In his first year at REBNY, Banks earned $250K less than Spinola

Tax filings show the former Con Ed lobbyist was paid $627K salary in 2015

From left: John Banks and Steven Spinola (Credit: Adam Pincus for The Real Deal)

In his first year on the job at the Real Estate Board of New York, John Banks received a total compensation of $627,335, the real estate trade group’s 2015 tax forms show. That’s nearly $250,000 less than what his predecessor, Steven Spinola, made in the same year, his final one as president of one of the city’s most powerful lobbying groups.

Experts in the world of nonprofit executive pay said there are multiple factors that go into calculating CEO compensation, an important one being length of tenure. Spinola was in the position for nearly 30 years, and spent part of 2015 in charge before formally passing the baton to Banks. But even if it’s only in terms of optics, the fact that REBNY’s first black president made a good deal less than his white predecessor can’t be ignored.

“It doesn’t look good. I can say that,” said Doug Sauer, CEO of the New York Council of Nonprofits. “The perception would raise the question about why he made less.”

A spokesperson for REBNY declined to comment.

Banks earned a base salary of $622,035 in 2015, with perks like money for retirement, deferred compensation and additional non-taxable benefits pushing his total compensation up to $627,335, REBNY’s annual filings with the Internal Revenue Service show. During that same period, Spinola took home a base salary of $846,035, and additional benefits pushed his total compensation for the year to $868,692.

REBNY announced in late 2014 that it had appointed Banks – then the top lobbyist at Con Edison – to serve as its next president. In March 2015, Banks assumed the role of “president-elect” and worked alongside Spinola during a transition period, which included negotiations that ultimately failed to renew the lucrative 421a tax incentive.

It’s not clear whether the compensation figures listed on the tax forms represent salaries for the full year, or just a portion. While the filings cover the 2015 tax year, which runs contiguous with the calendar year, they were only recently made available.

Just as salaries for top executives in the for-profit world are negotiated on the open market, nonprofits compete for top talent with enticing compensation and benefits packages.

Sauer said that for an organization the size of REBNY – it recorded gross revenues of $13.6 million in 2015 – it’s not uncommon to see such large salaries. Still, it is a rarified world.

Out of 4,587 charities studied in 2016, only 76 (or less than 2 percent) paid their CEOs $500,000 or more, according to Charity Navigator, an independent watchdog group. The median salary for a nonprofit CEO in New York City in 2016 was $175,803, the group found.

Sauer added that while it’s not inconceivable that REBNY would pay a newcomer less than someone with three decades of experience, nonprofits typically do pay more to minority leaders..

“Minority executive leadership, whether it’s Hispanics or Asians or African-Americans, is usually more of a premium in white organizations,” he said.

Sauer did note that his experience lies mostly with 501(c)3 nonprofits, the kind of organization charities typically use as a tax structure. REBNY is registered as a 501(c)6 – the main distinction being that the trade group is allowed to participate in political activities and has more freedom to lobby lawmakers.

Spinola’s compensation grew steadily over the years, save a slight downturn of just a few thousand dollars between 2008 and 2009 to $661,380. In the following years, REBNY gave him increasingly larger benefits, including a bonus of nearly $200,000 in 2012.

His total compensation topped out in 2014 shy of $1 million.

Other top-earning executives at REBNY include senior vice president James Whelan, who earned a total compensation of $501,139 in 2015, and CFO William Auerbach, who earned $354,676.

