Richard L. Weber, Esq. High-profile Case Shines a Spotlight on Obligation of Nonprofit Directors By Richard L. Weber, Esq.
N ‘Nonprofit boards should consider obtaining ‘directors and officers’ insurance coverage (aka “D&O” coverage) and employee “fidelity insurance” in order to protect board members that diligently perform their duties.’
Richard L. Weber is an attorney with Bond, Schoeneck & King, PLLC in Syracuse. He specializes in business litigation, trust and estate litigation, and property disputes. To contact him, send an email to rweber@bsk.com. FEBRUARY / MARCH 2021
nonprofit boards cannot merely “show up” onprofit organizations are an esat monthly meetings and “rubber stamp” sential fixture in our communities. the actions of the organization’s executives Often, the engine that drives a nonand staff; individual directors who abdicate profit is its board of directors. their duties could incur significant individService on a nonprofit board is to be ual liability. Each and every director must commended. However, a recent court case be mindful of the fiduciary duties and underscores how important it is that indiobligations that come with board service, vidual directors understand the fiduciary including: obligations that come with nonprofit board • the duty of care, which demands service. acting in good faith with the appropriate In September 2019, The College of New degree of diligence, care and skill required Rochelle filed for bankruptcy after 115 years for the position, and includes (among other of operation. This particular bankruptcy was things) attending and actively participating commenced in The United States Bankruptcy at board meetings, reviewing reports and Court for the Southern District of New York minutes of the board and the organization, as a “Chapter 11” filing — a variation of and engaging in periodic review or audit bankruptcy that seeks “reorganization” of of the organization’s employees and operthe insolvent organization to satisfy debts ational practices; and (if possible) move forward with con• the duty of obedience, which requires tinued operation in some form in the future. compliance with applicable law and reguOver the following months, a number lations and the organization’s internal govof creditors filed claims in the bankruptcy, erning documents and mission statement; seeking to recover payment on debts owed this duty includes monitoring the operations by the college, and the campus itself was put of the organization to up for auction. make sure it remains On Jan. 14, 2021 the Guest Columnist properly focused on its committee established to core mission; and protect the interests of unsecured creditors • the duty of loyalty to the organization, commenced a lawsuit directly against former which demands that a board member put members of the college’s board of trustees. the best interests of the organization above The complaint in the lawsuit asserts (among his or her individual interests. other things) that the former trustees impropFortunately, the majority of nonproft erly “delegated near complete control” over organizations have diligent and engaged financial decisions to certain college adminboard members, and good internal goveristrators, failed to install proper corporate nance practices. Yet it is essential that an governance systems and safeguards, enabled individual serving on a nonprofit board of misuse and depletion of college endowment directors take the time to personally review funds, and failed to ensure proper payment the organization’s formation and goverof payroll taxes and other liabilities. nance documents (including its mission In particular, the complaint alleges that statement and bylaws), and become familiar the trustees failed to adequately supervise with the organization’s assets (including real the college’s former treasurer - vice president property and accounts), finances (including of finance, which enabled that individual to tax filings and audited financial statements) engage in unlawful misconduct and mismanand operations. agement of assets (actions for which he was Nonprofit boards should consider ultimately prosecuted by the Department of obtaining “directors and officers” insurJustice and sentenced to a three-year prison ance coverage (aka “D&O” coverage) and term). employee “fidelity insurance” in order The complaint seeks significant finanto protect board members that diligently cial recovery directly from each individual perform their duties. trustee, and asserts that each trustee bears Finally, organizations should consider responsibility for the tens of millions of retaining outside accountants and attorneys dollars of liabilities incurred by the college to review operations on a periodic basis with prior to the bankruptcy. an eye toward ensuring compliance with all The College of New Rochelle case is applicable laws and obligations. strong reminder that individuals serving on OSWEGO COUNTY BUSINESS
93
