Guide-for-Nonprofit-Organizations-Bankruptcy-Issues-FINAL-with-ads

Unfortunately, when it has a reason to look, the board of a nonprofit may find that its directorsand officers coverage is light, if not lapsed (a casualty of heretofore hidden cash flow,operational, and/or management issues). If the coverage appears to be substandard or haslapsed, direct the entity’s executive director to immediately engage with its insurance broker toadvise on options. Deal with any blame over the lapsed coverage at a later point; the immediatetask is to get adequate coverage in place, review the status of past coverage, and determine theextent to which the inadequate or lapsed coverage puts the current board at risk.There are other risks that may not be insurable. For example, recall the situation discussedpreviously in which the board discovers that the entity has not paid or reserved payment forcertain payroll tax obligations. Under existing law, management and board members may bejointly and severally liable for such taxes if the deficiency is not addressed. Directors should notcount on the availability of insurance coverage for that exposure.Board Disengagement: What then?During a financial crisis, a nonprofit board which has always struggled to find and holdproductive board members – a common theme - invariably finds that it needs more members,while at the same time, the crisis makes it virtually impossible to recruit new members andheightens the risk that existing members will resign.A resignation in this situation exacerbates an already skittish situation. The resigning boardmember takes away his or her expertise, board experience, resources, and vote. The latter canbe critical. If the board is now an even number, the board runs the risk of deadlock on a keyvote. Furthermore, if your board is small, the loss of a member increases the risk that a quorumwill not be available for a vote at a critical point in the case.In part due to the risk that board resignations may lead to issues finding a quorum, a nonprofitconsidering bankruptcy should immediately review its bylaws with an eye toward thefollowing issues:Should the quorum requirements be loosened to account for the potential drop out ofone or more board members, or to address the issue of disengagement by a sitting boardmember?Should the meeting and notice requirements be modified to ensure sufficient flexibilitywhile in crisis?Do the bylaws unduly restrict the entity’s ability to create and empower specialcommittees to address the crisis?The bylaws of a nonprofit with a membership structure present an additional layer ofcomplexity, as they typically require that certain critical issues be addressed through officialnotice to and duly called meetings and votes by the membership. It is unlikely that the bylawscan be amended, absent membership approval, to allow the board more flexibility goingforward in connection with decisions that otherwise require membership notice and approval,and there are constituent relationship risks to attempting to push through such changes in thefirst place. Better to engage the membership promptly and with candor, using the existingnotice and consent protocols. It is critical that the board review, understand and comply with14