An Administrator's Guide to California Private School Law

Chapter 2 - Governance

Lord Abbett Municipal Income Fund, Inc. v. Asami A district court in California granted summary judgment to defendant board members of a private school who were individually sued for alleged negligent misrepresentation. The plaintiff investment firm that purchased $9.5 million of tax-exempt municipal bonds on behalf of the school. After failing to make an interest payment on the bonds, the school filed for bankruptcy and dissolved, and as a result, the investment firm sued the board members. The court explained that directors or officers of a corporation do not incur personal liability for torts of the corporation merely as a result of their official position, unless they participate in the wrongdoing or authorize or direct it. The court held that although the board members were aware of the problems with the school’s future viability, none of the defendant board members authorized, directed or actively participated in any misrepresentation. The board members were therefore not liable for statements made by the school. 65

In addition to shielding directors from personal liability in certain situations, the California Corporations Code also provides that, under certain circumstances, a non-profit public benefit corporation has the power to indemnify any director or officer against expenses, judgments, fines, settlements and other amounts incurred in connection with an action brought against the director/officer. Indemnification means to compensate someone for losses that have already occurred, or to guarantee to repay someone for future losses. This indemnification applies only if (1) the individual was successful on the merits in defending against the action; or (2) the individual is a party to an action because of his/her status as a director or because of actions taken on behalf of the corporation, and was acting in good faith, in a manner believed to be in the best interest of the corporation, and in the case of a criminal proceeding, had no reasonable cause to believe the conduct in question was unlawful. 66 Except when the director is successful on the merits, in order for a corporation to indemnify that director, either a court or the corporation (by a majority vote of a quorum or approval of the members, if applicable) must determine that indemnification is appropriate. 67 A similar provision exists for religious corporations. 68 b. Federal Law Federal law also provides protection for volunteer directors of non-profit corporations under certain circumstances. The federal Volunteer Protection Act of 1997 (“VPA”) shields volunteers from personal liability when the individual acts within the scope of his/her duties as a volunteer, the individual was properly licensed, certified or authorized by the appropriate authorities, if applicable, and the harm was not caused by willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of the individual harmed by the volunteer.

An Administrator’s Guide to California Private School Law ©2019 Liebert Cassidy Whitmore 43