foundation 9-18-2015 resolutions ...second amendment to L.E. Philips Boy Scout Camp Trust Agreement and First & Second Amendment to same; review Presto Foundation 6-15-2015 resolutions, amended bylaws and pages 1 and 4 of articles of incorporation.
• 4/14/16 Draft review and revise excess business holdings memorandum regarding the Cohen and Phillips tax-exempt organizations; review email from Pat Ellenson regarding Presto Foundation and L.E. Phillips Family Foundation documents ...
• 4/16/16 Draft, review and revise excess business holdings memorandum regarding Cohen and Phillips tax-exempt organizations.
• 4/18/16 Email exchanges with Emil and Russ regarding excess business holdings memorandum regarding Cohen and Phillips tax-exempt organizations.
The trust paid for all of this legal work.
F. The Federation's handling of the trust's annual gifts
In a report prepared by an accounting firm hired by the Trustees, the firm reached the following conclusions: (1) from 2005 to 2007, the Federation failed to distribute funds as directed to the United Jewish Communities (UJC); (2) in 2006, the Federation used parts of the trust's annual gift to satisfy obligations to the UJC; (3) in 2002, 2008, and 2012, the Federation misclassified trust funds as "unrestricted;" and (4) from 2008 to 2011, the Federation pooled restricted and unrestricted funds.
In 2005, 2006, and 2007, the UJC confirmed that it received the dollar amount designated by the trustees.
MOTION FOR SUMMARY JUDGMENT
A. Overview of the claims.
Each side is asserting several claims, some of which are mirror images of claims asserted by the other side. Both sides ask the court to determine whether: (1) the Trustees have the authority under the original agreement to direct the Federation to distribute the trust's annual gift to particular charities; (2) the amended trust agreement is valid; and (3) Fransen was validly appointed as a trustee. Both sides are also suing each other for breach of fiduciary duty. Finally, the Trustees seek a modification of the trust agreement to substitute other organizations for the Federation and the Federation contends that the Trustees violated the Wisconsin Prudent Investor Act. The court will address each claim in turn.
B. Overview of the law
Three authorities are relevant to the parties' disputes: (1) the trust agreement itself; (2) federal law regulating the type of trust at issue in this case; and (3) the state law of trusts. Each of these sources helps inform the nature and extent of the duties the Trustees' owe the Federation. Because the Trustees repeatedly deny that they owe any duties to the Federation, it is important at the outset to explain why that view is incorrect.
1. Trust agreement
The trust agreement is titled "Melvin S. Cohen Trust for the Minneapolis Federation for Jewish Service." Dkt. 132, at 2 (emphasis added). The agreement states in multiple places that the purpose of the trust is to further the purposes of the Federation. Id. at 2, 4. The agreement also says that it cannot be amended in any way that "would alter the intention of the Donor that this trust be operated for the benefit of the Federation." Id. at 9-10. These provisions show that the Federation is not simply a conduit through which the Trustees can make donations to charities of their choosing.
2. Federal tax law
The requirement on the Trustees to act in the Federation's interest is emphasized in the relevant tax law. The agreement is clear that it is to be interpreted in light of "Section 509(a)(3) of the Code." E.g. , id. at 2 ("[I]t is the desire of the Donor to establish a charitable trust [that] mak[es] distributions ... in a manner qualifying the trust for recognition as a publicly supporting organization pursuant to Section 509(a)(3)."); id. at 3 ("[I]t is the intention of the Donor that this trust shall be 'operated in connection with,' as that term is defined in Section 509(a)(3) of the Code, the Minneapolis Federation for the Jewish Service, a publicly supported charitable organization."); id. at 10 ("[T]he Trustees shall make no amendment which would ... adversely affect the trust's qualification under Section 509(a)(3) of the Code.").
Section 509(a)(3) of the federal tax code sets forth requirements for qualifying as a "supporting organization," which is a type of public charity. Other examples of public charities include churches, schools, and hospitals. 26 U.S.C. § 509(a)(1).
