Why are members of the Board personally liable?

Until recently, it was difficult to sustain a legal action against members of boards of directors or trustees. This has changed dramatically as a result of new laws, regulations and policies motivated by massive accounting scandals involving companies like Enron, WorldCom, and Health South and the even more massive financial collapse caused by irresponsible lending practices in the residential mortgage industry.

New legislation, including Sarbanes-Oxley and Dodd-Frank, as well as new and extensive regulations in the Federal Sentencing Guidelines, the Foreign Corrupt Practices Act and prosecutorial standards concerning organizational liability expanded the oversight obligations of boards (and, therefore the potential liability of individual board members) to assure that the  organizations they govern have specific processes, procedures, guidelines and internal controls to detect, prevent and promptly deal with improper and unlawful conduct that could injure others and that could subject their organizations to liability.

Archer - board responsibilities law 2

It is well established that new laws and regulations imposing the duty on corporate governing boards to assure that their companies have established internal controls to prevent illegal and unethical conduct clearly apply to nonprofit boards. In addition, individual Board members can be held liable for their own actions that participate in, facilitate or encourage improper actions of management.

Unfortunately for the plaintiffs, Archer’s Board of Trustees, both before and after plaintiffs informed them of a pattern of improper conduct by the Head of School, made no efforts to meet either their oversight obligations or their duties to assure that their colleagues do not act improperly.

As will be developed later in this post, there are four distinct, sufficient legal grounds to hold the Board and its individual members liable for the improper actions alleged in the Josephson lawsuit:

1) Failure to Provide Oversight.  Each member of the Board breached his or her duty of care by failing to provide guidance or internal controls to detect and prevent reasonably predictable forms of unlawful, unprofessional and unethical conduct. They also failed in their corollary responsibility to “inquire”, to find out information they needed to and should know such as the penchant of the head of School, Elizabeth English to abuse the discretion granted her by the Board.

2) Direct Participation of Board Members. Plaintiffs allege that the evidence will establish that several individual board members crossed the line from governance to management and participated directly in certain improper decisions. Consequently, these board members may be held personally liable for those acts. Moreover, when the rest of the board discovered this impropriety, instead of taking remedial steps, they condoned the behavior and, thereby also became complicit in it.

3) Ratifying and Supporting Improper Actions. Even when every member of the Board was given extensive documented evidence of wrongdoing by Ms. English and some of their colleagues, the Board refused to conduct or agree to conduct and independent objective investigation. Moreover, when they were explicitly asked to repudiate decisions when there was still time to prevent some aspects of the injury, they chose to endorse and support all Ms. English’s actions.

4) Refusal to Mitigate Damages. On two separate occasions, the Board refused to mitigate the damages to Child 1 and Child 2 when they had a chance to do so despite the fact that there was no compelling institutional interest in enforcing the unjustified and unwise edicts of Ms. English which had not yet been fully implemented. First, they allowed Ms. English to prevent Child 1 from participating in graduation and other senior activities with her lifelong classmates and they refused to re-instate Child 2’s right to complete her education at Archer; second, they ratified Ms. English’s vindictive ban of the entire Josephson family timed to inflict maximum emotional harm by preventing Child 1 and Child 2 from attending graduation ceremonies of their friends.

Archer - no window dressing board

Background

Though there is no question that current formulation of a board members fiduciary duties applies to trustees of the Archer School for Girls, Board has made no effort to assure that its members fully understand the scope of their duties, including the obligation to provide oversight of organizational activities and implement policies and procedures that can effectively detect and prevent the types of misconduct engaged in by Ms. English.

Plaintiffs contend that if the Archer Board fulfilled its legal obligations the damaging behavior alleged in their complaint would not have occurred. Hence the Board’s dereliction of duty is a substantial cause of the harm and the board, as an entity and the individuals who comprise the board are liable for compensatory and punitive damages.

The bottom line is that the Archer School Board of Trustees violated its fiduciary duty to assure that the all actions of school administrators were lawful and consistent with the professional standard of care for educational organizations like Archer. As the head of School justifies most, if not all, of her questionable and improper behavior on the “sole discretion” clause granted to her or sanctioned by the Board, they also failed to assure she had guidelines and instruction concerning legal limitations to the way she exercised her claimed discretion including fundamental standards of good faith and fair dealing, standards precluding the arbitrary and capricious exercise of discretion and tort law creating civil liability for the intentional infliction  of emotional distress and violation of professional educational standards in a manner that subjects children to unreasonable emotional abuse).

