New York law provides that the state attorney general has the exclusive authority to represent the beneficiaries of a charitable corporation. N.Y. Est. Powers & Trusts Law §8.1.1(f).

This provision codifies “New York’s long-standing rule that “[n]ormally standing to challenge actions by the trustees of a charitable trust or corporation is limited to the Attorney-General.” Rettek v. Ellis Hosp., No. 1:08-CV-844 (GLS/DRH), 2009 WL 87592, at *2 (N.D.N.Y. Jan. 12, 2009), aff’d, 362 F.App’x 201 (2d Cir. 2010).

The limitation exists to in order to “prevent vexatious litigation and suits by irresponsible parties who do not have a tangible stake in the matter….” Alco Gravure, Inc. v. Knapp Foundation, 64 N.Y.2d 458, 466 (1985).

However, a narrow exception to the general rule applies “when a particular group of people has a special interest in funds held for a charitable purpose, as when they are entitled to a preference in the distribution of such funds and the class of potential beneficiaries is sharply defined and limited in number.” Id. at 465; see also Restatement of Charitable Nonprofit Orgs. § 6.05 Reporters’ Notes cmt. a (Am. L. Inst. 2021) (“Courts tend to grant special-interest standing sparingly”).

Although New York’s highest court has not expressly spoken to the issue of what forms of evidence can serve as the basis for that determination, New York courts “look[] to the trust’s chartering documents to discern the purpose of the trust, and whether there is a class of intended beneficiaries” that satisfies the exception. Sagtikos Manor Hist. Soc’y, Inc. v. Robert David Lion Gardiner Found., Inc., 127 A.D.3d 1056, 1057 (2d Dept. 2015) (citations omitted).

The Second Department’s articulation of this rule in Sagtikos Manor has now been upheld twice by the U.S. Court of Appeals for the Second Circuit—first in Hadassah Acad. Coll. v. Hadassah, The Women's Zionist Org. of Am., Inc., 795 F.App’x. 1 (2d Cir. 2019), and more recently in Israel Acad. of Sciences & Humanities v. Am. Found. for Basic Research in Israel, No. 23-1269-cv, 2024 WL 3289482 (2d Cir. July 3, 2024).

In both cases, appellees—foreign beneficiaries of a U.S. charity—argued that Alco Gravure’s progeny have looked beyond formation/chartering documents and that the Second Circuit should consider wills, gift instruments and other evidence beyond the chartering documents in determining if there is a special interest that conferred beneficiary standing. The Second Circuit rejected these arguments each time.

The appellees in Israel Academy of Sciences argued that Sagtikos Manor should be read more broadly as the Second Department considered not only the foundation’s certificate of incorporation but also the Will of the donor who established the foundation to see if it mentioned the Historical Society as a beneficiary to discern special interest standing.

That very argument, however, was rejected in the Hadassah case. See Hadassah Acad. Coll. v. Hadassah, The Women’s Zionist Org. of Am., Inc., No. 18 Civ. 2446 (AT), 2019 WL 1897668, at *3 (S.D.N.Y. April 29, 2019) (the Sagtikos Manor court “held no such thing” but merely “stated in passing that ‘Gardiner’s will did not mention the Historical Society’” and plaintiff “makes much of this dicta sentence”), aff’d, Hadassah Acad. Coll. v. Hadassah, The Women's Zionist Org. of Am., Inc., 795 F.App’x. 1 (2d Cir. 2019).

And the Second Circuit reaffirmed this in Israel Academy of Sciences. See 2024 WL 3289482, at *3 (the Sagtikos Manor “opinion made only a brief reference to the will” and that “we do not interpret its brief reference to the silence of the will as implying either that mention of the Historical Society in the will would have satisfied the special-interest standard, or that the special-interest inquiry require[s] the court to consult the will in addition to the chartering documents.”).

The court went on to clarify that “[i]n Hadassah, there was no charter or certificate of incorporation in the record” and it was because the plaintiff relied on the will and gift instruments that the court held that they did not support standing. See id.

The court “did not hold that such documents if they differed from the chartering documents, would control.. Id. (“contrary to the [Appellee’s] suggestion, “our summary order in Hadassah cannot be read as deviating from the framework articulated by the Second Department in Sagtikos Manor.”).

Notwithstanding the rule articulated by the Second Department in Sagtikos Manor, each of the appellees in Hadassah and Israel Academy of Sciences contended that there was case authority from other New York courts that considered factors beyond the formation/chartering documents, citing Swift v. N.Y. Medical College, No. 10717-04, 2006 WL 6610700 (N.Y. Sup. Ct. Nov. 15, 2006), and In re Trustco Bank, 33 Misc.3d 745 (N.Y. Sur. Ct. 2011). But, as the Second Circuit pointed out, “both these cases were decided by New York’s lower courts before ‘Sagtikos Manor’” and involved “clearly distinguishable” circumstances. Israel Academy of Sciences, 2024 WL 3289482, at *3.

In Trustco, St. Claire’s Hospital was a named beneficiary under a trust. The Hospital, however, had closed and Trustco Bank brought a cy pres action to determine whether St. Clare's Hospital’s relinquishment of its license to operate as a hospital rendered the administration of the subject charitable trusts according to their literal terms impractical or impossible. Ellis Hospital sought to intervene as an interested party.
The Surrogate’s court granted Ellis Hospital standing as there was an asset transfer agreement with St. Clare’s Hospital demonstrating that Ellis Hospital had acquired St. Clare’s assets and assumed its services.

