Board Members May Be Legally Responsible for Organization’s Negligence

Tennessee lawsuit highlights liability of nonprofit board. members

Church Law and Tax 1995-09-01 Recent Developments

Officers, Directors, and Trustees

Key point: Officers and directors of nonprofit organizations may be legally responsible for gross negligence in the management of the organization’s finances, property, and affairs.

The Supreme Court of Tennessee issued an important decision addressing the liability of the officers and directors of nonprofit boards. The facts of this case can be summarized as follows. All present and former members of the board of a nonprofit nursing home were sued by persons who had purchased life-time care agreements with the facility. These individuals paid a substantial entrance fee and a monthly maintenance fee. In exchange, the corporation was required to provide the resident with care for life, including care in a skilled nursing facility if needed, at no additional charge. Upon the death of a resident, the corporation was obligated to refund 50 percent of the entrance fee to the resident’s estate. The residents who brought the lawsuit claimed that the current and former board members had been grossly negligent in the management of the corporation’s affairs and that their mismanagement had jeopardized the corporation’s ability to perform according to the “life-care” contracts. The residents sued the board members individually on the following alternative theories: (1) grossly negligent management of the corporation; (2) breach of fiduciary duties owed by the directors to the residents; (3) violation of the Tennessee Consumer Protection Act; and (4) the legal writ of “quo warranto.”

The supreme court threw out the first three theories of liability, but allowed the board members to be sued on the basis of “quo warranto.” Tennessee law defines a quo warranto proceeding as follows (many other states have similar provisions):

The action also lies against the directors, managers, and officers of a corporation, or the trustees of funds given for a public or charitable purpose: (1) To bring them to an account for the management and disposition of property intrusted to their care; (2) To remove such officers or trustees on proof of misconduct; (3) To prevent malversation, peculation, and waste; (4) To set aside and restrain improper alienations of such property or funds, and to secure them for the benefit of those interested; and (5) Generally to compel faithful performance of duty. Tennessee Code § 29-35-102.

The Tennessee Supreme Court observed that a quo warranto action was available against corporate directors in this case to prevent “malversation, peculation, and waste,” since the directors were being sued “to bring corporation officers to an accounting for their mismanagement with regard to property committed to their care.”

The court rejected the directors’ argument that they were protected from liability by virtue of a provision in the Tennessee nonprofit corporation law granting immunity to uncompensated directors and officers of nonprofit corporations except when their conduct amounts to “willful, wanton or gross negligence.” The court observed:

The plaintiffs’ complaint alleges acts of gross negligence and misconduct by certain of the defendant directors. The defendants have not filed an answer or in any other manner denied or controverted the allegations of the complaint. For the purposes of this appeal, these allegations are taken as true. Therefore, in the present case, [state law] does not preclude [a quo warranto] action …. Allowing a quo warranto action upon allegations of gross negligence on the part of directors of a charitable corporation is consistent with another provision in the Nonprofit Corporation Act which authorizes the removal of directors by judicial proceedings. Pursuant to section 48-58-110(a)(1), in the case of a public benefit corporation, the attorney general may commence a proceeding to remove a “director engaged in fraudulent or dishonest conduct, or gross abuse of authority or discretion, with respect to the corporation.”

The court concluded that “a quo warranto action, alleging misconduct amounting to willful, wanton or gross negligence, for which [state law] provides no immunity, may be brought pursuant to [Tennessee law] against the directors of a charitable corporation regarding any of the corporation’s activities. A quo warranto action is proper against the directors of [the nursing facility] in this case.” State by Pierotti v. Sundquist, 884 S.W.2d 438 (Tenn. 1994).

See also the discussion of the case American Union of Baptists v. Trustees of the Particular Primitive Baptist Church, 644 A.2d 1063 (Md.1994).

See Also: Theories of Legal Liability | Immunity Statutes

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