Officers, Directors, and Trustees

Legal Developments

Pastor Lacked Authority to Appoint Board Members

The appointments were rescinded because they violated the church’s bylaws.

Richard R. Hammar, Attorney, CPA
Bio

Key point 3-01. In general, clergy have the legal authority to do those things specifically authorized in their employment contract, in their church’s constitution or bylaws, or by specific delegation of authority from the church board or congregation.

Key point 6-06.01. Churches select their officers and directors in various ways. For example, it is common for members of a church board to be elected by the church’s membership, while officers are elected by the board. The civil courts generally refrain from resolving disputes involving the selection of church officers and directors on the ground that the First Amendment guaranty of religious freedom prevents them from becoming involved in ecclesiastical disputes.

A New York court ruled that a pastor lacked the authority under his church’s bylaws to appoint members of the board of trustees, meaning all transactions entered into by the board had to be rescinded.

Background

This case involved a dispute as to who is in control of a church, (the “church”), a religious corporation. On March 1, 2021, the pastor of the church unilaterally appointed seven persons to the board of trustees of the church (“the new board of trustees”).

The new board of trustees elected a new pastor and voted to amend the church’s certificate of incorporation and bylaws to transfer all of the church’s property to another religious corporation.

As this case shows, fundamentals matter when it comes to sound church governance, and Church Law & Tax’s Church Governance: What Leaders Must Know to Conduct Legally Sound Church Business is a must-have for pastors and church leaders in search of answers surrounding this critical topic. Order your copy today. (Advantage Members enjoy an additional 20% off ALL store purchases.)

Original board seeks injunction

The original board of trustees (the “plaintiffs”) sought a preliminary injunction noting that under the bylaws that controlled the affairs of the church on March 21, 2021, the pastor lacked authority to unilaterally appoint the new board of trustees and that their appointments were therefore nullities (void). The plaintiffs further claimed that all the actions taken by the new board of trustees following their appointment were also nullities.

The church’s bylaws at the time the pastor appointed the new board of trustees controlled the affairs of the church. Article IV of the 1990 bylaws stated, in relevant part:

The trustees, other than the first Board of Trustees, and except as provided in any Article of these By-laws, shall be elected at the annual meeting of the voting members, and each trustee elected shall serve until the next succeeding annual meeting and until his successors shall have been elected and qualified. The board of Trustees shall be authorized to increase their number by unanimous consent.

Court: The plaintiffs “will likely prevail on their claim”

The court noted that the plaintiffs “correctly contend that there are no provisions in the . . . By-Laws which permitted the [pastor] to act unilaterally in appointing the New Board of Trustees on March 1, 2021,” and so his appointments “were therefore nullities and all the actions taken by the New Board of Trustees subsequent to March 1, 2021 were also nullities.” The court concluded:

Here, the plaintiffs established their right to a preliminary injunction. The plaintiffs demonstrated that they will likely prevail on their claim that the [pastor] acted without authority when he appointed the New Board of Trustees and that until [the church] holds another election for the purpose of electing new trustees, those persons who were Trustees prior to March 1, 2021 should remain in control of [the church].

The court made several orders, including:
  • The board of trustees shall consist of those trustees in office as of the date of the business meeting on March 1, 2021, and they “shall have all the authority set forth in the 1990 By-Laws to act on behalf of” the church;
  • The deed purporting to convey the church’s property to another religious organization is rescinded;
  • The new board of trustees “are enjoined from conducting and/or engaging in any business on behalf of” the church as the board of trustees of the church;
  • Any changes and corporate amendments made by the new board of trustees are hereby vacated;
  • The former board of trustees are directed to turn over all documents, papers, and effects in their possession which belong to the church to the lawful board of directors;
  • The former board of trustees are directed to restore the original locks to the church and/or provide keys to the locks at the church to the lawful board of trustees;
  • The former board of trustees are restrained from “bringing in, appointing and/or hiring any pastor, reverend or spiritual advisor to preside over” the church; and
  • The former board of trustees are enjoined from denying any member or trustee of the church entry to the church.

What this means for churches

This case demonstrates the fundamental principle that a minister cannot unilaterally appoint members of a church’s governing board in a manner that conflicts with the church’s bylaws or other governing documents.

And, if this principle is violated, the church may be required to rescind any and all legal obligations entered into by the purported board members following their unauthorized appointment. This obviously can lead to havoc, which is good reason for churches to be sure that contracts and other commitments are executed by persons having legal authority to do so.

Southern Baptist Church, Inc. v. Samuel, 2021 N.Y. Misc. LEXIS 6234 (2021)

Legal Developments

Board Possessed Legal Authority to Fire Its Pastor

State nonprofit corporation law factored heavily in the court’s ruling.

Richard R. Hammar, Attorney, CPA
Bio

Key point 6-02.02. Churches are subject to the provisions of their governing documents, which generally include a charter and a constitution or bylaws (in some cases both). A charter is the state-approved articles of incorporation of an incorporated church. Most rules of internal church administration are contained in a constitution or bylaws. Specific and temporary matters often are addressed in resolutions. If a conflict develops among these documents, the order of priority generally is as follows—charter, constitution, bylaws, and resolutions.

A Maryland appeals court ruled that a church’s board of trustees had the legal authority to terminate a pastor even though this authority was not specifically mentioned in the church’s governing documents.

Background

In the summer of 2016, a man met with a pastor regarding his desire to start a church. During their discussions, it was agreed that the pastor’s son-in-law would serve as pastor of the new church. At a meeting in October 2016, the pastor and three additional parties signed articles of incorporation, which were submitted to the Maryland Department of Assessments and Taxation. The department accepted the new church’s articles of incorporation, thereby initiating its existence as a nonprofit corporation.

