Boards Can’t Just Abandon an Insolvent Nonprofit

My office—the Tennessee attorney general’s charity unit—recently received a call from a judge. She was adjudicating a foreclosure that had advanced to the stage in which the debtor’s assets would soon be sold at auction. The judge was concerned because the debtor in this case was a nonprofit, and she realized that the parties had not involved our office in the foreclosure process. As a result, the judge invited our office to attend the next meeting on the status of the foreclosure.

The only parties present at the meeting were the lender and the court-appointed receiver for the nonprofit’s assets.

When we asked about the status of the nonprofit, the lender told us that the board members had all resigned and that the nonprofit had no management.

Apparently, once the board of directors realized that the nonprofit was no longer financially viable, its members washed their hands of the whole affair. The board passed a resolution allowing the lender to exercise its remedies under the loan documents and then disappeared.

As long as the nonprofit exists, however, the board has fiduciary duties to it. If a nonprofit is insolvent or otherwise can no longer fulfill its charitable mission, the board must ensure that the nonprofit winds down its affairs in an orderly fashion.

The board is responsible for ensuring that the nonprofit provides appropriate notices to state and federal regulators. The board is also responsible for providing requested information to regulators. Board members cannot avoid these obligations by resigning and leaving the nonprofit with no leadership.

Legally the board is required to dissolve the nonprofit, but when it fails to do so, that responsibility falls to the regulators and the courts.

This process will probably involve subpoenas to members of the former board, which may require board members to retain personal legal counsel at their own expense. What’s more, by resigning, board members may no longer have the benefit of directors’ and officer’ liability insurance. Former board members may even be personally liable for actions done in the name of the nonprofit while it is unmanaged.

While it may seem easy in the short term to abandon a failing nonprofit, in the long term, it can be a costly proposition for board members. It is far better to see the nonprofit safely through the dissolution process.