Archer - risk management obligation

Plaintiffs contend that instead of even attempting to meet their oversight responsibilities the Archer Board allowed Ms. English to believe that a phrase buried in the Archer handbook actually gave her complete unchallengeable discretion to do whatever she wanted (without any guidance whatsoever) including the right to make unilateral decisions, without a clear process to terminate enrollment contracts, banish parents and dismiss students. What’s more, even when clear and compelling evidence was presented to them that the Head of School, Ms. English was exercising this discretion in inappropriate and probably illegal ways for personal reasons, the board failed to exercise oversight or even order a comprehensive objective investigation of the allegations.

As this lawsuit demonstrates, private schools are vulnerable to liability and reputation damage when an administrator takes too literally the claim that she has sole discretion to eject parents and students from the school without adequate cause.  Thus, the failure to require the school to develop and implement guidelines on the use of discretion makes the board liable for consequences flowing from this omission.

According to a recent publication by The Office of Inspector General of the U.S. Department of Health and Human  Services  (http://oig.hhs.gov/fraud/docs/complianceguidance/040203CorpRespRsceGuide.pdf) a manual that explicitly addresses the new standards applicable to governing boards of nonprofit organizations, the root of legal duties of board members is their personal, non-delegable fiduciary duty of care.

The Inspector General’s white paper on board member duties also clarifies that a trustee’s obligations with respect to the duty of care arise in two distinct contexts: 1) The decision-making function: the application of duty of care principles to a specific decision or a particular board action; and 2) The oversight function: The application of duty of care principles with respect to the general activity of the board in overseeing the day-to-day business operations of the corporation; i.e., the exercise of reasonable care to assure that corporate executives carry out their management responsibilities and comply with the law.

Finally, board members will be held to the “reasonable inquiry” test which requires them to conduct the appropriate level of due diligence so they can make informed decisions. In other words, the Inspector General says, “directors must be aware of what is going on about them in the organization and must in appropriate circumstances make such reasonable inquiry, as would an ordinarily prudent person under similar circumstances.”

Plaintiffs contend that a systematic application of these legal principles to the actions and inactions of the Archer Board will not only justify liability but punitive damages. 

Archer - board - duty to say no more

Pattern of Violations of Oversight Responsibilities 

The Josephsons contend that the Board has been little more than a rubber stamp regarding the way crucial policies and practices within the scope of their responsibility were created and implemented of the Head of School.

The impact of this “hands-off” approach can be seen not only in the vast damage done to all the plaintiff’s by the unaccountable conduct of Ms. English, but also by the board’s failure to meet its obligations to assure that Ms. English effectively pursues and accomplishes specific aspects of the Five Year Strategic Plan, which would have prevented or made less likely the improper conduct described in this document.

In particular, Ms. English has not been held accountable with respect to her failures regarding the following aspects of the Board’s Strategic Plan.

1)       Goal 7 states that “Equally important to academic excellence is the quality of community that has been established by the School’s commitment to character development.” Ms. English has not been held accountable to demonstrate specific, tangible and effective means of promoting character development employed during her tenure.

To the contrary, she dismembered the formal character development models that were in place and in process when she arrived at the school and failed to replace them with an effective equally comprehensive different strategy or program.

Instead she installed an inherently defective student review process that has been ineffectual at widely promoting the development of positive ethical values and has, instead, promoted fear and distrust. Most pertinent to our case, she also used the discretionary power, conferred on her by the Board, to maliciously punish the Josephson children for what she perceived as a challenge to her authority.

2)      Goal 2 requires the Head of School to “Create compelling incentives to continue to attract and retain an outstanding faculty, administration and staff from diverse backgrounds.” It adds that “Excellent schools require outstanding educators. The caliber of its teachers is the School’s highest priority.” An explicit objective of efforts in this area is to encourage long-term commitment to Archer.”

Had the Board monitored the pursuit of this objective, it would have found that another negative result of allowing Ms. English to base her management style on intimidation rather than inspiration is the departure of an unprecedented number of outstanding faculty members and a palpable alienation of a significant number of current teachers and administrators who are in constant fear of the consequences of disagreeing with Ms. English on any issue.