To qualify as a supporting organization under § 509(a)(3), the organization must be "operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of" a different organization called a "publicly supported organization." 26 U.S.C. § 509(a)(3)(A). The implementing regulation states further than the supporting organization may not "pay over any part of its income to, or perform any service for, any organization other than those publicly supported organizations specified in its articles." 26 C.F.R. § 1.509(a)-4(c)(3). The parties agree that the trust is a "supporting organization" and the Federation is a "publicly supported organization" under § 509(a)(3).
A supporting organization is subject to one of three types of oversight by the supported organization. The supporting organization must be: (1) "operated, supervised, or controlled" by the supported organization; (2) "supervised or controlled in connection with" the supported organization; or (3) "operated in connection with" a supported organization. 26 U.S.C. § 509(a)(3)(B)(iii). The parties agree that the trust agreement in this case adopts the third option. Dkt. 132-1, at 3.
To be "operated in connection with" a supported organization, a supporting organization must "provide[ ] to each supported organization such information as the Secretary may require to ensure that such organization is responsive to the needs or demands of the supported organization." 26 U.S.C. § 509(a)(3)(f)(1)(A). The "responsiveness" requirement is set forth in 26 C.F.R. § 1.509(a)-4. The regulation identifies three ways it may be satisfied:
(A) One or more officers, directors, or trustees of the supporting organization are elected or appointed by the officers, directors, trustees, or membership of the supported organization;
(B) One or more members of the governing body of the supported organization are also officers, directors, or trustees of, or hold other important offices in, the supporting organization; or
(C) The officers, directors, or trustees of the supporting organization maintain a close and continuous working relationship with the officers, directors, or trustees of the supported organization.
26 C.F.R. § 1.509(a)-4(i)(3)(ii). The regulation also states that the supported organization must "have a significant voice in the investment policies of the supporting organization, the timing of grants, the manner of making grants, and the selection of grant recipients by such supporting organization, and in otherwise directing the use of the income or assets of the supporting organization." 26 C.F.R. § 1.509(a)-4(i)(3)(iii).
The regulation does not define the term "significant voice," but it provides an example of a situation that satisfies the requirement and an example that does not. In the example showing compliance, the supporting organization and supported organization have quarterly meetings
during which they discuss projected needs and ways in which [the supported organization] would like [the supporting organization] to use its income and invest its assets. Additionally, Trustee communicates regularly with that officer of [supported organization] regarding [the supporting organization's] investments and plans for distributions from [the supporting organization]. Trustee provides the officer of [supported organization] with quarterly investment statements, [other required information], and an annual accounting statement.
Id. In the example showing noncompliance, the supporting organization "makes annual cash payments to [the supported organization]. Once a year, Trustee sends to [the supported organization] the cash payment, [other required information], and an accounting statement. Trustee has no other communication with [the supported organization]." Id.
The obvious benefit of qualifying as a supporting organization (rather than a private foundation) is reduced government scrutiny and regulation. Polm Family Found., Inc. v. United States , 655 F.Supp.2d 125, 127 (D.D.C. 2009) (" Section 509(a)(3) organizations are exempted from private foundation status, and therefore excused from the extensive regulation of private foundations."). But the organization cannot avoid all oversight. The tradeoff is that the supporting organization accepts supervision by the supported organization. In other words, § 509(a)(3) rests on a premise that the IRS need not monitor the supporting organization as closely as it otherwise would because the supported organization will reign in the supporting organization if it tries to depart from the purpose of the trust. William F. Quarrie, Mable E. Quarrie & Margaret K. Quarrie v. Commissioner , 603 F.2d 1274, 1277-78 (7th Cir. 1979) ("Supporting organizations are ... excepted [from regulation] in so far as they are subject to the scrutiny of a public charity. The Treasury Regulations therefore provide that the supporting organization must be responsive to the needs of the public charity and intimately involved in its operations.").
Thus, § 509(a)(3) and § 1.509(a)-4 place important limitations on the discretion of the Trustees. These laws reinforce and emphasize the duties imposed on the Trustees in the trust agreement to serve the interests of the Federation.
