DON’T SWEAT THE THREATS – Part 3

DIRECTOR AND OFFICER INDEMNIFICATION

Tim and Steve Sellers

This is the third in a four part series that explores the protections the law provides for those who serve their communities as association directors and officers in North and South Carolina.

Just because a person cannot be held liable for damages doesn’t mean that person can’t be sued and required to defend himself. Lawsuits are expensive, even if you have done nothing wrong. The law provides some protection for this as well, and that protection is  called indemnification.

When officers and directors are indemnified by the association, they have assurance that the association will pay or repay them for the losses, costs or expenses they incur as a result of a legal proceeding. By statute, the association must indemnify a director who is “wholly successful” (on the merits or otherwise) in the defense of any proceeding brought against him because he is or was a director of the association. N.C.G.S §55A-8-52; S.C. Code 33-31-852. This mandatory indemnification extends only to the director’s reasonable expenses incurred in connection with the proceeding and applies to officers of the corporation as well as directors. N.C.G.S §55A-8-56(1); S.C. Code 33-31-856. This mandatory indemnification, however, is only available to an officer or director who is “wholly successful, on the merits or otherwise, in [his/her] defense” of the proceeding. In other words, the officer and director must defend himself and win before seeking reimbursement of the expenses incurred.

In addition to the mandatory indemnification for expenses described above, both North and South Carolina statutes permit (but do not require) the association to indemnify a director against liability he/she incurs in a proceeding which is brought against that person because he/she is or was a director. N.C.G.S §55A-8-51; S.C. Code 33-31-851. Putting this additional indemnification in place requires specific action by the association as provided in N.C.G.S §55A-8-55 and S.C. Code 33-31-855. As with mandatory indemnification for expenses, this additional protection against liability is available to the association’s officers as well as its directors. N.C.G.S §55A-8-56; S.C. Code 33-31-856. This type of indemnification does have limits, however. For example, an association may not indemnify an officer or director who is found liable to the corporation or liable on the basis that he/she received an improper personal benefit. Finally, officers and directors may ask the court to apply this indemnification if the association fails to do on its own. N.C.G.S §55A-8-54; S.C. Code 33-31-854.

In addition to the mandatory and permissive indemnifications which are allowed by statute in both states, a North Carolina association may agree to indemnify any of its directors, officers, employees or agents against liability or expenses incurred in any proceeding arising out of their status as such or their activities in any of the foregoing capacities. This additional indemnification may be implemented by the association in its articles of incorporation, its bylaws, or by separate contract or board resolution. N.C.G.S §55A-8-57(a). This option permits the association to provide indemnification that is even broader than that which is provided for by statute. However, the association may not indemnify a person against liability or expenses a person incurs because of conduct that was at the time – or which the person believed to be – clearly in conflict with the association’s best interest or if the person received an improper personal benefit. The South Carolina Code does not contain a provision which is similar to this provision in the North Carolina General Statutes.