Monday, April 27, 2015

Risk Management: Directors of Nonprofits

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


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 on March 27, 2015. It is reproduced with permission.

Monday, April 20, 2015

New "Foundation Landscapes: Education" Website Provides a One-stop Resource for Education Philanthropy

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Press Release

Cheryl Loe
Communications Project Manager
Foundation Center
(888) 356-0354 ext. 701

Foundation Center Introduces Foundation Landscapes: Education

New Website Provides a One-stop Resource for Education Philanthropy

New York, NY — April 1, 2015. Foundation Center, the leading source of information about philanthropy worldwide, introduces Foundation Landscapes: Education, a new online portal that serves as a hub of information about education philanthropy.
This website draws dynamically from a variety of Foundation Center information resources to provide a central, comprehensive source for the most current education-related reports, news, case studies, funding data, and other digital content.
Education is one of the largest program areas within the philanthropic sector. U.S. foundations dedicate on average more than 20 percent of their overall grantmaking to education-related purposes each year. Education funders, policymakers, educators, and others can now access a wealth of high-quality information resources all in one place — a convenient, efficient way to find quick facts and figures, receive alerts, and stay informed about education funding.
"Foundation Landscapes: Education helps funders and others scan the field, track what their colleagues are doing, and assess their own work in the context of broader trends," said Lisa Philp, Foundation Center's vice president for strategic philanthropy. "This is part of our growing array of Knowledge Services that blend information, analysis, and technology to benefit the social sector." These data-driven tools and content-rich platforms developed by Foundation Center are designed for funders and their networks, consultants, advisors, and grantees. A brand-new section of Foundation Center's website,, makes it easy to review and explore the full set of offerings, including Foundation Landscapes.
Foundation Landscapes: Education can be accessed at; it is made possible through generous support from the Arthur Vining Davis Foundations.
Share on Twitter: New one-stop resource for #education #philanthropy from @fdncenter. Read

About Foundation Center
Established in 1956, Foundation Center is the leading source of information about philanthropy worldwide. Through data, analysis, and training, it connects people who want to change the world to the resources they need to succeed. Foundation Center maintains the most comprehensive database on U.S. and, increasingly, global grantmakers and their grants — a robust, accessible knowledge bank for the sector. It also operates research, education, and training programs designed to advance knowledge of philanthropy at every level. Thousands of people visit Foundation Center's website each day and are served in its five regional library/learning centers and its network of more than 470 funding information centers located in public libraries, community foundations, and educational institutions nationwide and around the world. For more information, please visit or call (212) 620-4230.
Foundation Center • 79 Fifth Avenue, New York, NY 10003 • (212) 620-4230

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Monday, April 13, 2015

Upcoming Events & Webinars

April 17th and May 15th, 2015 from 1:00 PM to 2:00 PM 
NYCON Membership Benefits Orientation [Webinar]
In our "Get to Know Us" Sessions, NYCON staff will tell you a lot more about our membership benefits - and answer all the questions you have regarding our process, costs and what you get for FREE.  We will be talking about these benefits...
  • Nonprofit Training, Education and Professional Assistance NYCON empowers our members with the best practices, policies, and procedures as well as information on ever-changing regulations, funding, accountability and more.
  • Cost Savings Solutions for Nonprofits NYCON leverages the purchasing power of thousands of nonprofits to bring you economies of scale on everything from Office Supplies to Fundraising Software. 
  • The Nonprofit Voice in New York State NYCON represents our members on the local, state and national level, giving voice to small and medium sized nonprofits everywhere.

April 21st, 2015 1:30 pm to 4:00 pm
If We Changed the Way We Think About Charity: Charity Could Change the World - Featuring Dan Pallotta [Saratoga] 
Join the Saratoga County Chamber of Commerce and RACE for a galvanizing discussion. 

The eight-county Capital Region has a wealth of world-class cultural and creative assets. However, a 2014 research study conducted by the Regional Alliance for a Creative Economy (RACE) concluded that more support is needed to leverage our region's creative talent, performing arts venues and products to drive our regional economy though travel and tourism, workforce development, and more. Join the Saratoga County Chamber of Commerce and RACE for a galvanizing discussion with Dan Pallotta, one of today's most prominent advocates for nonprofit organizations. Dan will discuss how our society can change our thinking on nonprofit organizations to encourage true innovation and lasting impact.

 Location: Saratoga Springs City Center, 522 Broadway, Saratoga NY.