3. Trust law
It is well established that "trustees have fiduciary duties to beneficiaries." Wisconsin Med. Soc'y, Inc. v. Morgan , 2010 WI 94, ¶ 66, 328 Wis. 2d 469, 503, 787 N.W.2d 22, 39. See also Wis. Stat. Ann. § 701.0801 ("Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with this chapter."). One of these is the duty of loyalty, which requires the fiduciary "to act solely for the benefit of the principal in all matters connected with the agency, even at the expense of the agent's own interests." Zastrow v. Journal Commc'ns, Inc. , 2006 WI 72, ¶ 31, 291 Wis. 2d 426, 446, 718 N.W.2d 51, 60 (internal quotations omitted). See also id. ¶ 28 ("A consistent facet of a fiduciary duty is the constraint on the fiduciary's discretion to act in his own self-interest because by accepting the obligation of a fiduciary he consciously sets another's interests before his own."); Matter of Sensenbrenner , 76 Wis. 2d 625, 635, 252 N.W.2d 47, 51 (1977) ("A trustee must ... exercise diligence, prudence, and absolute fidelity.") (internal quotations omitted); Uniform Trust Code § 802, Comment (2004) ("[T]he duty of loyalty [is] perhaps the most fundamental duty of the trustee.").
Flowing from the duty of loyalty is the duty of "fully disclosing to the beneficiary all information relevant to the beneficiary's interest." Zastrow , 2006 WI 72, at ¶ 29, 291 Wis.2d 426, 718 N.W.2d 51. See also Wis. Stat. Ann. § 701.0813(1) ("A trustee shall keep the distributees or permissible distributees of trust income or principal, and other qualified beneficiaries who so request, reasonably informed about the administration of the trust."); Van Der Puy v. Van Der Puy , 2009 WI App 27, ¶ 8, 316 Wis. 2d 412, 763 N.W.2d 559 ("A trustee who fails to make a full disclosure of material facts to a beneficiary or who personally profits from his or her role as a trustee breaches the trustee's duty of loyalty."). As will be discussed below, the Trustees' duty of loyalty and duty of disclosure play a key role in resolving the parties' disputes in this case.
The Trustees contend in their opening brief that they owe no fiduciary duty to the Federation because the Cohen Trust is a "charitable trust" and therefore does not have "definite beneficiaries." The trust is indeed a charitable trust, but like many charitable trusts, it has a beneficiary to which the Trustees owe duties. Morgan , 2010 WI 94, at ¶ 70, 328 Wis.2d 469, 787 N.W.2d 22 ("The existence of named beneficiaries is what transforms the Fund from money set aside for a purpose into a formal trust.").
Not surprisingly, in their reply brief, the Trustees drop their contention that they do not owe the Federation a fiduciary duty and they do not respond to the Federation's amply supported contention that it is a "qualified beneficiary" under Wis. Stat. § 701.0110 and that the Trustees owe duties to the Federation as a "supported organization" under federal tax law. In any event, because the trust agreement itself states that it is "for the benefit of the Federation," and refers to the Federation as the trust's "beneficiary," Dkt. 132-1, at 10, it makes little sense to contend that the Trustees have no fiduciary duty to the Federation.
With these basic principles in mind, the court turns to the particular issues debated by the parties.
C. The parties' relative authority over the distribution of funds
The parties agree that the Trustees must give the annual gift to the Federation, but they disagree about what must happen to the gift after that. The Trustees want a declaration and injunction that the Federation must distribute the trust's 2015 and 2016 gifts to the charities designated by the Trustees. The Federation wants a declaration that the trust agreement does not give the Trustees the right to designate funds to particular charities. The agreement is clear that the Federation is correct.
The parties recognize that a trust agreement is interpreted in accordance with general principles of contract law. The parties assume that Wisconsin law applies, so the court will do the same. FutureSource LLC v. Reuters Ltd. , 312 F.3d 281, 283 (7th Cir. 2002).
The objective is to determine the settlor's intent, but courts look to the agreement first to determine that intent. Matter of Estate of Furmanski , 196 Wis. 2d 210, 215, 538 N.W.2d 566, 568 (Ct. App. 1995). If the language of the agreement is unambiguous, it is controlling and "there is no need to look further to determine the [settlor's] actual intent." In re McGuire Marital Tr. , 2003 WI App 44, ¶ 10, 260 Wis. 2d 815, 824-25, 660 N.W.2d 308, 313.
