What's happening
This bill updates and consolidates New York's not-for-profit corporation law regarding indemnification and liability protections for directors, officers, and key persons.
Why it matters
Expands and clarifies protections for "key persons". (not just directors and officers), potentially encouraging talented individuals to serve in nonprofit leadership by reducing their personal legal risk.
Modernizes and consolidates indemnification rules. , making it easier for nonprofits to understand when and how they can cover legal costs and judgments for their leadership, which could help organizations recruit and retain qualified board members and managers.
Establishes clear standards and procedures for court-ordered indemnification. , including when advancement of legal expenses is permitted and when repayment is required, thus providing more predictable legal outcomes for individuals involved in litigation.
Allows for broader insurance coverage. for directors, officers, and key persons, even in cases where the corporation might not otherwise be able to indemnify them, potentially reducing the financial exposure of individuals serving nonprofits.
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Who cares
Headline styles
Protect Nonprofit Leaders from Lawsuits
Plain English, a few words. Used as the page title.
Sponsors
Senator · Senate District 14
No co-sponsors yet.
History
- Referred to corporations, authorities and commissions
- Referred to corporations, authorities and commissions
Full text
5 pagesUnderlined is new[Struck] is removedOfficial text on nysenate.gov ↗
STATE OF NEW YORK
5747
2019-2020 Regular Sessions
IN SENATE
May 14, 2019
Introduced by Sen. COMRIE -- read twice and ordered printed, and when printed to be committed to the Committee on Corporations, Authorities and Commissions
AN ACT to amend the not-for-profit corporation law, in relation to the indemnification of directors, officers and key persons; and to repeal sections 721, 722 and 723 of the not-for-profit corporation law relating thereto
The People of the State of New York, represented in Senate and Assembly, do enact as follows:
Section 1. Sections 721, 722 and 723 of the not-for-profit corporation law are REPEALED.
§ 2. The not-for-profit corporation law is amended by adding a new section 721 to read as follows: § 721. Authorization for indemnification of directors, officers or key
persons; insurance.
(a) A corporation may indemnify any director, officer or key person against expenses, including judgments, fines, excise taxes, amounts paid in settlement, attorneys' fees, court costs and disbursements actually and necessarily incurred as a result of action or proceeding, or any appeal thereof, arising out of service as a director, officer or key person (1) who was or is a party or is threatened to be made a party to any threatened, pending or contemplated action or proceeding, or any appeal thereof, whether civil, criminal, administrative or investigative (including an action by or in the right of the corporation and/or by its members, if any, or in the right of any other corporation of any kind, domestic or foreign and/or by its members, if any), or by any partnership, joint venture, trust, employee benefit plan or other enterprise; and (2) who has met the standards of conduct set forth in section 717 (duty of directors and officers and key persons) and elsewhere in this article and who is entitled to the protection of section 720-a of this article (liability of directors, officers, key persons and trustees) to
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[ ] is old law to be omitted.
LBD11695-01-9
S. 5747 2
the extent applicable, and (3) with respect to any criminal action or proceeding, who had reasonable cause to believe that her or his conduct was lawful. A director, officer or key person who may be indemnified under this section shall include a person (i) whose testator or intestate is or was a director, officer or key person of the corporation, or (ii) who is or was serving in any capacity at the request of the corporation as a director, officer or key person of another corporation, partnership, joint venture, trust, estate, employee benefit plan or other enterprise.
(b) The termination of any action or proceeding, including an action by or in the right of the corporation and/or by its members, by judgment, order, settlement, adjudging liability to the director, officer or key person, conviction or upon a plea of nolo contendere or its equivalent shall not necessarily create a presumption that the (1) director, officer or key person did not act in accordance with the standards of care set forth in subdivision (a) of this section, and (2) with respect to any criminal action or proceeding, did not have reasonable cause to believe that the director's, officer's or key person's conduct was unlawful.
(c) No indemnification shall be made by the corporation if such director, officer or key person shall have been adjudged to be liable, including liability to the corporation, unless and only to the extent that the court, in which such action or proceeding was brought, shall determine, upon application, that, despite the adjudication of liability but in view of all the circumstances of the case, such director, officer or key person is fairly and reasonably entitled to indemnification with respect to all or any of the judgments, fines, excise taxes, amounts paid in settlement, attorneys' fees, court costs and disbursements actually and necessarily incurred, because the director, officer or key person had made a good faith effort to meet the standards of conduct set forth in this article.
