A recent opinion of the Maryland Court of Special Appeals demonstrates the vulnerability officers and directors of unincorporated nonprofit associations potentially face if the association breaches a contract. The Court held that these individuals may be held personally and individually liable for the breach of a contract entered into by the association if they authorized, assented to, or ratified the contract.
The case involved the board members of a nonprofit, unincorporated association, the Pikesville Recreation Council (the "Council"). All of the board members were volunteers, who received no compensation for their work with the Council. The plaintiffs in the case were two former teachers at a preschool the Council operated. After losing county certification to run the preschool, the Council terminated the jobs of both teachers before the end of their contracts and stopped paying them. The teachers sued the Council and its officers and directors for unpaid wages and damages.
Before the Court began its analysis, it clarified that this opinion applied only to officers and directors (which the Court held the board members were) of nonprofit unincorporated associations, and not to ordinary members. Applying the common law as it relates to principals and agents, the judge concluded that the directors and officers were principals and the nonprofit unincorporated association was the agent.
Thus, if an officer or director is shown to have authorized, assented to, or ratified the contract, the officer or director may be held personally liable for the association's breach of contract even if he or she is not specifically named in the contract. In fact, the Court stated that unless an officer or director did not clearly disapprove the contract, liability would likely attach.
This case shows the risk to the officers and directors of a nonprofit association remaining unincorporated. Yet, many nonprofits, such as local community organizations, homeowners' associations, and other such groups are not incorporated. If you are a director or officer of one these groups, you may be personally liable if the association is sued for breach of contract.
If you have any questions about this article, or about incorporating an organization, please contact Emerson Dorsey or Glenn Bushel.