By Rich Bockmann | March 28, 2017 08:00AM

therealdeal.com

Highlights of the Trump Budget Proposal

HEALTH AND HUMAN SERVICES

• Proposed funding change: -17.9%
• Up for elimination: $4.2 billion for things including the Low Income Home Energy Assistance and the Community Service Block Grant programs

HOUSING AND URBAN DEVELOPMENT

• Proposed funding change: -13.2%
• Up for elimination: $3 billion in spending on the Community Development Block Grant program; $1.1 billion for the HOME Investment Partnerships, Choice Neighborhoods, and Self-help Homeownership Opportunity programs

DEPT. OF STATE AND USAID

• Proposed funding change: -28%
• Spending cuts: $650 million over three years from development banks including the World Bank. Also, reduction in support for the United Nations, including peacekeeping efforts
• Up for elimination: Global Climate Change Initiative; the Emergency Refugee and Migration Assistance account

Trump Budget Cuts Billions of Dollars From Antipoverty Programs

The Chronicle of Philanthropy

By Alex Daniels, Megan O’Neil, and Timothy Sandoval

The Trump administration’s preliminary budget proposal would zero out many nonprofit-administered antipoverty programs in areas including heating assistance, affordable housing, and economic development, while also eliminating federal agencies such as the National Endowment for the Arts.

Also on the chopping block is the Corporation for Community and National Service, which provides charities with tens of thousands of low-cost AmeriCorps workers each year, and the agency’s Social Innovation Fund, which steers public and private dollars to nonprofit programs that prove positive results.

The White House called for foreign-assistance spending by the State Department and USAID to be cut by nearly one third, or more than $10 billion.

The spending cuts outlined in the summary "skinny budget" released Wednesday would require the approval of Congress. Mick Mulvaney, director of the Office of Management and Budget, said the White House will release in May a full budget for fiscal year 2018.

"Skinny budgets are tricky because they give you top line, but they don’t give you a lot of details," said Alicia Phillips Mandaville, vice president for Global Development Policy and Learning at InterAction, a membership group of international charities. "This one calls out some specific things but not always in ways we can tell what will come out in the subsequent, more detailed version."

Presidents never get everything they request, but the White House budget proposal is always an important and influential starting point for the months of tough negotiations that follow on Capitol Hill.

The stakes for nonprofits are high. Public charities get about one-third of all their revenue from government grants and fees for services, including Medicare and Medicaid payments, according to the Urban Institute’s National Center for Charitable Statistics. Nonprofit revenue totaled $1.7 trillion in 2013, according to the center.

Rallying Cry

Nonprofit leaders across the country reacted with dismay to the cuts proposed in the budget, which they characterized as deep and damaging. They say that if Congress enacts even a portion the cuts outlined by the Trump administration — which were proposed to help pay for a $54 billion increase in military spending — it will have far-reaching consequences for charitable programs and their beneficiaries.

"This is an opportunity for a rallying cry," said Tim Delaney, president of the National Council of Nonprofits.

He called on nonprofit leaders to examine how the potential cuts might affect their organizations and the people they serve. Then they can start reaching out to partner groups and state nonprofit associations to coordinate on advocacy with local representatives.

Nonprofits should emphasize how the cuts will affect the people they serve — not their organizations, Mr. Delaney said. "Nobody cares about whether nonprofits are getting hurt — or this corporation or that entity. The real concern is how this will affect the lives of individual Americans."

Economic Development

President Trump’s budget proposal would shutter multiple programs that serve low-income communities. It would eliminate the Legal Services Corporation, which provides legal representation for low-income people. It would also close the doors at several regional commissions that provide education, clean water, economic development, and health grants in low-income areas: the Appalachian Regional Commission, the Delta Regional Authority, the Denali Commission, and the Northern Border Commission.

Other programs that would be slated for closure include several U.S. Housing and Urban Development efforts to provide low-income housing, including the HOME Investment Partnerships, Choice Neighborhoods, and Self-Help Homeownership Opportunity programs.

The proposal also calls for a 17.9 percent, or $15.1 billion, cut in the Department of Health and Human Services. It doesn’t specify whether the Senior Nutrition Program, which supports Meals on Wheels groups across the country, would be cut.

"We don’t know how that will be spread out, but it is pretty frightening," said Ellie Hollander, president of Meals on Wheels America.

Community Block Grants

Donna Butts, executive director of Generations United, which supports social services for children and the elderly, is especially concerned about the proposed elimination of the Community Development Block Grant program. It provided $3 billion in grants in the current fiscal year to states, cities, and counties to provide job training, develop housing for low-income residents, build community centers, make loans to small businesses, and redevelop homes.

