A South Carolina court ruled that an agreement entered into by two church board members to pay a monthly stipend to the widow of a deceased pastor was unenforceable because the board members lacked the authority to enter into such an agreement. Jenkins v. Refuge Temple Church of God, 818 S.E.2d 13 (S.C. App. 2018). This feature article will review this ruling and more broadly address the key legal issues associated with signatures and signature authority. It is important for church leaders to be familiar with this information to avoid both the unenforceability of contracts and the potential personal liability for those who sign contractual agreements on behalf of a church.
Key point 4-06. Clergy who sign legal documents in their own name with no indication that they are signing in a representative capacity on behalf of their church may be personally liable on the document.
Key point 6-06.2.Officers and directors must be legally authorized to act on behalf of their church. Legal authority can be expressed, implied, inherent, or apparent. In addition, a church can ratify the unauthorized actions of its officers or directors, but this is not required.
Editor’s Note:Editor’s note: The numbers with each key point coincide with the numbered key points in Pastor, Church & Law, Fifth Edition (available on ChurchLawAndTaxStore.com, and the Legal Library on ChurchLawAndTax.com).
A church’s pastor founded the church in 1997. The pastor incorporated the church under state law by filing articles of incorporation with the secretary of state. The initial board adopted bylaws in 1997. The bylaws provide that congregation members would be nonvoting members and the board members would be voting members. The bylaws authorize the board to manage the affairs of the church, impose upon the board a fiduciary obligation to the church, and specify that the board will consist of no less than three members. The bylaws establish that a majority of the board shall constitute a quorum, and specify that the act of a majority of the board shall be the act of the board. The bylaws grant the pastor the authority to fill any vacancy in the board with the advice and consent of a majority of the present board. The bylaws allow the board to authorize any officer or agent of the church to enter into any contract or execute and deliver any instrument on behalf of the church.
In 2002, the board, consisting of the pastor and two other individuals, held a special meeting to consider and vote on an employment agreement titled “Pastor's Employment and Retirement Agreement” (the Agreement) to retain the pastor as the church's pastor for life. After discussion, a board member made a motion to approve the Agreement, and the board unanimously adopted the Agreement.
Section four of the Agreement, titled “Death of Pastor,” provides:
In the event of the pastor's death, if pastor is survived by his spouse, a monthly sum equivalent to the pastor's monthly salary and housing allowance, which will become salary at the time of his death shall be paid to his spouse for the remainder of her life, even if she leaves the church.
Section six of the Agreement explains the Agreement is binding on all parties, revokes all prior employment agreements with respect to the pastor, and states, “It is also agreed that in the event of Pastor's death or total disability, this Agreement shall become irrevocable.”
The church employed the pastor until his death in 2004. After his death the church began paying his spouse $1,575 each month. In 2005, the church's new pastor received a letter from an accounting firm hired by the church, informing him that the former pastor’s spouse had been receiving a housing allowance and salary from the church and recommending the church reclassify the payment as a retirement plan as opposed to income for tax purposes because the payments “weren't quite legitimate.”
In 2010, the church wrote a letter to the spouse informing her that the church could no longer afford to keep paying her the monthly amount of $1,575. The letter explained the church had been compensating her “in honor of the service of yourself and your late husband, our pastor . . . and to help you financially during the transition.” The letter informed the spouse that she would receive the regular payment amount for February 2010 and March 2010, and then a reduced amount of $500 from April 2010 until December 2010, at which time the payments would cease.
In 2011, the spouse sued the church alleging breach of contract for failure to pay wages under the state’s Payment of Wages Act. The trial court ruled in favor of the spouse, concluding that (1) the Agreement was a valid and enforceable contract, (2) the board had the authority to execute the Agreement, and (3) the church had honored the Agreement from 2004 to January 2010. But the court found that the spouse was not entitled to recover damages under the state’s Payment of Wages Act. The church appealed.
On appeal, the church argued the civil courts lack jurisdiction to rule on the ecclesiastical matters presented in the case. The appeals court disagreed:
(1) [C]ourts may not engage in resolving disputes as to religious law, principle, doctrine, discipline, custom, or administration; (2) courts cannot avoid adjudicating rights growing out of civil law; (3) in resolving such civil law disputes, courts must accept as final and binding the decisions of the highest religious judicatories as to religious law, principle, doctrine, discipline, custom, and administration. . . . Where a civil court can completely resolve a church dispute on neutral principles of law, the First Amendment commands it to do so.
