Matter of Othmer

[*1] Matter of Othmer 2009 NY Slip Op 51935(U) [24 Misc 3d 1249(A)] Decided on September 11, 2009 Sur Ct, Kings County Johnson, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on September 11, 2009
Sur Ct, Kings County

In the Matter of the Application of POLYTECHNIC INSTITUTE OF NEW YORK UNIVERSITY, A Beneficiary under the Last Will and Testament of Mildred Othmer, Deceased,



1686/98



For the Petitioner

David G. Samuels, Esq.

Duval & Stachenfeld

101 Park Avenue, 11th Floor

New York, NY 10178

(212) 883-1700

For the Attorney General

Carl DiStefano, Esq.

Charities Bureau

120 Broadway

New York, NY 10271

(212) 416-6349

Diana A. Johnson, J.

This is a petition by the Polytechnic Institute of New York University for authorization to modify restrictions of its bequest under the Last Will and Testament of Mildred Othmer pursuant to EPTL § 8-1.1(c).

Mildred Othmer died on April 9, 1998. Her husband had predeceased her, dying on November 1, 1995. They had no children. Her sole distributee was a niece, Mary Donahoo Siena. Ms. Siena had two children. The gross estate was over $623,000,000.00.

Her will, dated August 8, 1988, was admitted to probate on December 30, 1998. Except for approximately $8,000,000 left to Ms. Siena, her children and other friends and relatives, the entire estate was left to various charities.

Polytechnic University, now Polytechnic Institute of New York University (hereinafter [*2]referred to as the "University") was a major beneficiary under her will. In ARTICLE ONE of the will, she left her residence to the University. In ARTICLE SEVEN of the will, she left her interest in her husband's patents to the University. In ARTICLE EIGHT of the will, she left $2,000,000 to the University, part of which was to endow the Othmer Distinguished Professorship of Chemical Engineering, and the balance of which was to either endow a number of Othmer Graduate Research Fellowships or to endow the Othmer Endowment Fund (the "Othmer Fund"). The will provided that the Othmer Fund was to be:

held either in perpetuity and the income to be used for general purposes, or in part or in whole for the construction or acquisition of a building to be called the Donald F. And Mildred Topp Othmer Building. Will, ARTICLE EIGHT(a).

Finally, she left 25% of her residuary estate to the Othmer Fund. Will, ARTICLE TEN(a).

The administration of the Mildred Othmer estate was concluded and the account of the executors judicially settled by decree entered on June 17, 2003. In total, the University received over $130,0000, of which approximately $82,000,000 was held in the Othmer Fund.

The First Cy Pres Proceeding

In 2000, the University undertook significant upgrades to its plant and infrastructure. The Othmer bequest in 1998 fueled a successful capital campaign, concluded in 2001, which resulted in the transformation of the University from a commuter to a residential university. As part of its plan, the University constructed a new residence hall, academic and athletic facilities and various improvements to its physical plant. To fund these improvements, the University obtained a $90,000,000 loan from the New York City Industrial Development Agency, secured by a bond (the "IDA bond"). Under the terms of the IDA bond, the University was required to earn sufficient revenues to maintain a debt coverage ration of 1:10. In addition, the University agreed to maintain cash or unrestricted quasi-endowment investments equal to at least $15,000,000. After 2006, the University was required to maintain cash or unrestricted assets of $20,000,000.

Less than a year after receiving the funds, the University's financial affairs were negatively impacted by the aftermath of the terrorist attack on September 11, 2001, the dot.com bust in 2001, and concerns about information technology jobs being shifted off shore. The result was two-fold. First, there was a decrease in income generated by the endowment. Second, there was a downturn in enrollment, with the result that the University's revenues and reserves were in danger of falling below the requirements of the IDA bond.