The block grants allow states and localities flexibility to design programs as they see fit. But because each recipient uses the grants differently, it can be hard to come together to fight the proposed cuts, according to Ms. Butts.

"It’s a blessing and a curse," she said. "When it’s block granted, it’s harder to rally a constituency. It makes it easier to cut."

Ms. Butts is bracing for more. She thinks the $1.5 billion Social Services Block Grant program, an entitlement program that supports foster care and adoption services and adult day care for the elderly, could be vulnerable. It was not included on the proposal, which only outlined cuts in discretionary programs. (Discretionary spending is implemented through appropriations bills, while spending on entitlement programs like Social Security and Medicare is mandatory.)

Generations United and social-service organizations from all 50 states sent members of Congress a letter defending the program last week. But Ms. Butts fears that the deep cuts the administration has proposed throughout domestic programs will pit social-service groups against one another.

“Nobody cares about whether nonprofits are getting hurt -- or this corporation or that entity. The real concern is how this will affect the lives of individual Americans.”

"We are stronger together, but some groups are starting to express a willingness to elevate their particular age group," she said. "Some of the groups are starting to splinter."

Foreclosures and Evictions

South Jersey Legal Services, which receives the majority of its funding from the Legal Services Corporation, last year handled more than 9,200 cases. Douglas Gershuny, the group’s executive director, said the proposed elimination of the Legal Services Corporation would reduce that number by a third.

"That means more unjust foreclosures and evictions resulting in homelessness," he said in a statement. Mr. Gershuny also worried that more domestic-violence victims would be unable to escape abuse, and more homeless veterans and hungry children would be denied government benefits.

Closing the Appalachian Regional Commission would be a "cruel disinvestment" from an area hit hard by the collapse of the coal economy, said Jake Lynch, spokesman for the West Virginia Community Development Hub.

Over the past two years, the commission has made $73 million in grants to improve life in coal production areas. Mr. Lynch’s group received $94,000 to mentor local community teams in ways to diversify their economies.

"The specter of ARC vanishing is really sad," Mr. Lynch said. "West Virginia could use some hope and could use some help, and ARC has been providing that."

Advocacy for the Arts

The Corporation for Public Broadcasting, the Institute of Museum and Library Services, the National Endowment for the Arts, and the National Endowment for the Humanities are among 19 independent agencies identified for elimination in President Trump’s budget.

The elimination of the National Endowment for the Arts would be a significant blow to the roughly 100,000 nonprofit arts organizations across the nation, said Robert Lynch, president of Americans for the Arts, a network of cultural groups.

Although the amount of money the endowment provides is small, cutting the NEA would disrupt other streams of funding for cultural organizations, he said. Almost all NEA grants are matched by state and local money, and campaigns for private donations are often built around NEA-funded projects, he added.

Ending the NEA would not put many arts organizations "out of business directly," he said. "But that’s really not the point — services will be reduced and survival will be a little bit harder."

The NEA has been a catalyst for growth in the arts since it was formed in the mid-1960s, he said. There were only four state arts councils before the NEA was formed, he said. Now all 50 states have them.

Mr. Lynch noted that on Tuesday about 700 arts leaders will be on Capitol Hill protesting cuts to the NEA and other arts funding during "Arts Advocacy Day."

Ripple Effect

John Gomperts, director of AmeriCorps from 2010 to 2012, said nonprofits with staff members who come to them through programs run by the Corporation for National and Community Service should be talking to their congressional representatives about why they are important.

"We have been, for the last 20-plus years, asking young people to step up and be leaders in their own communities in the county," said Mr. Gomperts, now chief executive of America’s Promise, which works to improve graduation rates, among other things. "It is such a red, white, and blue kind of idea."

Many AmeriCorps volunteers are young people trying to serve children growing up in difficult circumstances, he said.

