Background. A church purchased vacant land as the site of a new building. The church signed a $120,000 note, which was secured by a first mortgage on the land. When the church was unable to obtain a commercial loan to finance construction of the new building, it borrowed $100,000 from two of its members. The church signed a promissory note agreeing to pay the members in full within seven months, at ten percent interest. To secure this loan the church conveyed title to this property to the two members, subject to the first mortgage. With the financing in hand, construction of the new facility began. Unfortunately, the church defaulted on both loans. To protect against a foreclosure (and loss of its security) the two members paid off the church’s debt under the first mortgage. By now the members had invested more than $200,000 in the project. A court later ruled that the two members were entitled to exclusive possession of the church property. The church appealed. A state appeals court agreed with the trial court’s eviction of the church from the property.

Relevance to church treasurers. There are a couple of important points to note. First, churches that seek to raise funds by borrowing from their own members may be creating a significant problem. Church leaders sometimes assume that borrowing from members is an attractive option because it is convenient and members will be more “forgiving” than a bank if the church is late with a payment or defaults. As this case illustrates, borrowing from church members can create unforeseen legal complications. Some members cannot afford to be “forgiving” when the church fails to repay them their loans. This case illustrates another important point—failure to pay promissory notes ultimately may lead to a congregation’s eviction from church property. Promissory notes that are secured by mortgages on church property must be honored in order to avoid foreclosure.

This article originally appeared in Church Treasurer Alert, June 1997.