Senate Bill S2138

                                 BILL NUMBER:  S2138

 TITLE OF BILL :  An act to amend the not-for-profit corporation law,
in relation to duty of directors and available relief for breach
thereof

 PURPOSE :  To permit not-for-profit corporations to protect their
directors from personal liability for a breach of duty except where a
director's actions were in bad faith, involved intentional misconduct,
knowing violation of law, or personal gain, financial or otherwise.

 SUMMARY OF PROVISIONS :  This bill would add to Section 402 of the
Not-for-Profit Corporation Law a new subsection (d) to provide that
the certificate of incorporation may limit a director's personal
liability to the corporation or its members for damages for any breach
of duty as director, unless the director's acts or omissions were in
bad faith, involved intentional misconduct, a knowing violation of law
or personal gain, financial or otherwise. Section 720 (a) (1) of the
Not-for-Profit Corporation Law would be amended to conform with the
possible limitation of liability provided under the new Section 402
(d).  This bill will not apply to corporations organized pursuant to
Article 43 of the insurance law.

 JUSTIFICATION :  When the Not-for-Profit Corporation Law ("N-PCL") §
720-a was enacted in 1986, the legislature addressed the need to
protect volunteer directors, officers and trustees of not-for-profit
              

charitable organizations against third party tort claims. Directors,
officers and trustees of not-for-profit corporations are frequently
named as defendants, regardless of culpability, because they are
either perceived as having greater financial resources than the
nonprofit organizations they serve or are perceived as being more
likely to settle a frivolous suit than to contest the suit, due to
their role as volunteers in not-for-profit organizations, insufficient
funds and their status in the community.

Unfortunately, the legislature limited the protection of N-PCL §
720-a to those individuals who served as directors, officers and
trustees of Internal Revenue Code Section 501 (c) (3) organizations
and limited that protection to third party claims. This bill would
provide protection to directors of all not-for-profit corporations
against claims by the corporation or its members. Chapter 367 of the
Laws of 1987 amended the Business Corporation Law ("BCL") (adding new
section (b) to BCL §402) to provide that corporations could, by
provision in the certificate of incorporation, limit the liability of
directors to corporations or shareholders for any breach of duty
unless the director's actions were in bad faith or involved
intentional misconduct, a knowing violation of law or financial or
other profit by the director.

The BCL legislation was in part a response to director's legitimate
concerns regarding unjustified exposure to personal liability for good
faith management actions. This concern for exposure diminished the
ability of corporations to recruit directors, undercut directors'
ability to act based upon corporate interests as opposed to acting
primarily to minimize potential liability, and threatened to drive
corporations out of New York to states with statutes more favorable to
directors.  All of these concerns apply to a much greater extent to
directors who serve on boards of not-for-profit corporations. They
perform valuable functions for the community and the State of New
York. Indeed, because not-for-profit directors usually serve without
compensation and because many not-for-profit corporations can ill
afford appropriate levels of directors' liability insurance or provide
adequate indemnification, the concerns of directors over litigation,
however frivolous, are substantially heightened.


The perception of exposure to personal liability has had a detrimental
effect on the ability of not-for-profit corporations to recruit
directors. This bill will ease this problem. The exclusion of
protection for acts that are in bad faith, involve intentional
misconduct, a knowing violation of law, or personal gain, minimizes
any potential detriment to the corporation or its members.  These
benefits may only be extended to directors by amendment of the
certificate of incorporation and under Section 802 of the N-PCL,
members must authorize such amendments if there are any members
entitled to vote thereon. Many other states, including Delaware and
Pennsylvania, provide protection for directors of not-for-profit
corporations similar to that provided for in this bill.

 EFFECTIVE DATE :  This act shall take effect immediately.