The first section of the church’s articles of incorporation provided that five named persons had been “elected by the members of the congregation . . . to act as trustees in the name and on behalf of said congregation. . . .”

The third section of the articles of incorporation defined the corporation’s purposes as follows:

The Corporation is organized as a church exclusively for religious, charitable, and educational purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1986 (or the corresponding provision of any future United States Revenue Law), including for such purposes, but not limited to, promoting the cause of Christ; advancing the kingdom of God; winning the unsaved; reaching the unchurched; encouraging the development of all members and others in Christian living; and engaging in any other activity that is in the furtherance of section 501(c)(3) tax-exempt purposes.

On November 27, 2016, the church held an “ordination and sending” service for its new pastor. On that same day, church members unanimously voted to install the church’s official constitution, which “made no mention of appointing or dismissing clergy but did provide that the officers of the church had the authority to conduct all of the business affairs of the church” (quoting a state appeals court).

The church board voted to remove the pastor

In late 2018 and early 2019, church trustees began discussing removal of the pastor due to his conduct, including:

  • “bringing a gun into the church and leaving it unattended and accessible to children”;
  • “resisting the creation of a school and summer camp”;
  • “a lack of organizational skills”; and
  • “attempting to organize a ‘bow shoot’ at [the church] despite being informed that [the church] was not insured for such activity.”

On March 3, 2019, the church’s board met and voted on the removal of the pastor:

[T]he Board of Trustees convened, with all seven elected board members and the pastor, a trustee by virtue of his position as pastor in attendance. Five elected board members voted to remove the pastor, and two trustees and the pastor voted in opposition. Following the meeting, the pastor was issued a letter instructing him to remain away from [the church] and to vacate the [parsonage] on or before April 5, 2019.

The church asked a local court to issue a non-adversarial “declaratory judgment” addressing the legal authority of the trustees to oust the pastor.

The pastor claimed that the church “trustees had no authority to remove him as pastor” since the state nonprofit corporation law contained “no language expressly authorizing the trustees to ‘control any operation of the church‘ aside from the church’s assets.”

The pastor also argued that the decision to remove him involved “ecclesiastical matters” that should have been left to the church to decide.

The church trustees claimed that the language of the state nonprofit corporation law was “not exhaustive and that the trustees acted within the scope of their corporate authority.”

The trustees had “the authority to terminate”

The trial court concluded that “the question of who possesses the authority under the relevant governing documents to authorize the removal [of a pastor], and the validity of those documents, is a non-ecclesiastical matter that the Court can resolve without trespass to the First Amendment.”

The court found that the church trustees acted within the scope of their corporate and statutory authority when they voted to end the pastor’s tenure. The pastor appealed.

A state appeals court agreed with the trial court’s ruling:

Churches in Maryland formally organize as religious corporations and thus, the trustees, not the congregation, constitute the corporation. . . . “[T]he purpose of [religious] incorporations . . . [is] to enable the church to attend more readily and efficiently to their temporal affairs, without any power or authority to interfere with forms of worship, articles of faith, or any other matter, relating strictly to spiritual concerns.” . . . [The Maryland Religious Corporations Law] states: “[u]nless otherwise provided by law or its charter, a Maryland corporation has the general powers, whether or not they are set forth in its charter,” to perform “every other act not inconsistent with law which is appropriate to promote and attain the purposes set forth in its charter.” Thus, a corporation’s board of directors [including a religious corporation’s board] has the power to manage “[a]ll business and affairs of a corporation. . . .”

Here, while the church’s incorporation documents did not expressly provide for the appointment or removal of a pastor, the trustees were clearly the “body corporate” and there were no documents conferring any authority to the congregation.

The court also found that the church never adopted a new or different constitution, and therefore, “the authority to terminate [the pastor] was vested in the governing body, i.e., the trustees. . . . As such, the trustees properly acted in accordance with their corporate authority.”

In responding to the pastor’s argument that the trustees lacked authority to terminate him because the firing of a pastor is an ecclesiastical matter reserved to the church, not the trustees, the court noted: “[H]ere, there was simply no evidence that the Board’s decision was based on disputes regarding religious doctrine, biblical interpretations or other ecclesiastical matters.”

Rather, the court added, the pastor’s “‘personal behaviors, organizational shortcomings, inability to manage . . . drove’ the decision.”

The court concluded: “In sum, the [church’s] Board of Trustees, in accordance with its Articles of Incorporation and applicable statutes, had the authority to terminate [the] pastor.”

What this means for churches

There are three points to note about this case.

First, the court concluded that the civil courts do not necessarily have to refrain from resolving all internal church disputes. The resolution of such disputes is barred by the First Amendment only in disputes regarding “religious doctrine, biblical interpretations or other ecclesiastical matters.”

Second, the court applied state nonprofit corporation law in determining the procedure for removing the church’s pastor since the church had not addressed this issue in its governing documents.

This illustrates the basic principle that state nonprofit corporation law is a “gap filler.” An incorporated church is generally free to address issues of administration and governance in its articles and bylaws in any manner it chooses, free from state interference. But, if a church neglects to address an issue in its governing documents, then state nonprofit corporation law will provide the answer.

Third, the case illustrates the legal effect of incorporation. Does it make a church subordinate to state corporate law? No. The court explained:

Churches in Maryland formally organize as religious corporations and thus, the trustees, not the congregation, constitute the corporation. . . . “[T]he purpose of [religious] incorporations . . . [is] to enable the church to attend more readily and efficiently to their temporal affairs, without any power or authority to interfere with forms of worship, articles of faith, or any other matter, relating strictly to spiritual concerns.”

