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May board declare that it isn’t legally responsible for damages?

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May board declare that it isn’t legally responsible for damages?

Are you aware of nonprofit organizations having its board members sign a statement declaring that the board is not personally or legally responsible if the organization is being sued and not financially liable for organization’s debts? I am wondering if this is standard practice, and, if so, is there a template that is available for Boards to adopt?

I have never heard of a board signing a declaration that the members are not personally liable and doubt that it would affect the claims of outside third parties.  One cannot avoid liability simply by saying that one won’t be liable.  Legislatures and courts have done a lot of it for them, however.

There are several built in protections for volunteer board members in most nonprofits.  It is extraordinarily rare to find a nonprofit director or trustee who is personally liable for damages.

First, many states have allowed nonprofits to provide bylaws stating that the directors will not be personally liable except for cases of self-dealing or willful misconduct or recklessness.  This might help prevent obligations to outsiders, although the law was originally written in many states to prevent obligations to the corporation itself.

Second, the federal volunteer protection act protects volunteers except in similar cases.  Some states provide for absolute immunity for volunteers.

Third, there is the business judgment rule that protects directors who engage in good faith administration of the organization.  But they should be aware that some states may agree with the Lemington Home case in bankruptcy, where the board was found to have failed to act in good faith because they were so lax in their oversight of the organization.  (See Nonprofit Issues®, 3/16/13, 1/15.)

Fourth, ordinarily directors are not liable personally on the contractual obligations of the corporation (except in a rare bankruptcy case like Lemington Home).  They could incur personal liability if they act wrongfully toward others.  But even there, they may have insurance protection if they are covered for the type of claim that is being made.

Tuesday, September 1, 2015

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Comments

State and federal taxing agencies can and will find board members personally responsible for withholding taxes that have not been paid. The only requirement is that the person being held liable had a position of responsibility over finances. This is not exactly on point of the question asked, but it is an important exposure that should always be kept in mind.

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