New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on March 6, 2002, representing the position of the New York State Insurance Department.

Re: Liability of Board Members for a Not-for-Profit-Corporation

Question Presented:

Are the members of the Board of Directors of a Not-for-Profit Corporation held harmless from litigation resulting from Board decisions?

Conclusion:

N.Y. Not-for-Profit-Corp. Law § 720-a confers qualified immunity for uncompensated officers and directors of certain not-for-profit corporations.

Facts:

No facts were presented.

Analysis:

During the mid-1980’s, New York faced a liability crisis that affected all aspects of the private and public sectors. One of the results of the increasing unavailability of insurance was the hesitancy of citizens to accept positions as uncompensated officers and directors of not-for profit corporations. In 1986, N.Y. Not-for-Profit-Corp. Law § 720-a, which has been described as "fixing reasonable limitations on the liability exposure of those who give of their time and energy without charge to lead public service organizations, was enacted to institute qualified immunity for uncompensated officers and directors of certain not-for-profit corporations. That section provides:

Except as provided in sections seven hundred nineteen and seven hundred twenty of this chapter, and except any action or proceeding brought by the attorney general or, in the case of a charitable trust, an action or proceeding against a trustee brought by a beneficiary of such trust, no person serving without compensation as a director, officer or trustee of a corporation, association, organization or trust described in section 501 (c) (3) of the United States internal revenue code shall be liable to any person other than such corporation, association, organization or trust based solely on his or her conduct in the execution of such office unless the conduct of such director, officer or trustee with respect to the person asserting liability constituted gross negligence or was intended to cause the resulting harm to the person asserting such liability. For purposes of this section, such a director, officer or trustee shall not be considered compensated solely by reason of payment of his or her actual expenses incurred in attending meetings or otherwise in the execution of such office.

N.Y. Not-for-Profit-Corp. Law § 720-a (McKinney 1997).

N.Y. Not-for-Profit Corp. Law § 719 (McKinney 1997) provides:

(a) Directors of a corporation who vote for or concur in any of the following corporate actions shall be jointly and severally liable to the corporation for the benefit of its creditors or members or the ultimate beneficiaries of its activities, to the extent of any injury suffered by such persons, respectively, as a result of such action, or, if there be no creditors or members or ultimate beneficiaries so injured, to the corporation, to the extent of any injury suffered by the corporation as a result of such action:

(1) The distribution of the corporation’s cash or property to members, directors or officers, other than a distribution permitted under section 515 (Dividends prohibited; certain distributions of cash or property authorized).

(2) The redemption of capital certificates, subvention certificates or bonds, to the extent such redemption is contrary to the provisions of section 502 (Member’s capital contributions), section 504 (Subventions), or section 506 (Bonds and security interests).

(3) The payment of a fixed or contingent periodic sum to the holders of subvention certificates or of interest to the holders or beneficiaries of bonds to the extent such payment is contrary to the provisions of section 504 or section 506.

(4) The distribution of assets after dissolution of the corporation in violation of section 1005 (Procedure after dissolution) or without paying or adequately providing for all known liabilities of the corporation, excluding any claims not filed by creditors within the time limit set in a notice given to creditors under articles 10 (Non-judicial dissolution) or 11 (Judicial dissolution).

(5) The making of any loan contrary to section 716 (Loans to directors and officers).

(b) A director who is present at a meeting of the board, or any committee thereof, at which action specified in paragraph (a) is taken shall be presumed to have concurred in the action unless his dissent thereto shall be entered in the minutes of the meeting, or unless he shall submit his written dissent to the person acting as the secretary of the meeting before the adjournment thereof, or shall deliver or send by registered mail such dissent to the secretary of the corporation promptly after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. A director who is absent from a meeting of the board, or any committee thereof, at which such action is taken shall be presumed to have concurred in the action unless he shall deliver or send by registered mail his dissent thereto to the secretary of the corporation or shall cause such dissent to be filed with the minutes of the proceedings of the board or committee within a reasonable time after learning of such action.