As the court stated, “[g]iven the ties that now bind St. Clare’s to Ellis, this case is uniquely different” and “this ruling should not be interpreted as meaning that in the event the court determines that it must exercise its cy pres power, Ellis will be the likely recipient of the subject charitable disposition.” Trustco, 33 Misc.3d at 753.

In the subsequent cy pres proceeding, Ellis was, in fact, deemed the proper beneficiary of the trusts originally intended to benefit St. Clare’s because, by providing the services that St. Clare’s had provided at the same location, Ellis “most closely resemble[d] St. Clare’s as it existed at the time of the gifts at issue.” In re Trustco Bank, 37 Misc. 3d 1045, 1057 (N.Y. Sur. Ct.2012), aff’d sub nom. In re Lally, 112 A.D.3d 1099 (3d Dept. 2013).

But as the Second Circuit in the Israel Academy of Sciences case succinctly put it, in the underlying Trustco decision, “[t]he asset transfer agreement was considered, not to determine whether a beneficiary of the trust had a special interest sufficient to confer standing, but rather whether St. Clare’s Hospital had conveyed that interest to Ellis Hospital.” 2024 WL 3289482, at *3.

In Swift, the plaintiff was hired by New York Medical College as a professor and director of the Institute for the Genetic Analysis of Common Diseases. It was undisputed that the private donations to the College which were held in a custodial account were to be used specifically for plaintiff's medical research project at the Institute and were “earmarked” as such. He thus had “a tangible stake” in the matter and he had standing to enforce the purpose for which the funds were gifted to College. Swift, 2006 WL 6610700, at *2.

By contrast, in the Israel Academy of Sciences case, as the Second Circuit noted, “‘[a]ll contributions [were] accepted solely upon [the] condition,’ with ‘earmarking’ explicitly ‘prohibited.’” Israel Academy of Sciences, 2024 WL 3289482, at *3.

This is notable. In both the Hadassah and the Israel Academy of Sciences case, the appellees were foreign beneficiaries of a U.S. charity. As the Second Circuit noted, the “anti-earmarking provision is no accident.” Israel Academy of Sciences, 2024 WL 3289482, at *3 n.5. Donations to the U.S. entity are “tax-deductible only because the U.S. entity has ‘full control of the donated funds, and discretion as to their use,’ … and they are not ‘earmarked in any manner,’ ….” Id. (citations omitted).

In other words, U.S. federal tax law requires the U.S. charity to exercise discretion and control over the grant and the use of funds by the foreign beneficiary. For example, if the foreign entity were to engage in non-charitable purposes and/or conduct activities (e.g., political campaign intervention or terrorist activities) that would jeopardize the U.S. entity’s tax-exempt status, it is through exercising discretion and control that the U.S. entity would be able to no longer fund the foreign beneficiary. No foreign beneficiary, therefore, has a legal ‘right’ to funds donated to a U.S. charity of the type that would give rise to special interest standing.

Indeed, were courts to recognize standing in such situation, it would render the discretion and control element meaningless, upending U.S. tax law, and open the floodgates—foreign beneficiaries would be able to bring suit against U.S. charities, which includes thousands of “Friends of” or “American Friends of” organizations.

To confer standing on these myriad foreign beneficiaries, in effect, would do exactly what policy considerations counsel against, i.e., invite vexatious litigation. It is exactly for this reason that the Legislature limited standing to challenge the actions of the trustees of a charitable corporation to the New York State Attorney General and New York courts have construed the exception to that general rule, narrowly. The Second Circuit just reaffirmed this—not once, but twice.

There is some suggestion in the Israel Academy of Sciences decision, however, that despite this reaffirmance, the issue has not been put entirely to bed.

While the court rejected the appellee’s argument that in Sagtikos Manor, the Will was considered as a foundational/chartering document, the decision goes on to state that “to the extent that the [W]ill served as a chartering document in [the Sagtikos Manor] case, it was because the testator himself had established the foundation and that action sought ‘a judgment declaring the intent of the grantor.’” Id. at *3 (citations omitted). “[B]y contrast, the [Appellee here] makes no allegation that the donors played any role in establishing the [U.S. charity]. Because the donors did not create the [U.S. charity], their communications are not relevant to understanding the purpose for which the [U.S. charity] was created.” Id.

Thus, the court left open the possibility that a court may look beyond the chartering documents at donor communications to determine special interest beneficiary standing, under different circumstances.

Separately, the court, while noting that “New York law ‘accord[s] standing to donors to enforce the terms of their own gifts,’” Id. (citing Smithers v. St. Luke’s -Roosevelt Hosp. Ctr. 281 A.D. 127, 140 (1st Dept. 2001), rejected the appellee’s argument that it had alternative standing as a donor, because “[t]he [Appellee] itself did not transfer such donations to the [U.S. entity],” Id. (emphasis added) (appellee merely requested that third party private donors make contributions directly to the U.S. entity). Thus, the court left open the possibility that a foreign entity may have donor standing to sue under different circumstances.

That begs the question. If a foreign entity directly funded the creation of a U.S. “Friends of” organization, would it have standing to sue, both under the special-interest beneficiary standing rule and/or as a donor? To answer that question, the age-old adage “third time’s a charm” may be more accurate.

Reprinted with permission from the January 8, 2025 issue of The New York Law Journal. (c) 2025 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.