Once again, churches can revise their governing documents to provide for any contingency, including the removal of a pastor. Vaughn v. Faith Bible Church, 241 A.3d 1028 (Md. App. 2020).

Legal Developments

Church’s Failure to Follow Bylaws Nullifies Actions

Court deems selection of a pastor, board member resignations, and special meeting null and void.

Richard R. Hammar, Attorney, CPA
Bio


Key point 6-02.2. Churches are subject to the provisions of their governing documents, which generally include a charter and a constitution or bylaws (in some cases both). A charter is the state-approved articles of incorporation of an incorporated church. Most rules of internal church administration are contained in a constitution or bylaws. Specific and temporary matters often are addressed in resolutions. If a conflict develops among these documents, the order of priority generally is as follows—charter, constitution, bylaws, and resolutions.

Key point 6-06.4. Church officers and directors can be removed from office in the manner authorized by the church’s governing documents. It is common for church bylaws to give the membership the authority to remove officers and directors who engage in specified misconduct or change their doctrinal position.

Key point 6-12.1. Church membership meetings must be conducted in accordance with the procedural requirements ordinarily specified in the church’s governing documents. The most common requirements pertain to notice, quorum, and voting.

The Idaho Supreme Court ruled that a church’s failure to follow its bylaws in the selection of a pastor, the resignation of two board members, and the conduct of a specially called business meeting, rendered these actions null and void.

Selection of a pastor

A dispute arose in a church over the appointment of a pastor and the resignation of two board members. The church’s bylaws addressed the selection of a pastor as follows:

Section 4. Vacancy: In the event of a vacancy in the senior pastorate, a pastor shall be selected in the following manner:

The board of directors shall immediately convene and assign one of the associate pastors as a temporary replacement for the senior pastor. A roster of candidates shall be presented to the board of directors for review of their scriptural qualifications. Upon acceptance of qualification, each candidate will present themselves to the voting membership. After the voting membership has had an opportunity to review all candidates set forth by the board of directors, a special meeting will be called and a vote will be taken, with a majority vote required for the final appointment of the new senior pastor.

The court noted that there was no evidence that the pastor was ever voted on by the membership. Rather, the only evidence was that he had been asked when meeting with the church board if he would be interested in serving as pastor, and he replied that he was. The court concluded that “this was not sufficient evidence for a finding that he was properly appointed as the senior pastor.” Because there was no evidence that the bylaws were complied with, the pastor’s appointment was not valid.

The court stressed that the bylaws of a corporation are “equivalent to contracts among the members” and are binding on its members, and therefore “actions taken in violation of a corporation’s bylaws are void.”

Resignation of board members

Another issue before the court was whether two of the church’s three board members had effectively resigned their positions. The only evidence that one of these board members had resigned was his statements to the other board members, and some church members, that he “no longer wanted to be on the board.”

The court quoted the following provision in the state nonprofit corporation law: “A director may resign at any time by delivering written notice to the board of directors, its chairman, or the corporation.” I.C. § 30-3-69(1).

The court explained: “Although a director may resign at any time, the exclusive method for doing so is by delivering written notice… .” The court noted that neither of the two board members who allegedly resigned “ever submitted a written resignation. Accordingly, there is no evidence to support the … [conclusion that they had resigned.]”

The court then addressed the argument that these two board members had effectively resigned by absenting themselves from the board:

We note that absence from board meetings is only grounds for removal of a director when specifically provided for in the corporate documents. Here, there is no such provision in the bylaws or articles. The bylaws do, however, allow for removal of a director “by a unanimous vote of the remaining board members” regardless of whether the director has been absent from board meetings. However, there is no evidence in the record that such a vote took place.

Furthermore, the court found that no board meetings took place for the previous four months and so “there were no board meetings to be absent from.”

In conclusion, “because there was no evidence in the record to support a finding that [the two board members] ever tendered a written resignation or absented themselves from the board,” they did not cease to be members of the board.

Special meeting

Following the alleged “resignation” of two of the board’s three members, the remaining member called a special meeting of the church membership at which two new members were selected. The validity of this special meeting was contested on the ground that the meeting could not be called by one board member.

The court quoted the state nonprofit corporation law regarding the calling of special membership meetings:

(1) A corporation with members shall hold a special meeting of members: (a) On call of its board or the person or persons authorized to do so by the articles or bylaws; or (b) Except as provided in the articles or bylaws of a religious corporation if the holders of at least ten percent (10%) of the voting power of any corporation sign, date and deliver to any corporate officer one (1) or more written demands for the meeting describing the purpose or purposes for which it is to be held. I.C. § 30-3-47.

The church’s bylaws address special meetings as follows: “Special meetings of the voting membership may be called by or at the request of two-thirds (2/3) of the voting membership… . Notice of the annual, regular, or and (sic) special meeting of the voting membership shall be given by oral notice at three consecutive Sunday services. The business to be transacted at the meeting need not be specified in the notice, unless specifically required by law or these bylaws.”

In this case, the court noted, “no membership roster was kept… . Thus, calling the special meeting at the request of two-thirds of the voting membership was not possible. Consequently, the only method available to call the special meeting was on call of [the church’s] board as provided under” state law (quoted above). And, while the church’s bylaws were silent as to what constitutes an act of the board, the nonprofit corporation law specifies that “an act of the board occurs when a quorum is present and the majority of directors vote in favor of such act.” Since two of the church’s three board members had not resigned, a “majority of directors” consisted of two or three of the board’s three members. Therefore, the special meeting of the church membership could not be lawfully called by one board member. The court concluded: “Here … the meeting was not called by the majority of directors in office and therefore was improperly called [and consequently] any action taken at the special meeting, including the election of new directors, was void.”

