Minnesota nonprofits get break on clawbacks

  • Article by: DAVID PHELPS , Star Tribune
  • Updated: April 4, 2012 - 9:36 AM

New law limits givebacks by charities that receive donations from frauds like Tom Petters'.

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Gov. Mark Dayton

Photo: Glen Stubbe, Star Tribune

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Gov. Mark Dayton signed into law Tuesday legislation that would give extended immunity to charitable and religious organizations that unwittingly take donations and contributions that are the result of ill-gotten gains.

The legislation, overwhelmingly endorsed in House and Senate votes, became controversial in the days leading up to Dayton's signature when it was discovered the bill would seriously affect the potential for recovery of losses for victims of the Tom Petters Ponzi scheme, the biggest fraud in state history.

The law shields Minnesota nonprofits that are being asked to return millions in tainted donations, in many cases years after the donations were made and the money spent.

Doug Kelley, the bankruptcy trustee in the Petters case, whose job is to recover as much money as he can from those who benefited from the Petters scheme, has estimated Petters and associates, including alleged co-conspirator Frank Vennes Jr., made as much as $425 million in donations.

Kelley and a team of his lawyers made unsuccessful last-ditch efforts to block the bill, which was supported by the likes of Big Brothers Big Sisters of the Twin Cities and Minnesota Teen Challenge, a chemical addiction treatment program.

The last-minute interest in the bill prompted Dayton to call a meeting in his office Tuesday morning with legislative supporters of the bill, charitable groups and representatives of Kelley as the governor considered his options.

The law makes organizations liable to return tainted contributions within two years of a donation. Any questionable contributions discovered after two years are not affected by the law. The current statute of limitations is six years.

The law also is retroactive, in that it applies to existing collection attempts such as those clawback cases stemming from the Petters bankruptcy.

Kelley estimates the contributions he's seeking total as much as $445 million, only half of which may be collectible under the new law. He said those funds should be returned to investors who were victims of Petters' $3.65 billion scheme and to creditors of Petters' business operations.

Kelley said in an e-mail Tuesday that he would probably challenge the bill's constitutionality. "We are still studying it," he said.

A memo prepared by Kelley's legal team outlining opposition to the measure said, "The bill protects donations made with the intent to defraud creditors and rewards charities that received donations at the expense of victims from whom the funds were stolen and whom they are owed."

But charities said they lack the resources to do due diligence on all of their contributors and, in many cases, have already spent the money by the time a fraud or other criminal activity is associated with the donation.

Robert McCollum, an attorney who sits on the board of Big Brothers Big Sisters of the Twin Cities, called Dayton's action "a significant day in the history of the state for nonprofits."

"Organizations can now move forward without the fear that they one day may have to pay back what was donated to them," McCollum said in an interview Tuesday.

David Phelps • 612-673-7269

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