Recent Developments

Issues that affect ministers and churches
Officers, Directors, and Trustees

A Texas appeals court decision addressed the issue of a church trustee's alleged criminal liability for misapplication of church funds. Here are the facts. In 1973, a donor conveyed a tract of land to a church by delivering to three church trustees a deed to the property. A sanctuary was constructed on the property. By 1978, church attendance had declined significantly and weekly services had been cancelled. The three trustees discussed selling the property, and agreed that the property and building were "not theirs personally" but rather "were the Lord's and they should be the work of the Lord's." However, no action was taken. In 1981, one of the trustees sold the property for $100,000 to a third party by signing his own name and forging one of the other trustee's signatures on a deed. The trustee placed the sales proceeds in a church account, and within two months spent almost the entire balance on personal purchases. He was prosecuted for violating a Texas law prohibiting trustees from knowingly "misapplying" property held in a "fiduciary" capacity. A jury convicted the trustee of misapplication of funds and felony theft, but the appeals court overturned the convictions. The court reasoned that the trustee could not be guilty of either misapplication of funds or theft since "at the time of the misapplication the church had ceased all of its regular functions of work and worship for approximately three years … and was not in existence as a matter of law." Since the church did not exist, the trustee could not be convicted for misapplication or theft of its assets. A dissenting judge denounced the court's handling of the case, noting that under Texas law (1) a trustee has "a solid duty of loyalty and fidelity," and "must make a strict accounting of the properties of the trust"; (2) a trustee cannot by himself sell any property held in trust for his own benefit; and (3) the attorney general must be notified if trust property is distributed contrary to the purposes of a trust. The dissenter also challenged the court's conclusion that the church had ceased to exist, since the trustee's own actions "prove the contrary." Specifically, the trustee executed the forged deed in the name of the church, deposited the proceeds in a church account, and paid for all of his personal purchases with church checks. Another important consideration missed by both the majority and the dissenter is the fact that section 501(c)(3) of the Internal Revenue Code requires that the assets of churches and other exempt organizations be distributed upon dissolution (i.e., termination) to another organization exempt from federal income taxation under section 501(c)(3) of the Code. Section 501(c)(3) specifies that a church's charter must contain a dissolution clause that satisfies this requirement. Had the church in the Texas case complied with this requirement, the unfortunate and unjust result may well have been avoided. Martinez v. State, 753 S.W.2d 165 (Tex. App. 1988).

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Posted: January 2, 1989

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