What this means for churches

This case raises the following important points.

First, a church’s governing documents must be followed in the selection of pastors. The court concluded that the church’s failure to follow its bylaws in the selection of its senior pastor rendered his selection invalid. While not all courts would agree with this conclusion, it is not without precedent, and at a minimum should encourage church leaders to be sure that all pastoral selections comply with the church’s governing documents.

Second, and perhaps most importantly, the court ruled that board members do not cease to be members of the board by informing others that they no longer want to serve in that capacity. Rather, board members remain on the board until they cease to be members pursuant to the terms of the church’s governing documents, or the provisions of the nonprofit corporation law under which the church is incorporated. But nonprofit corporation law generally applies to issues of church administration only with respect to matters not addressed in the church’s governing documents, as was the case here. The court concluded that the procedure for a board member’s resignation described in the state nonprofit corporation law had not been followed, and so the two members who allegedly had resigned had not done so and remained on the board.

Knowing with certainty when a board member ceases to be a member of the board is of utmost importance, since board members generally cease to be liable for the actions of the board after they have resigned. If there is doubt or ambiguity regarding a board member’s status, this means that such a person may be exposed to continuing liability for board decisions over which he or she exercised no control. As a result, church leaders should review their governing documents to see if the procedure for resignation is clearly specified so there is no ambiguity regarding the timing of a board member’s resignation. The same goes for the end of a term of office. If a church’s governing documents are clear, then nonprofit corporation law will not be invoked.

Third, the court concluded that actions taken at a special business meeting that was not called according to the procedure described in a church’s governing documents are null and void. The court concluded: “Here … the meeting was not called by the majority of directors in office and therefore was improperly called [and consequently] any action taken at the special meeting, including the election of new directors, was void.” Again, the failure of church leaders to ensure that the church’s governing documents are followed in the notice and conduct of a membership meeting can lead to the invalidation of actions taken. Kemmer v. Newman, 387 P.3d 131 (Ida. 2017).

Legal Developments

Pastor’s Breach of Contract Lawsuit Against Board Members Dismissed by Court

The court concluded that church board members are not personally liable for breach of contract, since “whenever a corporation makes a contract, it is the contract of the legal entity … and not the contract of the individual members.”

Richard R. Hammar, Attorney, CPA
Bio


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 6-07.02. Church board members may be personally liable for contracts they sign if they do so without authorization, or if they fail to indicate that they are signing as a representative of the church.

Key point 6-08. State and federal laws provide limited immunity to uncompensated officers and directors of churches and other charities. This means that they cannot be personally liable for their ordinary negligence. However, such laws contain some exceptions. For example, officers and directors may be personally liable for their gross negligence or their willful or wanton misconduct.

A federal district court in Pennsylvania dismissed a lawsuit by a pastor against individual members of a board of deacons claiming that his termination constituted a breach of contract.

A church hired a pastor (the "plaintiff") in 2012. The church and plaintiff executed a contract specifying a 20-year term of employment expiring in 2032. The contract stated various terms and conditions governing termination of the pastor's employment, including that either party could terminate the agreement with or without cause but with certain contractual consequences. The contract further provides that "the rights of termination set forth in this contract are in addition to any other rights of termination allowed to either party by law." The plaintiff claimed that termination of his employment as pastor was without cause as defined in the contract, and on this basis sued the church and each member of the board of deacons (the "defendants") for breach of the employment contract in a federal district court. He sought $2.6 million in damages.

The defendants asked the court for a "judgment on the pleadings," meaning that the law was so overwhelmingly in their favor that the court should rule based solely on the pleadings. The court addressed each of the plaintiff's claims in evaluating the defendants' motion.

Deacons' personal liability

The board of deacons were named individually and personally as defendants in the plaintiff's lawsuit. The deacons asked the court to dismiss them from the case on the following grounds: (1) They could not be sued for breach of a contract to which they were not parties; (2) they did not have authority as deacons of the church to hire or fire church employees, and therefore, they could not be held liable for actions for which they had no authority; and (3) as volunteers in a nonprofit organization they were "immune" from liability under state nonprofit corporation law as uncompensated charitable volunteers.

(1) The deacons were not parties to the contract

The court agreed that the existence of a contract between the pastor and the individual deacons was required under Pennsylvania law for the pastor to pursue his breach-of-contract claim against them: It is axiomatic that only a party to a contract can be sued for its breach … . Moreover, as a general matter, when a corporation enters into a contract, the corporation alone is liable … . Whenever a corporation makes a contract, it is the contract of the legal entity—of the artificial being created by the charter—and not the contract of the individual members. Liability of the corporate officer for breach of contract only extends where, as opposed to here, the officer makes the promise in his individual capacity … . Notably, only one of the [deacons] was a signatory to the contract, having signed as stated thereon as Chairman of the Deacon Board. Regardless, the contract itself attached … clearly indicates that it is an agreement between the pastor and church as the contracting parties … . Nowhere in the document does the language reasonably suggest that [individual deacons were] assuming personal liability for the contract.

(2) Board of deacons' lack of authority to hire and fire employees

The individual deacons argued that they did not have authority as deacons to hire or fire church employees, and therefore cannot be held liable for actions for which they had no authority. They also claimed that under the church bylaws, the church, by a two-thirds vote of the congregation, could remove a pastor from his tenure.

The plaintiff insisted that the bylaws make the board of deacons responsible for providing input regarding church administrative matters.

