Recent Developments in Minnesota Regarding Officers, Directors, and Trustees

The Minnesota Supreme Court has issued an important ruling addressing the personal liability of members of the board of a nonprofit corporation.

Church Law and Tax1998-03-01

Officers, Directors, and Trustees

Key point. In most states, uncompensated directors of nonprofit corporations are not liable for their ordinary negligence. They are liable only for acts of gross negligence or willful and wanton misconduct.

Key point. The immunity of uncompensated board members of nonprofit corporations from liability for their ordinary negligence is not necessarily an “affirmative defense” that is lost if not claimed in an answer to a lawsuit.

The Minnesota Supreme Court has issued an important ruling addressing the personal liability of members of the board of a nonprofit corporation. While the case involved a director of a local “humane society,” it has direct relevance to board members of churches and other religious organizations. An uncompensated director of a humane society was sued by an employee who was injured when he attempted to disinfect some animal cages using a formaldehyde solution prescribed by the director. The director’s answer to the lawsuit failed to mention a state law granting immunity to uncompensated directors of nonprofit corporations. This law provides:

A person who serves without compensation as a director, officer, trustee, member, or agent of an organization exempt from state income taxation … is not civilly liable for an act or omission by that person if the act or omission was in good faith, was within the scope of the person’s responsibilities as a director, officer, trustee, member or agent … and did not constitute willful or reckless misconduct.

The victim claimed that the director lost this defense by not raising it in her answer. The state supreme court disagreed. It acknowledged that “affirmative defenses” are waived if not asserted in an answer to a lawsuit. However, the court ruled that the state law protecting uncompensated board members was an “immunity” rather than an affirmative defense, and it was not waived by being omitted in the director’s answer to the lawsuit. The court concluded that the director’s actions did not constitute “willful or reckless misconduct” and therefore she was protected from liability by the statute.

The victim made an interesting argument. He conceded that the immunity statute protects directors, but he insisted that directors only can act collectively as a board. Therefore, the director in this case was not eligible for protection under the statute since her recommendations were made alone and without any participation by the board. The court rejected this novel argument. It acknowledged that “it is a longstanding tenet of corporation law that a member of the board has no authority to act individually unless specifically authorized by the corporate bylaws or articles of incorporation.” However, the court noted that the statute protects more than directors. It also protects officers, trustees, members, and agents, and these individuals (unlike directors) can act individually rather than collectively. The court observed:

Were we to adopt [the victim’s] position, a director who decides to donate her individual time will receive no protection because those actions always fall outside the very narrow scope of her technical responsibilities as a director. Meanwhile, a nondirector who decides to donate her time will receive protection because her actions always fall within the broad scope of her responsibilities as either a member or agent of the organization. The legislature certainly could not have intended such an absurd result …. To the contrary … the intent of the legislature was to provide a broad protection to all uncompensated contributors. By listing all of the various “hats” that volunteers might wear, the statute … plainly provides protection to all volunteers …. Consequently, we hold that the broad wording of [the statute] protects all uncompensated persons acting on behalf of the nonprofit corporation, and not just those uncompensated persons acting within the specific scope of their duties as defined by their official position. As a result, a director acting outside the specific scope of his or her duty as a member of the board will receive the statute’s protection so long as the director is acting on behalf of the nonprofit corporation.

Application. This case is important for two reasons. First, it may be used to excuse an inadvertent failure to raise the director immunity statute in an answer to a lawsuit. Church board members have been named as defendants in numerous lawsuits, and occasionally their attorneys fail to assert this defense in their answer to a lawsuit. In some states, the immunity statute will be deemed an “affirmative defense” that is waived if not asserted in the answer. But this case illustrates that this is not always the case. In Minnesota, and in any other state that follows this same rationale, the director immunity statute is an “immunity” rather than an affirmative defense, and it is not waived if not mentioned in the answer to the lawsuit. Second, the court ruled that the director immunity statute applied to individual directors even if they were not acting collectively as a board. The only requirement is that their acts must have been on behalf of the corporation. This conclusion was based on the wording of the immunity statute, which also protects “officers, trustees, members, and agents.” Since these persons often can act individually rather than collectively on behalf of a corporation, and since most directors occupy at least one of these positions, they are protected by the immunity statute for their individual actions on behalf of the corporation. Church board members should review their own state directory immunity law to see if protection is extended to officers, members, and agents. If so, then it is more likely that the statute will apply when they are acting individually (rather than collectively). Rehn v. Fischley, 557 N.W.2d 328 (Minn. 1997). [ Personal Liability of Church Officers, Directors, and Trustees]

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