The church insisted that the “ministerial exception” bars courts from resolving claims concerning contracts between a church and a minister, citing the United States Supreme Court’s unanimous ruling in Hosanna-Tabor Evangelical Lutheran Church and School v. E.E.O.C., 565 U.S. 171 (2012). The court disagreed:
We believe the ministerial exception . . . is inapplicable in this situation. In Hosanna-Tabor, the Supreme Court of the United States held that a “ministerial exception” grounded in the First Amendment barred an employment discrimination suit brought on behalf of a minister, challenging her church's decision to fire her. The Supreme Court explained that “the exception . . . ensures that the authority to select and control who will minister to the faithful . . . is the church's alone.” However, the Supreme Court clarified that “we express no view on whether the exception bars other types of suits, including actions by employees alleging breach of contract. . . .”
In contrast, the parties in this case are not asking this court to resolve an employment discrimination suit or a dispute over who will lead a church, but rather to determine the validity of a contract between a church and a former minister's wife. Additionally, the Supreme Court expressly refused to hold whether the ministerial exception bars other types of suits, such as breach of contract, which is the type of action brought in this case. Thus, we find the ministerial exception is inapplicable.
The church next argued that the resolution of the issues in this case would require extensive inquiry into religious matters and this court was therefore unable to adjudicate this dispute under neutral principles of law. The court disagreed, noting that “in applying neutral principles of law to the facts of this case, we find a court's exercise of jurisdiction over this matter would not violate the federal or state constitutions. This case does not contain disputes as to religious law, principle, doctrine, discipline, custom, or administration. This case presents a temporal issue: the validity of a contract involving a church and a former minister's wife providing for monthly payments by the church to the wife after the death of her husband. Where . . . a church controversy necessarily involves rights growing out of a contract recognized by the civil law, . . . civil tribunals cannot avoid adjudicating these rights.” The court acknowledged that “although we recognize we must accept ‘as final and binding the decisions of the highest religious judicatories of the church as to religious doctrine and discipline,’ we find the resolution of this dispute requires only ‘the application of neutral principles of contract law and very little inquiry into religious law. . . .’ Accordingly, we find the trial court did not err in exercising jurisdiction over this case.”
The church’s next argument on appeal was that the trial court erred in finding the Agreement valid because the board that executed the Agreement lacked proper authority. Specifically, the church claimed that the pastor had improperly appointed two of the members of the board who executed the Agreement, thereby undermining its legal validity. The court agreed with the church: “Because the method of electing a hierarchical church's board members is a matter of church polity, we must defer to the decisions of the highest ecclesiastical body of the church, as dictated in the Official Manual of [the parent denomination]. . . . The Official Manual provides: ‘In all cases where the laws require a special mode of election of church [directors], that mode must be followed. . . . Where, however, no particular mode of election of [directors] is established or required by law, then the [directors] shall be elected by a majority of the members of the congregation.’”
The court concluded:
Accepting these determinations in the Official Manual, we . . . are bound to accept the Official Manual's mandate that the majority of the members of the congregation shall elect the members of the Board. Accordingly, we believe the pastor improperly appointed [the two Board members]. They were qualified members of the church at the time they were selected to serve on the Board, which complied with the Official Manual. However, the pastor appointed both of them to the Board. Although the church's bylaws grant the pastor the authority to fill any vacancy on the Board with the advice and consent of a majority of the present Board, these bylaws conflict with the Official Manual's requirement that the majority of the congregation's members elect the members of the Board. Therefore, we find the pastor improperly appointed both [members] to the Board. Because neither [Board member] was properly elected to the Board, the Board lacked the authority to execute the Agreement, and we hold the trial court erred in finding the Agreement a valid and enforceable contract.
This case introduces the important topic of signing church documents. The key point is that only persons who are duly authorized to sign church documents have the legal authority to do so.
Here are seven points for church leaders to note regarding signatures:
1. Constitutional considerations
The court concluded that the civil courts are not barred by the First Amendment religion clauses from resolving all church disputes. Rather, they are only barred from resolving disputes concerning “religious law, principle, doctrine, discipline, custom, or administration.” The United States Supreme Court acknowledged this principle in a landmark case in 1871: “Whenever questions of discipline, or of faith, or ecclesiastical rule, custom, or law have been decided by the highest of these church judicatories to which the matter has been carried, the legal tribunals must accept such decisions as final, and as binding on them, in their application to the case before them.” Watson v. Jones, 80 U.S. (13 Wall.) 679 (1871).
2. The ministerial exception
The court noted that the “ministerial exception” doctrine, which generally bars the civil courts from resolving employment discrimination lawsuits between churches and clergy, has limits. The doctrine did not apply in this case because “the parties . . . are not asking this court to resolve an employment discrimination suit or a dispute over who will lead a church, but rather to determine the validity of a contract between a church and a former minister's wife.”
3. Legal authority
This case illustrates the importance of having a church’s legal documents signed by persons having legal authority to do so. In this case, the two purported board members had not been elected according to the process described in the parent denomination's Official Manual, and therefore they had no legal authority to act on behalf of the church.