The court concluded that both parties argue these matters for naught. These arguments do not have any relevance to the individual defendants' liability for breach of contract. That the contract, charter and bylaws spell out the structure of the church and certain procedures to be followed regarding termination of the pastor does not establish any liability of the individual defendants for breach of the contract between the pastor and the church.

(3) Charitable immunity for nonprofit volunteers

The individual deacons argued that even if they could be sued for the pastor's termination, they are immune from liability under the state nonprofit corporation statute, which provides:

(a) General rule. Except as provided otherwise in this section, no person who serves without compensation, other than reimbursement for actual expenses, as an officer, director or trustee of any nonprofit organization under section 501(c)(3) of the Internal Revenue Code … shall be liable for any civil damages as a result of any acts or omissions relating solely to the performance of his duties as an officer, director or trustee, unless the conduct of the person falls substantially below the standards generally practiced and accepted in like circumstances by similar persons performing the same or similar duties, and unless it is shown that the person did an act or omitted doing of an act which the person was under a recognized duty to another to do, knowing or having reason to know that the act or omission created a substantial risk of actual harm to the person or property of another. It shall be insufficient to impose liability to establish only that the conduct of the person fell below ordinary standards of care.

The court noted that this provision only applies to liability for "torts" (i.e., personal injuries) and not to breach-of-contract claims like the one presented in this case.

The court's conclusion

The court agreed with the position of the deacons, and dismissed the plaintiff's claims against them.

What this means for churches

This case is relevant to church leaders for these reasons:

  1. Liability for breach of contract. The court concluded that church board members are not personally liable for breach of contract, since "whenever a corporation makes a contract, it is the contract of the legal entity … and not the contract of the individual members. Liability of the corporate officer for breach of contract only extends where, as opposed to here, the officer makes the promise in his individual capacity." Even the fact that the chairman of the deacon board signed the contract did not make him personally liable if the contract "clearly indicates that it is an agreement between the pastor and church as the contracting parties." The court stressed that "nowhere in the document does the language reasonably suggest that [individual deacons were] assuming personal liability for the contract."

    Church board members may be personally liable on contracts that they sign in two ways. First, they may be liable on a contract they sign without authority to do so. Second, board members may be personally liable on contracts they are authorized to sign but which they sign in their own name without any reference to the church or to their representational capacity. To prevent this inadvertent assumption of liability, board members who are authorized to sign contracts (as well as any other legal document) should be careful to indicate the church's name on the document and clearly indicate that they are signing in a representative capacity (i.e., agent, director, trustee, or officer).

    To summarize, clergy and church board members should refrain from signing contracts unless they are certain that (1) the contract has been properly authorized; (2) they are authorized to sign on behalf of the church; (3) the church is clearly identified in the contract as the party to the agreement; and (4) the minister signs in a "representative capacity" (for example, as "authorized agent" or "president").

  2. Charitable immunity. Most states have enacted laws limiting the liability of officers and directors of nonprofit corporations. In many states, these "immunity" laws protect church volunteers. Most of these laws only immunize uncompensated directors and officers (or volunteers) from legal liability for their ordinary negligence committed within the scope of their duties. These statutes generally provide no protection for "willful and wanton" conduct or "gross negligence."

    3. Many courts have agreed with this court, and have limited state charitable immunity laws to personal injuries, and not breach-of-contract claims. Lee v. Sixth Mount Zion Church, 2016 WL 2344529 (W.D. Pa. 2016).

Legal Developments

“Ecclesiastical Abstention Doctrine” Preserved in Kentucky Church Governance Lawsuit

Church Law and Tax Report “Ecclesiastical Abstention Doctrine” Preserved in Kentucky Church Governance Lawsuit Key

Church Law and Tax Report

“Ecclesiastical Abstention Doctrine” Preserved in Kentucky Church Governance Lawsuit

Key point 6-06.4. Church officers and directors can be removed from office in the manner authorized by the church’s governing documents. It is common for church bylaws to give the membership the authority to remove officers and directors who engage in specified misconduct or change their doctrinal position.

Key point 6-12.4. Most courts refuse to intervene in church disputes concerning the validity of a membership meeting that was not conducted in accordance with the procedural requirements specified in the church’s governing documents. However, some courts are willing to intervene in such disputes if they can do so without inquiring into religious doctrine or polity.

Key point 9-07. The First Amendment allows civil courts to resolve internal church disputes so long as they can do so without interpreting doctrine or polity.

The Kentucky Supreme Court ruled that it was barred by the “ecclesiastical abstention doctrine” from resolving a lawsuit brought by dismissed board members of a church-affiliated agency challenging the legality of their dismissal. A church-affiliated children’s services ministry attempted to remove a board member for repeated acts of harassment. The ministry’s board of trustees voted by majority vote to remove the director, but failed to achieve the two-thirds vote required by the ministry’s bylaws to remove a director. As a result, several trustees resigned in disgust and protest. Six months later, at the ministry’s annual business meeting, several members proposed a resolution replacing the existing board with a new board, and amending the bylaws to include measures to protect against misconduct by board members. The resolution passed overwhelmingly by a vote of 113 to 8.

The ousted board members filed a lawsuit challenging the resolution that removed them from office. The ousted board members asked the court to invalidate the bylaw amendment on the ground that the notice requirement prescribed by the bylaws was not followed, and reinstate them as the lawful board.