"I understand the president is trying to give expression to a different set of priorities, but the notion of uninvesting, disinvesting, in young people on both sides of this equation just seems to me unfortunate and shortsighted."

The current appropriation for the Corporation of National and Community Service is $1.1 billion, up from $1 billion in 2016. The agency has sustained attacks from lawmakers and others before, some of whom questioned whether paid service is really service. Nonprofit leaders and champions of national service said they find it striking that President Trump has not said much about volunteering and civic engagement, breaking with decades of presidential tradition.

AnnMaura Connolly, president of the advocacy group Voices for National Service, said that eliminating the Corporation for National and Community Service would cost taxpayers money. She cited a Columbia University study that found that for every $10 spent by the federal government on national service, $15 was raised from private sources to pay for such work.

"By matching or exceeding federal support with private-sector dollars, national service programs lessen the strain on the federal government through partnerships with more than 1,100 community and faith-based nonprofits," Ms. Connolly said in a statement. Among those charities that rely heavily on national service programs are Habitat for Humanity, Catholic Charities USA, and the American Red Cross, she said.

Foreign Aid

Ms. Phillips Mandaville of InterAction said the proposed one-third cut to foreign assistance includes a reduction in U.S. support for and work with the United Nations and the World Bank.

"At a macro level, those things, added up, really potentially undermine our ability as a country to be engaged in the world," she said.

While many big U.S.-based aid organizations get more than half their revenues from government, others are mostly supported by private philanthropy. Those donors want to see the country continue to play a leading role in global health and development efforts.

"Part of what they are concerned about is not just how much money the United States is putting into something but the net effect on development and humanitarian outcomes if the U.S. withdraws like this," she said.

Spending on foreign aid accounts for less than 1 percent of the federal budget, Ms. Phillips Mandaville said, a good value considering it saves lives and protects U.S. interests. And she questions the choice to slash an already tight foreign-aid budget to pour more into defense spending.

"The same way that Thanksgiving dinner isn’t just about turkey, our global leadership isn’t just about the military," Ms. Phillips Mandaville said. "In dinner terms, what this budget does is propose to eliminate mashed potatoes and pumpkin pie in order just to get more turkey."

She and others in the development community said that U.S. foreign-aid spending has long enjoyed strong bipartisan support in Congress and that they hope lawmakers will reject proposed cuts to that piece of the budget.

David Miliband, chief executive of the International Rescue Committee, said that slashing the U.S. foreign-aid budget endangers the country’s work to prevent and respond to global crises like ISIS and Ebola.

“The notion of uninvesting, disinvesting, in young people on both sides of this equation just seems to me unfortunate and shortsighted.”

"Working to counteract these with a forward-leaning foreign-aid policy doesn’t just mean saving lives today but sparing the U.S. and its allies around the world the much more difficult, expensive work of combating them tomorrow," Mr. Miliband said in a statement.

Taxes May Be Next

The White House’s proposal did not include details on the administration’s plans for tax policy — so its views on the charitable tax-deduction were not included. Speaking at a rally in Tennessee on Tuesday night, President Trump said that a tax-overhaul bill would follow on the heals of health-care legislation.

Steve Taylor, counsel for public policy for United Way Worldwide, said he’s heard support for the charitable tax deduction in conversations he’s had with White House staff and members of Congress. Still, neither the administration nor legislators on Capitol Hill have ruled out that limits could be placed on the deduction as part of a tax-overhaul bill — which Republicans are hoping to pass this year.

Mr. Taylor said it’s hard to know where the GOP-controlled Congress will come down on the charitable deduction. "At the end of the day, Congress is looking for revenue that they can use for their big-picture plan, which is to lower taxes," he said. "And they’re looking under every stone for that revenue, so we are as vulnerable as any" group.

