The Common Law
Nonprofit director and personal liability
I recently agreed to volunteer on the board of directors of a local nonprofit organization. My position starts in January. A fellow board member mentioned that we can be personally liable for mistakes made by the nonprofit. Is that right? If yes, it makes me hesitant to join.
Volunteering as a director for a nonprofit organization is a great way to engage in the community and give back. But would volunteers think twice about serving as a nonprofit director if they could be sued personally in relation to the nonprofit's actions?
Established Texas law diminishes most fears of personal liability, and rightfully so, as otherwise quality volunteers would be discouraged from volunteering as nonprofit directors. Texas relies on the Nonprofit Corporation Act, which essentially states that a nonprofit director cannot be liable to the organization or any other person if the director acts in good faith, with ordinary care, and in a manner the director reasonably believes to be in the best interests of the nonprofit corporation. A person seeking to establish personal liability of a director must show the director failed to comply with each component of this standard. From a practical standpoint, one of the best ways for nonprofit directors to protect themselves from personal liability under this standard is to pay close attention to the authority the nonprofit organization has granted to its directors and do not deviate from that authority without permission as given by the organization's bylaws and other rules.
It is important to note that Texas law limits, but does not completely prohibit, personal liability of a nonprofit director for actions taken on behalf of the organization. Lawsuits are uncommon but not entirely unprecedented. Examples of claims asserted against directors include discrimination (age, race, sex, national origin, etc.), wrongful termination, or libel and slander. Even if the lawsuit is meritless, the director could be forced to incur large legal bills in order to defend against the frivolous claim. As a new director, you may also want to check if your nonprofit maintains directors and officers liability insurance.
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Marrs, Ellis & Hodge LLP, www.jmehlaw.com.
The material in this column is for informational purposes only. It does not constitute, nor is it a substitute for, legal advice. For advice on your specific facts and circumstances, consult a licensed attorney. You may wish to contact the Lawyer Referral Service of Central Texas, a non-profit public service of the Austin Bar Association, at 512-472-8303 or www.austinlrs.com.