Permits elimination of liability of directors of certain not-for-profit corporations to the corporation or its members

Justification

When the Not-for-Profit Corporation Law ("N-PCL") § 720-a was enacted in 1986, the legislature addressed the need to protect volunteer directors, officers and trustees of not-for-profit charitable organizations against third party tort claims. Directors, officers and trustees of not-for-profit corporations are frequently named as defendants, regardless of culpability, because they are either perceived as having greater financial resources than the nonprofit organizations they serve or are perceived as being more likely to settle a frivolous suit than to contest the suit, due to their role as volunteers in not-for-profit organizations, insufficient funds and their status in the community.

Unfortunately, the legislature limited the protection of N-PCL § 720-a to those individuals who served as directors, officers and trustees of Internal Revenue Code Section 501 (c) (3) organizations and limited that protection to third party claims. This bill would provide protection to directors of all not-for-profit corporations against claims by the corporation or its members. Chapter 367 of the Laws of 1987 amended the Business Corporation Law ("BCL") (adding new section (b) to BCL §402) to provide that corporations could, by provision in the certificate of incorporation, limit the liability of directors to corporations or shareholders for any breach of duty unless the director's actions were in bad faith or involved intentional misconduct, a knowing violation of law or financial or other profit by the director.

The BCL legislation was in part a response to director's legitimate concerns regarding unjustified exposure to personal liability for good faith management actions. This concern for exposure diminished the ability of corporations to recruit directors, undercut directors' ability to act based upon corporate interests as opposed to acting primarily to minimize potential liability, and threatened to drive corporations out of New York to states with statutes more favorable to directors. All of these concerns apply to a much greater extent to directors who serve on boards of not-for-profit corporations. They perform valuable functions for the community and the State of New York. Indeed, because not-for-profit directors usually serve without compensation and because many not-for-profit corporations can ill afford appropriate levels of directors' liability insurance or provide adequate indemnification, the concerns of directors over litigation, however frivolous, are substantially heightened.

The perception of exposure to personal liability has had a detrimental effect on the ability of not-for-profit corporations to recruit directors. This bill will ease this problem. The exclusion of protection for acts that are in bad faith, involve intentional misconduct, a knowing violation of law, or personal gain, minimizes any potential detriment to the corporation or its members. These benefits may only be extended to directors by amendment of the certificate of incorporation and under Section 802 of the N-PCL, members must authorize such amendments if there are any members entitled to vote thereon. Many other states, including Delaware and Pennsylvania, provide protection for directors of not-for-profit corporations similar to that provided for in this bill.

Effective date

This act shall take effect immediately.