What We Learned About Your Bylaws

 

Our staff attorneys have spent more than a year reviewing hundreds of nonprofits' bylaws.Here is what they learned about the most common legal pitfalls!                                                                                                                         This is the first in a series of "The Five Most Common Bylaw Pitfalls for New York's Nonprofits" produced by NYCON's Legal Team. Stay tuned for Legal Pitfall #2 Next Week!   Welcome to the New Year! Can you believe it's 2016 already? Our legal team  spent much of 2015 reviewing and revising hundreds of our members bylaws for compliance with the new Nonprofit Revitalization law.   As you probably know by now, the law governing nonprofits recently changed pretty drastically. Some changes are for the better (yes, email voting can happen now!) but some make running a nonprofit a little more difficult.    For better or worse, most of the time they necessitate a change in the way we structure and govern our organizations, and that means revising our bylaws to bring ourselves into compliance.    Our attorneys have seen the same pitfalls time after time. So, NYCON is kicking off the new year with knowledge gleaned from the bylaw reviews our team has already done... And here is what they learned!     Legal Pitfall #1:  An Inadequate Conflict of Interest Policy   As many nonprofits are aware, the 2014 NYS Nonprofit Revitalization Act ("NPRA") requires far more formality than was previously required with respect to the disclosure, review, assessment and reporting of real and potential conflicts of interest.  Yet, it's still common to see nonprofit by-laws with a clause saying it will "maintain, regularly-updated conflict of interest procedures in order to fully comply with all applicable laws and regulations."   So, what's wrong with that? Well, for starters, such a limited conflicts of interest "policy" fails to comply with the law.  New NPRA obligations require all nonprofits to adopt and implement written conflicts of interest policies and procedures, which must address specific criteria.    Beyond statutory obligations, from a practical standpoint, a nonprofit with such a deficient policy simply doesn't have appropriate policies and procedures in place to properly address any real or potential conflicts of interest, let alone justify its response to any such situations, if ever questioned. A deficient policy needlessly undermines the mission, compromises operations and potentially exposes the nonprofit to liabilities. Need Additional Resources? Check out the Attorney General's Guidance entitled "Conflicts of Interest Policies Under the Nonprofit Revitalization Act of 2013." That resource will outline the minimum statutory requirements for New York nonprofits.   Members Only Webinar:   "The New Legal Bylaw Pitfalls Every New York Nonprofit Should Know"  RSVP Today.   Can We Help?  If you Still Have Questions and you are with a current NYCON member. you can submit your questions to our legal team here.   Need a Bylaw Review? If you'd like to find out more about our bylaw review services (including how to get a price) please click here.

 

	New York Council of Nonprofits Daily update ⋅ January 1, 2016
	NEWS
	The NonProfit Times Minimum Wage No Small Issue For Nonprofits The NonProfit Times Living wage advocates in New York City last year managed to bump the ... said Doug Sauer, CEO of the New York Council of Nonprofits (NYCON). Flag as irrelevant

Risk Management: Directors of Nonprofits

Court of Appeals to Directors of Nonprofits: “Nonprofit” Does Not Mean “No Risk for You”

WRITTEN BY BRUCE A. ERICSON, JERALD A. JACOBS, AND MARLEY DEGNER
CREATED ON WEDNESDAY, 22 APRIL 2015 12:29

The U.S. Court of Appeals for the Third Circuit recently upheld a $2.25 million jury verdict against the directors of a nonprofit nursing home, holding them personally liable for breach of their duty of care. Their sin? Failing to remove the nursing home’s administrator and CFO “once the results of their mismanagement became apparent.” While the court overturned a punitive damages verdict against five directors (the jury had found nine other directors liable for compensatory damages but not punitive damages), it upheld punitive damage awards of $1 million against the CFO and $750,000 against the Administrator. The decision, while unusual, illustrates that serving on a nonprofit board is not risk-free even if as in this case, the directors do not breach their duty of loyalty or engage in any self-dealing. [In re Lemington Home for the Aged, 777 F.3d 620 (3d Cir. 2015).]

The Lemington Home Case

Founded in 1883, the Lemington Home for the Aged was the oldest nonprofit unaffiliated nursing home in the United States dedicated to the care of African Americans. For decades, the Home had been “beset with financial troubles” and by the early 2000s it was being cited by the Pennsylvania Department of Health for deficiencies at a rate almost three times greater than the average.