1. Language of the agreement
The relevant provision in the trust states:
The Trustees may, in their discretion, designate in writing to the Federation their selection of a particular function, activity, or grant program of the Federation, for the benefit of which the trust's annual distribution, or any designated portion of it, shall be applied. Such designation, if any, need not be based on a recommendation of the Federation ....
Dkt. 132-1, at 4. This language resolves the dispute. The agreement gives the Trustees authority to select "a particular function, activity, or grant program of the Federation." It does not include the right to designate a particular charity.
The agreement does not define or list the Federation's functions, activities, and grant programs. But the Federation says that its "functions" are its purposes; Dkt. 171, ¶ 44; its "activities" are "things the Federation does itself to further its functions," such as conducting missions to Israel, operating the Harry Kay Leadership Institute and publishing "Minneapolis Jewish Life" magazine, id. ¶45; and its "grant programs" are programs in which it "fulfills its functions by granting funds to other organizations, or individuals, to carry out certain activities, including its Annual Campaign," id. ¶46.
The Trustees question the authority of the Federation's understanding of the terms, noting that the Federation was not involved in drafting the agreement and contending that the Federation's understanding has been inconsistent over the years. But despite all of these criticisms, the Trustees do not attempt to justify a contrary interpretation or otherwise challenge the substance of the Federation's interpretations. Construing the word "function" to mean purpose is also consistent with the settlor's stated intent in the agreement itself, which is to "benefit or carry out the charitable, education[al] and religious purposes of the Federation." Dkt. 132-1, at 2.
The Trustees contend that the agreement gives them the authority to choose "particular recipients," but there is no textual basis to support that view. The Trustees rely on the sentence in the agreement stating that their designations "need not be based on a recommendation of the Federation," but that sentence means only that the Trustees can choose any Federation "function, activity, or grant program" they want; it does not expand the Trustees'
authority to choose third-party charities.
Because the court has concluded that no reasonable reading of the agreement would support the Trustees' position, it is not necessary to consider any of the extrinsic evidence that the parties cite, such as the statements of Melvin Cohen. The Trustees ask the court to consider the extrinsic evidence, citing Wis. Stat. § 701.0103(27), which defines the "terms of a trust" to mean "the manifestation of the settlor's intent regarding a trust's provisions as expressed in the trust instrument or as may be established by other evidence that would be admissible in a judicial proceeding." But this provision does not purport to elevate the status of extrinsic evidence in the context of a trust agreement. Rather, it simply confirms the common law rules for interpreting trust agreements, directing courts to rely on the language of the agreement or "other evidence that would be admissible in a judicial proceeding." Because extrinsic evidence is not admissible in a judicial proceeding in the absence of an ambiguity, that evidence is not admissible in this case. Isbrandtsen Co. v. Johnson , 343 U.S. 779, 783, 72 S.Ct. 1011, 96 L.Ed. 1294 (1952) ("Statutes which invade the common law ... are to be read with a presumption favoring the retention of long-established and familiar principles, except when a statutory purpose to the contrary is evident.").
The Trustees make other contentions that simply are not relevant to the questions before the court. For example, the Trustees contend that the Federation's purposes are so broad that "anything goes." Dkt. 137, at 27. But the disputed designations involve particular charities not purposes, so it makes no difference in the context of this dispute how broad the Federation's purposes are.
2. Modification through course of conduct
Alternatively, the Trustees contend that the parties modified the agreement through their conduct to give the Trustees authority to direct the Federation to distribute the annual gift to particular charities. First, the trustees cite Wis. Stat. §§ 701.0412 and 701.0413, but both of those statutes relate to modification of a trust agreement by a court , not the parties, so those statutes do not apply to this claim. The Trustees cite no authority for the view that a court may modify the trust agreement under those statutes and make the modification retroactive.
