Directors And Officers Beware: Could You Be Personally Liable?

Now is the time for directors and officers of nonprofit health care providers to reassess their governance and compliance obligations to ensure that they do not inadvertently breach their fiduciary duties. The need for self‑evaluation stems from a cautionary opinion on fiduciary duties from the Third Circuit Court of Appeals and a collaborative publication on the duty of care and compliance from the United States Department of Health and Human Services ("HHS"). This article, the scope of which is limited to the obligations of directors and officers of nonprofit health care providers, examines the instances in which directors and officers may face liability.

Fiduciary Duties of Directors and Officers and Limits of Liability

Certain core fiduciary duties apply to all directors and officers of nonprofit health care providers. The duties of loyalty, care and obedience are among the most important directors and officers owe to their organization.1

The duty of loyalty requires directors and officers to act in good faith and refrain from self‑dealing. Directors and officers must also not exploit any of the organization's business opportunities for their own personal gain.2 Wisconsin courts apply a more restrictive duty of loyalty to nonprofit organizations than is standard in most states.3 Most states only hold nonprofit organizations to the same standard as for‑profit organizations.4 In re Lemington Home for the Aged, 777 F.3d 620 (3d Cir. 2015) ("Lemington"), makes clear that directors and officers of nonprofit organizations who breach their duty of loyalty risk both personal liability and punitive damages.

The duty of care requires that directors and officers use the same degree of diligence, inquiry and skill in performing their duties as a prudent person would use in similar circumstances.5 Directors and officers must make informed, good‑faith decisions to further the organization's purposes.6 Given the complexity and fast‑paced nature of today's business world, the duty of care only requires that directors and officers be "reasonably" well informed before making a business decision.7 Directors and officers who exercise their reasonable business judgment will generally fulfill their duty of care.

The duty of obedience requires that directors and officers carry out the organization's purposes as set out in its organizational documents.8 Directors and officers must act within the scope of the organization's mission. For example, directors and officers who do not use the organization's assets to further the organization's purposes as described in its charter may violate the duty of obedience. This duty is unique to—and necessary for—nonprofit organizations because they have no shareholders and the public needs assurance that its donations to the organization will only be used to fulfill its mission.9

Liability: Limited or Not?

Wisconsin's business judgment rule ("BJR") for non-stock corporations10 protects directors and officers from personal liability arising from a breach or failure to perform any duty resulting solely from their status as officers or directors.11 Directors and officers may be held personally liable if they do not disclose that their actions are on the organization's behalf.12 If they disclose that they are acting on the organization's behalf, directors and officers will only be held personally liable if one of the BJR's exceptions applies.13 The BJR does not protect directors and officers if the director or officer: (1) violates criminal law; (2) willfully fails to deal fairly; (3) gains an improper personal benefit; or (4) engages in willful misconduct.14

Directors and officers may also be held personally liable for two broad types of self‑dealing: (a) if they willfully fail to deal fairly with the organization in connection with a matter in which they have a material conflict of interest;15 and (2) if they enter into transactions from which they derive an improper personal benefit.16 Transactions between directors and officers and the organization are valid if: (1) the officer or director disclosed his or her interest in the transaction, or it was previously known to the directors, committee or members that approved the contract or transaction by...