(d) Expenses, including attorneys' fees, court costs and disbursements, incurred by a director, officer or key person of the corporation or by persons serving at the request of the corporation as directors, officers or key persons of another corporation, partnership, joint venture, trust or other enterprise, in defending any civil, criminal, administrative or investigative action or proceeding, arising out of such service, may be paid, if authorized in accordance with paragraph (e) of this section, in advance of the final disposition of such action or proceeding, upon receipt by the corporation of an undertaking in accordance with article 25 of the civil practice law and rules by or on behalf of such director, officer or key person to repay such amount if she or he shall ultimately be determined not to be entitled to be indemnified as authorized in this section.
(e) Any indemnification or advancement under this section, except for one ordered by a court, shall be made only in the specific action or proceeding upon a determination that indemnification of the present or former director, officer or key person is proper in the circumstances because the person has met or in the case of an advance can be reasonably expected to meet the applicable standard of conduct set forth in paragraph (a) of this section:
(1) by a majority vote of the directors of the corporation who are not parties to such action or proceeding, even though less than a quorum;
(2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum;
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(3) if there are no such directors, or if such directors so direct, by independent legal counsel in a reasoned written opinion; or
(4) by the members, if any.
(f) A right to indemnification or to advancement of expenses arising under a provision of the certificate of incorporation, a bylaw or a resolution of the board or of a committee thereof shall not be eliminated or impaired by an amendment to the certificate of incorporation to the bylaws or to the resolution after the occurrence of the act or omission that is the subject of the civil, criminal, administrative or investigative action or proceeding for which indemnification or advancement of expenses is sought, unless the provision in effect at the time of such act or omission explicitly authorizes such elimination or impairment after such action or omission has occurred.
(g) A corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer or key person of the corporation, or is or was serving at the request of the corporation as a director, officer or key person of another corporation, partnership, joint venture, trust, estate, employee benefit or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall include, in addition to a consolidated or surviving corporation, any constituent corporation, including any constituent of a constituent, absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers or key persons that any person who is or was a director, officer or key person of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer or key person of another corporation, partnership, joint venture, trust, estate, employee benefit plan or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.
(i) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall continue as to a person who has ceased to be a director, officer or key person and shall inure to the benefit of her or his heirs, executors and administrators if that person was a director, officer or key person at the time the cause of action or claim arose or prosecution was threatened or information or indictment was filed.
(j) For the purpose of this section, a corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of her or his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to applicable law shall be considered fines; and action taken or omitted by a person with respect to an employee benefit plan in the performance of such person's duties for a purpose reasonably believed by such person to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the corporation.
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§ 3. Section 724 of the not-for-profit corporation law, as amended by chapter 368 of the laws of 1987, paragraph (a) as amended by chapter 549 of the laws of 2013, is renumbered section 722 and amended to read as follows: § 722. Indemnification of directors [and], officers or key persons by a
court.
(a) Notwithstanding the failure of a corporation to provide indemnification, and despite any contrary resolution of the board, of a committee thereof or of the members in the specific case under section [723] 721 [(Payment of indemnification other than by court award)] (Authorization for indemnification of directors, officers or key persons; insurance), indemnification [shall] may be awarded by a court to the extent authorized under section [722 (Authorization for indemnification of directors and officers), and paragraph (a) of section 723 (Payment of indemnification other than by court award)] 721 (Authorization for indemnification of directors, officers or key persons; insurance). Application therefor shall be made on notice to the attorney general and may be made, in every case, either:
(1) In the civil action or proceeding in which the expenses were incurred or other amounts were paid, or
(2) To the supreme court in a separate proceeding, in which case the application shall set forth the disposition of any previous application made to any court for the same or similar relief and also reasonable cause for the failure to make application for such relief in the action or proceeding in which the expenses were incurred or other amounts were paid.
(b) The application shall be made in such manner and form as may be required by the applicable rules of court or, in the absence thereof, by direction of a court to which it is made. Such application shall be upon notice to the corporation. The court may also direct that notice be given at the expense of the corporation to the members and such other persons as it may designate in such manner as it may require.
(c) Where indemnification is sought by judicial action, the court may allow a person such reasonable expenses, including attorneys' fees, during the pendency of the litigation as are necessary in connection with his defense therein, if the court shall find that the defendant has by his pleadings or during the course of the litigation raised genuine issues of fact or law.
§ 4. Section 725 of the not-for-profit corporation law is renumbered section 723.
§ 5. The section heading and subdivision (a) of section 723 of the not-for-profit corporation law, as amended by chapter 368 of the laws of 1987 and such section as renumbered by section 4 of this act, are amended to read as follows:
Other provisions affecting indemnification of directors [and], offi-
cers and key persons.
