Most states have adopted statutes providing individuals who serve as directors on nonprofit boards with limited immunity from liability. Among other issues that frequently arise is the scope of the protection provided under this statutory immunity. A recent decision from the Connecticut Appellate Court in a case involving a liability claim against the volunteer President of the nonprofit interpreted the statutory immunity expansively to encompass a broad range of activities. The decision provides interesting insight into the extent of immunity available to nonprofit board members. The Connecticut Appellate Court’s decision, released on January 1, 2013, can be found here.

 

Background

The Friends of Hammonasset is nonprofit volunteer organization organized under Section 501(c)(3) of the Internal Revenue Code. The organization works with the Hammonasset Beach State Park (a Connecticut State Park). Deanna Becker serves as the volunteer President of Friends. Becker is not compensated for her services.

 

In January 2010, the park held its annual “Owl Prowl” event. The Friends organization was invited to participate in the event and handled all of the publicity for it. One the evening of the event, one of the attendees slipped and fell on roadway and broke his wrist.

 

The injured individual filed a personal injury lawsuit against Friends and against Becker. The trial court entered summary judgment for both defendants, holding that the plaintiff had not alleged sufficient facts to support a claim for premises liability against Friends and also that Becker has immunity from plaintiff’s claims brought against her in her capacity as President of Friends. The plaintiff appealed.

 

The Appellate Court’s decision

On appeal the plaintiff argued that the trial court erred in entering summary judgment in Becker’s favor because his claims against Becker did not relate to duties or activities within the scope of the statutory immunity.

 

The statutory immunity provisions, which are contained in Connecticut General Statutes Section 52-557m, provide that the officer or director of tax-exempt organization who is “not compensated” for their services “shall be immune from civil liability for damage or injury … resulting from any act, error or omission made in the exercise of such person’s policy or decision-making responsibilities if such person was acting in good faith and within the scope of such person’s official function and duties, unless such damage or injury was caused by the reckless, willful or wanton misconduct of such person.”

 

In his appeal, the plaintiff argued that this section does not apply because he did not allege that Becker was negligent in her “policy or decision-making responsibilities.” Rather, he alleged that she was negligent in her supervising, training and oversight activities as the President of Friends, in that she allegedly failed to suet up a walk through of the path to determine if safety hazards existed; failed to assign a member of Friends to do a walk through; and failed to notify or assign a volunteer to notify the state to plow or sand the area.

 

The Appellate Court determined that these alleged activities of Becker were within her “policy or decision-making responsibilities,” noting that:

 

When the phrase “decision-making responsibility” is examined in conjunction with the dictionary definitions of supervise, oversee and train, the allegations in the complaint describe conduct falling squarely within Becker’s decision-making responsibilities. The allegations imply that Becker had the authority to make decisions that included ordering a walk through of the park before the event, directing that a Friends volunteer perform the walk through, and informing the state of dangerous conditions that the volunteer might find. Accordingly, the plaintiff cannot prevail on his claim that decision-making responsibilities do not encompass supervising, training and overseeing.

 

The Appellate Court also rejected the plaintiff’s contention that the state statutory immunity provision was preempted by the federal Volunteer Protection Act. The Act contains a provision preempting any state law to the extent that it is inconsistent with the Act, but exempting from preemption any state statue that provides “additional protection” to volunteers. The Appellate Court interpreted the Connecticut statutory provisions to provide “greater protections” than the Act, and accordingly the Appellate Court concluded that the Act did not preempt the Connecticut statutory provisions.

 

Discussion

In a January 21, 2013 Hartford Business Journal article discussing this decision (here), Dylan Kletter, an attorney with the Brown Rudnick law firm, notes that the Appellate Court’s decision confirms that the statutory immunity provisions “provide broad protection” for volunteer nonprofit board members and officers, adding that

 

Although the scope of an officer or directors’ “policy or decision-making responsibilities” will vary based on the unique facts of each tax-exempt organization’s mission and activities, the court’s decision gives comfort to such volunteer officers and directors and reinforces the concept that unless such an individual acts with “reckless, willful or wanton misconduct” in the exercise of their duties, they may similarly qualify for total immunity from legal liability and damages.

