FIDUCIARY OBLIGATION OF BOARD MEMBERS
OF NONPROFIT ORGANIZATIONS
Thomas O. Katz, Esq.
I. INTRODUCTION
Good people seeking to support good causes sit on the board of directors or as trustees of a variety of nonprofit organizations. More often than not, these good people approach their service on the boards of nonprofits with Self understanding of their fiduciary obligations as board members, situations in which personal liability can arise, or ways or ways to manage that liability. Given the voluntary nature of service and dedication to a cause, the issue of who should be responsible when something goes wrong often causes tension between two very important and necessary interests – on the one hand, unduly strict and burdensome duties imposed upon board members can discourage civic minded individuals from serving on boards, yet, on the other hand, someone must be held accountable for the mismanagement of these charities. Set forth below is a brief outline of the legal obligations of a board member of nonprofits.
II. FIDUCIARY DUTIES
A.
Introduction: The concept of fiduciary duties
permeates the law. The term ‘fiduciary’ derives from the Latin for trust. In
any fiduciary relationship, the law imposes the duties of care and loyalty on
the fiduciary. In
1.
Duty of Care: This describes the level of competence
that is expected of a board member. This generally means that the board member
owes the duty of care that an ordinarily prudent person would exercise in a
like position and under similar circumstances. For nonprofit boards, this may
be difficult because many board members do not regularly attend board or
committee meetings, which may make it more difficult to exercise as adequate duty
of care.
2. Duty of Loyalty: This means that the board member must put the interest of the organization first. Board members can have business dealings with the organization, but such dealings will be subject to a higher degree of scrutiny if ever tested in the courts. This generally requires that these be full disclosure of the board members Interest, and the terms of transaction must be fair to the organization.
3. Duty of Obedience: This means that the board member must promote actions consistent with the organization’s stated mission.
B. Discharging of Duties: In discharging their duties, directors are generally not required to have any special expertise in any particular field. In recognition of this principle, Section 617.0830(2), F.S., provides that in discharging his or her duties a director is entitled to rely on information, opinions, reports or statements including financial statements and other financial data, if prepared or presented by:
1. Officers and Employees: One or more officers or employees of the nonprofit whom the director reasonably believes to be reliable competent in the matters presented.
2. Professionals: Legal counsel, public accountants, or other persons as in matters the director reasonably believes are within the persons’ professional or expert competence; or
3. Committees: A committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence.
However, according to Section 617.0803(3), F.S., a director cannot be acting in good faith in discharging his or her duties if the director has knowledge concerning the matter in question that makes reliance otherwise permitted by the foregoing unwarranted. That is, the reasonable reliance provisions of the statute will not shield a director from liability where he or she has particular information which makes relying upon other parties unreasonable. For attorneys or accountants serving on the board of directors, this may impose a higher standard if discussing, for example, legal or financial matters.1
C. Duty of Care: Generally, a director of a nonprofit is held to the same standards as a director of for-profit corporation.3 The standard of care is not breached by acts of simple negligence, even if such actions were clearly wrong.5 Rather, directors will be held personally liable for monetary damages to any person for any statement, vote, decision, or failure to take an action, regarding the organizational management or policy of the nonprofit only where there is a showing of criminal activity, fraud, willful misconduct, or self-dealing.4 There is a dearth of recent cases finding directors in breach of their duty of care. The overwhelming majority of the recently reported cases dealing with directors’ duty of care find in favor of the directors. The cases that do find that directors have breached their fiduciary duty tend to be rooted in the duty of loyalty, rather than the duty of care (see below).
1 SeeComment to Revised Model Business Corporation Act 8.30 (noting that the special / particular background and qualifications of a particular director may impose a higher standard upon such director than another director of the same corporation who does not possess such qualifications). I & B Am Jur 2d. Corporations 1698
2 See F.S. 617.0830(1) and (2) (identical to the standard of care provisions governing for-profit corporations in F.S. 607.0832(1) and (2); F.S. 617.0831 (stating that, with certain exceptions, the indemnifications and liability provisions governing for-profit corporations apply to nonprofit corporations).
3 Perlow v. Goldberg, 700 So. 2d 148 (Fla. 3rd DCA 1997).
4 SeeF.S. 617.0834(1).
1. Perlow v. Goldberg, 700 So.2d 148 (Fla. 3rd DCA 1997). Although this case (and the two that follow) involved a condominium, the law regarding the fiduciary duties owed by directors of a condominium is the same as for other corporations, including nonprofits.3In Perlow, condominium owners sought personal judgments for breach of fiduciary duties against two directors of the condominium association. The alleged breach was based upon the directors’ failure to properly administer insurance proceeds from Hurricane Andrew. The court acknowledged that the directors were negligent in administering the funds. However, there was no allegation in the owners’ complaint of criminal activity, fraud, willful misconduct, or self-dealing. Absent one of these elements, there can be no personal liability imposed upon a director of a corporation for negligent management.
2. Taylor v. Wellington Station Condominium Association, Inc., 633 So2d 43 (Fla. 5th DCA 1994). In Taylor, the condominium association filed suit for breach of fiduciary duty against an officer and 25% shareholder in the corporation that developed the project who also served as a director of the condominium association. The suit alleged breach of fiduciary duty on the grounds that the director failed to (1) enforce the obligation of the developer to pay its share of common expenses, (2) properly allocate association funds for the use and benefit of the association, and (3) properly designate expenses chargeable to the developer. The trial court granted the owners’ motion for summary judgment, finding as a matter of law that the director breached his fiduciary duty to the condominium association. The trial court’s decision was reversed on appeal. The appeals court ruled that in order to impose personal liability on a director there must be a showing of culpable intent on the part of the director to engage in criminal activity, fraud, willful misconduct, or self-dealing with respect to the corporation. Additionally, on these facts, the court found that there was still a factual issue of whether the director’s conduct was sufficient to rise to the level necessary to impose personal liability.
3. Munder v. Circle One Condominium, Inc. 596 So2d 144 (Fla. 4thDCA 1992). In Munder, a condominium developer corporation failed to create a board of directors as required under the bylaws and retained full control of the association’s duties, which included the requirement to purchase insurance for the clubhouse. A fire destroyed the uninsured clubhouse, so the unit owners brought suit against the developer in both his corporate and individual capacity (individual was the president and sole shareholder of the corporate developer). The trial court entered judgment against the developer in both his corporate and individual capacity. The appeals court affirmed the judgment with respect to the corporate liability but reversed with respect to the imposition of personal liability. The court recited the general rule of director liability in Florida, viz., directors are not liable for corporate acts simply by reason of their official relation to the corporation; there must be some affirmative wrong-doing on the part of the director such as fraud, self-dealing, unjust enrichment, or betrayal of trust in order for personal liability to be imposed.
4. South End Improvement Group, Inc. v. Bank of New York, 602 So.2d 1327 (Fla. 4th DCA 1992). The corporation in South End was in the business of supplying water to certain
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