The Trustees also cite Nelsen v. Farmers Mut. Auto. Ins. Co. , 4 Wis. 2d 36, 55, 90 N.W.2d 123, 133 (1958), which cited a treatise for the following standard to modify a contract: "Modification must be made by the contracting parties or someone duly authorized to modify, and one party to a contract cannot alter its terms without the assent of the other parties; the minds of the parties must meet as to the proposed modification." In a more recent Seventh Circuit opinion applying Wisconsin law, the court articulated a similar standard, stating that "[t]he existence of an agreement modifying a previous contract is established in the same way as any other contract" and that "[t]he acts relied upon to modify a prior contract must be unequivocal in character." Carnes Co. v. Stone Creek Mech., Inc. , 412 F.3d 845, 852-53 (7th Cir. 2005) (internal quotations omitted).
Neither side cites any authority in which this standard was applied to a trust agreement as the result of a course of conduct between the trustees and the beneficiary of the trust. As the Trustees point out in another context, the Federation is not a signatory to the trust agreement. Cf. Orth v. Wisconsin State Employees Union Counsel24 , 546 F.3d 868, 873-74 (7th Cir. 2008) ("The prevailing although not unanimous view is that the signatory parties can alter the contract ....") (emphasis added). Because the parties do not address that issue, the court will assume as the parties do that the common law standard for modification applies and that a "meeting of the minds" between the Trustees and the Federation was necessary for the modification to occur. Under that standard, no reasonable jury could find that the parties modified the agreement in the way that the Trustees suggest.
The Trustees point to various instances in which the Federation agreed to distribute at least part of the annual gift to particular charities. But if this shows that the agreement was modified at all, it only shows that the parties modified the agreement to allow the Trustees to recommend particular charities to the Federation. The Trustees point to no situation in which the Federation agreed to distribute a gift to a charity over the Federation's objection. In fact, in correspondence, the Trustees consistently referred to designations as "requests" and the Federation referred to the designations as "recommendation[s]." E.g. , Dkt. 128-28 and Dkt. 128-34. The Federation's own view is confirmed by its practice of researching charities with which it was unfamiliar before approving the designation. If the Federation was of the view that it was required to accept the Trustees' recommendation, there would have been no point for the Federation to do anything other than distribute the money.
In their opposition brief to the Federation's motion for summary judgment, the Trustees contend that the Federation "waived" its right to reject any of the Trustees' designations by consistently accepting them in the past. That is simply a repackaged version of the Trustees' modification argument and it relies on the same faulty premise that the Federation's conduct demonstrates a view that the Trustees had a right to designate any charity they wish. Accordingly, the court will deny the Trustees' motion for summary judgment on this issue and grant the Federation's summary judgment motion.
3. The Federation's authority to place funds in reserve
The remaining question as to this claim is whether the Federation had the authority to hold the trust's 2015 and 2016 gifts in reserve pending resolution of the parties' dispute. The Trustees say that the agreement required the Federation to return the gifts if it failed to distribute the funds as the Trustees directed. They cite the following sentence in Article XI: "In the event that the Federation ... is not then in existence or is unwilling or unable to accept the distribution... then the assets of this trust shall be distributed to an organization or organizations which are described in Section 501(c)(3) of the Code." Dkt. 132-1, at 10. The Trustees say that the Federation was "unwilling ... to accept the distribution," so the money should have gone back to the trust.
The Trustees' argument is not persuasive. The section of the agreement the Trustees cite addresses situations in which the agreement will be "terminat[ed]." It does not relate to disagreements between the Federation and the Trustees over what to do with a particular gift. And the agreement consistently uses the words "distribute" and "distribution" to refer to the act of the Trustees giving the gift to the Federation, not the Federation forwarding the funds to particular charities. E.g. , Dkt. 132-1, at 4 ("The Trustees shall distribute 'substantially all' ... of the net income of the trust each year ...."); id. (referring to "the trust's annual distribution"). Thus, the Federation was "willing ... to accept the distribution" and did so. The agreement does not tell the parties what to do when they disagree about whether each side has complied with the terms of the agreement and the Trustees do not cite any other authority that would have prohibited the Federation from placing the funds in reserve. Accordingly, the court concludes that the Trustees have failed to show that the Federation violated their rights as to this issue.
