BILL NUMBER: S5160
SPONSOR: COMRIE
 
TITLE OF BILL:
An act to amend the not-for-profit corporation law, in relation to the
indemnification of directors, officers and key persons; and to repeal
sections 721, 722 and 723 of the not-for-profit corporation law relating
thereto
 
SUMMARY OF MAJOR PROVISIONS:
The proposed consolidated indemnification provisions would make many
changes in law.
Section 1 of the bill would repeal section 721 for the reasons stated in
section I.A. of this Memorandum in Support.
Section 2 of the bill would renumber section 722 as section 721 and
consolidate the substantive indemnification provisions in one subdivi-
sion (A).
Subdivision (A) would make indemnification available not only in actions
by third parties, by the corporation and in derivative actions by the
corporation or by its members, but in representative actions by members
against directors, officers or key persons for, for example, violation
of their fiduciary duties to them. It would provide consistent standards
for director, officer and key person conduct by incorporating by refer-
ence the general fiduciary standards of care set forth in section 717
which section 722 now ignores. It combines existing section 722(a) and
part of section 722(c) up to the clause beginning "except . . . .
Subdivision (B) is essentially section 722(b) but modified consistent
with the proposed standards of conduct in subdivision (A) and to make it
clear that the presumption thus created is not irrebuttable.
Proposed subdivision (C) restates the clause in section 722(c) beginning
"except . . ." to preserve the authority of a court to award indemnifi-
cation, notwithstanding an adjudication of liability, if in its
discretion, the court determines that the director, officer or key
person had made a good faith effort to meet the applicable standards of
conduct. Section 722(c) now contains no substantive guidance for the
court. Proposed subdivision (C) also confers discretion on the court to
determine the extent to which indemnification shall be made. Section
722(c) now confers such discretion on a court only with respect to a
"proper" portion of a settlement amount and related (?) expenses.
Section 722(D) would overrule Spitzer v. Soundview Health Center, 2005
N.Y. Misc. LEXIS 3249, 233 N.Y.L.J. 18 (Sup. Ct. NY, County), one of the
"Espada" cases. The Court interpreted the requirement of an "undertak-
ing" in a case of advance indemnification to be as little as a naked
promise to repay. This exposes not-for-profit corporation assets to loss
and equally important, is inconsistent with settled law.
Section 2501 of the Civil Practice Law and Rules defines "undertaking"
either as "Any obligation to pay . . . which contains a covenant by a
surety to pay the required amount" or the "deposit . . Law section 14
defines "bond" and "undertaking" as equivalent. The decision is also
inconsistent with how the similar Business Corporation Law section has
been applied. Donovan v. Rothman, 253 A.D.2d 629, 677 N.Y.S.2d 327 (1"
Dept 1988); Piliplak v. Keyes, 286 A.D.2d 237, 729 N.Y.S.2d 99 (1"
Dep't), motion for.leave to appeal denied, 97 N.Y.2d 828, 893 N.E.2d
105, 802 N.Y.S.2d 828 (2008).
Subdivision (E) is procedural and sets forth all of the ways a corpo-
ration may authorize indemnification as set forth in section 723 which
would be repealed.
Subdivision (F) provides that generally a corporation cannot retroac-
tively eliminate or impair rights to indemnification set forth in its
certificate of incorporation, to view or resolution of the board or of a
committee thereof.
Subdivision (G) makes it clear that the indemnification insurance that a
corporation is authorized to purchase by NPCL section 726 covers a
director's, officer's or key person's services, at the request of the
corporation, on another legal entity.
Subdivision (H) ensures the survival of indemnification in case of a
merger or consolidation of a corporation.
Subdivision (I) provides that once a right to indemnification arises, it
continues to benefit a former director, officer or key person's and her
or his heirs and estate.
Subdivision (j) incorporates section 722(d). Section 3 of the bill would
repeal section 723.
Section 4 of the bill would renumber section 724 as section 722 and make
a technical and a conforming change in the introductory paragraph of
subdivision (a).
Section 5 of the bill would renumber section 725 as section 723 and make
conforming changes in subdivision (a).
Section 6 of the bill would amend section 720-a to add "salary or other"
to the reference to "compensation" because "salary" is the term used in
section 715(e).
Section 7 of the bill would make January 1, 2020 the effective date of
the Act, but give directors, officers and key persons the option of
having their rights to indemnification determined either by the NPCL as
in effect when their rights accrued or under the NPCL as amended by such
act.
 
