Charity Moved $1 Million Before Bankruptcy Filing

Forbes Magazine/March 2, 2009

Two days before it sought Chapter 11 bankruptcy protection, calling itself "unable to meet its obligations,'' the National Heritage Foundation wired $1 million to an affiliate charity, new court filings show.

The transfer by the large, controversial Falls Church, Va., nonprofit to Congressional District Programs Inc. kept the money, at least for the time being, out of the potential reach of NHF's outside creditors. However, the move raises many questions and is likely to be a focus of attention when those creditors gather to question an NHF representative under oath on Thursday.

NHF, run for decades by the family of John T. (Dock) Houk II, filed for bankruptcy in Alexandria, Va., on Jan. 24 after a Texas family tried to collect on a $6 million verdict it won against NHF, in a suit claiming the charity had misled it. (NHF is appealing that verdict.)

The collapse was one of the largest charity bankruptcies in recent times; NHF's latest audited financial statement for 2007 listed $208 million in net assets.

In a document filed in court on Feb. 27, NHF disclosed that two days before it filed for bankruptcy protection, it wired $1 million to Congressional District Programs. This nonprofit shares officers, directors and even a Web site with NHF and is located at the same address. The move left NHF with less than $6 million in cash, against bank loans of $7.5 million, court filings show. An NHF official did not respond immediately to an e-mailed request for comment on the transfer.

NHF specializes in administering donor-advised funds, which operate like mini-family foundations--individual donors make contributions and take their income tax deductions upfront, then dole out the funds to individual operating charities over time. But for years, NHF has been criticized for skirting federal tax laws.

The bankruptcy filing gave NHF a temporary respite from its debts. The action also halted $2 million in yearly payments to holders of charitable gift annuities issued by NHF. Many of those annuitants have filed unsecured-creditor claims with the bankruptcy court.

Other items of note in NHF's new financial disclosures include these:

  • NHF wrote off a $10,000 loan made to Charity Admin Inc., a for-profit business run by the Houk family and touted on the NHF Web site. During the past year, NHF also made $8,300 in payments to a Houk-family marketing business, To The Point LLC.

  • During 2008, NHF experienced $21 million in investment losses, exceeding the $16 million it listed in cash and non-cash contributions.

  • Mystery continues to surround the Vantage Fund, which an NHF official previously described in a deposition as an in-house investment vehicle holding more than a dozen different investments, many of them troubled. The bankruptcy filing said the Vantage Fund had a book value on Dec. 31 of $16.7 million but a market value of just $11.6 million, suggesting a $5.1 million loss. The NHF filing did not break out individual Vantage Fund holdings.

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