Posted May 2nd, 2022 in Top Stories, Legal Insights with Tags Nonprofits, Foundations, Private Foundations
Otto Bremer Trust Decision Offers Insights for Foundation Trustees
On Friday, April 29, 2022, Ramsey County District Court Judge Awsumb issued a decision in the highly publicized case brought by the Minnesota Attorney General’s Office seeking removal of the three Otto Bremer Trust Trustees.
The Attorney General sought removal of the Otto Bremer Trust Trustees based on eight legal theories. The Court agreed with the Attorney General on only one of those theories. One Trustee was removed for serious (and well-detailed) breaches of trust. In all other respects, the decision is a stunning win for the Otto Bremer Trust and the two Trustees left in charge of the Otto Bremer Trust. The Judge confirmed the Trustees had broad latitude, upheld all of their decisions that were challenged by the Attorney General, and left them in place to run the Otto Bremer Trust going forward.
For private foundation trustees, the order provides a wealth of broadly-applicable and important takeaways.
Otto Bremer Trust (OBT) is a private foundation created as a Trust in 1944. Its assets totaled $2B in 2020, 88% of which was Bremer Bank stock. OBT’s three Trustees have served as Trustees for decades, each having inherited their position from family members who served as Trustees before them. In 2014, the Trustees removed the long-time OBT Executive Director and eliminated the position entirely, drawing criticism from other local foundation leaders that OBT was not exhibiting good governance practices. In 2019, the Trustees sold a portion of the shares OBT held in Bremer Bank stock. Bremer Bank leaders saw the sale as a breach of the Trustees’ fiduciary duties and urged the Attorney General to investigate many of the OBT Trustees’ practices. An investigation and this litigation ensued.
The Court’s Order
- Trustee Compensation: The Attorney General alleged that fees the Trustees paid to themselves were excessive and unreasonable, and constituted a breach of fiduciary duty and an impermissible conflict of interest. The Court disagreed and held that the fees did not violate the Trustees’ fiduciary duties.
The Trustees paid themselves each a base fee of $353,307 in 2020. In addition, OBT paid Trustee Lipschultz and Reardon an additional $183,000 and $191,000 for investment services, respectively.
The Trust document written by Otto Bremer explicitly authorized the Trustees to compensate themselves for services up to 4% of the cash income of the Trust, to be divided among them as they choose. The Trustees’ payments never came close to 4% of the cash income of the Trust. The Judge concluded that the payment of the investment services fee and the trustee base fee were consistent with the Trust document and constituted reasonable compensation levels based on a third-party compensation study and prior Court approval of the fees. As such, the Judge concluded that the Trustees’ decision to pay themselves fees did not constitute a breach of trust or improper self-dealing.
- Governance Structure: The Attorney General alleged the governance structure of OBT, whereby the Trustees chose their own successors and remained in office for decades, constituted a breach of the duty of loyalty to the Trust. The Court disagreed and held that the selection of successor Trustees (including family members) was not improper because the Trust document explicitly allowed individual Trustees to choose their successors. The Court concluded that the OBT Trustees acted within their discretion to set up a governance structure where the three Trustees exercised virtually all power and decisions for OBT.
- Discretionary Grantmaking: The Attorney General alleged that OBT’s Trustee-discretion grantmaking outside the normal grantmaking process was improper because the process was not coordinated by OBT staff and grants were made to charities for which Trustees were Board members. The Court disagreed, calling the making of Trustee-discretion grants an acceptable enhancement to the OBT’s overall charitable giving process. The Court concluded that grantmaking through a Trustee-discretionary process did not constitute any breach of fiduciary duties.
- Conflicts of Interest: As mentioned above, the Attorney General argued that the Trustees’ use of discretionary grantmaking to benefit nonprofits for which they served as directors was a breach of their fiduciary duties. The Attorney General also argued that a contract approved by the Trustees with a company that employed the spouse of one Trustee was a blatant breach of fiduciary duty by the Trustees. The Court disagreed. The Court concluded that the process by which the Trustees disclosed the conflicts and made the other Trustees aware of their relationships was proper, even when the Trustees participated in the decision to approve a grant or contract for which they had a conflict. The Court felt OBT’s conflicts of interest policy, which required disclosure but did not prohibit voting, was adequate and properly followed.
- Grants to Nonprofits in Compliance with Trust Document: The Attorney General argued that several grants approved by the Trustees did not technically comply with the Trust document and that approval of the grants constituted a breach of fiduciary duties. The Court disagreed, explaining that the Trustees had broad discretion in interpreting the Trust requirements. The Court concluded that the grants, which complied with the intent (if not the literal reading) of the Trust, did not constitute a breach of trust or fiduciary duty.
