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Fiduciary Duties in Nonprofit Organizations

"I'm a member of the Board of Directors of a local nonprofit organization and have been told that I owe a 'fiduciary duty' to the tax-exempt organization. What is a fiduciary duty?"

It's very common for volunteers serving on a board of directors of a nonprofit organization to be unfamiliar with the term "fiduciary duty" or "fiduciary relationship." Nonetheless, this unfamiliarity does not excuse directors from satisfying to their fiduciary duties to the corporation (and the public) while making governing decisions for the organization.

Case law is clear that a fiduciary relationship "is ordinarily synonymous with a 'confidential relationship.' It is ... founded upon the trust or confidence reposed by one person in the integrity and fidelity of another, and likewise precludes the idea of profit or advantage resulting from the dealings of the parties and the person in whom the confidence is reposed." (Wolf v. Superior Court (2003) 107 Cal. App. 4th 25, 30.) Common examples of fiduciary relationships are "trustee/beneficiary, directors and majority shareholders of a corporation, business partners, joint adventurers, and agent/principal." (Id.; Thomson v. Canyon (2011) 198 Cal. App. 4th 594.)

The established rule demands that corporate directors and officers "scrupulously observe" their duty and "not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers." (Bancroft-Whitney Co. v. Glen (1966) 64 C2d 327, 345.) A few of the specific fiduciary duties owed by directors to the nonprofit corporation and the public include the duty of loyalty, duty of care, duty of reasonable inquiry, and duty to comply with investment standards (see Corp. Code §§ 5231, 7231, 9241; see also Corp. Code § 5240.)

While a lot of this legal jargon can sound intimidating, it's usually much more common sense than many lawyers may lead you to believe. However, I cannot stress the importance of adherence to these fiduciary duties enough as breaching a duty is a surefire way to find yourself in costly litigation.

Ben Schwefel is an Associate Attorney at The Loftin Firm. For questions relating to a business, nonprofit, or estate planning matter, contact Ben at (760) 814-9649. 

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