The legal situation for nonprofits is unfortunate, but I think the potentially workable patches wouldn’t help an org in Lightcone’s shoes very much. IIRC, one state shortened its look back period for charities after many of them got burnt in a fraud.
But all these transfers were within ~7 months. Most of us would prefer our monies go to charity rather than our creditors, so a superfast look back period would incentivize throwing tons of money to charity once the business or person realized the ship was gonna sink.
Protection based on a donor’s good faith wouldn’t help. Protection up to a percentage of profits wouldn’t help given FTX claimed tons of losses on its taxes. Protection based on consistency with a well-established pattern of giving from that donor wouldn’t help.
Equitably, my general take in these situations is that the charity got some value toward its charitable out of the expended donation (although perhaps not the full dollar value). The victims got $0 out of the transaction. So I’d be hesitant to endorse any reforms that didn’t produce some meaningful recoveries for victims in a case like this.
(I have lots of takes here, but my guess is I shouldn’t comment. Overall, agree with you that it’s a tricky situation of the law. I disagree that there aren’t small changes that would help. For example, I think if the Religious Liberty and Charitable Donation Protection Act of 1998 could have considered foundations or corporations as part of its definition of “natural person”, that would have been a substantial improvement. But again, I sadly can’t comment here much, which I find really annoying, also in parts because I find this part of the law quite fascinating and would love to talk about it)
We may not disagree: I had specific elements of Lightcone’s situation in mind when I said “help an org in Lightcone’s shoes very much.” That situation is unfortunately not rare, given the charities that ended up with Madoff-tainted money and Petters-tainted money.
So in that context, the RLCDAP amendments to 11 USC 548 won’t help a charity with a SBF/Madoff/Petters-type problem because they don’t protect charities where the debtor had an “actual intent to hinder, delay, or defraud” creditors under (a)(1)(A). Another reason a small fix might not help here: If Congress were to extend RLCDAP protections to corporations, it would need to decide how big the safe harbor should be. Although RLCDAP gives individuals some room to play bad-faith games, that room is usually fairly limited by the usual relationship between individual’s incomes and assets. I don’t think it would be reasonable to protect nearly as much as FTXFF was handing out under the circumstances. Whatever formula you choose, it has to work for low-margin, high-volume companies (think grocery stores) as well as tech-like companies.
I would have to think more about the extent to which—at least where large donations are involved—strong protection should be dependent on the existence of an acceptable comprehensive audit of the company-donor. Where that isn’t the case, and the donations are fairly large, I might focus relatively more on education of the nonprofit sector about the risks and relatively less about writing them an insurance policy on the creditors’ backs.
In part, I think I’m much more accepting of charitable donations by insolvent individuals than insolvent corporations. A decent number of individuals are insolvent; I certainly would not suggest that they should not donate to charity and instead have some sort of ethical duty to run their lives in a way that maximizes creditor recoveries. In contrast, I am more willing to assign an insolvent corporation has much more rigorous duties to creditors and so am considerably more willing to call out dissipation of assets away from creditors.
Yeah, I agree with that. Mainly, I think I want to signal to the audience that the situation in which orgs find themselves reflects thorny policy tradeoffs rather than a simple goof by Congress. Especially since the base rate of goofs is so high!
The legal situation for nonprofits is unfortunate, but I think the potentially workable patches wouldn’t help an org in Lightcone’s shoes very much. IIRC, one state shortened its look back period for charities after many of them got burnt in a fraud.
But all these transfers were within ~7 months. Most of us would prefer our monies go to charity rather than our creditors, so a superfast look back period would incentivize throwing tons of money to charity once the business or person realized the ship was gonna sink.
Protection based on a donor’s good faith wouldn’t help. Protection up to a percentage of profits wouldn’t help given FTX claimed tons of losses on its taxes. Protection based on consistency with a well-established pattern of giving from that donor wouldn’t help.
Equitably, my general take in these situations is that the charity got some value toward its charitable out of the expended donation (although perhaps not the full dollar value). The victims got $0 out of the transaction. So I’d be hesitant to endorse any reforms that didn’t produce some meaningful recoveries for victims in a case like this.
(I have lots of takes here, but my guess is I shouldn’t comment. Overall, agree with you that it’s a tricky situation of the law. I disagree that there aren’t small changes that would help. For example, I think if the Religious Liberty and Charitable Donation Protection Act of 1998 could have considered foundations or corporations as part of its definition of “natural person”, that would have been a substantial improvement. But again, I sadly can’t comment here much, which I find really annoying, also in parts because I find this part of the law quite fascinating and would love to talk about it)
We may not disagree: I had specific elements of Lightcone’s situation in mind when I said “help an org in Lightcone’s shoes very much.” That situation is unfortunately not rare, given the charities that ended up with Madoff-tainted money and Petters-tainted money.
So in that context, the RLCDAP amendments to 11 USC 548 won’t help a charity with a SBF/Madoff/Petters-type problem because they don’t protect charities where the debtor had an “actual intent to hinder, delay, or defraud” creditors under (a)(1)(A). Another reason a small fix might not help here: If Congress were to extend RLCDAP protections to corporations, it would need to decide how big the safe harbor should be. Although RLCDAP gives individuals some room to play bad-faith games, that room is usually fairly limited by the usual relationship between individual’s incomes and assets. I don’t think it would be reasonable to protect nearly as much as FTXFF was handing out under the circumstances. Whatever formula you choose, it has to work for low-margin, high-volume companies (think grocery stores) as well as tech-like companies.
I would have to think more about the extent to which—at least where large donations are involved—strong protection should be dependent on the existence of an acceptable comprehensive audit of the company-donor. Where that isn’t the case, and the donations are fairly large, I might focus relatively more on education of the nonprofit sector about the risks and relatively less about writing them an insurance policy on the creditors’ backs.
In part, I think I’m much more accepting of charitable donations by insolvent individuals than insolvent corporations. A decent number of individuals are insolvent; I certainly would not suggest that they should not donate to charity and instead have some sort of ethical duty to run their lives in a way that maximizes creditor recoveries. In contrast, I am more willing to assign an insolvent corporation has much more rigorous duties to creditors and so am considerably more willing to call out dissipation of assets away from creditors.
I mean, I would really love to discuss this stuff with you, but I think I can’t. Maybe in a year or so we can have a call and discuss bankruptcy law.
Yeah, I agree with that. Mainly, I think I want to signal to the audience that the situation in which orgs find themselves reflects thorny policy tradeoffs rather than a simple goof by Congress. Especially since the base rate of goofs is so high!