Duties and Liabilities of Nonprofit Directors and Officers
Many of us have been asked to serve from time to time on the boards of many of our local non-profit organizations. When one decides to join a non-profit organization’s Board of Trustees exactly what are one’s legal responsibilities and duties?
First, all trustees and officers owe a duty of care and a duty of loyalty to the organization. The duty of care means the trustee understands and is familiar with the organization’s structure and mission. The trustee attends meetings and is informed about decisions the organization is making. Generally, a trustee must act prudently and in good faith.
The duty of loyalty is easier to define since it pertains to avoiding conflicts of interest and self-dealing. If there is a business relationship between the trustee and the non-profit organization it should be fully disclosed and it should be on terms which are fair and reasonable. It is also a good idea for an organization to have a written policy concerning business relationships with its trustees.
A Trustee who fails to exercise good business judgment could be held accountable by the members of the organization, its beneficiaries, by other Board members, or even by the State. Trustees who err but can demonstrate they did their best in good faith to exercise good judgment generally will not be held liable. Of course, bad faith, dishonesty, gross negligence or unauthorized acts will result in potential liability of a trustee.
New Jersey’s Non-profit Corporation Act provides that trustees and officers may be indemnified by their organizations if proceedings are brought against the officer or trustee. The organization must have specifically authorized such indemnification and it must be demonstrated the officer or trustee acted in “good faith and in a manner which the agent reasonably believed to be in or not opposed to the best interests of the corporation” N.J.S.A. 15A: 3-4.
New Jersey’s Charitable Immunity Act (N.J.S.A. 2A: 53A-7) also protects non-profit organizations and their officers and trustees against claims of liability for negligence. But the protections against liability don’t extend to damages caused by willful, wanton or grossly negligent acts of commission or omission or the negligent operation of a motor vehicle. Again, the standards for the exercise of good judgment will apply.
It is recommended that all non-profit organizations review their policies and organizational documents for the protection of their officers and trustees. Complex issues can arise when doing business with Board members, engaging in fund-raising, lobbying activities and making investment decisions. We strongly recommend and are prepared to assist our clients prepare the appropriate policies and guidelines.
