• Key point 6-07.03. Church board members have a fiduciary duty to use reasonable care in the discharge of their duties, and they may be personally liable for damages resulting from their failure to do so.
• Key point 6-07.06. Federal and state securities laws make board members personally liable for acts of fraud committed by an organization in connection with the offer or sale of securities. These laws apply to churches, and as a result church board members may be liable for fraudulent practices occurring in connection with the offer or sale of church securities.
Church Officers, Directors, and Trustees
* A federal court in Indiana ruled that the directors of a church subsidiary could be sued individually for financial losses incurred by investors in a securities scam on the basis of their breach of their fiduciary duty of care. A denomination created a subsidiary organization (the Loan Fund) in the 1920s to raise funds for denominational programs and to provide loans to affiliated churches. From 1996 to 2002 the Loan Fund raised millions of dollars by selling investment notes, mostly to church members. The notes were sold in connection with "offering circulars" containing detailed information about the Loan Fund and its finances and operations. The offering circulars informed investors that the funds from these notes would be used primarily to make interest-bearing loans to local churches. In 2002, the Loan Fund owed approximately $85 million to noteholders.
The United States Securities and Exchange Commission (SEC) filed a civil enforcement action against the loan fund on the ground that it was insolvent and had raised millions of dollars unlawfully by making false statements to prospective investors. A federal court appointed a receiver to liquidate the loan fund's assets and meet as many obligations to creditors as possible, including the noteholders.