AVOIDING THE DOGHOUSE

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1 AVOIDING THE DOGHOUSE By: Todd M. Kiesz Jeffers, Danielson, Sonn & Aylward, P.S 2600 Chester Kimm Road, Wenatchee, WA (tel.)

2 Outline Types of Liability Risks Protections for Good Faith Acts Applicable Statutes Best Practices for Organizations

3 Regulatory Liability IRS Charitable Status Compliance Federal, State or County Laws Zoning or land use Permitting Secretary of State Discovery Requests

4 Third Party Liabilities Breach of Contract Assumed Liabilities Indemnifications/Defense Agreements Tort Liability Personal Injury Negligence, Intentional Acts, Fraud Failure to Supervise Dangerous Conditions

Tort Liability Personal Injury Negligence,

5 Officer and Director Liabilities Self Dealing Breach of Fiduciary Duties Fraud/Theft Negligence/Bad Faith

6 Officer and Director Liabilities Officers and Directors may have personal liability for: Failure to observe the Organization s formalities Lack of minutes or meetings Commingled personal and corporate finances If unclear whether acting individually or on behalf of the Organization, or Actions outside of organizations or individual s authority

Commingled personal and corporate finances If unclear whether acting individually or

7 Officer and Director Liabilities Officers and Directors have personal liability for: Non-profit loans to Officers and Directors Gross Negligence in carrying out or failing to carry out rights and responsibilities Failure to answer interrogatories from the Secretary of State Intentional misconduct or knowing violation of law

or failing to carry out rights and responsibilities Failure to answer

8 Officer and Director Liabilities Officers and Directors have personal liability for: Personal benefit/conflict of interest transactions Breaching the duty of loyalty to the Organization Violation of Lobbying Limits

benefit/conflict of interest transactions Breaching

9 Limits of Officers and Directors Liability Officers and Directors protected from liability where: Act on behalf of Organization within the authority and rules prescribed by the Articles of Incorporation, the Bylaws, and applicable statutes ( Follow the Rules ), Act within the purposes set forth in the Articles of Incorporation, and

prescribed by the Articles of Incorporation, the Bylaws, and applicable statutes (

10 Limits of Officers and Directors Liability Act in Good Faith Reasonably believe such action is in best interest of the Organization Use such care as an ordinarily prudent person would use under similar circumstances (the Reasonable Person Standard ) RCW

Organization Use such care as an ordinarily prudent person would

11 Reasonable Person The Reasonable Person is not: An expert in every or any field The Reasonable Person is: Reasonably informed The Reasonable Person does: Use their actual expertise in carrying out their duties (CPA, lawyer, biologist, investment advisor etc.)

The Reasonable Person does: Use their actual expertise in

12 Reasonable Reliance on Advisors Permitted The Board can rely upon: Employees, Officers and Directors which the Director reasonably believes to be reliable. Counsel, public accountants, or other persons as to matters which the Director reasonably believes to be within such person's professional or expert competence.

Counsel, public accountants, or other persons as to matters which the Director

13 Good Faith Use of Committees Permitted The Board can rely upon: A committee of the board upon which the director does not serve duly designated in accordance with the articles of incorporation or bylaws as to matters within its designated authority which committee the director reasonably believes to merit confidence, and so long as, in any such case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted

the director reasonably believes to merit confidence, and so long as, in any such case, the director acts in good faith, after

14 Good Faith Action Are In the Best Interest of the Organization Directors and Officers Must act in the best interest of the Organization and not themselves Avoid conflicts of interest Remove conflicted Directors from decision

best interest of the Organization and not themselves

15 Good Faith Actions Require Exercise of Due Care Directors and Officers must use due care in executing fiduciary duties and making decisions, including: Evaluating programs of the Organization Examining financial statements Approving acquisitions, debts, and expenses Attending meetings to be informed on Board issues

Evaluating programs of the Organization Examining financial statements

16 Good Faith - Same Duty of Care as For Profit Organizations Directors and Officers owe same duty of care to the Non-profit Organization as for the Profit Organization. Just because you work for free or work on a good cause does not mean you have a lower duty of care.

Organization as for the Profit Organization.

