Everett, Wash.
Published: Sunday, May 17, 2009

House built on Pasado's property entangled in divorce

By Scott North and Jackson Holtz
Herald Writers

 MONROE -- The founders of Pasado's Safe Haven are like many people whose long marriage has ended in divorce: they can't agree on much, including issues great and small.

High on the list of things Susan Michaels and Mark Steinway disagree about are the details of a 2003 agreement they entered with Pasado's. The nonprofit's money was used to help pay for construction of the home the couple built at the Monroe-area sanctuary. The couple said they intended eventually to bequeath the property to Pasado's.

Read more:
Pasado's Safe Haven: Charity is a force for animals but critics question tactics, finances
Each party has their own version of what was intended and agreed upon. Michaels and Steinway don't agree on when the deal was struck, let alone exactly what was approved and by whom.

The precise terms of the arrangement weren't memorialized in public records typical of real estate transactions. That helped turn a big money deal into a source of confusion and litigation for Pasado's.

That sort of situation can lead to tax problems for charities.

Michaels and Steinway six years ago began building a 2,400-square-foot custom house, but determined they lacked the money to finish the job, according to papers filed in their divorce and a separate lawsuit that arose out of the dispute.

Pasado's board approved contributing $170,000 of the nonprofit's funds to pay for the home's construction, the pair told the court.

In exchange, Michaels and Steinway agreed to deed over to Pasado's ownership of the 24-acre lot where the home was being built, right at the heart of the animal rescue sanctuary.

When the deal was approved, Michaels was president of Pasado's board and Steinway was secretary-treasurer. In interviews, both said they recused themselves from voting on the deal, leaving the decision in the hands of other board members.

Precisely how many people were on the board at the time is a point of contention. Michaels maintains it was herself, Steinway and two others. Tax forms filed by the charity list six board members in 2003. The board's makeup has fluctuated over time, sometimes comprising just the founders, their relatives and a longtime friend from college.

Long-term plan

Michaels and Steinway acknowledge living at the home rent-free for about four years, and expecting to do so until their deaths.

In court papers filed in connection with her divorce, Michaels maintained that the couple agreed to deed over ownership of the land to Pasado's in exchange for money to finish construction.

The $170,000 paid by the nonprofit was exactly what the couple had paid for the land years earlier, she said, so they'd see no real estate profit in the deal.

The pair's wills were written to pass along ownership of the house to Pasado's, she said.

Steinway told the court he and Michaels agreed to turn over the land, but intended to maintain ownership of the house and live there until their deaths. To ensure that arrangement was possible, the nonprofit's board agreed that an acre the house sits upon was to be segregated from the rest of the land, which was to be provided to Pasado's, he said.

That part of the deal was never consummated, Steinway said. It proved to be more complicated than the parties thought, and took on less urgency in the face of other issues, including a national-level animal rescue effort that Pasado's launched after Hurricane Katrina.

"There is no excuse. I know we screwed up," Steinway said.

Michaels provided the newspaper, and the mediator in her divorce, with a statement from a former board member supporting Michaels' recollection of the house deal.

She also presented what she said were hand-written notes and a resolution from a Jan. 3, 2003, meeting when the board gave its approval. The documents, however, do not show that any vote was taken on the agreement, and that aside from Michaels and Steinway, just one other board member was present.

Steinway supplied the newspaper with a series of e-mails that he said show when the board actually approved the house deal later in 2003. The e-mails indicate that Steinway drew up a resolution based on forms he found on the Internet, and board members gave approval, electronically.

The Herald interviewed Claudia Moore, one of the board members included in the e-mail string. She remembered the deal coming together as Steinway described.

After he left the marriage, Steinway joined Michaels in deeding over to Pasado's the couple's ownership in the house and property -- which for tax purposes have always been a single parcel, records show.

Steinway said he wanted compensation for his ownership interest in the home. He said he expected Michaels to include the home in the assets to be divided in the divorce, especially since she was still living there rent-free. Under the agreement, she gets that right for life.

Instead, Steinway was sued by Pasado's.

In court papers, the nonprofit said the couple would have been permitted to reside in the house for life, as long as they were providing animal care and other services to Pasado's.

The nonprofit also said the agreement barred Michaels and Steinway from selling or taking out loans on the house and land.

Separate loan

County property records show that didn't stop Michaels and Steinway from using the same property to secure a separate $100,000 loan from a private lending company in late 2003.

That was another mistake, Steinway said.

Michaels would not discuss the private loan except to say that she and her ex-husband had paid it back, using their own money. Records confirm the loan was repaid.

In general, charities that loan money to board members risk trouble, including running afoul of federal regulators, according to a legal expert who specializes in studying nonprofits.

Charitable groups are granted tax-exempt status based on the condition that the people who run them don't receive excess personal benefit, especially when it comes to money, said Sheldon Frankel, a professor of tax law at Seattle University Law School.

"Loans to directors are suspect," Frankel said.

He said such transactions "give rise to conflict of interest issues" on the federal level and appear to violate the Washington state statutory prohibition against them.

Frankel didn't review the paperwork regarding Pasado's transaction. However, he said that any time money or property passes between a charitable organization and donors, directors, or others in control, the transaction should be well-documented.

This is both to show the parties' intent and to eliminate inference of a conflict of interest, he said.

The government has moved to curb loans by changing the tax form that nonprofit groups file, Frankel said. In 2008, a new section was added, requiring disclosure of interested party loans.

Michaels says it would be an error to consider as a loan the transaction that helped pay for the house.

Steinway said he and Michaels lost money on the deal.

"It was probably not a good thing to do," said Steinway, who now lives in Louisiana. "We did what we felt was necessary and we knew that under scrutiny anybody who knew the facts would say that we weren't personally benefiting from having a nonprofit."
© 2009The Daily Herald Co., Everett, WA