John H. Warren III, J.
Lawyers are often asked to serve on boards of nonprofit corporations and if they do so, they will often be asked by other directors about the potential individual liability of a director for actions of the nonprofit, for actions of the director and for actions of other directors. It is essential, therefore, that such lawyers understand the risks involved. It is the purpose of this article to further that understanding.
The risk/reward analysis resolves itself into the question of whether (1) the risk of the liability to the director outweighs the benefit of the service to the public, or (2) the benefit of the service to the public outweighs the risk of liability to the director.
of nonprofit corporations must have a thorough understanding,
first, of the duties of such a director because it is for a
breach of those duties that a director may be sued
individually, putting the director's personal assets at
risk. Insurance companies providing coverage for directors of
nonprofit corporations emphasize this concept. The website of
one insurance company states that such potential liability
"[C]ould threaten an individual's livelihood and
personal fortune" and that directors owe "fiduciary
duties to the nonprofit organization and its grantees and
Although a director of a nonprofit corporation has duties and standards of conduct to adhere to, a system of statutory protection does exist in South Carolina for such a director. This system is more protective of a director of a nonprofit corporation than the system protecting a director of a business corporation. Liability insurance exists too, enabling the public benefit to be achieved by directors serving nonprofits to outweigh the risk of personal liability.
Duty of care as interpreted by state law
director of a nonprofit corporation has two duties under
South Carolina law: (1) a duty of care and (2) a duty of
Three primary South Carolina statutory provisions address the duty of care of a director of a nonprofit corporation: S.C. Code Ann. Sections 33-31-830, 33-31-202 and 32-31-834.
S.C. Code Ann. Section 33-31-830
governing statutory authority affecting directors is codified
in Section 33-31-830 and is based on the second edition of
the Model Nonprofit Corporation Act approved by the Committee
on Nonprofit Corporations of the American Bar Association in
(2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
(3) in a manner the director reasonably believes to be in the best interests of the corporation.
Subsections (1) and (2) constitute the duty of care and the standard is a negligence standard involving an analysis of the specific language of the section, including "a prudent person," "in a like position" and "under similar circumstances." Id.
Section 33-31-830(d) provides that a director meeting the standard of Section 33-31-830(a) is not liable to the corporation, a member or any other person if complying with this section.
S.C. Code Ann. Section 33-31-202
Section 33-31-202(b)(2) provides that no director is personally liable for monetary damages for breach of any duty to a nonprofit corporation or its members, excepting, with respect to the duty of care, "acts not in good faith or intentional misconduct or knowing violation of law."
protection in this Section has both positive and negative
differences from the protection in Section 33-31-830. On the
positive side, the protection from liability here is not only
against negligence, but also against gross negligence,
because intentional misconduct would be a higher standard
than gross negligence.