CASE STUDYFirst Born Church of the Living God v. Bank South, 472 S.E.2d 469 (Ga. App. 1996)
A dispute arose in a church over the tenure of its pastor. The church board held an emergency meeting, at which the pastor was removed and a new pastor was appointed. The board also modified its bank resolution by removing the dismissed pastor’s name as an authorized signature and requiring that only those checks and withdrawals having the approval of the new pastor be honored. The bank asked a court to determine who was authorized to control the church’s bank accounts. It sought to protect itself against liability in the event that it honored checks written by both the former and current pastors of the church. The court ruled that the board’s actions were lawful, and concluded that only those checks and withdrawals having the approval of the current pastor should be authorized by the bank. The former pastor appealed. A state appeals court reversed the ruling of the trial court. It concluded that the board’s action in changing the bank resolution was invalid because it was not done in compliance with the church’s constitution. The court quoted the following language in the church’s constitution:
Any legislation passed by the board shall be presented to the [pastor] for his approval and signature. If the legislation or any part of it fails to meet his approval, it is his privilege to veto the same and send it back to the board, along with his reasons for the veto. The legislation must then be revoted upon by the full board, and must be passed by a two-thirds majority before it can become law.
The court concluded that the board’s action was legally invalid because it did not comply with this procedure. The court observed: “The evidence indisputably shows that the board failed to follow the procedural requirements of the church constitution when it transacted its business because no legislation was ever presented to [the former pastor] for his approval and signature.”
4. Personal liability for unauthorized signature
Persons who sign contractual agreements on behalf of a church may be personally liable for any breach of the agreement. Whether clergy will be personally liable on contracts they sign depends upon two factors: (1) whether their employing church is disclosed in the contract, and (2) whether they sign in a representative capacity, such as “Rev. John Smith, President.” If both elements are observed, a minister ordinarily will not be personally liable on the contract. The church's identity usually is disclosed by listing the church as one of the parties to the contract. Clergy who sign a contract on behalf of a church without disclosing their title or office will not be personally liable if the church is identified in the contract and the circumstances clearly reveal that they signed in an official capacity. This view, however, is not universally accepted. As a result, ministers should be careful to disclose their representative capacity when signing a contract on behalf of a church, and clearly identify the church in the body of the contract as the party to the agreement.
A leading treatise on corporation law states that “if there is no disclosure of the [corporation] in the body of the contract, the mere appending of words descriptive of the signer as, for example, the word 'president,' would not be sufficient of itself to relieve the signer of individual liability.” Fletcher Cyc. Corp. § 3034.
This analysis assumes that the contract was authorized by appropriate church action. If a minister signs a contract that has not been so authorized, the general rule is that he or she will be personally liable on the contract. The church, of course, can “ratify” an unauthorized contract, in which case the church becomes liable for it.
In many cases, it is unclear whether a minister has been authorized to sign a contract on behalf of the church. This obviously is a very important question, for clergy who sign contracts without authorization may be personally liable. Clergy should be certain that the contract has been duly authorized by appropriate action and that they are authorized to sign. The church's charter and bylaws must be reviewed, as well as resolutions of the church board and pertinent state laws. To illustrate, many churches have adopted bylaws requiring that the disposition of church property be authorized only by congregational vote. Even if the board of deacons or trustees of such a church independently approves the disposition of church property, any subsequent contract of sale would be unauthorized. And even if the church congregation has approved the sale in a church business meeting, the minister should be satisfied that all of the procedural requirements for such a meeting—such as notice and quorum—have been met.
Clergy should not assume that they are authorized to enter into contracts on behalf of their church simply by virtue of their position. One court observed:
The mere proclaiming of [oneself] as the religious superior of the congregation may suffice to establish that fact in spiritual matters of his church, but it does not affect legal superiority in secular matters. There must be clear and convincing evidence of congregational acknowledgement of and acquiescence in the concept of legal superiority and authority over church business and property matters. Gospel Tabernacle Body of Christ Church v. Peace Publishers & Co., 506 P.2d 1135, 1138 (Kan. 1973).
A minister of an unincorporated church who signs a contract on behalf of the church may be personally liable on the contract even if the church is identified in the contract and the minister signs in a representative capacity. Several courts have concluded that ministers and trustees of unincorporated churches who sign contracts on behalf of their churches will be personally liable on them.