3)      Goal 3 focuses on Archer’s commitment to academic excellence. While the many excellent faculty members who remain have, by and large, achieved this goal, the lack of board oversight has permitted Ms. English to conceal or understate major deficiencies in the math and science curricula, so as to force families, including Josephson’s, to supplement Archer curricula by online courses (approved of and subsidized by Archer).

Moreover, the Board of Trustees permitted Ms. English to proclaim that Archer is a STEM school (an institution with robust courses in science, technology, engineering, and mathematics) although she has not been able to attract or retain teachers capable of offering calculus-based physics, computer science or a math class beyond Calculus BC, a math level two full levels lower than other independent schools in the area.

4)      Goal 7 also imposes on the Head of School the obligation to “support the highest ethical and moral standards in an atmosphere of honesty, respect and responsibility for all members of the school community.”

Ample evidence of her dishonesty, disrespect and irresponsibility (detailed in the attached Memorandum) during her dealings with my clients demonstrate the impact of the Board’s failure to hold Ms. English accountable to this objective.

Archer - Edmund Burke quote

Following are the formal allegations the Complaint seeking to establish Board Liability 

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THE COMPLAINT. The Complaint sets out in great detail both the legal theory for holding board members personally responsible for the actions alleged herein and specific allegations of conduct of various board members. ABOT is an abbreviation for the Archer School for Girls Board of Trustees

4. Defendants BARBARA BRUSER, MEGAN CALLAWAY, JUSTIN CHANG, STEPHANIE DARROW, SUZIE DORAN, BETH FRIEDMAN, ANN GIANOPULOS, MARK GORDON, CAROLINE GRAINGE, CATHY HELM, MICHAEL HESLOV, KATHY KENNEDY, DEBBIE LEHMAN, SCOTT LORD, JONATHAN LURIE, FRANK MARSHALL, RAY MICHAUD, CATRICE MONSON, BARBARA NATTERSON HOROWITZ, HILLARY NEWMAN, LAWRENCE O’DONNELL, JOHN OHANESIAN, KAREN RICHARDS SACHS, VICTORIA SHORR, JODY SIEGLER, ANA SERRANO, RON STONE are, and all times relevant hereto were, members of ABOT.

a) Each trustee has a personal fiduciary duty of care that includes specific responsibilities set forth in Section 5231(a) of the California Corporation Code to serve with such care, including “reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”  This includes a duty to keep informed and make reasonable inquiries and the responsibility to assess and understand the liability and reputational risks inherent in the administration of a private school, especially when it grants broad discretion to employees to discipline and exclude students and regulate parent behavior. The duty of care also requires ABOT members to acquire and regularly assesses information from internal and external sources to determine whether staff, especially the Head of School, has or is engaging in conduct that creates undue and avoidable liability and reputational risks.

b) Because of the enormous and lasting impact educators have on the intellectual, social, emotional and moral development of students,  governing boards of primary and secondary educational institutions, including ABOT, have and should have an especially high duty to assure that policies and procedures are in place to assist and encourage administrators and teachers to provide a physically and emotionally safe environment that promotes the well-being of every student and helps each of them reach their highest potential.

1) Though principles of governance require trustees to refrain from involvement in day-to-day management, personnel and student discipline decisions of school administrators, governing boards and the individual members of those boards, including ABOT and the defendant board members, have and should have a fiduciary duty to assure that their organizations have in place a robust process for identifying, prioritizing, managing and monitoring critical risks.
2) ABOT, and each member of ABOT, has a fiduciary duty to assure that ARCHER has and implements in good faith, policies, practices, guidelines and internal controls to protect students, teachers, staff and parents from harm and ARCHER from liability resulting from negligent, reckless, intentional or otherwise unprofessional conduct of employees. And, where harm has already been caused, ABOT and its individual members have the additional duty to mitigate harm caused by employee negligence, malice or unprofessionalism.

c) In particular, ABOT, and each member of ABOT, has a fiduciary duty to assure that ARCHER has and implements in good faith a systematic and reliable process to:

1) Detect and prevent unprofessional, improper, unethical or illegal conduct that would subject students, staff and parents at ARCHER to harm and Archer to liability or reputational risks.