(a) All expenses incurred in defending a civil or criminal action or proceeding which are advanced by the corporation under paragraph [(c)] (d) of section [723] 721 [(Payment of indemnification other than by court award)] (Authorization for indemnification of directors, officers or key persons; insurance) or allowed by a court under paragraph (c) of section [724 (Indemnification of directors and officers by a court)] 722 (Indemnification of directors, officers or key persons by a court) shall be repaid in case the person receiving such advancement or allowance is ultimately found, under the procedure set forth in this article, not to be entitled to indemnification or, where indemnification is granted, to
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the extent the expenses so advanced by the corporation or allowed by the court exceed the indemnification to which he is entitled.
§ 6. Section 720-a of the not-for-profit corporation law, as added by chapter 220 of the laws of 1986, is amended to read as follows: § 720-a. Liability of directors, officers, key persons and trustees.
Reflowed for reading: line numbers and page breaks removed. Cite the official text.
Sponsor's memo
Title of bill
An act to amend the not-for-profit corporation law, in relation to the indemnification of directors, officers and key persons; and to repeal sections 721, 722 and 723 of the not-for-profit corpo- ration law relating thereto
Summary of major provisions
The proposed consolidated indemnification provisions would make many changes in law.
Section 1 of the bill would repeal section 721 for the reasons stated in section I.A. of this Memorandum in Support.
Read the full memo (1,654 words)
Section 2 of the bill would renumber section 722 as section 721 and consolidate the substantive indemnification provisions in one subdivi- sion (A).
Subdivision (A) would make indemnification available not only in actions by third parties, by the corporation and in derivative actions by the corporation or by its members, but in representative actions by members against directors, officers or key persons for, for example, violation of their fiduciary duties to them. It would provide consistent standards for director, officer and key person conduct by incorporating by refer- ence the general fiduciary standards of care set forth in section 717 which section 722 now ignores. It combines existing section 722(a) and part of section 722(c) up to the clause beginning "except . . . .
Subdivision (B) is essentially section 722(b) but modified consistent with the proposed standards of conduct in subdivision (A) and to make it clear that the presumption thus created is not irrebuttable.
Proposed subdivision (C) restates the clause in section 722(c) beginning "except . . ." to preserve the authority of a court to award indemnifi- cation, notwithstanding an adjudication of liability, if in its discretion, the court determines that the director, officer or key person had made a good faith effort to meet the applicable standards of conduct. Section 722(c) now contains no substantive guidance for the court. Proposed subdivision (C) also confers discretion on the court to determine the extent to which indemnification shall be made. Section 722(c) now confers such discretion on a court only with respect to a "proper" portion of a settlement amount and related (?) expenses.
Section 722(D) would overrule Spitzer v. Soundview Health Center, 2005 N.Y. Misc. LEXIS 3249, 233 N.Y.L.J. 18 (Sup. Ct. NY, County), one of the "Espada" cases. The Court interpreted the requirement of an "undertak- ing" in a case of advance indemnification to be as little as a naked promise to repay. This exposes not-for-profit corporation assets to loss and, equally important, is inconsistent with settled law. Section 2501 of the Civil Practice Law and Rules defines "undertaking" either as "Any obligation to pay . . . which contains a covenant by a surety to pay the required amount" or the "deposit . . Law section 14 defines "bond" and "undertaking" as equivalent. The decision is also inconsistent with how the similar Business Corporation Law section has been applied. Donovan v. Rothman, 253 A.D.2d 629, 677 N.Y.S.2d 327 (1" Dep't 1988); Pillplak v. Keyes, 286 A.D.2d 237, 729 N.Y.S.2d 99 (1" Dep't), motion for leave
to appeal denied, 97 N.Y.2d 828, 893 N.E.2d 105, 802 N.Y.S.2d 828 (2008).
Subdivision (E) is procedural and sets forth all of the ways a corpo- ration may authorize indemnification as set forth in section 723 which would be repealed.
Subdivision (F) provides that generally a corporation cannot retroac- tively eliminate or impair rights to indemnification set forth in its certificate of incorporati6o, ti:viaw or resolution of the board or of a committee thereof.
Subdivision (G) makes it clear that the indemnification insurance that a corporation is authorized to purchase by NPCL section 726 covers a director's, officer's or key person's services, at the request of the corporation, on another legal entity.
Subdivision (H) ensures the survival of indemnification in case of a merger or consolidation of a corporation.
Subdivision (I) provides that once a right to indemnification arises, it continues to benefit a former director, officer or key person's and her or his heirs and estate.
Subdivision (j) incorporates section 722(d).
Section 3 of the bill would repeal section 723.
Section 4 of the bill would renumber section 724 as section 722 and make a technical and a conforming change in the introductory paragraph of subdivision (a).
Section 5 of the bill would renumber section 725 as section 723 and make conforming changes in subdivision (a).
