16-6a-904. Advance of expenses for directors

(1) A nonprofit corporation may pay for or reimburse the reasonable expenses incurred by a directorfn1 who is a party to a proceeding in advance of final disposition of the proceeding if:
     (a) the director furnishes the nonprofit corporation a written affirmation of the director's good faith belief that the director has met the applicable standard of conduct described in Section 16-6a-902;
     (b) the director furnishes the nonprofit corporation a written undertaking, executed personally or on the director's behalf, to repay the advance, if it is ultimately determined that the director did not meet the standard of conduct; and
     (c) a determination is made that the facts then known to those making the determination would not preclude indemnification under this part.

(2) The undertaking required by Subsection (1)(b):
     (a) shall be an unlimited general obligation of the director;
     (b) need not be secured; and
     (c) may be accepted without reference to financial ability to make repayment.

(3) Determinations and authorizations of payments under this section shall be made in the manner specified in Section 16-6a-906

Enacted by Chapter 300, 2000 General Session

Comments by  Kimble Law PLLC

Footnote 1:  Officers, Employees, Agents Included.  Unless the articles of incorporation provide otherwise, a nonprofit corporation may indemnify and advance expenses to an officer, employee, fiduciary, or agent of the nonprofit corporation to the same extent as to a director; and if the individual is not a director, to a greater extent if not inconsistent with public policy, and provided for by: (i) its articles of incorporation or bylaws; (ii) general or specific action of its board of directors; or (iii) contract.   

See Section 16-6a-907.

Comment 1:  Indemnification Provisions - See Also.  Regarding provisions for indemnification and limitations on liability of board members, see also the following sections in the Condo Act and Community Association Act authorizing the association's rules to provide for indemnification of board members, and authorizing any of the documents related to the formation or operation of the nonprofit corporation to provide for liability limitation, as well as indemnification:

  • Utah Code Sections 57-8-8.1(5)(d) and 57-8a-218(13)(d) (2018) ("(13) Unless otherwise provided in the declaration, an association may by rule: . . . (d) provide for the indemnification of the association’s officers and board consistent with Title 16, Chapter 6a, Utah Revised Nonprofit Corporation Act." 57-8a-218(13)(d)).
  • Utah Code Sections 57-8-40(4) and 57-8a-228(4) (2018) ("Notwithstanding any conflict with the declaration or any recorded bylaws, the organizational documents of a nonprofit corporation or other entity formed in accordance with Subsection (2) may include an additional indemnification and liability limitation provision for: (a) board members or officers; or (b) similar persons in a position of control." 57-8a-228(4)).
  • Utah Code Section 57-8-10.3 (2018) (". . . the organizational documents of an association of unit owners may indemnify and limit management committee member and officer liability to the extent permitted by the law under which the association of unit owners is organized.").

Comment 2:  Liability.  What liability do directors and officers have under the law?  None, if they act with what is commonly called "business judgment," which is carrying out of the director's duties:
      (1) in good faith,
      (2) with care an ordinarily prudent person in a like position would exercise under similar circumstances, and
      (3) in a manner the director reasonably believes to be in the best interests of the corporation.

The law states that a director or officer is not liable to the nonprofit corporation or its members for any action taken, or any failure to take any action, as an officer or director, as the case may be, unless:
      (1) the director or officer has breached or failed to perform the duties of the office:
            (a) in good faith,
            (b) with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and 
            (c) in a manner the director reasonably believes to be in the best interests of the corporation, and
      (2) the breach or failure to perform constitutes:
            (a) willful misconduct; or
            (b) intentional infliction of harm on the nonprofit corporation or the members; or
            (c) gross negligence.

(See Utah Code Subsections 16-6a-822(2) and (6)).

A director who relies on counsel of an attorney may be entitled to a stronger presumption that the director acted with "business judgment," and thus that the director is entitled to liability protection.  See Utah Code Subsections 16-6a-822(3).

For indemnification of directors and advance of defense expenses of directors, see Sections 16-6a-901 through 910.

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