It’s a great charitable organization, you’re going to get CRA credit, and you want to convince the wealthy directors to become customers of your bank, so you entertain a loan application from a well-known local charity. It rents its space so there is no real estate collateral and there is no owner to guaranty the loan. BUT it has pledges from donors as a result of its annual giving campaign. Are the pledges enforceable? The answer, as always, is “It depends,” but what does it depend on? A recent federal court answered part of the question when a charity tried to collect on a $1 million pledge. The charity lost, so what can a lender learn?

Today’s Takeaway? The pledge must be a clear and direct written promise to pay, not just a statement of intent. The lender must tell the pledgor that the pledge has been assigned as collateral. The pledge should be collected by the lender and not paid directly to the charity.  All the other formalities of the grant of a security interest and its perfection must be followed.

Jay L. Hack is available at jlh@gdblaw.com.