In addition, the losses threatened the University's authority to offer federal scholarships and loans under Title IV of the Higher Education Act of 1965, Pub. L. No. 89-329, 79 Stat 1219 ("Title IV"). Under Title IV, Part B, as amended by Pub. L. No. 102-325 and codified at 20 USC § 1070 et seq., and the regulations issued thereunder, 34 CFR Part 662, the Department of Education administers Federal Family Education Loan Programs, whereby eligible lenders make guaranteed loans on favorable terms to students or parents to help finance student education. The loans are typically guaranteed by state or private agencies and, ultimately, by the government. See Pelfrey v Educational Credit Management Corp., 71 F Supp2d 1162, 1163 (N.D. Ala 1999). Federal Family Education Loan programs include such basic educational assistance programs as Federal Pell Grants (20 USC 1070), Federal Stafford Loans, Federal Supplemental Loans for [*3]Students, Federal PLUS loans (20 USC 1078-2) and Federal Perkins Loans. 20 USC 1087-aa.

In order to participate in the programs, the University must meet certain financial standards. 20 USC 1099c (c). Federal regulations require the University to meet a composite score of at least 1.5, based upon revenues and assets. As a result of its financial reverses, the University had to show in 2006 either: (1) a surplus of $10,000.000.00 routinely, (2) an increase unrestricted funds by $10,000,000.00 or (3) an increase temporarily restricted funds by $10,000,000.00 to satisfy the 1.5 composite score.

The University attempted to meet the financial crises by reducing expenses and freezing staffing and salary, but that this was not sufficient to meet the requirements of either the IDA bond or Title IV composite score. In addition, the University was required to repay over $2,000,000.00 in accounts/payable in July, 2005. The University projected that it would run a cash deficit of approximately $6,000,000.00 in fiscal year 2005/06 and, based on its projections, the University was expected to run out of cash by April, 2006, and incur a shortfall of $6,000,000.00 by June, 2006.

To meet its dire needs, the University petitioned for cy pres relief to use $13,400,000 of the Othmer Endowment Fund to meet bond covenants and Title IV composit scores for obtaining financial aid. The University asked that $8,400,000.00 in the Othmer Endowment Fund be moved from permanently restricted to temporarily restricted funds. Over the next three years, funds would be released from temporarily restricted to unrestricted. Additionally, the University requested that $5,000,000 be moved from permanently restricted to unrestricted funds

The transfer would be an accounting transaction to increase the temporary restricted and unrestricted funds without depleting the funds. The funds obtained from the Othmer Fund would remain in the investment portfolio and not be expended. They would be added to the existing University's current unrestricted funds of $15,000,000.00 to meet the requirements of the IDA bond and Title IV until 2030. The total, $13,400,000, would be returned to the Othmer Fund by 2030.

The Attorney General reviewed the plan and consented to the withdrawal of $13,400,000 from the Othmer Fund to unrestricted and temporarily restricted funds. Based on the University's showing of need and the Attorney General's consent, the application for cy pres relief was granted. Matter of Othmer (Polytechnic University), 12 Misc 3d 414 (Sur Ct, Kings County 2006).

The Current Cy Pres Proceeding

In June, 2009, the University petitioned to invade the endowed fund further. The petition states that the University has drawn down $11,464,000 of the $13,400,000 authorized in the previous cy pres proceeding. The University has experienced an increase in enrollment and revenue. However, it suffered substantial overall losses in its portfolio as a result of the financial dislocation in virtually all investments. The University has taken steps to meet the problem. It refinanced a number of the IDA bonds; it decreased spending and became affiliated with New York University.

Nonetheless, the University states that as a result of losses in the financial meltdown of 2008, the value of its restricted funds, primarily the Othmer Fund, decreased from approximately $147,000,000 as of June of 2007 to less than $85,000,000 at the current time. Unless the University is able to transfer at least $38,000,000 from restricted to unrestricted funds over the [*4]next three years, it will be out of compliance with Title IV and IDA bond coverage rations. The refinanced bonds require a debt coverage ration of 1.0 in 2009 and 2010 and 1.05 in 2011. The maximum annual debt service is approximately $5,750,000. None of the above can be achieved in the short run without cy pres relief. In the long run, the University is confident that its recent affiliation with New York University will increase enrollment and revenues.

