Claims totaling $3.2 million against the leaders of the now defunct Tri-Valley Community Foundation (TVCF) are likely to be settled for $1.75 million to be paid by left-over funds and an insurance policy that covered the organization's directors.
The settlement agreement is scheduled to be ruled on Aug. 27 before Judge Charles Novack in the U.S. Bankruptcy Court for Northern California in Oakland.
The foundation, which served the financial interests of charities in the Tri-Valley and beyond for years, closed its doors abruptly in March, 2012, after an audit found it was claiming and appropriating funds it didn't have. These included $2.5 million in its "donor advised funds," which weren't in its audited account.
Chapter 7 trustee Michael G. Kasolas then filed a claim in Bankruptcy Court, contending that David Rice, the longtime president of TVCF and its board members, failed in their management and administration of the affairs of the organization. At one time, he wanted those responsible to stand trial before a jury on those charges.
In the settlement agreement, calmer decisions prevailed with the Nonprofits Insurance Alliance of California (NIAC), which insured the organization's board of directors, agreeing to pay $1.75 million to settle all claims in exchange for dismissal of further claims. Originally, creditors had sought $3 million in claims.
In the settlement, NIAC representatives said the directors' coverage was limited to $1 million, but eventually agreed to the higher amount in mediation proceedings. Kasolas also determined that legal statues potentially applicable to the directors arguable prevented the imposition of any personal liability against them.
Unclear in the settlement, is the continued or potential liability of Rice, himself, who was not a director and may not have been covered by the NIAC policy. Rice was fired April 30, 2012, after an independent audit found discrepancies in his organization's finances and reserves. Ron Hyde, then chairman of the foundation's board of directors, was named chief executive and president.
Rice reportedly left his home in Walnut Creek for a position with a nonprofit in Texas, but repeated attempts to reach him have been unsuccessful.
Earlier this year, counsel for the NIAC initiated discussions to resolve the claims before retired Superior Court Judge James Warren. That resulted in the settlement agreement that will go before Bankruptcy Court Judge Novack Aug. 27.
In his Bankruptcy Court filing, Attorney Steven B. Sacks, who represented Chapter 7 trustee Kasolas, said that Rice, during the last two years of his presidency and at a time when financial discrepancies were known, raised what he said were additional funds that would be used to reduce liabilities.
He specifically targeted large donors who had the ability to make donations in excess of $100,000. But Rice assured donors that their donations would be held by TVCF and disbursed only once the donors gave advice or directions.
"Rice did not honor those assurances," Sacks stated. "The board was aware, or should have been aware, that funds were received by TVCF under such arrangements," but did not take any action to ensure that happened. Rice, in fact, with the board's approval, provided donors with a solicitation marketing brochure that affirmed that doors would have a say in how their contributions were used.
Instead, those funds were commingled with uncommitted donations that were not sufficient to meet the outgoing expenses and payments TVCF had promised, "continuing to misspend agency funds in a manner contrary to the representations it had made to donors," according to Sacks.
Sacks also criticized TVCF's auditors, Robert Lee & Associates, which, Sacks said, early in its report in May 2011 "failed to mention the ample information of financial irregularities that RLA uncovered."
"Most egregiously...it stated that TVCF had donor permission to use agency funds as working capital when donors had not given such permission," he said.
By the time of TVCF's bankruptcy filing, the agency had misspent and diverted millions of dollars in funds that had been earmarked for distribution to other charities or were subject to restrictions on their use, Sacks stated in his Bankruptcy Court report.
In fact, when a donor of agency funds would question why a pass-through contribution had not been delivered, Rice would find funds to make those payments.
"Spending by Rice continued apace through 2011 and into 2012," Sacks added, with Rice obtaining funds from TVCF investment accounts on his own authority without counter-signature from anyone on the board of directors. He accessed those funds whenever he felt that cash was needed for immediate needs without consultation with donors or directors.
In connection with the settlement agreement, TVCF's former directors argued that they were entitled to rely on information and advice that they received from Rice and the Robert Lee & Associates auditing firm even though that information turned out to be wrong or incomplete.
The proposed settlement agreement, which it clears the former directors of any culpability, does not resolve claims against RLA or, possibly, even David Rice.