Article Archives >> Lead Stories >> July 1-15, 2009
Foundation Exec Ordered
To Repay Excess Compensation
Court rules that contract to pay excess
compensation is void as a matter of public policy
An appellate court in Texas has affirmed a jury verdict ordering a private foundation executive to repay more than $5 million in excess compensation, but has reversed the award of more than $10 million in punitive damages. The state Court of Appeals has held that a contract to pay the grandson of the founders of the Carl B. and Florence E. King Foundation more than reasonable compensation would be void as against public policy. (Yeckel v. Abbott, Ct. of App. TX, Third Dist., No. 03-04-00713-CV, 6/4/09.)
The Foundation was founded in 1966 by oilman Carl King and his wife Florence. In 1971, their grandson Carl L. Yeckel was elected to the board, and in 1975 he became a fulltime employee at an annual salary of $24,000. He claimed he was recruited by a promise that he could expect an income that would be “equivalent to that in the business world.”
In 1984, he entered in to an agreement with his aunt, who was then President of the Foundation, to serve at a rate “as may be agreed upon,” with the expectation that he would serve until age 65, at which point he would be paid retirement pay for life equivalent to 75% of his average compensation of the prior year.
In 1993, Yeckel became President of the Foundation and the following year began to increase salaries for himself and the Foundation’s two other employees. In 1994, he recommended to the Board increases of 4%, plus possible merit increases up to 4%. One director questioned whether his salary, then $220,800, was already high compared to comparable foundations, but apparently nothing was done about it.
In subsequent years, Yeckel did not ask for approvals, and by 2002, his salary had increased to $974,978. The CFO was being paid $451,937, and the administrative assistant was being paid $141,622. At the time, the assets of the Foundation were about $37.6 million. Although the salaries were included in the 990-PF filed with the IRS, the Board never saw the filings. In 2002, the Foundation made grants of about $1.03 million and paid salaries and other human resource costs of about $2.6 million.
After a complaint by Yeckel’s sister, the state Attorney General sued Yeckel, members of the board, and the CFO for breach of fiduciary duty, conversion, and conspiracy to commit fraud in violation of the state Nonprofit Corporation Act. When the five members of the Board either resigned or were removed, the Foundation also joined in the suit as a plaintiff. Yeckel counterclaimed that he was entitled to his retirement pay at 75% of his final salary.
After a two-week trial in probate court, the jury found a breach of fiduciary duty and that the employment agreement had not been authorized by the Board. It found that the contract would require an unreasonable compensation that would impair the Foundation’s ability to perform its charitable public services. The Court declared the contract void. Yeckel appealed.
The Court of Appeals rejected a number of claims by Yeckel that the jury instructions were not correct and ruled that “a contract that requires the Foundation to pay Yeckel compensation in excess of reasonable compensation for services rendered is void as a matter of public policy. In addition, a contract is void where its enforcement would injure the public good by rewarding Yeckel for participating in fraudulent or illegal activity.”
It rejected the award of punitive damages, however, because it said that the Attorney General had not proved all the elements required under state law to impose such penalties.
YOU NEED TO KNOW
This kind of abuse is more possible, and possibly more prevalent, in small private family foundations that are not subject to as much public scrutiny as public charities. When the IRS did its recent compensation study, the results of which were announced in 2007, most of the violations involved private foundations, not public charities. (See Nonprofit Issues®, February 16, 2007.)
The excess benefits tax rules, which apply only to public charities, have provided a means by which a public charity can obtain a “rebuttable presumption” that salary is reasonable (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions”). The newest Form 990 specifically asks about the procedure for setting compensation. Probably most public charities that pay substantial salaries either now do or will follow the rules. The new Form 990 also asks whether all members of the Board have seen the form before it is filed.
Perhaps it is time to take steps like these to change the Form 990-PF to reduce the likelihood of abuse in the private foundation sector. If those two questions had been on the 990-PF during the 1990s, would this situation have been avoided?
Article Archives >> Lead Stories >> July 1-15, 2009