JUSTIFICATION:
This bill would completely revise the not-for-profit corporation law's
(NPCL's) indemnification and related provisions for directors and offi
cers and add key persons as individuals who may be indemnified to the
same extent as a director and officer. As Sean Delany, Esq., head of the
Lawyers Alliance, testified at the Senate Corporation Committee NPCL
hearing in 2013, the indemnification provisions are complicated, incom-
plete, inconsistent and unworkable. Based as they are on the correspond-
ing provisions of the Business Corporation Law, some are also inappro-
priate for not-for-profit corporations. Some, but not all, of the
difficulties raised by the Business Corporation Law indemnification
provisions (and, therefore, by the NPCL's) are well analyzed in Schloss-
berg v. Schwartz, 43 Misc.3d 1224 (A), 992 N.Y.S.2d 161. (Sup. Ct.
Nassau County 2014), copy attached.
A. Repeal of Section 721. Section 721 would be repealed. It provides
that the indemnification and advancement of expenses of directors and
officers provided by NPCL Article 7 are not exclusive, if additional
indemnification is authorized by certificate of incorporation , by-laws,
resolution of members (if any), resolution of directors or agreement
with them.
However appropriate such a provision may be for for-profit Business
Corporation Law assets (see Business Corporation Law section 721), such
discretion is not appropriate for not-for-profit corporation assets,
even though the discretion conferred by section 721 is not unlimited. It
further provides "no indemnification may be made ... if a judgment or
other final adjudication adverse to the director or officer establishes
that his acts were committed in bad faith or were the result of active
and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained a financial profit or other
advantage to which he was not legally entitled." But as we shall see
these standards are not consistent with the standards for indemnifica-
tion in the substantive indemnification sections of Article 7 (which are
not themselves necessarily consistent). Not are they consistent with the
general fiduciary standard set forth in NPCL section 717. Nor it is
clear if they arc subject to the limitations on indemnification in
section 725 which applies by its terms to all of the Article 7 indemni-
fication provisions.
B. Section 722: Section 722(a) relates to indemnification in third party
or derivative civil or to criminal actions against a director or offi-
cer. Its standard is "acted in good faith, for a purpose which he
reasonably believed to be . . . in the best interests of the corpo-
ration, and, in criminal proceedings, had no reasonable cause to believe
that his conduct was unlawful." Why should it not also include represen-
tative actions by members which are alluded to in NPCL section 623(c)?
Why should indemnification apparently be available under section 722(a)
regardless of liability and, as we shall see, not under section 722(c)
except by court order for which the section provides only a vague stand-
ard? Section 722(c) relates only to actions against the director or
officer by the corporation itself or in its right or of that of another
entity the defendant serves at the request of the corporation, except a
threatened or pending action that is settled or when she or he shall
have been adjudged liable. But there is another exception: unless a
court determines that (nevertheless) she or he is "fairly and reason-
ably" entitled to indemnification. No standard is provided to the court.
723 Section 723(b) is largely procedure, But section 723 (a) raises new
issues of consistency: A person who has been successful, on the merits
or otherwise (procedurally?), in the defense of a civil or criminal
action.or proceeding of the character described in section 722 shall be
entitled to indemnification as authorized in such section. (emphasis
added)
Section 723(c) provides: Expenses incurred in defending a civil or crim-
inal action or proceeding may be paid for in advance of the final dispo-
sition of such action or proceeding upon receipt of an undertaking by or
on behalf of such director officer to repay such amount as, and to the
extent, required by paragraph (a) of section 725 This requirement was
emasculated by Spitzer v. Soundview Health Center, 2005 N.Y. Misc. LEXIS
3249, 233 N.Y.L.J. 18 (Sup. Ct. N.Y. County), one of the Espada cases.
There the Court held that a bare promise to repay was sufficient,
despite contrary authority. Section 725(a)
 
OTHER PROVISIONS AFFECTING INDEMNIFICATION OF DIRECTORS AND OFFICERS
provides for the repayment of advances if the person "is ultimately
found . . . not to be entitled to the indemnification." On information
and belief, Soundview paid the legal expenses of its employees, all of
whom pled or were convicted, and was not repaid.
Section 725. Section 725 places further limitations on indemnification.
 
LEGISLATIVE HISTORY:
New Bill; May of 2019.
2021-2022: S5513
2023-2024: S5587 Comrie/ A9446 Hyndman
 
FISCAL IMPLICATIONS:
None.