Law Schools

School Sued For Allegedly Skimming Money From Deceased Donor Endowments To Law School

St. Mary's University allegedly taking law school endowments and diverting them to cover undergrad expenses.

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I had occasion to work on a lot of matters involving charities and foundations during my time as a practicing lawyer. In the course of that work, the thing that never failed to elicit my rage was an institution taking someone’s earmarked money and trying to convert it against the donor’s wishes. I remember representing a Trustee in a case where the rest of the Board was trying to take a Foundation created for the creation and maintenance of an art museum and throw the money at a bunch of decidedly non-artistic projects. I’ve also seen a school take a gift funding a student activity special to the alum and commandeer it for general purposes as soon as the donor died and couldn’t protect his gift. There’s something about the brazenness of disrespecting someone as soon as they die that always drew a visceral reaction and I always appreciated the folks I had to work with at the NYAG’s Charities Bureau who did the good work of enforcing these legacies whenever they could.

It doesn’t surprise me to hear allegations that a law school is involved in this sort of behavior. Or, technically, it’s the parent university accused of taking the funds away from a gift to the law school.

St. Mary’s University School of Law finds itself the center of a lawsuit brought by one of its professors outlining a years-long effort by the university to divert funds from an endowed professorship to cover general operating expenses.

The Castleberry Endowment was launched by a 1985 letter from a donor, Frank Scanio, Jr., with funds “devoted solely and exclusively” for paying a “senior professor teaching oil and gas at the School of Law of St. Mary’s University, a supplemental salary.” The gift also required the school to provide Scanio with proof of the professor’s compensation to guarantee that the endowment was not being used to short-change the academic’s base salary. In 2003, a supplemental letter added more funds to the endowment.

That seems fairly cut and dried. Yet, the current occupant of the endowed chair, Laura Burney, says the school informed her that they would be distributing the funds according to the following terms:

a) The University will apply “at least 50% from endowed funding for existing salary and benefits.”
b) The University can make an allocation to the professor of “up to 25% from endowed funding for an increase in salary and benefits above the range of compensation.”
c) The University can make an allocation to the professor of “up to 25% from endowed funding for the professor’s travel, research, and continuing education. The amount to support of travel research, and continuing education may be used to fund an existing allocation from the operating budget, and in appropriate cases, to supplement an existing budget. Should the endowed position holder request a course release, the resources may be applied for the hiring adjunct faculty.”

Is any of that in the documents creating the charitable trust? Burney says no. Worse, she thinks that these policies may have been in place for years before she assumed the chair and that these funds are being diverted to cover the school’s undergraduate budget in contravention of donor intent.

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How could a school think they could get away with this? According to an email that Burney cites in the complaint, the university informed her that it “had received an ‘oral agreement’ from the ‘benefactor’s son’ [Frank Scanio III] to allow the University to apply its three-bullet diversion policy ‘going forward’….”

Except that’s not how any of this works! These things aren’t handed down like titles of nobility — unless there’s some provision in the agreement that says it does, anyway. If the donor — and the donor alone — can’t be reached to authorize the changes, then all alterations have to be made by the courts. This is something lawyers understand, which is why Professor Burney cites a memo written by the law school’s Administration and Finance Dean to the university warning them that using restricted funds contrary to a donor’s intent could subject the University and its Board of Trustees to liability for breach of fiduciary duty.

Oh, and even if that weren’t the case…

On June 4, 2020, Professor Burney spoke to Mr. Scanio. During this conversation, Mr. Scanio informed her that President’s Mengler’s statements attributed to him in the email were false: He had not promised to change the gift and has no intention of agreeing to any changes.

Yikes.

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A local paper talked to Scanio about the lawsuit and he seems appropriately angered about the whole affair:

In a telephone interview, Scanio said he fully backs Burney’s lawsuit. He also said he wants an independent audit going all the way back to the beginning to determine how much of the time his father’s directives had been violated.

There are also a number of allegations about whether or not Professor Burney was improperly denied the chair earlier when the law school recommended her for it and the university balked, and while her argument is compelling, even if one took the university’s side on whether or not “senior professor” requires someone to be tenured or not, it has no bearing on the central issue: the gift says this money has to go to the professor in that seat and the university’s policy explicitly states that they aren’t intending to give it all to the professor in that seat.

They seem to be arguing that the instrument doesn’t require them to give 100 percent of the available funds in any given year though they still can’t use any of the money for anything but paying the professor, so it’s not clear what that argument gets them. The fact that the school apparently thought that the donor’s son needed to authorize changes to the gift is pretty persuasive evidence that they understood on some level that this wasn’t authorized.

The parties are still litigating and maybe the school will find a way of securing the court approval that they need to transform the donor’s original intent. But cases like this one are important because there just aren’t enough checks on institutions willing to trample on their obligations to the people who generously gave to them as soon as those donors pass away and the publicity around this should help inspire donors and the people who care about them to be vigilant with their gifts. There are folks out there who assume there’s no more oversight and no one is in a position to call them out on it. And it’s more than a little macabre.

(The full complaint is on the next page.)

HeadshotJoe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news. Joe also serves as a Managing Director at RPN Executive Search.

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