17 Document Actions Maintain Minutes To reflect discussions of intent and motivations of the Directors, Identify information and persons relied upon, Identify Attendance, and Record what happened, approved, or decided

Directors, Identify information and persons relied

18 Standard of Review of Actions and Decisions All actions of the Officers and Directors will be viewed based upon: Factual Review: whether the actual decision was consistent at the time it was made with the authority, rules and duties applicable to the Organization, and Subjective Review: whether such decision or action was reasonable in light of what a theoretical reasonably prudent person would do in the circumstances.

authority, rules and duties applicable to the Organization, and Subjective Review: whether such decision

19 Exercise Honest and Reasonable Business Judgment Directors and Officers are generally not liable for damages to the Organization caused by: Honest and reasonable errors of business judgment, Compliance with standards and duties of directors and officers (including Good Faith Duties), and Within the authorized scope of authority.

reasonable errors of business judgment, Compliance with standards and duties of

20 Protecting Officers and Directors Volunteer Protection Act: RCW Does not prevent lawsuits against directors, officers and volunteers, but is a defense to their liability Only applies to those officers, directors and volunteers who do not receive compensation

volunteers, but is a defense to their liability Only applies to

21 Protecting Officers and Directors Volunteer Protection Act: RCW Volunteer must have acted within scope of authorized responsibilities Volunteer must be properly licensed or authorized for activity Harm must not have been caused by misconduct, negligence or recklessness of volunteer

22 Protecting Officers and Directors Volunteer Protection Act: RCW Harm must not involve a motor vehicle, vessel or aircraft Non-profit must carry public liability insurance covering the organization s liability for amounts set forth on schedule based upon size of organization (highest amount required $500,000)

23 Protecting Officers and Directors Indemnification: The Organization agreeing to reimburse or pay director or officer for any and all cost, expense, liability or claim arising out of some given action, to the maximum extent of such liability. Defense and Hold Harmless: The Organization agrees to defend the officer or director in any disputes, and to the extent any judgment is obtained against them, then the organization must pay the amounts therein.

24 Protecting Officers and Directors Indemnification: Required Indemnification: For Directors or Officers who successfully defend against lawsuits arising from their status as representatives of the Organization, unless limited by the Articles of Incorporation

25 Protecting Officers and Directors Indemnification: Permissive Indemnification: For Directors or Officers who regardless of success in defense of lawsuits arising from their status as representatives of the Organization, provided: Actions done in good faith Reasonably believed such actions to be in the best interest of the organization, and No reasonable cause to believe the action was illegal

26 Protecting Officers and Directors Indemnification: Prohibited Indemnification: For Directors or Officers who: Are found liable to Organization Receive an improper personal benefit Knowing violations of law Intentional misconduct, or Personal benefit transactions

27 Protecting Officers and Directors Insurance Liability Directors and Officers Review Coverage Requirements - Match Bylaws, Volunteer Protection Act limits, and other Contractual limits

28 Other Statutes and Notables Public Recreation Immunity Act RCW Charitable Solicitations Act, RCW Lobbying Limitations IRC 501(c)(3) Prohibition on Participation in Political Campaigns/Elections IRC 501(c)(3)

29 Summary Educate Each Board Member to: Understand the Organization and its purpose (the Purpose ) Understand the organizations activities and be comfortable such are within the Purpose Understand their obligations for good faith, fair dealings, and reasonable judgment Understand the prohibitions on self dealing

30 Summary Educate Each Board Member to: Understand need for corporate formalities (meetings, minutes, votes), and require observance by the organization Understand obligations to be reasonably informed on the business activities of Organization

31 Summary Maintain Directors and Officers liability insurance commensurate with the organization s activities File all required state and federal reports Pay all required taxes and fees

32 Summary Where possible reduce commitments, tasks, agreements and understandings to writing, Define officers, directors and employees duties and authority on behalf of the organization and make sure individuals are acting within scope of that authority

33 Summary Be Prudent: 1. Practical - having good sense in dealing with matters 2. Considerate - using good judgment to consider likely consequences and act accordingly 3. Careful in managing resources: careful in managing resources so as to provide for the future

34 THANK YOU! By: Todd M. Kiesz Jeffers, Danielson, Sonn & Aylward, P.S 2600 Chester Kimm Road, Wenatchee, WA (tel.)

Liability of Volunteer Directors of Nonprofit Corporations (10/02)

Liability of Volunteer Directors of Nonprofit Corporations (10/02) This memorandum addresses the California and federal law protections that exist to shield volunteer directors of nonprofit corporations