In 2004, the Home’s Administrator [Mel Lee] Causey started working part-time while continuing to draw a full salary. That same year, two patients died under suspicious circumstances; an investigation by the Department of Health found that Causey lacked the qualifications, knowledge and ability to perform her job. An earlier independent review also recommended that Causey be replaced. Although the Board obtained a grant of over $175,000 to hire a new Administrator, the funds were used for other purposes and Causey stayed on.

The Home’s patient recordkeeping and billing were in a state of disarray. The Home was cited repeatedly for failing to keep proper clinical records. CFO Shealey stopped keeping a general ledger, instead simply recording cash transactions on an Excel spreadsheet. When a consultant conducting an assessment of the Home for a major creditor requested records, Shealey responded by locking himself in his office, forcing the consultant to “camp outside.” Shealey also failed to collect at least $500,000 from Medicare because he stopped sending invoices.

In January 2005, the Board voted to close the Home, but concealed that fact for three months before filing for bankruptcy. In those three months, the Home stopped accepting new patients, making it less attractive to potential buyers. While in bankruptcy, the Board failed to disclose in its monthly operating reports that the Home had received a $1.4 million payment, which could also have increased its chances of finding a buyer. The court held that these facts supported the jury’s verdict that the defendants had “deepened” the corporation’s insolvency, which the court said was actionable under Pennsylvania law. [777 F.3d at 630.]

The court of appeals upheld the jury’s compensatory damages verdict against the directors despite the Home’s bylaw provision protecting the directors from claims for simple negligence and requiring proof of selfdealing, willful misconduct or recklessness. [Lemington, No. 10-800, 2013 WL 2158543, at *6 (W.D. Penn. May 17, 2013).] Both the court of appeals and the district court held that the evidence supported a finding that the directors breached their duty of care by recklessly (1) continuing to employ the Administrator despite actual knowledge of mismanagement and despite knowing that she was working only part-time in violation of state law; and (2) continuing to employ the CFO despite actual knowledge of mismanagement, including his failure to maintain financial records. [777 F.3d at 628-30; 2013 WL 2158543, at *7; In re Lemington Home for the Aged, 659 F. 3d 282, 286-87 (3d Cir. 2011).] Despite these holdings, the court of appeals reversed the award of punitive damages against the five directors, holding that there was insufficient evidence that they possessed the requisite state of mind and no evidence of self-dealing. [777 F.3d at 634-35.]

The Result in Lemington Home: Unusual But Not Unique

Lemington Home is not the only case in which a court has held that directors of a nonprofit breached their fiduciary duties. Other cases—some new and some old—show how directors of nonprofits sometimes find themselves in the crosshairs, especially after an institution fails.

Perhaps the best-known case is Stern v. Lucy Webb Hayes Nat’l Training School for Deaconesses & Missionaries, 381 F. Supp. 1003 (D.D.C. 1974), where the district court held that the directors breached their fiduciary duties of care and loyalty by failing to supervise the nonprofit’s finances and by approving transactions that involved self-dealing. The court found that the board’s finance and investment committees had not met for over a decade, and the directors had left management of the nonprofit to two officers who worked largely without supervision. Nevertheless, the court declined to award money damages against the directors, opting instead to impose certain reforms on the board.

Starting in 2007, seven years of litigation (and millions of dollars in legal fees) ensued between two nonprofits interested in the creation of a memorial to Armenians who died during the First World War and two of their directors; the nonprofits lost their claims against the directors and ended up having to indemnify them. The district court denied summary judgment on the issue of whether the directors had breached their fiduciary duties but then concluded after a bench trial that the directors’ decisions and the process by which they made them were reasonable and, even if the directors had breached their duty, the corporation could not show that it suffered injury as a result. Armenian Genocide Museum and Memorial, Inc. v. The Cafesjian Family Foundation, Inc., 691 F. Supp. 2d 132 (D.D.C. 2010); Armenian Assembly of America, Inc., et al., v. Cafesjian, 772 F. Supp. 2d 20 (D.D.C. 2011), aff’d, 758 F.3d 265, 275 (D.C. Cir. 2014).