 

Most other states statutory immunity provisions are similar to those of Connecticut, so the “comfort” that volunteer directors and officers can take from this decision is not limited just to those in Connecticut. The decision provides reassurance that courts will broadly interpret the scope of responsibilities for which the immunity protection is available. (It should be noted that some statues require that the nonprofit organization’s by-laws must expressly grant the immunity in order for an individual to be entitled to the immunity.)

 

But though this decision is reassuring for volunteer directors and officers, it nevertheless must be kept in mind that the immunity available under these statutory provisions is limited – and limited in a number of ways.

 

First, the protection is only available to nonprofit directors and officers who are not compensated. So if for example a nonprofit organization were to bring on their board a specialist of some kind who provides the organization with some indispensable exercise and if that individual were compensated for their board service, that individual likely would not qualify for the statutory immunity. 

 

Second, the scope of the statutory protection is limited. It not only is restricted to “policy and decision-making responsibilities” but only to those within “the scope of such person’s official function and duties.” At a minimum, these limitations present potentially fruitful grounds for dispute over the questions whether the individual’s alleged misconduct was with the scope of protected activities, as this case shows.

 

Third, the statutory provisions restrict not only the breadth of activities that are protected but also the kind of activities that are protected. Thus the immunity is not available when the individual officer or director was not “acting in good faith” or was engaging in “reckless, willful or wanton misconduct.” Plaintiff’s lawyers interested in averting the statutory immunity defense will likely keep these limitations in mind when drafting the complaint and will shape their allegations accordingly.

 

Finally, although it is kind of obvious, it is worth noting that even at its greatest extent, the statutory immunity provisions protects only individuals. It does not protect the nonprofit organization itself.

 

The volunteer directors and officers of nonprofit organizations can be reassured that they have immunity from liability for claims of negligence against them in connection with their actions undertaken within the scope of their duties. But because there are numerous limitations to the protection availably under the immunity statutes, it remains important for these organizations and their representatives to ensure that the organizations have and maintain a comprehensive program of liability insurance, including in particular broad, state-of-the- market D&O insurance. Because of the extent of the scope of protection afforded under these insurance programs is so important for nonprofit organization directors and officers, they will want to ensure that a knowledgeable and experienced insurance professional designed and placed their program.

 

The FDIC Ramps Up the Lawsuits: Earlier last week, I noted that the FDIC had filed the first of failed bank D&O lawsuit in 2013. I speculated at the time that there would be many more cases to come this year. As if to prove my point, late last week, the FDIC filed two more failed bank lawsuits, including the latest the agency has filed involving a failed Georgia bank. Both of the new lawsuits were filed on January 25, 2013. Both of the banks involved failed on January 29, 2010, so that agency filed its lawsuits just before the third anniversary of the banks’ failures and just ahead of the end of the statute of limitations period.

 

First, the agency filed an action in the Western District of Washington in its capacity as receiver for the failed American Marine Bank of Bainbridge Island, Washington against four officer defendants (one of whom was also a director) and six director defendants. The FDIC’s complaint (a copy of which can be found here) alleges claims for breach of fiduciary duty, gross negligence and negligence. Among other things, the FDIC alleges that the defendants “took unreasonable risks with the Bank’s loan portfolio; allowed irresponsible and unattainable rapid asset growth concentrated in high-risk and speculative” construction and commercial real estate loans; and “disregarded regulator advice and criticisms regarding lending activities. The complaint alleges that the defendants’ actions caused damages to the bank of “no less than $18 million.”

 

Second, in the latest lawsuit the agency has filed involving a failed Georgia bank, the FDIC filed an action in the Northern District of Georgia against eleven former directors and officers of the failed First National Bank of Georgia, of Carrollton, Georgia. In its complaint, which the FDIC filed in its capacity as receiver for the failed bank, the FDIC asserts claims for negligence, gross negligence and for breach of fiduciary duties. The complaint, which can be found here, alleges that the defendants failed to properly oversee the bank’s lending function, improperly approved millions of dollars in loans, allowed excessive concentration in certain lending areas and knowingly permitted poor loan underwriting. The FDIC alleges that these actions cause damages to the bank in excess of $29.97 million.

