The (Second) Restatement §90(2): A Holmesian Disaster?

-- By ArgiriosNickas - 18 Feb 2016

Charity's Unique Role in America

The role of charity in American society is unique: Americans pay less in taxes as a percentage of GDP than virtually every developed country, but contribute more to charity per capita than any other country. Porter, 2012.

§90(2): A Prudential Kick

Within this American tradition of charitable giving, the 1979 Restatement (Second) of Contracts attempted to address historical unenforceability of charitable subscriptions head on. The (Second) Restatement removed the requirements of consideration and detrimental reliance for charitable subscriptions. Restatement (Second) of Contracts §90(2).

The change is an example of Holmesian thought in application: the Restaters reflected on contract formalism – traditional promissory estoppel and consideration – and its application to a beneficial social function, charity. In other words, they attempted to facilitate a desired outcome, an increase in charitable giving, by modifying the legal framework surrounding it, in light of formalist hindrances discovered through reflection on the previous regime. The issue with §90(2)) lies not in the methodology, but in its applicative sagacity: whether the provision accomplishes its intended purpose or whether it has the opposite effect, harming autonomy interests and discouraging charitable pledging due to fear of state coercion.

The Evidence of Activity Level Effects is Unclear

An inquiry to settle the debate should start with an attempt to identify activity level effects, if any, of adoption. The most suitable data is published annually by the National Center for Charitable Statistics: it records the ‘average charitable contribution (ACC) per tax return as a percentage of adjusted gross income (AGI) per return’ by state, as a percentage and within a comparative quartile distribution. There are some limitations: the data does not extend back to the adoption of §90(2), and the rate of filers that itemize deductions varies by state. Assuming that public saliency of a legal rule increases over time, even the limited data set should reveal some identifiable trends. Without that assumption, at a minimum, the most recent quartile rankings should indicate the success of charitable legal regimes under §90(2). National Center for Charitable Statistics.

Iowa adopted an early draft of §90(2) in Salsbury v. Northwestern Bell Tel. Co., 221 N.W.2d 609 (Iowa 1974), and then reaffirmed, extending the doctrine to oral promises in Schmidt v. Mueller, 723 N.W.2d 454 (Iowa Ct. App. 2006). Between 2005 and 2013, Iowa rose from the fourth to the third quartile. New Jersey adopted the rule in Jewish Fed’n of Cent. N.J. v. Barondess, 560 A.2d 1352 (N.J. Law Div. 1989), basing its decision to enforce a pledge on public policy grounds. New Jersey ranked in the second quartile in 1995, and in the fourth in 2013. Other jurisdictions, though not expressly adopting the §90(2) rule, have indicated in dictum that, as a matter of public policy, pledge agreements for certain charitable organizations would be enforced. See Woodmere Academy v. Steinberg, 363 N.E.2d 1169 (N.Y. 1977); Hirsch v. Hirsch, 289 N.E.2d 386 (Ohio Ct. App. 1972). In 1995, New York and Ohio ranked in the first and third quartiles, respectively; in 2013, they ranked in the second and third. For critics of §90(2), the evidence is at best inconclusive, and at worst, contrary to major concerns regarding charitable activity level effects.

Further Evidence of Non-Impact

Further evidence of non-impact is found by the scarcity of cases that have been litigated on point. (Contract Law and Theory, 5th ed. Scott and Krauss)(Citing less than a half-dozen since the beginning of §90(2)’s drafting in 1965). Like familial promises, the area of charitable giving may be more amenable to extralegal enforcement: normative social pressure to give, reputational effects of failing to meet a charitable obligation, and general reciprocity underlying the charitable system.

§90(2)'s Saving Grace

The criticism of §90(2), its potentially misguided far-reaching prudential insurgency, may also be its greatest cause for celebration. At the very least, §90(2) signaled to courts that strict adherence to formalism in the charitable subscription context is sometimes flawed. This openness to judicial activism is further supported by §90 comment d, which outlined, for the first time, the availability of partial, tailored remedial enforcement under §90.

In Application:

In Mount Sinai Hospital Of Greater Miami, Inc. v. Jordan, 290 So.2d 484 (Fla. 1974), the court held that a pledge made “in consideration of and to induce the subscriptions of others,” but for which no other specific purpose was identified, was unenforceable for lack of consideration. It also held that because the Hospital undertook no specific work in reliance upon the subscription, the pledge could not be enforced through promissory estoppel. The defendant had executed two pledges for $50,000 each (today, approximately $700,000 in total) and had paid $20,000 before his death.

This dismissal of the enforcement claim reveals the flaws the Restaters aimed to address. In regards to consideration, charitable giving is not done in a vacuum: each donation jointly funds a community cause. The consideration may have been an implied understanding that the hospital would continue solicitation of other donations, or, more straightforwardly, the subsequent provision of actual charitable goods and services by the charity. In regards to reliance, the court failed to fully consider how charities function in society: as an ongoing entity with numerous income sources, divisibly irrelevant but indivisibly important. A hospital is primarily concerned with its patients, and secondarily concerned with the specificities of matching particular donations to particular budget allocations.

§90(2) broadly proposes that prudential fairness should not be limited by formalism. The Jordan court could have considered a variety of factors including the financial position of the estate (whether the enforcement of pledge was too great a burden on the estate’s primary heirs), the financial need of the hospital, the amount of the gift, the decedent’s other past charitable contributions, level of overall contact with the hospital, and whether the pledge was signed and written.

A Sheep in Wolf's Clothing

In light of inconclusive activity level effects, the unchallenged adoption of §90(2) in certain jurisdictions, and the functioning of a powerful non-legal regime, such an equitable standard may be worth further consideration for the most egregious violations of the collective values charity relies upon. §90(2)’s greatest worth may be its Holmesian nod to courts that strict adherence to formalism is not always justified.