Personal Liability for Non-Profit Board Members!

Mar 7, 2011 by steve

Pennsylvania State Senator Vincent J. Fumo was convicted of 137 felony counts including charges that he abused of Citizens Alliance for Better Neighborhoods, a Philadelphia charity that received $17 million from Peco Energy, a large utility company. Fumo obtained the payment for Citizens Alliance in exchange for favorable disposition of a regulatory matter.

Meanwhile, according to the lawsuit filed against the Board Members, the Executive Director and Fumo lined their own pockets with goodies and the charity’s resources were used by Fumo’s political campaign.

Personal Liability of Board Members.

A nonprofit corporation may, in its articles of organization, provide for the elimination or limitation of the personal liability of its officers and directors. See e.g., G.L. c. 180, § 3.  However, the articles of organization cannot eliminate or limit such personal liability where the officer or director has breached the duty of care or the duty of loyalty to the corporation or its members. Certain statutes impose personal liability on responsible officers. Further, a court could find in an appropriate case that directors and officers violated their duty of care in permitting a nonprofit corporation to engage in activities prohibited by statute.

Generally, the two standards that govern all actions taken by directors are as follows: (1) the duty of care, which requires, first, that the director be informed and second, that the director exercise independent and reasonable judgment;and (2) the duty of loyalty, which requires that the director act in good faith and in the best interest of the organization, rather than in their own interest or that of another person or entity.

In the final analysis, board members can avoid, or at least limit, personal liability if unless they breach the duty of loyalty; they do not act in good faith or knowingly violate the law, or they receive an improper personal benefit. Or, as seemingly alleged by the Pennsylvania Attorney General, they turned a blind eye to such activity.

Members of boards of directors need to properly understand these risks in order to adequately discharge their duties, and to protect themselves and their organizations from liability.