In 2010, the National Credit Union Administration sued the unpaid volunteer directors of Western Corporate Federal Credit Union seeking $6.8 billion in damages on account of the directors’ alleged failure to supervise the credit union’s investment decisions. The credit union had invested heavily in diversified portfolios of securitized mortgage-backed securities; when the credit crisis hit, the NCUA took over the credit union (much the way the FDIC takes over failed banks) and sued the former directors and officers. The district court granted the directors’ motion to dismiss, holding that the directors were protected by the business judgment rule. Nat’l Credit Union Admin, v. Siravo, et al., No. 10-1597, 2011 WL 8332969, *3 (C.D. Cal. July 7, 2011). (Two of the authors of this feature represented all directors and one officer in this litigation.) The officers did not fare as well; the court held that the business judgment rule did not protect them, and at least some officers ended up paying some money to the NCUA and suffering other sanctions.

These cases are unusual, which goes a long ways toward explaining the unusual rulings. Generally, absent fraud, bad faith, a conflict of interest, a wholesale abdication of responsibility, or decisions that are clearly unreasonable based on facts known at the time, the business judgment rule will protect directors of nonprofits from personal liability for a breach of the duty of care. But vindication can take years of litigation and lots of money.


What Are the Lessons of Lemington Home?

You can be sued. To be sure, directors of for-profit corporations are sued far more often than directors of nonprofits, but directors of nonprofits can be sued, nonetheless. 

If you are sued, the litigation can go on for years and be very expensive—even if ultimately you are vindicated. 

Because litigation—even unmeritorious litigation—can be expensive, directors should not serve without the protection of adequate directors’ and officers’ insurance (D&O insurance).

Directors of nonprofits, despite usually being volunteers, can face personal liability for breach of their fiduciary duties and will be held to much the same standard of care as directors of for-profit corporations.

Some states have enacted statutes dealing specifically with nonprofit directors’ duty of care. Pennsylvania has such a statute: 15 Pa. Cons. Stat. Ann. § 5712 (2011). [See Lemington, 659 F.3d at 290. Likewise, California has such a statute: Cal. Corp. Code § 7231.] But it is far from clear that these statutes offer directors of nonprofits any more protection than they offer directors of for-profit corporations; the differences are subtle, at best.

The business judgment rule offers directors some protection, but it is not an all-purpose shield against claims based on dereliction of duty, let alone disloyalty or self-dealing. To gain the protection of the business judgment rule, a director must be assiduous and informed before making decisions. Specifically: 

The board must supervise: it must ensure that the organization’s management are qualified to perform their duties and are actually performing those duties. The failure of the directors in Lemington Home to do this led to their being jointly and severally liable for $2.25 million in damages [777 F.3d at 626, 628.] 

The board must seek and follow independent expert advice where appropriate: the directors in Lemington Home failed to follow the recommendations of independent advisors to replace the Administrator, even after being awarded funds to do so. They also ignored the advice of their bankruptcy counsel. [Lemington, 2013 WL 2158543, at *7.]

Special care must be taken if the nonprofit veers toward insolvency:

Before filing for bankruptcy, consider conducting a viability study. In vacating the award of summary judgment for defendants, the Third Circuit in Lemington Home noted that the Board declined to pursue a viability study before filing for bankruptcy and suggested that this called into question the adequacy of their pre-bankruptcy investigation. Lemington, 659 F.3d at 286, 292. Beware the “deepening insolvency” theory. Although not recognized in every jurisdiction, the theory holds directors and officers accountable to creditors if their post-insolvency management increases the losses that creditors suffer.

This article was originally published as a “Client Alert” on PillsburyLaw.com on March 27, 2015. It is reproduced with permission.