The University proposes to move $38,000,000 in the Othmer Fund from permanently restricted to unrestricted funds, over a three year period, including at least $30,000,000 during the fiscal year ending June 30, 2009. The amount is caculated based upon the additional unrestricted revenue needed to achieve the Title IV ratio of 1.5. Over the next three years, the $38,000,000 would be released from permanently restricted to unrestricted to satisfy the Title IV requirements and to also satisfy the IDA bond debt coverage requirement.

As with the prior application, the transaction will increase the University's unrestricted assets without expenditure of funds. The funds so reclassified will remain in the investment portfolio as unrestricted funds. Any amounts which constitute assets which are released from the Othmer Fund will be returned in the future and, in no event, later than 2036.

Discussion

EPTL 8-1.1( c) provides that,

Whenever it appears to such court that circumstances have so changed since the execution of an instrument making a disposition for religious, charitable, educational or benevolent purposes as to render impracticable or impossible a literal compliance with the terms of such disposition, the court may, on application of the trustee or of the person having custody of the property subject to the disposition and on such notice as the court may direct, make an order or decree directing that such disposition be administered and applied in such manner as in the judgment of the court will most effectively accomplish its general purposes, free from any specific restriction, limitation or direction contained therein; provided, however, that any such order or decree is effective only with the consent of the creator of the disposition if he is living.

EPTL 8-1.1 is a codification of the doctrine of cy pres, which provides that where the court can discern a general charitable intent, the court may ensure that the charitable trust created when property is given in trust for a particular charitable purpose will not fail if it becomes impossible or impractical to fulfill the particular purposes. Instead, the court will fashion relief so that the charitable trust is applied to a similar charitable purpose. The rationale behind the doctrine of cy pres is that there is a public policy in favor of upholding gifts for charitable purposes. To this end, "although the testator intended that the property should be applied to a particular charitable purpose named by him, yet he had a more general intention to devote the property to charitable purposes. The testator would presumably have desired that the property should be applied to purposes as nearly as may be like the purposes stated by him rather than that the trust should fail altogether." (IVA Scott on Trusts [4th Ed] § 399 at 476).

EPTL 8-1.1 governs "charitable dispositions", whether in trust or by outright disposition to charities. Lefkowitz v Lebensfeld, 68 AD2d 488 (1st Dept 1979), affd 51 NY2d 442 (1980). The statute gives the surrogate's court jurisdiction to hear such applications where the trust is established by will. EPTL 8-1.1(c)(1). The courts have required the charity to establish three conditions before applying the doctrine: (1) that the gift or trust is charitable in nature; (2) that [*5]the donor demonstrated a general, rather than a specific, charitable intent; and (3) that circumstances have changed subsequent to the gift so that literal compliance with the restriction is impossible or impracticable. Matter of Wilson, 59 NY2d 461 (1983); Matter of Post, 2 AD3d 1091 (3d Dept 2003).

Some of these issues were raised and determined in the prior cy pres proceeding. Matter of Othmer (Polytechnic University), 12 Misc 3d 4114 (Sur Ct, Kings County 2006). To the extent that these factual issues are identical to the issues in the current cy pres proceeding and the parties to this proceeding had an opportunity to be heard in the prior proceeding, the doctrine of collateral estoppel applies and there is no need to re-litigate them. Matter of Othmer (Long Island College Hospital), 12 Misc 3d 919 (Sur Ct, Kings County 2006).

The doctrine of collateral estoppel bars re-litigation of factual issues that have been adjudicated by a prior, valid, final judgment between the parties. 9 CW2d § 63:445 at 398. Before the collateral estoppel can be found, it is necessary to show that the issue on which preclusion is sought is identical with the issue in the prior proceeding, that the issue was necessarily determined in the prior proceeding and that the litigant who will be held precluded in the present proceeding had a full and fair opportunity to litigate the issue doctrine. Kret v Brookdale Hosp. Med. Ctr., 61 NY2d 861 (1984); Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640 (1993); Gilberg v Barbieri, 53 NY2d 285 (1981).

