Board members may also be personally liable for their involvement in “excess services transactions” under federal tax legislation. An excessive performance transaction is a financial transaction between a “disqualified person” (for example, a director, officer, major contributor, or senior officer) and a 501(c)(3) public charity (or certain other types of tax-exempt organizations) where the disqualified person benefits more from the transaction than the organization. In other words, a financial transaction whose terms are more favourable to the disqualified person than fair value would generally be considered an overly useful transaction. Similar but stricter rules apply to 501(c)(3) private foundations, which in many cases completely prohibit financial transactions between the organization and disqualified individuals, whether or not the transaction is at fair market value. Venable: Top legal risks involving nonprofits by Melanie Lockwood Herman, Jeffrey S. Tenenbaum and Kristen E. Sitchler (2011) The existence of a causal link is an indispensable element in liability cases. Even in cases where the action of the board member is normally likely to cause injury, the causal link is considered severed if it is assumed that the damage was actually caused by another reason and that the board member cannot be held liable. Board members who deliberately fail to complete Form 990 or approve fraudulent tax returns (or submit other fraudulent documents such as grant applications or SBA loan applications) may also face fines and even jail time. The final group of liability concerns stems from the negligence of Council members. These are things that board members see and should have prevented, such as unsafe conditions in the facility used by the organization, or the failure to screen child care workers for child-related activities. This article focuses on the last two risks: legal claims against the board of directors for which the organization is responsible, and the risk of personal liability of individual board members. Not-for-profit leadership teams make countless decisions throughout the year, from deciding how to allocate financial resources to deciding which programs should be cut to make way for new initiatives.
These decisions can have an impact – both positive and negative – on a wide range of stakeholders, from clients and service recipients to members, neighbours and suppliers, individual and institutional donors. Each of these interveners is a potentially aggrieved plaintiff in a lawsuit alleging errors of judgment on the part of counsel. For example: Here are some of the downside risks of volunteering on a board of directors: Board members can generally be held personally liable for breaches of fiduciary duties, particularly in cases where the board member`s oversight functions are grossly neglected or where personal benefit is derived from the organization`s assets or resources (sometimes referred to as “private ingestion”). The state`s not-for-profit corporations law generally determines when misconduct has reached a level that can give rise to personal liability. Together, these concerns form the duty of loyalty and due diligence that every board member must respect. Except in exceptional cases of strict liability provided for by law, a member of the Board of Directors must have been liable for the damage in order to be held liable. Incorporation protects board members, as well as officers and employees of the corporation, from personal liability for the not-for-profit organization`s debts and other situations. In fact, one of the main purposes of incorporation is to ensure that any debts or lawsuits related to the business, such as a harm suit, belong to the corporation and do not jeopardize the personal assets of its officers, including their bank accounts or homes. An unregistered nonprofit often does not offer such protection, although in some states laws provide charitable immunity from prosecution for individuals affiliated with unregistered nonprofit groups. However, even in registered not-for-profit corporations, the law requires board members to carry out their management activities with care and care in order to be fully protected in certain circumstances. In each of these cases, a court first decides whether the person or group filing the application has standing to bring an action in the court where the case was filed.
Standing refers to a “Whether a not-for-profit organization is liable for damages associated with a board`s decisions depends on a number of considerations. These include whether the not-for-profit organization owed an obligation to the applicant, whether that duty was breached, and whether board members acted in good faith and with care in accordance with tradition. “A standard according to which the plaintiff in a dispute has a sufficient connection with the acts at the heart of the action, such as alleged infringement, tort or the consequences of a breach of contract. In most cases, this means that the plaintiff suffered damage directly attributable to the alleged act or omission of the non-profit organization (the defendant). In many cases against not-for-profit organizations and charities, the plaintiff is presumed to have standing. The next question to consider is whether the nonprofit is liable for the plaintiff`s damages or losses. The federal Volunteer Protection Act generally protects non-profit volunteers from civil liability unless the act was not within the volunteer`s jurisdiction or the harm was caused by intent or criminal misconduct, gross negligence, reckless misconduct or wilful and flagrant indifference to the rights or safety of the person harmed by the volunteer. However, additional conditions may apply, and this Act does not relieve board members of any liability to the organizations they serve.
Enforcement actions involving a breach of fiduciary duty may be taken by the Attorney General and sometimes, depending on the nature of the misconduct, by the IRS and other federal agencies. In certain circumstances, other directors, officers or voting members of the Corporation may sue on behalf of the Corporation to enforce breaches of fiduciary duties through a “derivative action”. Occasionally, other persons or stakeholders with a special relationship with the organization may have the right to sue for breach of fiduciary duty, but this is relatively rare. With rare exceptions, members of a not-for-profit board of directors are protected from personal liability for the following reasons: In addition, it is possible to specify additional obligations for board members in the company`s articles of association. In such a case, Council members must also act in accordance with these obligations, and any act to the contrary may result in legal liability. If your nonprofit is registered, you are protected from personal liability if someone is injured on the job while working with the organization. Like private sector companies, not-for-profit training provides protection for board members. However, this is not a general protection. To fully understand the personal liability risks associated with serving on a not-for-profit board, it is first necessary to understand the standards of conduct required of board members (also referred to as “directors” or sometimes “trustees”).
Board members who do not comply with these standards are at a much higher risk of becoming personally liable. In most cases, the actions of board members primarily harm the company itself. The reduction of the company`s assets can indirectly cause losses to creditors and shareholders. These damages are called “indirect damages”. Accordingly, article 555 of the Criminal Code provides that any shareholder, as well as the company itself, may claim compensation for the damage suffered by the company, while article 556 regulates the right of debtors to seek compensation in the event of bankruptcy. In an action for consequential damages brought by shareholders or creditors, the loss of the company is a sine qua non of the claim. Thus, the company, the partners subject to the loss by reflection and the creditors can claim compensation for the damage of the company in the event of bankruptcy. In this case, although compensation for the entire loss can be claimed, payment is made to the company and not to the shareholders or creditors themselves. This is an exception to ordinary civil procedure. Planning Tip – It is strongly recommended that all organizations maintain E&O insurance. While this article describes many ways in which board members are protected from personal liability, it won`t necessarily stop people from trying to sue board members.
Defending even a frivolous lawsuit requires significant upfront costs. D&O insurance offers this crucial protection. And insurance brokers are often a great resource to help you determine the right level of coverage, navigate difficult situations before a lawsuit takes place, and offer advice on best practices that can mitigate risk. For example, the board of directors has a duty on the organization`s institutional and individual donors to ensure that donated funds are spent in accordance with the donor`s wishes. In order to adequately comply with this obligation, the Commission may approve a gift acceptance policy; delegate responsibility for tracking grant-funded commitments and expenditures to the CEO (and her team); and reviewing and accepting the organization`s budget, quarterly financial statements and annual tax returns. This level of due diligence makes it likely that the organization, and not the members of its board of directors, will be held liable if a court finds that the organization breached its obligations to the plaintiff. The judge hearing the liability case shall decide on the amount of remuneration to be paid by each responsible member of the board of directors for each member, taking into account the reasons for the reduction.
