Dallas Bar Association

Editor’s Note: This article is the second in a series on the risks and benefits of lawyers volunteering their services with charitable organizations. We encourage readers to send feedback or thoughts to DHutchinson@dallasbar.org.

Because their skill sets offer an added dimension that is often appreciated by non-profit organizations, attorneys with a desire to give back to the community are frequently asked to serve on boards. However, as was discussed in the July 2007 issue of Headnotes (“Community Service: Risks for Lawyers Serving Non-Profits”), serving on a board requires the lawyer to satisfy certain legal duties. However, this service can be both meaningful and liability-free if lawyers put in the effort to serve within prescribed parameters. Doing so will help insulate the attorney from liability.

Under the Texas Non-Profit Corporation Act, a director must discharge his or her duties in good faith, with ordinary care, and in a manner the director reasonably believes to be in the best interest of the corporation (Tex. Rev. Civ. Stat. art. 1396 § 2.28), with officers held to an identical standard (Id. § 2.22). In exercising such duties, officers and directors may, in good faith and with ordinary care, rely on information, including opinions, reports or statements, about the non-profit which have been prepared by legal counsel, accountants and other professionals. See id. §§ 2.20(D), 2.28(B).

Similarly, directors are specifically permitted under the act to contract with investment counsel, trust companies, banks, investment advisors, or investment managers and to give such advisors the “full power and authority” to invest corporate assets on behalf of the non-profit association. Id. § 2.29(A)(1)-(2).

When it comes time to evaluate an officer’s conduct, the “business judgment rule” applies, and courts will not substitute their judgment for that of a corporate officer or director in matters of corporate policy. So long as the officer or director does not act in bad faith, dishonestly or willfully, courts will generally give deference to the sound business judgment of the officer or director. Conduct that is merely unwise, inexpedient, or imprudent is unlikely to constitute a breach of fiduciary duty.

However, when a director is grossly negligent in fulfilling his or her duties, the benefit of the business judgment rule is lost. See Resolution Trust Corp. v. Acton, 844 F. Supp. 307, 314 (N.D. Tex. 1994). For this to happen, under Texas law, there must be an “entire want of care which would raise the belief that the act or omission complained of was the result of a conscious indifference to the right or welfare of the person or persons to be affected by it.” Burk Royalty Co. v. Walls, 616 S.W.2d 911, 920 (Tex. 1981).

Equally troublesome is exercising no judgment. See Resolution Trust Corp., 844 F.Supp. at 314; see also RTC v. Norris, 830 F.Supp. 351, 358-59 (S.D. Tex. 1993).

For example, a violation of the business judgment rule may occur if a director is present at a board meeting at which improper corporate action is taken and has no dissent entered in the minutes. A director can also record his dissent by offering written notice to the recording secretary before the adjournment of the meeting, or sent by registered mail to the secretary of the corporation immediately following the adjournment of the meeting. See Tex. Rev. Civ. Stat. art. 1396 § 2.26(B).

Apart from exercising sound business judgment, fiduciaries also must carefully evaluate potential conflicts of interest so as to avoid breaches of loyalty.

Attorneys may find themselves in a number of conflict situations, including clients of their firm who may be adverse to the non-profit organization. For instance, the non-profit may consider hiring another lawyer from the director’s law firm. This may confer an indirect financial benefit on the director, giving rise to a potential conflict of interest. Further, the statute explicitly prohibits certain conflicted transactions. For instance, the Texas Non-Profit Corporation Act provides “no loans shall be made by a corporation to its directors.” Tex. Rev. Civ. Stat. art. 1396 § 2.25.

Directors should review section 2.30 (entitled “Interested Directors”) of the act before any vote is taken on a contract or transaction between the non-profit and a director or on any matter in which a director may have a financial interest.

Although fulfilling one’s fiduciary duties is most critical, an attorney should also consider the existence and adequacy of any officer’s and director’s liability insurance. Such policies not only provide valuable legal defense but may also help insulate one from personal financial liability in the event of a judgment or settlement.

Keeping these duties and protective measures in mind, an officer or director should consider taking the following steps to curtail liability when participating on a non-profit board.

Investigate the Position

Find out what the organization does.
Ask about its board structure and governance.
Obtain an annual schedule of board meetings to ensure that you have the time to fully commit to the position and its requirements.
Investigate whether the non-profit association has purchased (or can afford to purchase) officer and director liability insurance and provides indemnity.

Exercise the Duties of Care and Loyalty

Obtain meeting agendas in advance so as to properly prepare for the scheduled items of discussion.
Ensure all relevant information needed for a proposed decision is available.
Determine whether experts or consultants are needed to make a fully informed decision.
Comply with all required voting procedures.
Devote your full time and attention to the meeting.

Fully Disclose Potential Conflicts of Interest

Consider potential conflicts with other clients.
Evaluate potential conflicts with other professionals (i.e. accountants, financial planners, etc.) with whom you have a business relationship and abstain from voting on such matters.
Ensure the best interests of the non-profit organization are not compromised in favor of personal interests.

Finally, to comply with a duty of loyalty while serving on a board, lawyers are required to act in good faith and avoid any act of self-dealing. To place a lawyer’s personal interest in conflict with the interest of the non-profit would subject the lawyer to potential liability. On that rare occasion when a conflict arises and a lawyer cannot set aside his or her personal interest to do what is best for the organization, the lawyer should resign the board position.

By adhering to the above guidelines, lawyers can reduce the risk of liability, while serving the interests of the non-profit board with much gratification and reward.