Our new nonprofit corporation agreed to buy a property for $250,000. The seller has given us a short extension but we may not have the money to complete the deal. We have already had the engineering and design done for the building, but we have only $400 in the bank. We have yet to buy directors and officers insurance. If we can’t pay the engineer and architect, will we be personally liable? The President signed the contracts in his own name “for the X Center.”
It is unlikely that any of the officers or directors, including the President, will be personally liable for failure to pay the architect or engineer under the contracts, assuming that they were entered into in good faith with the belief that you would be able to pay. A primary reason to operate in the corporate form is to limit the possibility of personal liability for the obligations of the corporation. Absent very unusual situations or a personal guarantee, an officer or director will not be personally liable on a contract. The corporation may be liable, but if it has no assets, the creditors will be left holding the bag.
Your failure to obtain D & O insurance will undoubtedly not make a difference. D & O policies normally specifically exclude coverage for breach of contract claims and would not provide protection in this kind of situation.
Saturday, November 12, 2011
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Correct answer as always, but I would say that this is an example of a case where the lack of D&O coverage was a huge red flag that the then-new nonprofit was really getting out over its skis in even considering negotiating for purchase of quarter-million dollar property and commissioning engineering and building contracts while having such sparse assets ($400 in the bank).
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