Baylor Law SchoolBaylor Law SchoolNonprofit OrganizationsNonprofit Organizations

Spring 2005 CourseSpring 2005 CourseGovernance; State Standards of Care;

Attorney General OversightPrepared By:

Darren B. MooreBourland, Wall & Wenzel,

A Professional Corporation

Attorneys and Counselors

City Center Tower II

301 Commerce Street, Suite 1500

Fort Worth, Texas 76102

(817) 877-1088

(817) 877-1636 (facsimilie)

E-mail: dmoore@bwwlaw.com

©Bourland, Wall & Wenzel, P.C.

Duties of Trustees

• Duty of Care– Exercise care and skill

of person of ordinary prudence in dealing with person’s own property

– Liable for simple negligence

• Duty of Loyalty– Administer trust

property solely for benefit of beneficiaries

– No conflict of interest transactions even if fair to beneficiaries; no self-dealing

Duties of Directors

• Duty of Care

1. Act in good faith2. Use care that a person of

ordinary prudence would use in same or similar circumstances (reasonable skills)

3. Make decisions believed to be in the best interest of the corporation (must be reasonably informed) – Broader discretion than trustee

• Duty of Loyalty

1. Transactions with organization must be fair to the organization (e.g. fair dealing permitted)

2. Conflict of interest transactions voidable

3. Interested director should not cast vote

4. Corporate Opportunity Doctrine

5. Avoid use of inside information

Business Judgment Rule a/k/a Best Judgment Rule

• Directors of nonprofit corporations are not liable where they exercise their business (or best) judgment.

– Not liable for errors or mistakes in judgment if acted in good faith

– Not liable unless grossly negligent

Conflicts of Interest

Adopt a policyDisclose material factsInterested directors should abstain from

votingApproval from majority of disinterested

directors

Q: What if all directors are family members?

Public Trust – Charitable Organizations

• Case-law: For profit corporate standard applies to charitable corporations

• Texas Non-Profit Corporation Act – same

• Allows for business judgment rule and reliance on advice of professional advisors

Bylaws: Professional Management/Advisory Boards

• May be an executive committee

• Day to day management can be delegated

• CPA’s• Attorneys• Money Managers

No personal liability if director relies on information from others so long as director does not have knowledge that the information is incorrect

Investment: Uniform Management of Institutional Funds Act

• Authorizes delegation of investment decisions

• Provides for expenditure of invested funds

• Standard of care of corporate director

Investment: Uniform Investor Act

• Consider investment portfolio as a whole

• Diversify investments

Indemnification

• Permissive– Director in good faith– Director reasonably

believed she acted in the best interests of the corporation (or, if not conduct in official capacity, not in opposition to corporation’s interests)

– Criminal: no reason to believe conduct was unlawful

• Precluded– Found liable for receiving

personal benefit improperly– Found liable to the

corporation But: Can still be

indemnified for reasonable expenses incurred in connection with proceeding so long as not found liable for willful or intentional misconduct in performing corporate duties

Must have a provision in the governing documents to provide for indemnification during litigation

Mandatory Indemnification

Nonprofit must reimburse reasonable expenses incurred by a director after a court order and the exhaustion of all appeals where the director is successful in defending the lawsuit

Charitable Immunity: Texas

• No common law charitable immunity – Historically immune– TSC abrogated in 1971– Pendulum swung back in 1987 with passage

of Charitable Liability and Immunity Act of 1987 (Section 84.001 et seq Texas Civil Practice & Remedies Code)

Definition of Charitable Organization

a) An organization exempt from federal income taxation as a 501(c)(3), organized and operated exclusively for charitable or religious purposes

b) Any bona fide religious or charitable organization organized and operated exclusively for the promotion of social welfare [if it meets a sic part test which mirrors the test for 501(C)(3) status]

Charitable Immunity (con)

• Once within the definition, the volunteers, employees, and organization qualify for immunity under specific guidelines

• No Volunteer immunity for intentional torts, willful misconduct, gross negligence

Volunteer Immunity

• A volunteer is a person rendering services to or on behalf of a charitable organization who does not receive compensation (other than reimbursement for expenses)

• Direct service volunteer is immune if in good faith and within course and scope

• A director or officer must be in good faith• Still have liability up to personal insurance

if operation of a motor vehicle

Employee/Organization Liability

• For non-hospital employees and non-hospital organizations, limited immunity if obtain requisite amounts of insurance– $500,000/$1,000,000/$100,000– Must be in course and scope– Act does not apply to acts/omissions that are

willful, intentional, wantonly negligent, or done with conscious indifference or reckless diregard