 

These latest lawsuit are the 46th and 47th that the agency has filed as part of the current failed bank wave and the second and third so far in 2013. For whatever reason, the FDIC’s suits have been disproportionately concentrated in Georgia. This latest suit is the 15th in Georgia so far, meaning that just under third of all of the FDIC’s lawsuits have involved failed Georgia banks. Though more banks have failed in Georgia than any other state as part of the current bank failure wave, Georgia’s bank failures represent far less than a third of all bank failures. There may be some timing issues here as many Georgia banks were among the first to fail but it still remarkable how many suits the agency has filed in the state.

 

Scott Trubey’s January 25, 2013 Atlanta Journal Constitution article about the latest Georgia lawsuit can be found here. Special thanks to a loyal reader for sending me a link to the article and alerting me to the new lawsuit. Special thanks to yet another reader for sending me a copy of the Western District of Washington complaint.

 

Advisen Claims Trend Seminar: On Tuesday January 29, 2013 at 11 am EST, I will be participating in a Quarterly D&O Claims Update Webinar hosted by Advisen. The webinar will provide a quarterly review of securities and other litigation impacting D&O coverage and will identify and analyze the trends of greatest significance to Risk Managers and Management Liability professionals. The participants in this free webinar will include AIG’s Tom McCormack, and Advisen’s David Bradford and Jim Blinn. Further information about the seminar, including registration instructions, can be found here.

 

A Spectacle Too Many Are Missing: One of the world’s great sporting events is taking place, yet very few are paying any attention. The 2013 African Cup of Nations soccer tournament is being played now (actually, between January 19, 2013 and February 10, 2013) in South Africa. Though the tournament features many of the world’s best soccer players as well as a host of upstarts, the tournament undeservedly is receiving little attention, particularly in the United States.

 

Among the many incredibly talented players participating are the tournament are reigning African Footballer of the Year, Yaya Touré of the Côte d’Ivoire (who plays his club football for Manchester City in the English Premiere Leagu); Emmanuel Adebayor, the Togolese football player and striker for Tottenham Hotspur in the English Premier league; Michael Essien, the Ghanian player who is currently playing for Real Madrid in La Liga, the Spanish football league, on a season loan from Chelsea in the English league; and Gervinho, who plays for Côte d’Ivoire and for Arsenal in the English Premier League. There are many others great players as well.

 

Even more exciting than these marquee players are the upstarts, like the team from Niger that has qualified for the tournament for only the second time, or the team from tiny Cape Verde Islands, which has never previously qualified for the tournament, yet, after a stunning 2-1 victory on Sunday against Angola, is sitting in second place in its tournament bracket and has already qualified for the tournament’s next round.

 

The tournament has featured some brilliant games, including in particular the game in which Burkina Faso, which had hung on throughout the game, scored in the fourth minute on stoppage time on the absolute final play of the game to pull off a tie against a much more talented Nigerian team, or the game in which an inexperienced Niger side played with sheer determination to scrap out a nil-nil draw against the much more experienced team from the Democratic Republic of Congo.

 

A soccer aficionado friend of mine regards the world’s seeming inattention to these games with a shrug, noting that it may be that international soccer competitions, like Opera or Single-Malt Scotches, are an acquired taste that can be appreciated only by the cognoscenti. I disagree. This tournament features the highest level of athleticism and games that flow with an incredible beauty. I think many sports fans would be drawn into these games on first glimpse of they only saw the games.

 

The games are actually a lot easier to see this year than during prior tournaments, because ESPN 3 is showing at least some of the games live – but because of the time difference, they are being broadcast during the morning in the U.S., which is not a time when most people are watching sports. For those who are interested in the games or who think they might be interested, but aren’t interested in sitting down to watch soccer at 10 am in the morning, the best way to watch these games is through the Watch ESPN app. On the ESPN 3 Channel on the App, under the Replay tab, all of the games are listed by date. (You can also find all of the games by clicking on the Sports tab along the top of the user interface and clicking on “Soccer” in the drop down menu).

 

To get a sense of the sheer athleticism this tournament involves, as well as the incredible enthusiasm of the teams’ supporters, watch this video of the 22 year-old Tunisian forward, Yousef Msakni, scoring the game winning goal in stoppage time in a first-round game against Algeria:

 

http://www.youtube.com/embed/NtHgKRT_ME4