- Investments in Private Funds: The Attorney General argued that the Trustees’ decision to invest in private investments was a breach of fiduciary duty because banking law made those investments questionable. The Court disagreed. The Court concluded that in the totality of the circumstances—because the Trustees had engaged world-class legal and investment advisors and consulted with the Federal Reserve regarding the investments—the Trustees’ actions were within their authority and did not violate the prudent investor rule.
- Controversial Sale of a Bank Stock: The Attorney General alleged that the Trustees’ decision to sell a portion of OBT’s Bremer Bank stock to a variety of out-state investment banks was an abuse of discretion and a breach of the Trustees’ duty to act in good faith. The Court disagreed.
Leading up to the sale in 2019, OBT and Bremer Bank were jointly considering a merger or sale of the Bank. Such a sale or merger would have given OBT more cash assets by liquidating the Bremer Bank shares held by OBT. When the Bank decided against such a sale or merger, the Trustees decided to go forward alone. The Trustees engaged sophisticated private equity counsel to find a purchaser for a portion of OBT’s stock in Bremer Bank. The Trustees made the sale in part to increase OBT’s cash so that OBT could make its required annual payout. The Court’s order also describes how the sale was intended to effectuate a governance takeover of the Bank by the Trustees. The Court felt the Trustees’ actions were proper, holding that the Trustees were within their rights under the Trust to pursue a sale of the OBT’s interests in the Bank. The Court even said the sale was a “good faith effort” by the Trustees “to protect and enhance the Trust.”
- Multiple Breaches of Trust Required Removal of Trustee: The Attorney General asked the Court to remove all three OBT Trustees for a variety of breaches of trust. Judge Awsumb concluded that only Trustee Brian Lipschultz engaged in a serious breach of trust, necessitating his removal.
The Court found that Trustee Lipschultz used OBT assets for personal purposes, including using OBT email to send messages related to his personal business, asking OBT staff to manage his family’s calendar and send personal packages. The Court also found that Trustee Lipschultz behaved improperly with the Bremer Bank President and a fellow Trustee. Trustee Lipschultz also bullied and threatened local nonprofit leaders with the loss of OBT grant funding when the leaders did not support OBT in its disputes with Bremer Bank leaders. The Court order says that the bullying and threats were so severe that the nonprofit, Junior Achievement, returned a $1.2M grant to OBT in protest during the pandemic when the nonprofit desperately needed the funding to offer programs.
The Court order states “Lipschultz has shown repeatedly that he cannot operate in a purely charitable manner and has allowed his own personal interests, animosity, enmity or vindictiveness to impact his decisions and behavior as a trustee of one of the region’s most important charitable institutions.”
The other two Trustees, Daniel Reardon and Charlotte Johnson, were not removed by the Court. They will continue to run OBT subject to a future proceeding to determine whether and how a third trustee will be appointed to replace Trustee Lipschultz.
Takeaways for Private Foundation Trustees
Within the 103-page order, there are many important and broadly-applicable takeaways for trustees of private foundations.
- Have a good conflict-of-interest policy and follow it. The Court approved grants and other transactions where there were clearly financial and non-financial conflicts of interest by the Trustees. The Trustees followed a conflict-of-interest policy the Court felt was reasonable and documented their adherence to the policy, even if the policy did not require abstention from voting.
- Seek out competitive bids and proposals for vendor services, including investment services. The Court criticized the Trustees for not bidding out the investment services provided by the Trustees to OBT.
- Engage and rely on experts when making potentially controversial decisions like selling a significant asset of the Trust. The Court deferred to the Trustee’s controversial decision to sell a substantial amount of Bremer Bank stock amid a fight with Bremer Bank because the Trustees relied on legal and investment experts in concluding that the sale was necessary and reasonable for the benefit of OBT and its nonprofit beneficiaries, and undertaken pursuant to a commercially reasonable process.
- Even minor use of the private foundation’s property for personal purposes by a Trustee is inexcusable. Trustees should never use the foundation’s equipment, email system, or staff for personal reasons. Not even a little bit.
- Accidental use of foundation property or staff for private purposes should be rectified. If a private foundation trustee accidentally uses the foundation’s property or staff for personal purposes, the trustee should repay the private foundation for the value of the personal services, use of equipment, and all of the costs associated with the mistake. Repayment should put the foundation in the position it would have been absent the personal use.
- Using grantmaking as a threat won’t be tolerated. Exercising one’s influence as a grantmaker by threatening grantees and acting without common and basic decency toward others in business transactions constitutes a breach of fiduciary duties and can result in the removal of a trustee.
Heidi Christianson is an attorney at Nilan Johnson Lewis PA in Minneapolis. She counsels private foundations on governance, tax, and other matters. She can be reached at 612.305.7698 or email@example.com.