Tag: directors

No Fiduciary Duty Owed to Students of Shuttering College

The  United States Court of Appeals for the First Circuit’s  recent decision in Tristan Squeri et al. v. Mount Ida College et al.  upholds the dismissal of  claims brought by former students of Mount Ida College against both the College and certain officers and directors of the College.   The students instituted the action as a result of the sudden closure of the institution in the Spring of 2018.   The students sought relief on the following claims:

      • violation of privacy
      • fraud
      • negligent misrepresentation
      • fraud in the inducement
      • breach of fiduciary duty
      • breach of contract
      • unfair and deceptive practices

The First Circuit held that none of the claims could withstand the defendants’ motion to dismiss and affirmed the lower court decision from May 2019.

The primary argument on appeal concerned the fiduciary duty claim.   Specifically, the students argued that the individual defendants (as well as Mount Ida itself)  owed the institution’s students a fiduciary duty.   The  First Circuit was not persuaded:    “Massachusetts law firmly establishes that there is no such fiduciary duty between Mount Ida’s officers or trustees and Mount Ida students on the claims here.”  Rather, the Court held that the fiduciary duty imposed on the individual defendants by Massachusetts law (Mass. Gen. Laws ch. 180, § 6C)  was owed to the College directly and not to the students and  that imposition of the duties sought by the students would create conflicts with existing duties.   Further, the Court declined the students’ invitation to “expand the law” and impose a fiduciary duty directly on the College to its students.

Because the First Circuit was able to affirm on the grounds discussed, it noted that it need not take up various defenses raised by the defendants including the argument that the Volunteer Protection Act, 42 U.S.C. § 14503(a) provides immunity from suit (and not merely immunity from liability) as held recently by the Massachusetts Supreme Judicial Court in  Lynch v.  Crawford, 135 N.E.3d 1037, 1041 (Mass. 2019).   Lynch was discussed in a recent blog post here.

As the litigation in Mount Ida and Lynch demonstrates,it is not unusual for officers and directors of a financially troubled entity to be the subject of various claims.  Any individual contemplating service as a director or officer of any entity (for profit or not for profit) should ensure  a suitable directors and officers liability insurance policy is in place.  For a brief discussion of some of the considerations  for such policies, see my article “Five Things to Know About D & O” published by the American Bar Association Business Law Section (copy available here).

SJC Examines Nonprofit Director Immunity from Wage Act Claims

The Massachusetts Supreme Judicial Court recently issued an important decision (Lynch v. Crawford) involving a  volunteer board member’s invocation of immunity from  liability for claims made under the Massachusetts Wage Act.

The basic facts of the case are not complex. In 2013 a nonprofit health center encountered distress and closed without paying wages immediately.  Employees brought a class action lawsuit against the volunteer board chair (who was also serving as acting CEO). The board chair sought to have the suit dismissed.  He pointed to both state law (MGL c. 231, sec 85W) and federal law (42 USC sec 14503) – both of which generally seek to protect volunteers in connection with their service to nonprofits.  Although the employees were eventually paid from the entity, they nevertheless continued their Wage Act complaint (seeking treble damages and attorneys’ fees).

The trial judge denied the director’s motion to dismiss.  The  Massachusetts Appeals Court also refused to dismiss.   Neither court was convinced the above statutes necessarily provided the volunteer director absolute immunity from a Wage Act claim.    The issue  before the SJC was twofold:  (i) procedurally – was the volunteer director entitled to bring an appeal of the denial of the motion to dismiss immediately or did he need to await a final judgement; and (ii) under what circumstances (if at all) does an unpaid volunteer board member have immunity from a Wage Act suit.

In its decision, the SJC considered the intersection of the Mass Wage Act and the various immunity statues for service to a nonprofit and held that the volunteer board member was entitled to bring an immediate appeal of the lower court’s denial of his motion for summary judgement.   That holding, of course, is welcome news to any volunteer board member as the SJC recognized the importance of allowing immediate review to a board member seeking  immunity from liability by statute.

The SJC did not stop its analysis there however.   Rather, it further held that on the particular facts of the case presented, genuine issues of material fact existed that justified the denial of the director’s summary judgement motion.    Specifically, the SJC pointed to language in the state immunity law excepting “any acts or omissions intentionally  designed to harm.”   When viewing the record in the light most favorable to the nonmoving party (the Wage Act plaintiffs), the SJC determined that a genuine issue of of fact existed on that issue making denial of summary judgement appropriate.

As a result of this decision, nonprofit board members should be especially mindful of engaging in managerial acts that could be construed later as intentionally inflicting harm.  In the Crawford opinion, the SJC pointed specifically to facts indicating that the board member directed certain vendor claims to be paid before employee claims.   Although the volunteer will have the opportunity to dispute this factual issue at trial, the mere existence of such a factual issue proved sufficient to put his entitlement to immunity in jeopardy.