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Is a Church Obligated to Share Member Records?

State nonprofit corporation law may override protection of privacy.

Texas
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Key point 6-03.1. Church members generally have no right to inspect church records unless such a right is conferred by state nonprofit corporation law, a church's charter or bylaws, state securities law (if the church has issued securities), or a subpoena. Church records enjoy no privilege against disclosure, with the exception of documents that are protected by the clergy-penitent privilege under state law.

A Texas court ruled that persons who have been dismissed from membership in a church no longer have a right under the state nonprofit corporation law to inspect church records.

A married couple (the "plaintiffs") became increasingly dissatisfied with various ecclesiastical and secular church policies, including how the church handled its finances. The plaintiffs requested access to the church's financial books and records pursuant to a provision in the state nonprofit corporation law giving members a right to inspect corporate books and records. Their main concern was how the church had disposed of a donation they made to the church's building fund a few years earlier. In particular, they wanted to determine if the church had spent their designated donation for some other purpose.

Dissatisfied with the church's response, the plaintiffs sent the church a second request, through their attorney, to examine the church's financial records. The church allowed them to see some financial records, but not enough to satisfy them. A few days later, in accordance with its bylaws, the church revoked the plaintiffs' membership. The church insisted that this action was not the result of the financial inquiries, but rather due to the plaintiffs' longstanding and increasingly vehement disagreements with the church's ecclesiastical doctrines.

The church claimed that it made many efforts over the years to address the plaintiffs' concerns, including arranging for special meetings with an independent mediator, but ultimately these efforts failed. The church's members voted to remove the plaintiffs as members at a specially called business meeting.

The plaintiffs sued their former church. They alleged that while they were allowed to see some records, they were not permitted to copy them. They asked the court to order an audit of the church's financial records for the previous three years "to verify that [the church's] expenditures are for church-related purposes," "to determine whether or not the acts of the pastor and the board of deacons are illegal, oppressive, or fraudulent," and "to determine whether or not corporate assets have been misapplied or wasted."

The church asked the court to dismiss the lawsuit on the ground that the plaintiffs' claims implicated religious matters that were beyond the jurisdiction of the civil courts. It also argued that the plaintiffs lacked "standing" to pursue their claims since they were no longer members and had no legal right to inspect records or dictate church practices. Alternatively, it asked the court to order the financial records to be turned over to an independent CPA for an audit, at the church's expense.

The plaintiffs also sued each member of the church's board of deacons, claiming that (1) the deacons themselves had denied the plaintiffs access to the church's books and records; (2) the plaintiffs' monetary donations to the church "were not used for their intended purposes"; (3) the deacons, jointly and severally, had "misappropriated and converted" the plaintiffs' donations of money and property; and (4) the deacons had "excommunicated" the plaintiffs for seeking access to the church's financial records.

The lawsuit claimed that the deacons were liable on the basis of conversion, breach of fiduciary duty, misapplication of fiduciary property, and fraud. The church provided a legal defense for the deacons because of a provision in the church's bylaws obligating the church to indemnify the deacons.

The trial court accepted the church's proposal of an independent audit, and indicated that it might shift the cost to the plaintiffs if the audit uncovered no wrongdoing. The audit revealed some gaps in the church's records but no fraud. Consequently, the church filed a motion to require the plaintiffs to reimburse its audit expenses, which totaled $21,380.

The same day, the church again asked the court to dismiss the case on the grounds that (1) the court lacked jurisdiction over the plaintiffs' claims because they implicated ecclesiastical matters; (2) the audit conclusively established that the church had not engaged in wrongdoing; (3) the plaintiffs lacked standing and failed to allege a viable cause of action. The court dismissed all claims against the church and its deacons, and ordered the plaintiffs to reimburse the church for the cost of the audit.

The church and its deacons later asked the court to impose sanctions against the plaintiffs on the ground that their lawsuits were "frivolous, groundless, and brought in bad faith as a form of retaliation." The church and deacons requested sanctions equal to their attorney's fees. The court agreed that sanctions were appropriate, and ordered the plaintiffs to reimburse the church and deacons for all legal expenses incurred in defending against the plaintiffs' lawsuits. The plaintiffs appealed all of the trial court's rulings.

A state appeals court agreed with the trial court's dismissal of all of the plaintiffs' claims, and also upheld the trial court's award of sanctions to the church and deacons, and the reimbursement of the expenses of the independent audit.

What This Means For Churches

Church leaders often wrestle with the question of whether or not to honor requests by members to inspect various kinds of corporate records. Here are some points that church leaders should consider:

  1. Most state nonprofit corporation laws give the members of incorporated churches a legal right to inspect books and records for a proper purpose and a reasonable time. The right of inspection is not absolute. It only exists if a church is incorporated under a state nonprofit corporation law that gives members such a right.
  2. The right of inspection only extends to members. Several courts have ruled that members whose membership is revoked no longer have the legal authority to inspect church records.
  3. The right of inspection only extends to those records specified in the statute creating the right.
  4. Most such laws provide that the member may inspect documents "for a proper purpose" at a "reasonable time."
  5. The court concurred with the church's suggestion to have an independent CPA conduct an audit of the church's financial records in order to ascertain the validity of the plaintiffs' claim that their designated contributions to the church were not being spent according to their designations. The court also concluded that the cost of the audit could be assessed against the plaintiffs since it failed to turn up any evidence that supported their claims of financial mismanagement and fraud.
  6. The case illustrates the possible imposition of sanctions against plaintiffs who bring frivolous lawsuits against churches or other defendants. Generally, trial courts can impose sanctions "on a party, its attorney, or both for filing a groundless instrument in bad faith or for the purpose of harassment." The term "groundless" is defined as having "no basis in law or fact and not warranted by good faith argument for the extension, modification, or reversal of existing law." Sanctions may include costs and attorney's fees incurred to defend against the groundless suit. It is not uncommon for churches to be the targets of frivolous lawsuits. Church leaders, and their attorneys, should keep in mind this remedy in egregious cases. Though rarely awarded, the threat of sanctions can be a powerful deterrent.
  7. Some churches do not have members. Rather, they are governed by the lead pastor and in some cases an advisory board appointed by the pastor. Nonprofit corporation laws empowering members to inspect corporate records would not apply to churches with this governance model.
  8. Any decision to withhold documents from a member should be made with the advice of an attorney.

2010 WL 2010792 (Tex. App. 2010).

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Posted:
  • November 1, 2011

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