The ministry asked the court to dismiss the lawsuit, claiming that the courts lacked jurisdiction over the matter based on the “ecclesiastical abstention doctrine” which generally bars the civil courts from meddling in internal church disputes. A trial court ruled that it could resolve the controversy on the basis of “neutral laws” that would not trigger the ecclesiastical abstention doctrine. The state supreme court, on appeal, disagreed. It began its ruling with this observation:

The concept of ecclesiastical abstention or church autonomy has long been recognized as a necessary corollary to the First Amendment’s religion clauses. To protect the rights embodied in the Free Exercise and Establishment Clauses of the First Amendment, ecclesiastical abstention provides “a spirit of freedom for religious organizations, an independence from secular control or manipulation—in short, power to decide for themselves, free from state interference—matters of church government as well as those of faith and doctrine.”

Thus, when resolution of a case is “dependent on the question of doctrine, discipline, ecclesiastical law, rule, or custom, or church government,” secular courts must abstain from hearing the case. Put differently, “where resolution of the disputes cannot be made without extensive inquiry by civil courts into religious law and polity, the First and Fourteenth Amendments mandate that civil courts shall” not act.

“At bottom, the ecclesiastical-abstention doctrine is primarily interested in preventing any chilling effect on church practices as a result of government intrusion in the form of secular courts.” But churches are not the only benefactors of ecclesiastical abstention. All religious organizations are entitled to protection under the First Amendment, so all suits that present an ecclesiastical character, those “which concern theological controversy, church discipline, ecclesiastical government, or the conformity of the members of the church to the standard of morals required of them” fall within the scope of the ecclesiastical-abstention doctrine. [Quotations are from the following decisions by the United States Supreme Court: Watson v. Jones, 80 U.S. (13 Wall.) 679 (1871); Kedroff v. St. Nicholas Cathedral of Russian Orthodox Church, 344 U.S. 94 (1952); Serbian Eastern Orthodox Diocese v. Milivojevich, 426 U.S. 696 (1976).]

The court conceded that “the mere inclusion of a religious organization as a party to a suit does not necessarily implicate the ecclesiastical-abstention doctrine.” Secular courts “are not prohibited from hearing cases involving religious organizations where the dispute can be resolved by the application of neutral principles of secular law.” But this was not such a case since “the neutral principles doctrine should not be extended to religious controversies in the area of church government.” The court concluded: “It is axiomatic that the underlying dispute is about the internal governance of [a religious ministry]. The crux of the controversy revolves around who is entitled to govern [the ministry] by way of their position on the board of trustees. It could not be clearer that this suit concerns the internal governance of [a church agency].”

What This Means For Churches:

This case is an excellent example of the impact of the ecclesiastical abstention doctrine (sometimes called the “church autonomy” doctrine) on church disputes. Internal church disputes that concern “theological controversy, church discipline, ecclesiastical government, or the conformity of the members of the church to the standard of morals required of them” are beyond the reach of the civil courts, and cannot be revived by appeals to “neutral principles of law.”

Note that the court concluded that the ecclesiastical abstention doctrine deprived the civil courts of authority to decide not only the ousted board members’ claim that their ouster was unlawful, but also that the notice requirement in the ministry’s bylaws had not been followed. St. Joseph Catholic Orphan Society v. Edwards, 449 S.W.3d 727 (Ky. 2014).

See also “Charters, constitutions, and bylaws,” Kamchi v. Weissman, 1 N.Y.S.3d 169 (N.Y. App. 2014), in the Recent Developments section of this newsletter.

Legal Developments

Removal of Church Board Members

If a church neglects to address an issue in its governing documents, state nonprofit corporation law will provide the answer.

Richard R. Hammar, Attorney, CPA
Bio

Key point 6-02.2. Churches are subject to the provisions of their governing documents, which generally include a charter and a constitution or bylaws (in some cases both). A charter is the state-approved articles of incorporation of an incorporated church. Most rules of internal church administration are contained in a constitution or bylaws. Specific and temporary matters often are addressed in resolutions. If a conflict develops among these documents, the order of priority generally is as follows—charter, constitution, bylaws, and resolutions.

Key point 6-06.4. Church officers and directors can be removed from office in the manner authorized by the church's governing documents. It is common for church bylaws to give the membership the authority to remove officers and directors who engage in specified misconduct or change their doctrinal position.

A Florida court ruled that state nonprofit corporation law governed the removal of board members in a church that did not address the issue in its governing documents.

A pastor and a member of a church's board of directors (the "defendants") attempted to remove the four other members of the board (the "plaintiffs") and replace them with new members. When the ousted board members discovered what had happened, they entered into protracted negotiations to resolve the dispute without recourse to litigation. When that failed, the former board members sued the defendants, alleging breach of contract, breach of fiduciary duty, and fraud. A trial court dismissed the case on the basis of the "ecclesiastical abstention" doctrine which generally bars the civil courts from resolving internal church disputes. The court noted that any attempt on its part to resolve the dispute "would necessarily and excessively entangle this court in doctrinal and theological issues." The plaintiffs appealed.

A state appeals court ruled that the ecclesiastical abstention doctrine did not prevent it from resolving this case. It observed: "Plaintiffs are not categorically prohibited from ever seeking redress from the courts solely because a religious organization is somehow involved in the dispute. When a church-related dispute can be resolved by applying neutral principles of law without inquiry into religious doctrine and without resolving religious controversy, the civil courts may adjudicate the dispute …. Nothing in the record indicates that the plaintiffs have sought judicial intervention concerning any aspect of church governance. Instead, they allege that the defendants, acting without authority, attempted to remove specific board members from the organization in derogation of the requirements of [the Florida nonprofit corporation law]."