In the prior cy pres proceeding, this Court found that the gift to the University was charitable in nature and that the donor had a general, rather than a specific, charitable intent. Matter of Othmer (Polytechnic University), supra. The Attorney General, charged with protecting the indefinite public interest in charitable bequests, appeared in the prior proceeding and had a full opportunity to litigate the issues. Accordingly, the prior findings that the trust was charitable in nature and that the donor demonstrated a general charitable intent are binding upon the parties under the doctrine of collateral estoppel. People v Trans World Airlines, Inc., 171 AD2d 76 (1st Dept 1991).

This leaves only the third requirement, that circumstances have changed that threatened to frustrate the original purpose of the gift prong of the test. Matter of Wilson, 59 NY2d 461 (1983); Matter of Post, 2 AD3d 1091 (3d Dept 2003); Matter of Haskett, 4 Misc 2d 1065 (Sur Ct Westchester County 1957); Matter of Dean, 167 Misc 238 (Sur Ct Westchester County 1938). The proof of this is particular to each application for cy pres relief and collateral estoppel does not apply.

In the instant case, the change of circumstances has been adequately described in the petition. The testator could not have foreseen the economic upheaval resulting in the financial meltdown of virtually every categories of financial investments as a result of the sub-prime mortgage crises and the emergency conditions that followed. The loss in value of the University's endowment is severe, both from the resulting drop in endowment valuations and income. The record reveals that the University's portfolio, the majority of which is contained in the Othmer Fund, has decreased from approximately $147,000,000 as of June, 2007, to less than $85,000,000 at the current time.

Unless the University is able to transfer at least $38,000,000 from "restricted" to "unrestricted" status over the next three fiscal years, it will be out of compliance with Title IV and IDA bond coverage ratios. The inability to offer these financial inducements to its projected [*6]students threatens the ability of the University to attract a sufficient student body, jeopardizing its current financial standing as well as the ability of the University to fulfill its educational purposes.

The University has attempted to meet its financial challenges by reducing expenses and entering into an affiliation with New York University. However, this effort will not alleviate the immediate crisis. To meet the covenants under the IDA bond as well as its obligations under federal law, the University proposes to transfer at least $38,000,000 from its restricted fund to unrestricted funds over the next three years to remain in compliance with Title IV and IDA bond debt coverage ratios. If the University is found in breach of the IDA bond requirements or Title IV composite score, the primary intent of the bequest will become impossible or impractical to achieve.

There is no question but that the testator's charitable intentions would be frustrated if Polytechnic University was forced to suspend operations because of its inability to meet the requirements under title IV and its bond covenants. As the University notes, the testator's husband, Donald Othmer, was a member of the faculty. The testator and her husband were part of the University community from the 1930's until their deaths.They were deeply involved with the educational mission of the University. They contributed to the welfare of the University in many ways, from paying for renovations from their own funds to giving personal financial assistance to students. It is inconceivable that they would have wanted the educational mission fo the University to be frustrated because of its current situation.

The conditions for applying cy pres having been met, it becomes the obligation of the Court to ensure that the trust is administered and applied in such manner, as in the judgment of the Court, most closely approximates the intent of the testator. Matter of Wilson, 87 AD2d 98 (3d Dept 1982), affd 59 NY2d 461 (1983); see also Matter of Randall, 68 Misc 2d 119 (Sur Ct NY County 1971), affd 38 AD2d 1012 (1972).

The University emphasizes that the proposed modifications to the Othmer Endowment Fund does not envision the expenditure of the funds transferred. The University seeks only to reclassify the $38,000,000. It is a bookkeeping transaction designed to increase unrestricted funds to meet federal and loan mandates. It is expected that the $38,000,000 will be reclassified as restricted funds when no longer required to meet the requirements of Title IV and the IDA bond, or by 2036 at the latest.

The Attorney General has reviewed the proposal and agrees to the proposed modification.

Based on the above, the Court finds that the University has meet the requirements for the application of the cy pres doctrine codified in EPTL 9-1.1. For that reason, and also in reliance on the Attorney General's support of the relief requested, the Court grants the University's petition for cy pres relief in its entirety.

Submit decree.

/s/

Hon. Diana A. Johnson

Surrogate [*7]

Dated: September 11, 2009