VOLUNTEER SPORTS CLUB LIABILITY
BY ROBERT R. THOMPSON*
It's hard to believe - but believe it. According to a Detroit News article, a lawsuit was filed against an amateur youth baseball league by a parent of a player seeking more than $75,000 in damages. What was the alleged injury? The umpire's calls in a
kids baseball game which "were clearly wrong!"
Amateur sports clubs are springing up everywhere. Look around your community. You'll notice young athletes from 8-18 years of age occupying nearly every baseball diamond, basketball court, football and soccer field, gymnasium, golf course,
driving range, ice arena, and swimming pool in sight. If you continue to look, you'll notice new amateur sports facilities under construction and older facilities being upgraded and expanded. It's abundantly clear: the youth of our nation, and their parents, are
turned-on to recreational and competitive amateur sports in a big way.
This enthusiasm for sports has produced large numbers of youth sports clubs staffed by a large number of volunteers. In Michigan alone more than 1000 nonprofit, all-volunteer youth sports
clubs offer team competition within leagues in nearly every conceivable sports activity. It's not unusual to find some leagues consisting of over 300 individual teams, and our review of several
other states indicates comparable numbers and growth trends. These youth sports clubs are popular with the kids and their parents. The kids learn valuable sports skills from coaches, many
of whom were athletes in high school or college, and some of whom are retired professional athletes. The kids' parents enjoy the social interaction with each other in club volunteer activities and, of course, they raise money for the club, attend the games, and cheer for
their kid's team.
While amateur youth sports clubs offer a "fun" activity for the entire family, the kids quickly become serious competitors urged on by competitive parents, some of whom view their child as a potential professional athlete. But, as competition intensifies the risk of kids getting injured at practice or during a game increases. The competitive nature of sports activities and the desire to win also affects parental behavior. As noted above, some parents will actually sue the club if they believe their kid's performance is threatened by allegedly poor officiating. But, some parents engage in name-calling and otherwise act in a boorish manner at games. In spite of the occasional "ugly" parent behavior, most parents and their kids enjoy the spirited competition of the games and take winning and losing in stride. Apart from the coaching, playing, and officiating of games, there is, of course, the matter of club organization and operation.
In our firm's experience, we have encountered many forms of amateur sports club organization. Some clubs are incorporated under state law as nonprofit corporations. Many of such clubs operate as if they were tax-exempt organizations, although no application for tax exemption was ever filed with the Internal Revenue Service. Still other clubs have not incorporated at all and operate as committees not comprehending that they are unincorporated associations. Many of these clubs also operate as if they were tax-exempt organizations, although they are not so qualified. Moreover, many of the nonprofit incorporated clubs have filed "bare" articles of incorporation lacking liability limiting provisions and qualifying provisions in support of exempt status. Few such clubs, even though incorporated, actually operate as an incorporated entity. And, while most amateur youth sports clubs that we have seen are capably operated by their volunteer staff, few clubs appreciate the potential risk of liability to their volunteers.
The balance of this article will address the matter of potential volunteer liability from two perspectives: (1) protecting the amateur youth sports club organization, and (2) protecting the individual volunteer.
Protecting the Organization.
Contrary to what some may believe, the organization of an amateur sports club is anything but a "simple" matter. This is especially true when a club may consist of 10, 50, 100 or more teams, membership fees are collected, facilities are leased, and games are played. Yet, nevertheless, many clubs operate as loosely-organized, unincorporated members-operated "nonprofit" volunteer organizations with little awareness of the liability risk to their sports club organization and to themselves as volunteer members.
In all likelihood, if an operating amateur youth sports club fails to incorporate under state law as a nonprofit corporation, it will be considered an association, i.e., a general partnership. Accordingly, volunteer members would likely be jointly and individually liable for unpaid club debts and obligations.
In this section, we will seek to protect the amateur youth sports club and its volunteers in three ways: (1) by means of incorporation as a nonprofit corporation, (2) by requiring adult and children's waivers of liability, and (3) by obtaining insurance.
