Illinois Fiduciary Case: Citizens National Bank v. Kids Hope United

January 14, 2010

Citizens National Bank of Paris (the bank) was the trustee of two charitable trusts benefiting Edgar County Children’s Home (ECCH). ECCH merged with Hudelson Baptist Children’s Home (Hudelson) in 2003. The merged charities would later become Kids Hope United (Kids Hope). The bank petitioned the circuit court of Edgar County, Ill., to determine whether the charitable gifts to ECCH lapsed upon the merger of ECCH and Kids Hope.

La Fern Blackman died in 1967. Blackman’s will directed that after the death of her sister, Ettoile Davis, her farmland was to be held in trust, with 75% of the trust income to be paid to ECCH and the remaining 25% paid to a local cemetery. Blackman’s will provided further that in the event either or both of the named charities “should cease to operate or exist,” then the trustee was to distribute the income to another charity selected by the trustee.

Davis died in 1971. Like her sister’s will, Davis’ will directed 75% of the income from her trust to ECCH and the remaining 25% to the same local cemetery. However, the alternate distribution clause in Davis’ will provided that in the event either named charity “shall cease to function in its present capacity,” then the portion of the trust that would have gone to ECCH or the cemetery would instead be divided among three other local charities designated in Davis’ will.

ECCH was incorporated in Illinois in 1898, and it maintained an orphanage for Edgar County children on Eads Avenue in Paris, Ill. In 1980, ECCH expanded its mission statewide and offered its health, welfare and education services to children throughout Illinois. ECCH maintained an endowment fund to hold its property, which included the original institution on Eads Avenue.

In 2003, ECCH merged with Hudelson. In the organizations’ merger agreement, Hudelson guaranteed that it would continue ECCH’s mission of working with Edgar County children as long as it had the resources to do so. The property held by ECCH’s endowment fund was transferred to Hudelson, which subsequently changed its named to Kids Hope. Kids Hope closed the Eads Avenue facility in 2006.

In the bank’s petition for instructions, it noted that following ECCH’s merger with Hudelson, that ECCH ceased to exist. The bank sought confirmation that ECCH ceased to exist for purposes of the Blackman trust and direction on how the income payable to ECCH should be distributed under the cy pres doctrine. Likewise, the bank sought confirmation that ECCH had ceased to exist under the terms of the Davis trust so that it could distribute the net income to the remainder charitable beneficiaries Davis designated in her will.

The bank and Kids Hope filed cross motions for summary judgment. The circuit court granted the bank’s motion, finding that ECCH ceased to exist following the merger with Hudelson. The court directed the bank to distribute the charitable assets according to each trust’s alternate distribution provisions. The appellate court reversed the circuit court’s judgment noting that a charity does not cease to exist for the purposes of receiving charitable bequests unless the successor charity cannot carry out the purposes of the original bequest. The Illinois Supreme Court agreed to hear the bank’s appeal.

When interpreting trusts in Illinois, the court’s goal is to determine the settlor’s intent. The court considers the plain and ordinary meaning of the language used in the trust instrument. Charitable gifts are favored by the courts and are permitted presumptions consistent with the trust’s language in order to uphold a charitable bequest.

The court acknowledged that ECCH ceased to exist as a separate entity when it merged with Kids Hope, but the court stated that the important issue was whether Kids Hope was suited to carry on the charitable purposes intended by the donors. The court noted that nothing in the restrictive condition in Blackman’s will showed that she intended that ECCH needed to maintain a separate corporate existence in order to prevent the charitable bequest from lapsing. The court noted that the ECCH-Kids Hope merger agreement provided that Kids Hope would continue ECCH’s mission to serve the children in Edgar Country so long as it had the finances to do so. The court found that following the merger, Kids Hope was still able to carry out the purposes of Blackman’s bequest.

Accordingly, since Kids Hope was able to carry out the purposes of Blackman’s bequest, the court found that ECCH did not “cease to operate or exist” when it merged with Kids Hope. Furthermore, the court rejected the bank’s argument that the closing of the Eads Avenue facility was evidence that ECCH ceased to operate or exist. The court noted that Blackman’s will made no mention of the Eads Avenue facility remaining open.

With regard to the requirement in Davis’ will concerning whether ECCH had ceased to function in its “present capacity,” the court found it impossible to determine whether Kids Hope’s ongoing activities were equivalent to ECCH’s activities at the time Davis’ will was executed in 1968. The court indicated that a factual investigation and determination would need to be made in order to determine whether Kids Hope’s current activities were materially the same as ECCH’s activities in 1968. The court affirmed the appellate court’s reversal of the circuit court’s grant of summary judgment in favor of the bank with respect to the Davis trust, and ordered additional proceedings related thereto.

In a dissenting opinion, Justice Karmeier maintained that the court’s majority employed a strained construction of the language of the Blackman and Davis wills in order to uphold the charitable bequests to Kids Hope. Justice Karmeier faulted the majority for focusing on whether Kids Hope had the ability and was suited to serve the children of Edgar County, while not considering whether it actually does so.

The justice was concerned that Blackman and Davis clearly intended to benefit charities in the communities where they lived, and not necessarily the communities throughout Illinois served by Kids Hope. Furthermore, Justice Karmeier believed that the transaction costs of preparing charitable bequests would increase as attorneys spent additional time drafting definitions and providing for multiple contingencies in order to ensure that the donors’ charitable intent is implemented.

Justice Karmeier offers good counsel on drafting as every attorney should take extra caution when drafting charitable bequests. Charitable organizations may last for many years, merge with other charities, and the charitable purposes they serve may evolve over time. Bequests to charities should reflect the donor’s intentions as clearly as possible, and drafting attorneys should include clear and definite provisions for alternate distribution in the event a charity “ceases to operate or exist.” The court’s opinion in Kids Hope shows that a court may interpret a charitable bequest in a way unintended by the donor which may keep the bequest from reaching the charity the donor intended to benefit.

Adam M. Damerow is the principal author of this release.

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