(c) Any director against whom a claim is successfully asserted under this section shall be entitled to contribution from the other directors who voted for or concurred in the action upon which the claim is asserted.

(d) Directors against whom a claim is successfully asserted under this section shall be entitled, to the extent of the amounts paid by them to the corporation as a result of such claims:

(1) Upon reimbursement to the corporation of any amount of an improper distribution of the corporation’s cash or property, to be subrogated to the rights of the corporation against members, directors or officers who received such distribution with knowledge of facts indicating that it was not authorized by this chapter, in proportion to the amounts received by them respectively.

(2) Upon reimbursement to the corporation of an amount representing an improper redemption of a capital certificate, subvention or bond, to have the corporation rescind such improper redemption and recover the amount paid, for their benefit but at their expense, from any member or holder who received such payment with knowledge of facts indicating that such redemption by the corporation was not authorized by this chapter.

(3) Upon reimbursement to the corporation of an amount representing all or part of an improper payment of a fixed or contingent periodic sum to the holder of a subvention certificate, or of interest to the holder or beneficiary of a bond, to have the corporation recover the amount so paid, for their benefit but at their expense, from any holder or beneficiary who received such payment with knowledge of facts indicating that such payment by the corporation was not authorized by this chapter.

(4) Upon payment to the corporation of the claim of the attorney general or of any creditor by reason of a violation of subparagraph (a) (4), to be subrogated to the rights of the corporation against any person who received an improper distribution of assets.

(5) Upon reimbursement to the corporation of the amount of any loan made contrary to section 716 (Loans to directors and officers), to be subrogated to the rights of the corporation against a director or officer who received the improper loan.

(e) A director or officer shall not be liable under this section if, in the circumstances, he discharged his duty to the corporation under section 717 (Duty of directors and officers).

(f) This section shall not affect any liability otherwise imposed by law upon any director or officer.

N.Y. Not-for-Profit Corp. Law § 720 (McKinney 1997) provides:

(a) An action may be brought against one or more directors or officers of a corporation to procure a judgment for the following relief:

(1) To compel the defendant to account for his official conduct in the following cases:

(A) The neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge.

(B) The acquisition by himself, transfer to others, loss or waste of corporate assets due to any neglect of, or failure to perform, or other violation of his duties.

(2) To set aside an unlawful conveyance, assignment or transfer of corporate assets, where the transferee knew of its unlawfulness.

(3) To enjoin a proposed unlawful conveyance, assignment or transfer of corporate assets, where there are reasonable grounds for belief that it will be made.

(b) An action may be brought for the relief provided in this section and in paragraph (a) of section 719 (Liabilities of directors in certain cases) by the attorney general, by the corporation, or, in the right of the corporation, by any of the following:

(1) A director or officer of the corporation.

(2) A receiver, trustee in bankruptcy, or judgment creditor thereof.

(3) Under section 623 (Members` derivative action brought in the right of the corporation to procure a judgment in its favor), by one or more of the members thereof.

(4) If the certificate of incorporation or the by-laws so provide, by any holder of a subvention certificate or any other contributor to the corporation of cash or property of the value of $1,000 or more.

(c) In a corporation having no members, an action may be brought by a director against third parties to obtain a judgment in favor of the corporation. The complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reason for not making such efforts. The court in its discretion shall determine whether it is in the interest of the corporation that the action be maintained, and if the action is successful in whole or in part, what reimbursement if any should be made out of the corporate treasury to the plaintiff for his reasonable expenses including attorney`s fees, incurred in the prosecution of the action.

It is important to note that the provisions of N.Y. Not-for-Profit Corp. Law § 720-a (McKinney 1997) in no way limit a director’s liability pursuant to N.Y. Not-for-Profit Corp. Law §§ 719 and 720 (McKinney 1997).

There are numerous annotations following the above-referenced sections in the McKinney publication that may be helpful in understanding how the sections have been interpreted.

For further information you may contact Supervising Attorney Joan Siegel at the New York City Office.