Nonprofit Incorporation. We recommend a nonprofit incorporation of an amateur youth sports club as the preferred method of insulating volunteers from personal liability for club debts and obligations. For purposes of this article, we shall assume that the club desires to obtain exempt status under federal law.
The incorporation begins with preparation of the articles of incorporation. Apart from the mandatory disclosure provisions required by every state, it is in the optional provisions where the real "meat" of the articles of incorporation is found. And, it is here that the skill of the incorporator's attorney is demonstrated.
To protect the individual volunteer, we recommend that lawyers include immunity and indemnification provisions in the articles of incorporation (which will be discussed later in this article). To protect the organization, the important optional provisions to be included in the articles of incorporation include statements of: (1) nonprofit, exempt purpose, (2) governance as a directorship or membership organization, (3) lobbying and political campaign activities, (4) no
private inurement, and (5) a statement of dissolution.
1. Statement of Nonprofit Exempt Purpose. The purpose or purposes for which the corporation is organized must be stated in the articles of incorporation to comply with state nonprofit statutes and to obtain federal tax exempt status. A sample statement of purpose for an amateur youth soccer club seeking federal tax exempt status as a charitable and educational organization exempt under §501(c)(3) follows:
Sample statement of nonprofit exempt purpose: This corporation is organized as an amateur youth soccer club exclusively for charitable and educational purposes and to foster national or international amateur athletic competition within the meaning of §501(c)(3) of the Internal Revenue Code of 1986 (as amended), including for such purposes, the making of distributions to organizations which are recognized as exempt from tax under such §501(c)(3).
2. Statement of Governance: Directorship or Membership. Most state nonprofit statutes recognize the distinction of corporate governance by directors (a directorship corporation) or by the corporation's members (a membership corporation).
In a directorship nonprofit corporation, the sole voting members of the corporation are its directors who elect and re-elect the entire board of directors. Conversely, if a membership nonprofit corporation, members will elect the directors and will have such rights and privileges as are set forth in the corporation's bylaws and state statutes. However, a caveat is in order if a membership corporation is desired - be sure to state carefully and comprehensibly member's qualifications, voting rights and privileges, quorum requirements, whether proxies shall be allowed, and how and when membership meetings shall be called.
Sample directorship statement: This corporation is organized on a directorship basis and the sole voting members of the corporation are its directors.
Sample membership statement: This corporation is organized on a membership basis and the qualifications, voting rights, preferences or limitations, classes of membership and any other rights or privileges of members are set in forth in the corporation's bylaws. Each member of any class of members shall have equal rights with all members of that class.
3. Statement of Lobbying and Political Campaign Activities. The following sample statement in the articles of incorporation will satisfy federal tax-exempt requirements:
Sample lobbying and political campaign statement: No substantial part of the activities of this corporation shall consist of carrying on propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate or intervene in any political campaign (including the publishing or distribution of statements) on behalf of any candidate for public office.
4. Statement of No Private Inurement. While a comprehensive discussion of the doctrine of private inurement is beyond the scope of this article, a brief discussion is in order. To qualify as an exempt organization under §501(c)(3), or as a social welfare organization (§501(c)(4)), or a social club (§501(c)(7)), the amateur sports club must be organized and operated so that no part of its net earnings (yes, a nonprofit organization may have earnings) inures to the benefit of any person solely by virtue of that person's relationship to the club. This is an absolute prohibition; and if private inurement exists in any tax-exempt amateur sports club, its exemption may be terminated.
Sample no private inurement provision: No part of the net income or net assets of the corporation shall inure to the benefit of, or be distributable to, its directors, officers, members or other private persons. However, the corporation is authorized to pay reasonable compensation for services actually rendered and to make payments and distributions in furtherance of its tax-exempt purposes.
