The Midwestern Comtemporary Art Museum

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Case Analysis

Summary of Facts and Circumstances
The Midwestern:: Contemporary Art (MCA) Museum is one of the nation’s largest facilities devoted to modern art, opening its doors to Great Lakes in 1967. The MCA bought its first building, a three story townhouse, in 1977. In January of 1989, the MCA board hired Keith Schmidt as executive director. In April of 1989, a man with the name of Peter Smith began his chairmanship at MCA, after already being on the board since 1981. Peter Smith and Keith Schmidt often had intense debates at board meetings. Most of their arguments had to deal with the speed of MCA’s expansion, which was pushed by Schmidt. Smith had a more conservative approach to the situation and did not approve of the rapid changes Schmidt had planned for the museum. Due to problems between Smith and Schmidt, Peter Smith resigned from the board in December 1991. Shortly after that, the board approved of a $55 million capital campaign for construction of MCA’s new facility, $37.5 million of which was pledged by the board. The Smiths disappeared from the art scene at the end of 1991 and missed all payments on their $5 million pledge toward the planned new building for the museum. The problems started when MCA realized the construction funding on their new building, which started underway in 1993, depended on the Smith’s pledge. News got even worse when the Financial Accounting Standards Board made a new policy that required all non-profit organizations to record pledges as income, which was to begin December 15, 1994. Usually the procedure was that they would not record the pledges until the actual transfer of money from donor to museum occurred. This caused an even more financial hardship on the museum, and in late 1997, MCA found itself in a financial crisis due to a high debt load resulting from construction and because of the Smiths’ unfulfilled pledge. The pledge was supposed to be paid fully by June 1997. Nonetheless, the new MCA facility opened in June 1996 on Great Lakes Avenue. Peggy Fischer, the newly elected MCA board chair, sought advice from other board members on how to proceed with the case. Richard Lang, a fellow board member, suggested taking legal action against Peter Smith. Andrew Whitehorse, another board member, agreed with Lang in suing Smith, expressing his concern that the board’s long-standing prestige might be hurt if the financial crisis was not handled properly and fast. On the other hand, Rich Steiner, a member of the board disagreed with the other two men saying that the situation could be handled without taking it into legal matters. Jennifer Lee, another board member, said that “the lawsuit will not only irritate and anger the Smiths to the point where they will never voluntarily donate to us again, but it will also cause potential donors to view our actions as being insensible…” Another board members and friend of the Smiths, Jon Stuart, took sides with Lee and Steiner by adding that it would be unsympathetic to sue the Smiths at that time. He had just learned that Peter had been diagnosed with terminal cancer and was undergoing many chemotherapy treatments. He added that it would be very unwise and insensitive to file a lawsuit against the Smiths, and then was not the time to approach them. In December of 1997, MCA filed a lawsuit against Peter Smith, just four months before he passed away. Catherine Smith became the sole person-in-charge of his estate. A month after Peter Smith died, Keith Schmidt stepped down and Gregory Dunn replaced him and also was named CEO. In July 1998, Catherine Smith and MCA reached an out-of-court agreement. Two famous paintings were donated to MCA to substitute for the $5 million pledge. Analysis of Applicable Rules

The Financial Standards Accounting Board issued a new rule June 1993 that applied to all entities that received or made contributions, which required non-profit organizations to recognize contributions made as expenses at the time they...
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