2) Provide guidance and training to all employees on their legal, professional and ethical duties as educators.

3) Provide guidance and training to all employees on the philosophy of the school, including principles of collaboration and non-coercive discipline as well as the proper use of discretion and imposition of discipline.

4) Provide direction and guidance to the Head of School and other administrators as to legal and ethical limitations on the exercise of discretion and the need to avoid conduct that raises significant liability and reputational risks, including conduct that could be viewed as unfair, illegal and inconsistent with Archer’s values and traditions.

5) Regularly and rigorously review the conduct of the Head of School with respect to her performance in achieving the board’s strategic goals, adhering the high professional ethical standards and making decisions that are legal, ethical and in the best interests of students and ARCHER.

Responsibility of Members of ABOT (paragraphs 100-111)
100. Plaintiffs are informed and believe that BRUSER, HOROWITZ,  HELM and LORD, and by information and belief, other members of ABOT,  without the knowledge of or formal authority granted by the board itself and with knowing disregard for the proper role of board members, personally participated in,  conspired with, supported and/or encouraged the improper actions of  ENGLISH and that their participation was a material and proximate cause of the exclusion of CHILD 1 and Child 2 from ARCHER, violations of their rights privacy, intimidation and coercion, injury to personal relations, the defamation of MJ and all injurious other consequences resulting from this conduct. All these acts together demonstrate professional malpractice  as well as intent and malice justifying punitive damages.

101. Prior to the conduct of ENGLISH excluding CHILD 1 and Child 2 from ARCHER, all members of the ABOT knew or should have known about other incidents where ENGLISH abused the discretion and authority granted her by ABOT including arbitrarily and capriciously creating, construing and implementing policies that unfairly, improperly and unlawfully caused injury to students, parents and employees and that subjected ARCHER and ABOT to liability and reputational damage. This information did, or should have, put each member of ABOT on notice of the need and their responsibility to assure that ENGLISH’s conduct was reviewed and corrected and that guidelines and internal controls were created and implemented to detect, prevent and remedy abuses of discretion or other improper conduct.

102. Despite these duties, ABOT and each member of ABOT, in violation of their duty of care, failed to review, correct and hold ENGLISH accountable for her improper and unlawful actions. This failure encouraged and allowed ENGLISH to continue to use her discretion arbitrarily, capriciously and maliciously in a manner that resulted in injuries to students, teachers, staff and parents. As a result of this failure, ABOT and each individual member of ABOT, was a proximate cause of all damages alleged herein.

103. Prior to the conduct of ENGLISH excluding CHILD 1 and CHILD 2 from ARCHER, members of the ABOT knew or should have known of their duty to exercise due diligence and oversight to assure that internal controls were established and implemented to prevent, detect and, where necessary, promptly and properly deal with unlawful, unethical and unprofessional actions of ENGLISH and other employees of ARCHER.

104. In dereliction of these duties, ABOT and each member of ABOT, failed to provide thorough and effective oversight or require creation and implement policies, procedures, guidelines or other forms of internal control to protect students, parents and staff and prevent liability and reputational damage to ARCHER. These failures constitute proximate cause of all harms alleged herein.

105. On April 29, 2014, Plaintiffs sent to ARCHER and each member of the ABOT a letter summarizing Plaintiffs grievances and allegations and an extensive memorandum containing specific allegations and presenting documentary evidence supporting those allegations concerning the conduct of Defendant Elizabeth ENGLISH toward the plaintiffs. The April 29, 2014 letter also provided  ABOT and each of its members with:

a) Complete information with detailed documentation of the nature and scope of ENGLISH’s actions and the harm caused thereby and notified them of severe impending harm that would be caused if ABOT failed to mitigate the severe emotional distress resulting from decisions to: 1) prevent CHILD 1 from participating in senior activities with her friends and teachers and graduating with her class on May 29, 2014; and 2) coerce CHILD 2 and her parents to find a new school for CHILD 2 and subject her, as an openly gay female, to financial costs and social and emotional trauma related thereto.

b) The opportunity to repudiate, or cause ENGLISH to reverse, those decisions before they caused additional harm to plaintiffs. The letter informed them that a failure to do so would constitute ratification of those actions and create additional grounds for their personal liability, including punitive damages.