5. Statement of Dissolution. A sample statement of dissolution of a §501(c)(3) exempt amateur sports club for insertion in the articles of incorporation follows:
Sample dissolution provision: Upon the dissolution or winding up of the corporation, or in the event it shall cease to engage in carrying out the purposes set forth in these Articles, all of the business, properties assets and income of the corporation remaining after payment, or provision for payment, of all debts and liabilities of this corporation, shall be distributed to a nonprofit fund, foundation, or corporation which is organized and operated exclusively for tax-exempt purposes which are reasonably related to the purposes of this corporation, as may be determined by the Board of Directors of this corporation in its sole discretion, and which has established its tax-exempt status under §501(c)(3) of the Internal Revenue Code of 1986, as amended. In no event shall any of the business, properties, assets or income of this corporation, in the event of dissolution thereof, be distributed to the directors, members or officers, either for the reimbursement of any sums subscribed, donated or contributed by the same, or for any other purpose.
Waivers. As noted previously, kids will get hurt while engaging in athletic activities. This is especially true as kids get older and competition intensifies whether at practice or during games. But what happens when someone gets hurt at practice or during a game sponsored by your amateur youth sports club? Is there a way to protect the club from lawsuits?
Welcome to the world of waivers - where players and volunteers waive any claims against your amateur youth sports club in the event they become injured. But, don't be fooled - not all waivers are the same. A simple "I agree to waive all claims" will not work. More and more, people who sign waivers are challenging their validity in court - and winning.
For example, in a number of states you simply cannot use the same waiver form for both children and adults. Surprised? It's a fact. Waiver forms for adults can be fairly simple and still be upheld if challenged in court. But a waiver form for children must include a number of detailed disclosures and representations, and be signed by both parents or legal guardians (if available) to be upheld against possible attack.
A good waiver should do more than just guard against liability. It should also authorize your amateur youth sports club to seek medical treatment in the case of an injury, and specify who exactly can obtain and/or administer medical treatment or drugs - even over-the-counter drugs, like ibuprofen. This is especially important whenever a parent drops a child off for practice and says, "Will you please make sure Johnny/Susie takes a pill in two hours?" Don't do it without proper authorization!
You should also consider getting a waiver of liability from your coaches - even if they are independent contractors, whether paid by the organization or paid by your club's members - as well as from other adult volunteers.
It's incredible what is happening in the legal world today, but people are increasingly able to sue organizations for employment benefits (including health insurance coverage, retirement plan coverage, worker's compensation benefits and unemployment compensation benefits) even though they never did anything for the organization except serve as a volunteer or as an independent contractor. And, they are winning! An adult waiver form which disclaims the benefits of employment may be the only thing standing between your organization and huge payout to a disgruntled former volunteer.
Insurance. We shall only mention the word - insurance - and leave it to the reader to obtain an insurance package covering the amateur sports club for general liability and its officers and directors with errors and omissions insurance.
Protecting the Individual Volunteers.
Most likely, your amateur sports club depends on volunteer help. But what can you do to protect your volunteers from liability? How will you get people to volunteer if they have to bear the risk of liability themselves?
The risks of liability are all to familiar. Someone gets hurt at an athletic event, or during a practice session, or while training. Who gets blamed? The team, coaches, the trainer, or your club, its officers and board members! If there is a lawsuit, almost anyone could be included.
What additional steps may be taken to protect your volunteers and keep the amateur sports club going? Consider the following:
Immunity. The nonprofit corporation laws of many states offer partial legal immunity to three types of nonprofit volunteers: a) volunteer board members; b) other volunteers; and c) if your club is a §501(c)(3) organization, the volunteer board members are entitled to additional legal immunity.
But, here's the catch - in some states these forms of legal immunity only apply if your amateur sports club specifically adopts them in its Articles of Incorporation. In other words, there may not be any automatic protection just because you have a nonprofit corporation. A sample immunity provision for insertion in your club's Articles of Incorporation follows. But, be careful - check your state's immunity statutes.