Charitable Immunity:Open Questions/Types of Insurance

• What type of insurance is necessary

• Constitutionality• Interdependent on

intentional act exclusion

• General liability• Automobile liability• Hired and non-owned• Sexual misconduct• Counseling acts• D&O• EPLI• Special Events

Volunteer Protection Act 42 U.S.C. Sec. 14501 et al 1997

• Volunteers not liable if:– Acting within scope of responsibilities– Properly licensed if required– No willful or gross negligence– Not covered: use of motor vehicle/aircraft

**Preempts state law unless state law provides additional protection**

Avoiding Director Liability

• Advisory boards of professionals in their fields to provide guidance

• Indemnification provision in bylaws (good faith)

• D&O insurance

• Audits

• TX Charitable Liability & Immunity Act

• Volunteer Protection Act of 1997 (fed)

Authority of AG as to Charitable Organizations

• Common Law Authority

• Constitutional Authority

• Statutory Authority

Common Law Authority of the AG

• Representative of the public interest in charity (standing)

• Duty to ensure charity assets used for appropriate charitable purposes

• Broad authority to carry out duty

• Power and Duty derived from Statute of Charitable Uses (cf. Tex. Civ. Prac. & Rem. Code s 5.001)

Constitutional Authority of the AG

• AG shall “perform such other duties as may be required by law.”

• “[The AG] shall represent the state in all suits and pleas in the Supreme Court of the State in which the State may be a party, and shall especially inquire into the charter rights of all private corporations and from time to time, in the name of the State, take such action as may be proper and necessary to prevent any private corporation from exercising any power . . . Not authorized by law.”– Article IV, Section 22 Texas Constitution

Statutory Authority of the AG

• Chapter 123 of the Texas Property Code– Defines charitable trusts to include virtually all

charitable entities– AG is a proper (although not necessary party)

to proceedings involving charitable trusts (must receive notice and have right to intervene on behalf of public)

– Doesn’t provide any substantive rights (builds on common law authority)

Statutory Enforcement Authority

• Bingo Enabling Act

• Charitable Raffle Enabling Act

• Solicitation in the name of veterans’ organization

• Solicitation for Public Safety Organizations

• Telephone Solicitations by Charitable Organizations

• Duties of Nonprofit Hospitals

Statutory Investigative Authority

• Texas Miscellaneous Corporation Laws Act (Tex. Rev. Civ. Stat. Ann. Art. 1302-5.01 et seq.)

• Texas Nonprofit Corporation Act (Tex. Rev. Civ. Stat. Ann. Art. 1396-1.01 et seq.)

• Texas Uniform Unincorporated Nonprofit Association Act (Tex. Rev. Civ. Stat. Ann. Art. 1396-70.01 et seq.)

Texas Miscellaneous Corporation Laws Act

• Applies to for profit and nonprofit corporations

• Provides AG authority to present a written request to examine the operations of the corporation (without notice)

• Failure to comply with the AG can result in forfeiture of right to do business in Texas and fines for the corporation’s officers

Texas Non-Profit Corporation Act

• Provides AG various powers and investigative authority over nonprofits (cf. TUUNAA)

• Many powers implied from provisions of the Act which require corporate compliance (eg keeping accurate books and records)

• Authority to apply for involuntary dissolution (and liquidation)

• Authority to apply for appointment of a receiver

AG Authority Under the DTPA

• False, misleading, or deceptive acts or practices in the conduct of any trade or commerce (Note: AG Charitable Trusts Section is part of the Consumer Protection Division)

• Applies to nonprofits even if they don’t charge

• Applies to fraudulent solicitations regardless of whether goods or services are offered as part of the solicitation

• Authorizes pre-suit investigations

• Authorizes suits for enforcement

• Imposes penalties for noncompliance– Enhanced penalty in the

event AG determines act or practice seeking to acquire or deprive money from a consumer 65 or older

Common Causes of Action by AG

1. Constructive trust (really a remedy)

2. Breach of fiduciary duty (venue in Travis County)

3. Violations of various statutes (see above)

4. Fraud

5. Other

Remedies Commonly Sought by the AG

• Removal of trustees or board members

• Money damages

• Appointment of a receiver

• Injunctive relief

• TRO’s, asset freezes, orders of attachment

• Attorneys’ Fees and court costs

Next Week

No Class!

Read pp. 147-195 for March 3