CASE STUDY Hind-Marsh v. Puglia, 665 So.2d 1091 (Fla. App. 1995)
A corporate officer signed a check in the amount of $43,000 on behalf of his company. The company's name was imprinted on the check, so there was no doubt that it was an obligation of the company. However, the officer's signature did not indicate that he was signing in a “representative capacity”—that is, as a representative of the company rather than in his personal or individual capacity. A bank dishonored the check on the basis of insufficient funds, and the recipient sued the officer directly. The officer insisted that he could not be personally liable for the amount of the check, since the company's name had been imprinted on it. The court disagreed. It referred to a state law specifying that an authorized representative who signs his or her name to an instrument “is personally obligated if the instrument names the [company] represented but does not show that the representative signed in a representative capacity.” In summary, the officer was personally liable for payment of the check, even though the company's name was imprinted on it, since the officer did not indicate clearly that he was signing in a representative capacity.
The South Carolina court failed to address the legal requirement of “consideration.” In the typical contract, one person (the “promisor”) makes a promise to do something for the benefit of another (the “promisee”), in return for which the promisee provides the promisor something of value. The value provided by the promisee to the promisor in exchange for the promisor's promise is referred to as “consideration.” The requirement of consideration is what distinguishes legally enforceable promises (i.e., contracts) from unenforceable promises. What consideration did the church receive for its promise to pay the widow a monthly stipend? If it in fact received nothing, then the Agreement would be legally invalid and unenforceable.
To illustrate, a Tennessee court ruled that a church's decision to make biweekly payments to a former pastor's widow was unenforceable since the church received nothing of value (“consideration”) in return for its commitment, and therefore the church's decision to discontinue making the payments did not amount to a breach of contract. Cochran v. Robinwood Lane Baptist Church, 2005 WL 3527627 (Tenn. App. 2005).
6. State nonprofit corporation law
The South Carolina court noted that since the church was organized as a South Carolina nonprofit corporation, “the governing law for determining the proper election of board members is the South Carolina Nonprofit Corporation Act.” However, the court pointed out that section 33-31-180 of the South Carolina Code provides: “If religious doctrine governing the affairs of a religious corporation is inconsistent with the provisions of this chapter on the same subject, the religious doctrine controls. . . .” Many state nonprofit corporation statutes have a similar provision.
7. Electronic signatures and signature stamps
Some churches use electronic signatures or signature stamps. Unless subject to strict controls, these forms of signature can result in financial losses. Consider the following case study.
CASE STUDY710 F.3d 434 (D.C. Cir. 2013)
A church’s chief financial officer (the “defendant”) embezzled $850,000 in church funds, mostly by arranging increases in the church's line of credit at a local bank. His technique was simple. As chief financial officer, he had access to digital versions of the signatures of at least four of the church's officers. He used these to create phony corporate resolutions bearing the officers' “signatures” and authorizing increased borrowing. His deeds eventually came to light after he was terminated on other grounds, and he was charged with several financial crimes, including aggravated identity theft (one for each of the officers), bank and wire fraud, making a false statement on a loan application, four counts of tax evasion, and first-degree fraud.
According to evidence introduced at trial, the defendant was hired by the church in 2001 and later became its chief financial officer. He had control over the church’s bank accounts, credit cards, and checks. He also was responsible for conducting “reconciliation” of the church’s accounts. Using his position of trust, he used various means to defraud the church. Evidence showed that he embezzled money from the church on a weekly basis. For example, he wrote himself numerous unauthorized checks in addition to his biweekly salary. He paid his home mortgage and personal credit card from church bank accounts. He also misused his church credit card to make numerous luxury purchases, including the purchase of three cars (a Lexus SUV, a Range Rover, and a Nissan Maxima); a $12,000 diamond ring; an addition to his home; high-end furniture, including a projection-screen home theater and leather seating; numerous vacations at four-star accommodations; and sports tickets, including courtside season tickets to professional basketball games.
The defendant was tried and convicted on 12 counts in federal district court, and sentenced to eight years in prison. The district court judge also ordered the defendant to pay $850,000 in restitution to the church. The judge also banned him from working in any capacity handling the finances of any other church or organization upon his release.
There are several lessons to be learned from this Case Study, but especially one: Digital signatures and signature stamps are easily susceptible to abuse and, at a minimum, must be stored in a secure location with restricted access. The risks are compounded when several digital signatures are collected. In this case, the embezzler kept the digital signatures of four church officers. It would be virtually impossible for a church to safeguard the digital signatures of multiple officers and directors, meaning that such an arrangement should never be adopted. Even a single digital signature should be avoided unless there is sufficient assurance that it cannot be misused. This is a high standard that many churches could not meet.
Key Point. A CPA audit will provide church leaders with a management letter highlighting deficiencies in internal control. This represents one of the most valuable benefits of an audit, and makes misappropriation of church funds less likely.
Key Point. Cases of embezzlement raise a number of complex legal and tax issues. Our recommendation is that you retain an attorney to assist you in responding to these issues.