Philip J. Outhier Attorney at Law
On January 26, 2015, the United States Circuit Court of Appeals for the Third Circuit affirmed a multi-million dollar jury verdict against a nonprofit organization’s directors and officers, including the entry of a punitive damage award against the organization’s officers. The unanimous three-judge panel opinion suggests that nonprofit board members and corporate officers may not be insulated from personal liability as once believed. The opinion underscores the important principle that directors and officers of a nonprofit organization must perform their duties with the same standard of care imposed on directors and officers of for-profit organizations.
In Oklahoma, the formation and operation of nonprofit organizations is governed by the provisions of the Oklahoma General Corporation Act. The Act does not specifically distinguish between nonprofit and for-profit organizations; however, it does provide for the formation of “non-profit” corporations. An organization attains its “non-profit” status by filing the appropriate certificate of incorporation with the Oklahoma Secretary of State. In essence, the State of Oklahoma grants nonprofit status to a newly formed corporation provided that the organization strictly adheres to the rules imposed upon nonprofits by the laws of the State of Oklahoma.
Once incorporated, the “non-profit” corporation is considered an independent legal entity. The corporation is permitted to carry on all acts permitted by law. Governance of the entity is set out in a unique set of bylaws. The bylaws are the rules adopted for the regulation and routine operation of the entity. Most bylaws provide for a board of directors to develop policy with daily operations vested in an executive director or other employees. Additional rules relating to officer’s duties, terms of office and the like are also typically included.
Historically, nonprofit organizations, together with their directors and officers, were immune from all liability. In 1940, the Oklahoma Supreme Court abolished this blanket immunity and held that a nonprofit organization may be liable to an employee for injuries resulting from negligence when carrying out the mission of the organization. However, a number of state statutes appear to grant individual immunity to nonprofit volunteers provided the volunteer acted in good faith and within the scope of duty for the nonprofit organization. The only exception to individual immunity of a volunteer would be those instances when the individual acted with gross negligence or willful misconduct. The fact that the individual volunteer is immune from liability does not, however, grant immunity to the nonprofit organization itself. The nonprofit may nonetheless be liable for damages caused by a volunteer’s conduct.
While it is impossible to guarantee that an organization will not be sued for the actions of its officers or directors, there are a number of “best practice tips” which may help a nonprofit board member avoid personal liability:
- Engage in due diligence. If you are invited to serve on a nonprofit board, ask a few questions: Is the organization incorporated as a nonprofit? Is the organization in good standing with the Oklahoma Secretary of State? Is there any pending litigation?
- Make sure the organization you are serving has a clearly established mission. The mission should be clearly set out in your organizational documents or in a mission statement.
- Make sure the organization you are serving holds regular monthly meetings. Plan to attend regularly.
- Make sure the organization you are serving conducts annual orientation sessions with the board to clearly articulate board member responsibilities and expectations.
- Make sure the organization you are serving always records and retains well-documented minutes of all meetings.
- Make sure the organization you are serving regularly prepares and distributes monthly financial statements and other reports well before the appointed board meeting date. Make sure you understand the statements and reports.
- As a board member, don’t be afraid to ask questions, even the hard ones.
Overall, as a member of nonprofit board, you should be proactive in the operations of the organization you have agreed to serve. Remaining proactive and regularly participating in the overall operations of the organization is the best way to avoid individual liability.
For questions on this matter, contact Philip J. Outhier at Outhier & Caruthers PLLC, by phone at 580-234-6300 or email firstname.lastname@example.org.