c) The opportunity to demonstrate due diligence and meet their obligations arising from the duty of care by agreeing to and conducting a thorough, independent investigation of plaintiffs detailed claims and allegations contained in the letter an extensive and well-documented accompanying memo. It also demonstrated the willingness and desire of Plaintiffs to cooperate with a thorough and objective investigation by their offer to provide to ABOT evidence of other incidents of misconduct by ENGLISH demonstrating a pattern of misconduct.

d) The opportunity to demonstrate due diligence and meet their obligations arising from the duty of care by agreeing to establish internal controls, including guidance, policies and procedures to detect, prevent or promptly and properly ameliorate or mitigate harm caused by the unlawful, unethical and inappropriate actions of ENGLISH or other employees of ARCHER that could injure students, parents or employees and subject the school to liability and reputational damage.

e) Concrete and conclusive evidence of Plaintiffs’ ardent desire to avoid resource-draining and reputation-damaging litigation and their willingness to settle all claims against the ARCHER, ABOT and ABOT members based on four moderate and reasonable requests:

1) That the decisions to prevent CHILD 1 from participating in graduation activities and ceremonies and to prevent CHILD 2 from continuing her education at ARCHER were reversed prior to May 15, 2014.

2) ABOT commits to conducting a thorough, independent investigation of plaintiffs allegations.

3) ABOT commits to developing and implementing internal controls, including guidance, policies and procedures to detect, prevent or promptly and properly ameliorate or mitigate harm caused by the unlawful, unethical and inappropriate actions by employees of  ARCHER.

4) ARCHER to reimburse plaintiffs for the tuition paid to the ARCHER for the 2013-2014 academic year (defendants legal expenses alone are bound to far exceed this amount as will plaintiffs).

106. Reversing the decision to allow CHILD 1 to graduate with her class and participate in senior activities (plaintiffs offered to prove that CHILD 1 had successfully completed at another institution the one semester coursework needed to earn a diploma) would have had no serious deleterious effect on ARCHER. On the other hand, denying CHILD 1 to opportunity to experience one of the most momentous and memorable events in a person’s life with her teachers and lifelong friends and subjecting her to the pain and regret of seeing happy pictures and comments posted on social media by girls she grew up with – all because she was rude to a teacher and emotionally unable to subject herself to a judicial panel of peers – is outrageously cruel and hurtful.

107. Faced with the choice of ratifying or repudiating the decision of ENGLISH and the opportunity to mitigate the harm to CHILD 1 and her parents, the members of ABOT  chose to ratify the decision, allow the infliction of huge and lasting emotional harm on CHILD 1 and her parents and, thereupon, are complicit in it and responsible for its consequences.

108. Given that, by ENGLISH’s own admission, CHILD 2 had done nothing wrong and was a student in good standing before she was coerced into leaving ARCHER by threats and intimidation from ENGLISH, reversing the decision to prevent CHILD 2 from re-enrolling at ARCHER for the 2014-2015 academic year and relieving her and AJ and MJ of the enormous stress (and  expense) of finding and adjusting to a new school (admission deadlines to private schools were long past when CHILD 2 was informed that she would not be permitted to complete her education at ARCHER) would have had no serious deleterious effect on ARCHER. On the other hand, ratifying the decision was bound to intensify the stress and emotional pain and force CHILD 2 to face unknowable and frightening possibilities – all because ENGLISH thought MJ’s conduct in advocating for CHILD 1 was offensive – is outrageously cruel and hurtful.

109. Faced with the choice of ratifying or repudiating the decision of ENGLISH and the opportunity to mitigate the harm to CHILD 2 and her parents, the members of ABOT  chose to ratify the decision, allow the infliction of huge and lasting emotional harm on CHILD 2 and her parents and, thereupon, are complicit in it and responsible for its consequences.

110. The failure of the ABOT and each of its members to prevent or properly deal with the improper and unauthorized conduct of BRUSER, HOROWITZ, HELM and LORD was a proximate cause of all damages suffered by plaintiffs.

111. The failure of the BOT and each of its members to provide Defendant Elizabeth ENGLISH with any guidance, instruction or oversight in interpretation and implementation of her authority was a proximate cause of all damages suffered by plaintiffs.

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