The court noted that the state nonprofit corporation law (under which the church was incorporated) specified the procedure to be followed in removing board members of nonprofit corporations, and stipulated that these procedures applied only to the extent that a corporation's articles of incorporation or bylaws did not address the issue. The court found nothing in the church's articles of incorporation or bylaws addressing the removal of board members, and so, by default the state nonprofit corporation law applied. The court concluded:

The church in the instant case did not decide this aspect of church governance for itself; the bylaws of the church do not address the composition of the board, the removal of board members, or any similar aspect of corporate management. Because the church in the instant case had no bylaws governing the removal of board members, [the nonprofit corporation law] dictates the required procedures.

Because the statute unambiguously establishes procedures of uniform law, the instant dispute can be resolved by applying neutral principles of law without inquiry into religious doctrine and without resolving a religious controversy. Thus, the allegations in the complaint may be evaluated without recourse to any policy, practice, or doctrine of the church. The court is not asked to interpret religious doctrine or to evaluate church policies. The allegations at the heart of the complaint—that the defendants improperly attempted to remove members of the board of trustees—are entirely controlled by neutral application of [the nonprofit corporation law] …. This is not an instance where the court's involvement would transgress upon the exclusive authority granted to churches under the First Amendment "to decide for themselves, free from state interference, matters of church government."

What this means for churches

There are a couple of points to note about this case. First, the court concluded that the civil courts do not necessarily have to refrain from resolving internal church disputes. The resolution of such disputes is barred by the First Amendment only if an inquiry into church doctrine would be required. Second, the court applied state nonprofit corporation law in determining the procedure for removing church board members since the church had not addressed this issue in its governing documents. This illustrates the basic principle that state nonprofit corporation law is a "gap filler." An incorporated church is generally free to address issues of administration and governance in its articles and bylaws in any manner it chooses, free from state interference. But, if it neglects to address an issue in its governing documents, then state nonprofit corporation law will provide the answer. Bendross v. Readon, 89 So.3d 258 (Fla. App. 2012).

Legal Developments

Injuries on the Playground

Court rules church not liable for injuries based on gross negligence.

Richard R. Hammar, Attorney, CPA
Bio

KEY POINT 6-08 State and federal laws provide limited immunity to uncompensated officers and directors of churches and other charities. This means that they cannot be personally liable for their ordinary negligence. However, such laws contain some exceptions. For example, officers and directors may be personally liable for their gross negligence or their willful or wanton misconduct.

* An Arkansas court ruled that a church was not liable on the basis of gross negligence for injuries to a young child who was pushed off a piece of playground equipment by another child. A mother was required to sign a release when she enrolled her 3-year-old daughter (the "victim") in a church's preschool program. The release specified that the church would be liable only for gross negligence. The victim was injured when she was shoved off a piece of elevated playground equipment by a 3-year-old boy. The mother sued the church, claiming that it was responsible for her daughter's injuries on the basis of its gross negligence in failing to adequately supervise children playing on the elevated equipment. A trial court dismissed the case on the ground that the church had not been grossly negligent. A state appeals court affirmed this ruling. It defined gross negligence as "the intentional failure to perform a manifest duty in reckless disregard of the consequences as affecting the life or property of another," and concluded that the church's acts did not satisfy this definition. It concluded: "Under this analysis, we cannot say that the trial court erred by granting summary judgment on the grounds that there was no evidence of an intentional failure on the part of the daycare to perform a manifest duty. There was evidence that the three-year-old who pushed [the victim] off of the playground equipment had behavioral problems involving aggression toward daycare personnel and other children, but there was nothing to show that these problems were so unusual or severe that there was a manifest duty on the part of the daycare to segregate the boy from the other children during supervised play."

The court referred to an earlier case in which a school was found not to have been grossly negligent as a result of a bus driver's failure to prevent a girl from being raped by a male student. The court in the previous case concluded:

We cannot say that [the bus driver's] conduct rose to the level of gross negligence or reckless indifference. There is no evidence showing that he intentionally failed to perform a manifest duty in reckless disregard of the consequences as affecting the life of [the victim] nor that he intentionally performed an act of an unreasonable character in disregard of a risk to [the victim] that was known to him or so obvious that he must be taken to have been aware of it, and so great as to make it highly probable that harm would follow …. The [victim alleged that the bus driver] was grossly negligent or recklessly indifferent because he knew that [the assailant] was a problem student that he had to keep his eye on and failed to do so. However, [the victim] failed to provide any evidence that such a failure was in any way intentional …. [The victim] also asserted that [the driver] was grossly negligent or recklessly indifferent because of his knowledge of an incident during the prior year when Mary complained to Baum that another student, Kenny, had improperly touched her. Appellants contended that such earlier incident put him on notice that inappropriate sexual conduct had occurred on the bus. However, there was no evidence of an intentional failure to perform a manifest duty or intentional performance of an act with disregard of a known or obvious risk as a result of the earlier incident. Appellant does not cite any authority, and we know of none, that holds that an incident involving another student during the previous year establishes that a failure to observe or respond to an unobserved incident a year later rises to the level of gross negligence or reckless indifference. Appellants have failed to provide evidence to support the allegation that Baum intentionally failed to perform a manifest duty or act with disregard of a known or obvious risk on the day the incident occurred with regard to James. Applying our standard of review of summary-judgment cases to the present case, we hold that there exists no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law on the issues of gross negligence and reckless indifference. Doe v. Baum, 72 S.W.3d 483 (Ark. 2004).

