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Pinkert v. Schwab Charitable Fund: Another Unsuccessful Donor-Advised Fund Lawsuit

July 23, 2021, 8:00 AM

A federal trial court in California recently dismissed a lawsuit brought by an unhappy donor to a donor-advised fund established at the Schwab Charitable Fund.

On June 17, 2021, a magistrate judge for the Federal District Court in the Northern District of California held in Pinkert v. Schwab Charitable Fund that a donor to a donor advised fund (DAF) lacked standing to sue the Schwab Charitable Fund, the sponsor of the donor’s DAF. Accordingly, without any consideration of the merits of the case, the court summarily dismissed all claims asserted by the donor.

This case comes on the heels of Fairbairn v. Fidelity Investments Charitable Gift Fund (N.D. Cal. Feb. 2021), where the claims brought by a donor to a DAF sponsored by Fidelity Investments Charitable Gift Fund (Fidelity Charitable Fund) were also dismissed, not based on lack of donor standing, but on the basis that the donor could not establish a “special relationship” with the sponsor of the DAF and a breach of a fiduciary duty by the sponsor.

In the Pinkert case, the donor sued, individually and on behalf of a putative class of all fund account holders, the Schwab Charitable Fund, a tax code Section 501(c)(3) public charity that sponsors DAFs, as well as Charles Schwab Corp., an affiliated for-profit financial services company. According to the complaint filed on Oct. 30, 2020, although the Schwab Charitable Fund “is legally independent of the Schwab Corporation, several members of the Board of Schwab Charitable are affiliated with the Schwab Corporation or worked there prior to working at Schwab Charitable. Schwab Corporation permits the Schwab Charitable Fund to use all of its trademarks, and virtually all of the service contracts Schwab Charitable has entered into for the provision of administrative, custodial, and brokerage services with the Schwab Corporation. In addition, every person working for Schwab Charitable is actually an employee of the Schwab Corporation.”

Pinkert argued that as a result of the close relationship between the two entities, the Schwab Charitable Fund does not act independently with a sole focus on advancing its charitable purpose, but instead aims to maximize profits of the Schwab Corporation by making imprudent investment decisions and paying grossly excessive administrative fees for the benefit of the Schwab Corp. According to Pinkert, these excess profits all come at the direct expense of the charitable purposes that the Schwab Charitable Fund was supposedly established to promote.

Specifically, Pinkert asserted that:

  • there are cheaper alternatives available for the index funds and the money-market funds (such as Vanguard) than the ones available to the DAFs that were invested through the Schwab Corporation;
  • the investment funds have classes of shares that are more expensive for smaller investors with less bargaining power (a retail price), and less expensive for institutional investors (a wholesale price), and the Schwab Charitable Fund selected the retail shares when it could have qualified for wholesale shares;
  • Schwab Charitable Fund could have used its market power to negotiate better rates for the custodial and brokerage services that the Schwab Corp. provided; and
  • Schwab Charitable Fund has benefited the Schwab Corporation at its detriment, leaving fewer dollars in DAFs that can be donated to charitable organizations.

On the basis of the foregoing, Pinkert sued the Schwab Charitable Fund for the breach of its fiduciary duty and the Schwab Corp. for aiding and abetting such breach. The Schwab Charitable Fund and the Schwab Corp. moved to dismiss the case solely on the ground that Pinkert lacked standing to bring this suit in the first instance because in contributing assets to his DAF, he gave up legal control of the assets.

In its opinion, the court initially addressed the nature of a DAF, citing tax code Section 4966(d)(2)(A), which defines a DAF 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 [here, Schwab Charitable Fund], 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.” Therefore, the very nature of a DAF is that the sponsor takes ownership and control over the contributed funds, with the donor only having advisory privileges.

Further, citing Section 170(f)(18), the court stated that a donor to a DAF can only claim an income tax deduction for a charitable contribution to a DAF if the donor makes a “completed gift” and “relinquishes dominion and control over the donated property.” Finally, the court noted that Schwab Charitable Fund advises its donor in writing as to the following:

  • their donations to the fund are irrevocable and unconditional,
  • the donations are subject to the exclusive legal authority and control of the DAF as to their use and distribution,
  • donors cannot make donations subject to any material restrictions or conditions (such as reserving a right to control or direct distributions or “any other condition that prevents Schwab Charitable from exercising exclusive legal control over the use of contributed assets to further its exempt purposes,” and
  • Schwab Charitable retains final authority over the distribution of all grants and may decline or modify a grant recommendation that is inconsistent with its program policies, or for any other reason.

After making it abundantly clear that the Schwab Charitable Fund had exclusive legal control and ownership over the assets contributed to a DAF, the court turned to the issue of whether the donor in this case had standing in the first instance to even bring a lawsuit. In addressing this issue, the court stated that to have standing under Article III of the U.S. Constitution, the 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. An injury for these purposes requires a plaintiff to have suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent.

Pinkert asserted that he had a contractual right and property interests that gave him standing because “he directs the donations and recommends how the assets are invested.” The court rejected this contention, stating that these donor privileges do not equate to a concrete protected interest, given Schwab Charitable Fund’s exclusive legal control over the donated assets. The court further noted that “[n]o case supports the conclusion that the right to designate investments (in pre-selected funds) and donations in a donor-advised fund is a contractual or contingent property interest that gives a donor Article III standing to challenge the fund’s choice of investment funds or administrative fees.”

In reliance on the recent DAF case of Fairbairn v. Fid. Invs. Charitable Gift Fund, Pinkert also asserted that he had a “special interest” in the DAF that conveys common-law standing to him under California law. The court found the Fairbairn case to be distinguishable because in that case, the donors asserted that the Fidelity Charitable Gift Fund broke specific promises that it made to the donors about how it would sell donated stock contributed to a DAF.

Accordingly, the donors in Fairbairn sued to enforce those promises through claims for misrepresentation and breach of contract, and did not sue based on a general claim for the mismanagement of a DAF. By contrast, the court stated that in the Pinkert case, “there are no broken promises” and the donor was claiming a breach of a fiduciary duty from the mismanagement of the DAF.

Despite the court in the Pinkert case indicating that the Fairbairn case was brought only on the basis of enforcing broken promises, the court in Fairbairn specifically noted that the “Fairbairns also contend that apart from the alleged promises, Fidelity Charitable Fund’s liquidation of donated WATT shares violated the duty of care Fidelity Charitable owed to them.” (Emphasis added.) Therefore, the court seemed to have been clear that the asserted breach by Fidelity Charitable Fund of its fiduciary duty care in Fairbairn was not based on any alleged promises made by Fidelity Charitable Fund.

Indeed, the court in Fairbairn indicated, without reference to any promises made to the donor, that if a “special relationship” between a donor and the sponsoring organization of a DAF can be established, the sponsoring organization could be liable to the donor for a breach of a fiduciary duty. Of course, as the Fairbairn case demonstrates, establishing a special relationship between a donor and a sponsoring organization of a DAF and a breach of a fiduciary duty owed by the sponsoring organization to the donor may present significant if not insurmountable challenges.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Richard L. Fox is a shareholder and attorney in the Philadelphia office of Buchanan Ingersoll & Rooney, PC, where he writes and speaks frequently on issues pertaining to philanthropic planning. Richard can be reached at (215) 665-3811 and richard.fox@bipc.com.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.

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