Sample immunity provision: No volunteer director or volunteer officer (as defined in the Act) shall be personally liable to this corporation or its members for monetary damages for a breach of such director's or officer's fiduciary duty; provided however, that this paragraph shall not eliminate or limit the liability of a director or officer for any of the following:
a breach of the director's or officer's duty of loyalty to the corporation;
acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
a transaction from which the volunteer director or volunteer officer derived an improper personal benefit;
- an act or omission that is grossly negligent; or
- an act or omission occurring before the filing of these Articles.
Further, so long as it is tax exempt under §501(c)(3) of the Internal Revenue Code of
1986, as amended, the corporation assumes all liability to any person other than the corporation or its members for all acts or omissions of a volunteer director incurred in the good faith performance of the volunteer director's duties occurring on or after the date these Articles are filed. However, the corporation shall not be considered to have assumed any liability to the extent that such assumption is inconsistent with the status of the corporation as an organization described in said §501(c)(3).
In addition, the corporation assumes all liability to any person, other than the corporation, for all acts or omissions of a nondirector volunteer if all of the following are met:
the volunteer was acting or reasonably believed he or she was acting within the scope of his or her authority;
- the volunteer was acting in good faith;
the volunteer's conduct did not amount to gross negligence or willful and wanton misconduct;
- the volunteer's conduct was not an intentional tort; and
the volunteer's conduct was not a tort arising out of the ownership, maintenance or use of a
motor vehicle for which tort liability may be imposed.
If the State Act is amended after the filing of these Articles to authorize the further elimination or limitation of the liability of directors, officers or volunteers of nonprofit corporations, then the liability of directors, officers and volunteers, in addition to that described in this Article, shall be assumed by the corporation or eliminated or limited to the fullest extent permitted by the State Act as so amended, except to the extent that such assumption is inconsistent with the status of the corporation as an organization described in said §501(c)(3).
No amendment or repeal of this Article shall apply to or have any effect on the liability or alleged liability of any director, officer or volunteer of this corporation for or with respect to any acts or omissions occurring before the effective date of any such amendment or repeal.
Indemnification. Many state laws allow nonprofit corporations to indemnify, or reimburse, volunteers for the expenses they may incur in defending a liability claim. But, again in some states, unless your amateur sports club's Articles or Bylaws expressly provide for such indemnification, the law does you no good whatsoever.
The following sample indemnification provisions may be placed in your amateur sports club's articles of incorporation and/or its bylaws: Indemnification provisions are complex provisions which, in our opinion, should cover nonderivative actions (3rd party actions) and derivative actions (actions by or in the right of the corporation). The sample provisions which follow consider only the nonderivative and derivative aspects of an indemnification provision. In addition to these provisions, we also recommend provisions dealing with a determination that indemnification is proper, the advancement or reimbursement of expenses of a person who is a party or threatened to be made party to an action, etc.
Sample nonderivative actions provision: The corporation shall indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, formal or informal (other than an action by or in the right of the corporation), by reason of the fact that the person is or was a director, officer, or nondirector volunteer of the corporation, or, while serving as a director, officer or nondirector volunteer of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, nondirector volunteer or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, whether for profit or not, against expenses (including actual and reasonable attorney fees), judgments, penalties, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit, or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation or its members, and with respect to any criminal action or proceeding, if the person had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or on a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner that the person reasonably believed to be in or not opposed to the best interests of the corporation or its members and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.
Sample derivative actions provision: The corporation shall indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer or nondirector volunteer of the corporation or, while serving as a director, officer or nondirector volunteer of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, nondirector volunteer or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, whether for profit or not, against expenses (including attorney fees) and amounts paid in settlement actually and reasonably incurred by the person in connection with the action or suit, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation or its members. However, indemnification shall not be made for any claim, issue, or matter in which the person has been found liable to the corporation unless and only to the extent that the court in which the action or suit was brought has determined on application that, despite the adjudication of liability but in view of all circumstances of the case, the person is fairly and reasonably entitled to indemnification for the reasonable expenses incurred.