D. Trustees' authority to substitute a new organization for the Federation
The Trustees allege that the Federation has acted in ways that are so inconsistent with the purposes of the trust that another set of organizations should be substituted in its place. Although both sides moved for summary judgment on this claim, the Trustees say nothing about it in their opening brief. Regardless, the court need not decide whether the Trustees have forfeited their right to obtain summary judgment on this claim because the court concludes that the Federation is entitled to summary judgment.
In their brief in opposition to the Federation's motion for summary judgment, the Trustees again cite Wis. Stat. § 701.0412(1) :
The court may modify the administrative or dispositive terms of a trust or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. To the extent practicable, the court shall make the modification in accordance with the settlor's probable intention.
The Trustees identify two reasons that circumstances have changed in a way that make it appropriate to substitute new organizations for the Federation: (1) the Federation has refused to give the trust's annual gift to the charities designated by the Trustees; and (2) the Federation has broadened its purposes to include support for "non-Jewish" organizations. The Trustees' first ground for making a substitution fails because the court has rejected their claim that the Federation violated the trust agreement by refusing to distribute the trust's annual gifts to particular charities.
The Trustees' second ground fails as well. First, the trust agreement does not restrict the use of the money from the trust to "Jewish" organizations. In fact, apart from references to the name of the Federation, the word "Jewish" does not appear anywhere in the agreement. When the agreement refers to particular purposes of the trust it uses much more general language. E.g. , Dkt. 132-1, at 2-3 ("This trust is created and shall be operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, within the United States or any of its possessions."). The agreement does limit the trust to the purposes "of" the Federation, but the agreement does not place particular limitations on what those purposes must be or state that the Federation will forfeit gifts from the trust if the Federation changes its purposes.
Second, even if the court were to assume that the Federation could change its purposes in a way that would thwart the purposes of the trust, the Trustees have adduced no evidence that has occurred. Although it is undisputed that the Federation has expanded its purposes to include more types of charities, the Trustees are not alleging that the Federation has turned its back on any of the charities that it funded at the time the trust was created. As the Federation points out, if the Trustees did not agree with the purposes of particular charities that the Federation funds, the Trustees were free under the terms of the agreement to earmark gifts for particular purposes with which the Trustees agree. Accordingly, the court will grant the Federation's motion for summary judgment on this issue and deny the Trustees' motion.
E. Validity of first amended trust agreement
In February 2016, the Trustees a drafted a new version of the trust agreement. The Federation challenges the legality of both the process the Trustees used and the following substantive changes: (1) permitting the Trustees to designate particular charities to receive the annual gift; (2) removing the reference to the "Federation Trusteeship" and the Federation's right to appoint a new trustee when the outgoing trustee fails to do so; (3) permitting the Trustees to elect to become a private foundation; and (4) removing the requirement that the Trustees agree unanimously to amend the trust agreement. Both sides seek summary judgment on this claim.
The court is persuaded that both the process of the amendment and the substance of the changes both violated the trust agreement as construed in light of federal tax law and breached the Trustees' fiduciary duties to the Federation. As to process, it is undisputed that the Trustees drafted the amended agreement in secret, without consulting the Federation. That is inconsistent with the Trustees' duty under 26 C.F.R. § 1.509(a)-4 and trust law to keep the Federation informed. Wis. Stat. Ann. § 701.0813(1) ; Zastrow , 2006 WI 72, at ¶ 29, 291 Wis.2d 426, 718 N.W.2d 51.
As to substance, it is clear that the purpose and effect of most of the amendments in dispute are to undermine the Federation and limit its influence over the trust. The addition of language permitting the Trustees to designate particular charities is obviously the direct result of the parties' dispute in the case. The amendment gives the Trustees more control over the distribution of the annual gift at the expense of the Federation, essentially allowing the Trustees to bypass the Federation and prioritize their own wishes over the Federation's. As for removing the reference to the "Federation Trusteeship," the Federation's right to appoint a new trustee when the outgoing trustee fails to do so, and the requirement that Trustees agree unanimously to amend the trust agreement, the Trustees provide no justification for the amendments. But their purpo