Section 6 of the bill would amend section 720-a to add "salary or other" to the reference to "compensation" because "salary" is the term used in section 715(e).
Section 7 of the bill would make January 1, 2020 the effective date of the Act, but give directors, officers and key persons the option of having their rights to indemnification determined either by the NPCL as in effect when their rights accrued or under the NPCL as amended by such act.
Justification
This bill would completely revise the not-for-profit corporation law's (NPCL's) indemnification and related provisions for directors and offi- cers and add key persons as individuals who may be indemnified to the same extent as a director and officer. As Sean Delany, Esq., head of the Lawyers Alliance, testified at the Senate Corporation Committee NPCL hearing in 2013, the indemnification provisions are complicated, incom- plete, inconsistent and unworkable. Based as they are on the corre- sponding provisions of the Business Corporation Law, some are also inap- propriate for not-for-profit corporations. Some, but not all, of the difficulties raised by the Business Corporation Law indemnification provisions (and, therefore, by the NPCL's) are well analyzed in Schloss- berg v. Schwartz, 43 Misc.3d 1224 (A), 992 N.Y.S.2d 161. (Sup. Ct. Nassau County 2014), copy attached.
A.Repeal of Section 721. Section 721 would be repealed. It provides that the indemnification and advancement of expenses of directors and offi- cers provided by NPCL Article 7 are not exclusive, if additional indem- nification is authorized by certificate of incorporation , by-laws, resolution of members (if any), resolution of directors or agreement with them.
However appropriate such a provision may be for for-profit Business Corporation Law assets (see Business Corporation Law section 721), such discretion is not appropriate for not-forprofit corporation assets, even though the discretion conferred by section 721 is not unlimited. It further provides "no indemnification may be made ... if a judgment or other final adjudication adverse to the director or officer establishes that his acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he personally gained a financial profit or other advantage to which he was not legally entitled." But as we shall see these standards are not consistent with the standards for indemnifica- tion in the substantive indemnification sections of Article 7 (which are not themselves necessarily consistent). Not are they consistent with the general fiduciary standard set forth in NPCL section 717. Nor it is clear if they are subject to the limitations on indemnification in section 725 which applies by its terms to all of the Article 7 indemni- fication provisions.
B.Section 722. Section 722(a) relates to indemnification in third party or derivative civil or to criminal actions against a director or offi- cer. Its standard is "acted in good faith, for a purpose which he reasonably believed to be . . . in the best interests of the corpo- ration, and, in criminal proceedings, had no reasonable cause to believe that his conduct was unlawful." Why should it not also include represen- tative actions by members which are alluded to in NPCL section 623(c)? Why should indemnification apparently be available under section 722(a) regardless of liability and, as we shall see, not under section 722(c) except by court order for which the section provides only a vague stand- ard? Section 722(c) relates only to actions against the director or officer by the corporation itself or in its right or of that of another entity the defendant serves at the request of the corporation, except a threatened or pending action that is settled or when she or he shall have been adjudged liable. But there is another exception: unless a court determines that (nevertheless) she or he is "fairly and reason- ably" entitled to indemnification. No standard is provided to the court.
C.Section 723. Section 723(b) is largely procedural. But section 723(a) raises new issues of consistency: A person who has been successful, on the merits or otherwise (procedurally?), in the defense of a civil or criminal action or proceeding of the character described in section 722 shall be entitled to indemnification as authorized in such section. (emphasis added)
Section 723(c) provides: Expenses incurred in defending a civil or criminal action or proceeding may be paid for in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such direc-
tor officer to repay such amount as, and to the extent, required by paragraph (a) of section 725
This requirement was emasculated by Spitzer v. Soundview Health Center, 2005 N.Y. Misc. LEXIS 3249, 233 N.Y.L.J. 18 (Sup. Ct. N.Y. County), one of the Espada cases. There the Court held that a bare promise to repay was sufficient, despite contrary authority. Section 725(a) OTHER PROVISIONS AFFECTING INDEMNIFICATION OF DIRECTORS AND OFFICERS provides for the repayment of advances if the person "is ultimately found . . . not to be entitled to the indemnification." On information and belief, Soundview paid the legal expenses of its employees, all of whom pled or were convicted, and was not repaid.
Section 725. Section 725 places further limitations on indemnification.
Legislative history
New Bill; May of 2019.
Fiscal implications
None.
Effective date
January 1st, 2020; provided, however, that rights to indemnification that accrued prior to such effective date shall be determined by the not-for-profit corporation law as then in effect, unless the director, officer or key person elects to have those rights or obligations deter- mined by the not-for-profit corporation law as amended by this act.
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