There are a handful of reasons volunteer officers and directors of nonprofits organizations will be held personally liable for damages in the event of a lawsuit, most of which you might ordinarily expect. But be careful not to rest on your laurels with what seems obvious. The California Legislature has carved out one exception in particular that might surprise you.
When it comes to business law, California nonprofit corporations fall under the Corporations Code. As such, the Legislature has done a good job protecting volunteer officers and directors from personal liability for serving on a nonprofit board of directors. They recognize that if well-meaning citizens had to be overly concerned about the risk of losing their personal assets by serving on the boards of their favorite charities, such volunteer service would be significantly curtailed. Then who would manage and direct the charitable affairs of the people of California?
California Law Generally Protects Volunteer Board Members From Lawsuits—But Not Always
Section 5047.5 of the Corporations Code provides the protection volunteer officers and directors need, providing that “no cause of action shall arise for monetary damages against any person serving without compensation as a director or officer of a nonprofit organization.” In other words, it’s not very easy to sue volunteer board members of nonprofit corporations. The statute then lists all of the exceptions. Most of them are predictable and make a lot of sense. One, though, is worthy of being on your next board agenda—subsection (h). But before discussing subsection (h), it is important to know the other limitations.
Volunteer officers and directors are only exempt from being sued for negligent acts or omissions occurring (1) within the scope of that person’s duties as a director acting as a board member, or within the scope of that person’s duties as an officer acting in an official capacity; (2) in good faith; (3) in a manner the person believes to be in the best interest of the corporation; and (4) in the exercise of his or her policymaking judgment. That shouldn’t be too difficult.
But, beware! The statute does not protect a volunteer or director for any of the following: (1) Self-dealing transactions; (2) Certain conflicts of interest; (3) Intentional, wanton, or reckless acts, gross negligence, or an action based upon fraud, oppression, or malice; or (4) for corporations that do not maintain the requisite level of liability insurance. There are a few other requirements, and if you serve on a board of directors in California, it would serve you well to read and understand all of Corporations Code section 5047.5.
So what about Subsection (h)?
Almost at the very end of the statute (there is only one more subsection after that) lies subsection (h), which, in essence, states that the statute does not provide protection for any corporation that unlawfully restricts membership, services, or benefits conferred on the basis of political affiliation, age, or any characteristic listed or defined in the Unruh Civil Rights Act, also known as Civil Code section 51.
Now, that might not cause as much concern for you as it does for me, but from a risk perspective, subsection (h) leaves many well-meaning but unwary board members entirely exposed to personal liability in the event of a lawsuit. The list of characteristics identified in Civil Code section 51 is not unfamiliar. It includes sex, race, color, ancestry, national origin, disability, medical condition, genetic information, marital status, religion, and sexual orientation.
What does that mean for volunteer board members?
Going back to the language of subsection (h), protection from personal liability for volunteer board members does not apply to any nonprofit corporation that unlawfully restricts membership, services, or benefits based upon any of the characteristics enumerated in Civil Code section 51. For those of us sitting on a nonprofit board, that means that it is incumbent upon us to be sure that the organizations we serve are not unlawfully discriminating against people in a protected classes.
But board members of some organizations are by nature especially at risk—those who serve a particular political class, a limited age group, people within a specific race or national origin, and those who serve out of closely-held religious beliefs.
Who loses with conflicting public policies?
Did the Legislature truly intend to restrict volunteer board members for organizations such as these from enjoying the protection from the risk of a lawsuit for the work they do in our communities? Maybe. And especially given the public policy to ensure full and equal accommodations, advantages, facilities, privileges or services in all business of every kind whatsoever for all people in California.