1:30 p.m. Registration
2:00 p.m. Dan Pallotta
3:00 p.m. Panel Discussion

April 23rd, 2015   2:30 pm to 4:00 pm
Online Tools to Help Nonprofits Learn, Listen & Engage [Webinar] 
Presented by Jay Wilkinson, CEO & Founder of Firespring
NYCON Corporate Member; Free to Current Nonprofit Members

Nonprofits are notorious for having tight budgets and limited resources. If this sounds like your  organization or if you're looking for ways to help your nonprofit run more effectively, you'll want to join Jay in this session to discover:
  • Dozens of no-cost or low-cost online tools to manage projects, organize events, accept donations and monitor social media;
  • Top 10 tools Jay couldn't live without & evaluate which are compatible for your nonprofit;
  • How to educate your constituents and monitor trends and conversations; and
  • Ways to engage with your audience in less than 15 minutes a day.
"Jay's session was awesome. I spent the next hour checking off a few of Jay's suggestions with our own website, Facebook page and email service. We have some work to do! I hope the rest of the attendees 
had as many take-aways as I did."
-Sue Joe, Affiliate Relations Director, National Down Syndrome Congress

May 20th, 2015   11:00 am to 12:30 pm 
Board Impact: Making Service on Your Board a "Win-Win" [Lunch & Learn Webinar]  
Presented by Susan Weinrich, Vice President of Organizational Development Services, NYCON
Free to Current NYCON Nonprofit Members
Board Room
Is your organization facing challenges recruiting new board members?  Are you worried about attracting future board leaders?  Nonprofits throughout the state struggle with connecting and explaining to the community what it means to be a board member and why someone should volunteer to do so.  Often nonprofits are undermining their own efforts in attracting people to board service.  This session will explore the personal, professional and community value of being a board member, and how your organization can leverage and market these areas to bring success to your nonprofit board.  Please encourage your board members to register and attend this session.

August 21st, 2015  11:00 am to 12:30 pm 
Board Committee Structures "Post Nonprofit Revitalization Act" [Lunch & Learn Webinar]
Presented by Susan Weinrich, Vice President of Organizational Development Services, NYCON 
Free to Current NYCON Nonprofit Members
This webinar will help your board and staff operationalize your new committee structure post Nonprofit Revitalization Act. Gone are standing and ad-hoc committees; enter committees of the board and committees of the corporation. Are the latter accountable to the Board or accountable to the Executive Director? Do you need minutes? Who should chair them? How do we bring on non-board members and what is their role? For committees of the Board, what authority do they really have and how to we ensure they are accountable to the board. Join this discussion and bring your questions and suggestions.
In this Issue...

Featured Webinar
Six Reasons Why Infographics Matter
April 7, 1:00 
Why infographics?
If you've never created one, they can seem daunting and expensive. However, when you find the right data and have the right story to tell, your Infographic can reach a wide audience and make a big difference in your community and beyond. Register.

Benefit Spotlight On:
Membership Benefits Spotlight!
NEW! Credit Card Processing from Dhama Merchant Solutions 

Does your nonprofit collect (or want to collect) donations, dues or payments via credit card in person or online? NYCON, via a partnership with the National Council of Nonprofits, is announcing one solution geared towards making this an easier, more affordable tool you can use to collect revenue for your nonprofit.

Introducing our latest member benefit from Dharma Merchant Services. 

Corporate Member SPOTLIGHT:

Master of Public Administration Program (MPA) at Marist College 
The Master of Public Administration program (MPA) at Marist College
prepares innovative leaders of public and nonprofit organizations with the knowledge, skills, and values necessary for effectively managing in a diverse, technologically engaged and global society. Interested in furthering your nonprofit career?

Nonprofits & the Economy Like You've Never Seen Before...

Nonprofits Mean Business!
Powerful Data Illustrates the Economic Impact of the  
Nonprofit Community in New York State

For years New York's nonprofits have struggled to find and capitalize on data that reflects the important business and fiscal impact of our community on the state's economy.

We are pleased to report that more data is becoming readily available and that NYCON has created a series of Infographics that you can use to educate your own constituents, legislators, donors and others, on just how critical nonprofits are to making New York state a better place to to live and work!

Grab our Great Nonprofit Infographics...
Share, Tweet, Like and Send!

First, take a look at an overview of the New York State Nonprofit Community's Economic Impact! Wegenerate over $179 Billion in revenue each year and have over $288 Billion in assets. You can see the number of charities in your region, types of services they provide and the economic impact they have.
You can also check out the "Truth About Nonprofits" Info Cards. These info cards were delivered to our legislators in Albany in early March.  

We encourage members to post the infographics and cards on their websites, social media, and share in as many ways as possible.  If you need help getting started, find strategies below on who to talk to and how to use the data.

Assist funders in better understanding where the strengths and weakness lie across the state and region. Let them know how they can help strengthen the nonprofit community in your area.
Policy Makers
Schedule a time with your local policymakers to start t the conversation as to why Nonprofits are valuable to the state and the region. Point out that we are a large, diverse, and influential community of business that should partake in decisions impacting the state. 

Community Members 
Educate community members as to what nonprofits are, and diversity of our community.
Business Leaders     
By sending this data to business leaders in your area, you're letting them know how much of a viable business partner you can be. 
Nonprofits can use the data to inform their own decisions, and see where future partnerships or opportunities lie.  

Want to get involved or interested in creating your own economic impact data infographic? Email us Today.