Application. This case is important because of the court's definition of gross negligence. Church leaders should be familiar with the concept of gross negligence, since such behavior not only exposes a church to punitive damages in most states, but it also exposes members of the church board to personal liability. While the definition of gross negligence varies slightly from state to state, this court stressed the necessity of intentionality in failing to perform a duty to protect others from injury. While the church's preschool workers may have been inattentive, and even negligent, in their supervision of the young children on the elevated playground equipment, their conduct did not rise to the level of an intentional failure to perform their duty of care in supervising the children. On the other hand, it is possible, if not likely, that church board members who refuse to implement a policy for the screening of children's workers would be deemed grossly negligent in the event that a registered sex offender is hired to work with children and later molests one or more of them. The board's refusal to implement such a policy might well be deemed by a jury to constitute an intentional breach of the duty of care the church owes to children, thereby exposing the board members to individual liability. The same might be true if a church board allows minors to be transported to an off-campus activity in a fully loaded church-owned 15- passenger van. In either case, the actions of the church board might be deemed to be grossly negligent, thereby eliminating the limited immunity from personal liability that is otherwise enjoyed by uncompensated board members of nonprofit corporations. 2007 WL 1277900 (Ark. App. 2007).

Legal Developments

Church Members Sue for Breach of Fiduciary Duties

Court rules that the First Amendment bars it from resolving the complaint.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

Church Members Sue for Breach of Fiduciary Duties

Court rules that the First Amendment bars it from resolving the complaint.

Richard R. Hammar, J.D., LL.M., CPA

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.

The North Carolina Supreme Court ruled that it was barred by the First Amendment from resolving a complaint by church members that their pastor and two other church officials had breached their fiduciary duties by improperly using church funds. An independent church hired a new pastor. Shortly after being installed, the pastor began recommending various changes in church government. At a congregational meeting, the members approved a new set of bylaws for the church. The bylaws created an internal governing body, the “council for ministry,” with broad authority to manage the business and affairs of the church. Some members expressed concern over the changes. On several occasions they requested access to the church’s financial records, but were denied. Some of the concerned members (the plaintiffs) asked a court to compel the church to honor their request to inspect church records pursuant to the authority vested in them by the state nonprofit corporation law. A court ordered the church to turn over the documents the plaintiffs requested. After reviewing the documents, the plaintiffs believed that church funds had been misappropriated by the pastor, a church secretary, and the chairman of the board of trustees (the defendants). The plaintiffs, on behalf of the church, sued the defendants alleging conversion of funds, breach of fiduciary duty, and civil conspiracy. The plaintiffs sought a return of the disputed funds and punitive damages. The defendants asked the church to dismiss the lawsuit on the ground that it involved internal church matters that were beyond the jurisdiction of a civil court. The court declined to dismiss the case, and the defendants appealed.

The state supreme court ruled that the First Amendment guaranty of religious liberty prevented the civil courts from resolving the plaintiffs’ claims. The court noted that the plaintiffs alleged that the pastor and other defendants usurped the governmental authority of the church’s internal governing body, and breached their fiduciary duties by improperly using church funds, which constitutes conversion. The court concluded:

Determining whether actions, including expenditures, by a church’s pastor, secretary, and chairman of the board of trustees were proper requires an examination of the church’s view of the role of the pastor, staff, and church leaders, their authority and compensation, and church management. Because a church’s religious doctrine and practice affect its understanding of each of these concepts, seeking a court’s review of the matters presented here is no different than asking a court to determine whether a particular church’s grounds for membership are spiritually or doctrinally correct or whether a church’s charitable pursuits accord with the congregation’s beliefs. None of these issues can be addressed using neutral principles of law. Here, for example, in order to address plaintiffs’ claims, the trial court would be required to interpose its judgment as to both the proper role of these church officials and whether each expenditure was proper in light of the church’s religious doctrine and practice, to the exclusion of the judgment of the church’s duly constituted leadership. This is precisely the type of ecclesiastical inquiry courts are forbidden to make ….

Because no neutral principles of law exist to resolve plaintiffs’ claims, the courts must defer to the church’s internal governing body, the council for ministry, thereby avoiding becoming impermissibly entangled in the dispute. Having been delegated broad oversight authority by the congregation, the council for ministry has already considered some expenditures challenged by plaintiffs, taken action, and declared the matter closed. Plaintiffs’ complaint does not challenge the authority of the council for ministry or argue that the council did not follow its own internal governance procedures. Plaintiffs simply object to the council’s determination that the expenditures were proper. Although it has not specifically considered every issue raised by plaintiffs, as the church’s internal governing body, the council for ministry is the only authority constitutionally permitted to decide matters that cannot be resolved using neutral principles of law. Unless the church, through its congregation and following proper internal procedures, revokes the council for ministry’s authority to resolve church disputes, plaintiffs must raise their concerns with the council for ministry and accept the resolutions reached by that governing body.

The court rejected the plaintiffs’ claim that since the church was incorporated the state nonprofit corporation law could be used to resolve the dispute. It simply noted that “a church that incorporates under the North Carolina Nonprofit Corporation Act does not forfeit its fundamental First Amendment rights. Regardless of a church’s corporate structure, the Constitution requires courts to defer to the church’s internal governing body with regard to ecclesiastical decisions concerning church management and use of funds.” Harris v. Matthews, 643 S.E.2d 566 (N.C. 2007)

This Recent Development first appeared in Church Law & Tax Report, January/February 2008.

Legal Developments

Internal Church Disputes

The courts will not resolve disputes regarding a church’s spiritual or ecclesiastical affairs.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

Internal Church Disputes

The courts will not resolve disputes regarding a church’s spiritual or ecclesiastical affairs.

Richard R. Hammar, J.D., LL.M., CPA

Key point 9-07. The First Amendment allows civil courts to resolve internal church disputes so long as they can do so without interpreting doctrine or polity.

* An Alabama court rejected a request by church members to compel a church board to call a general membership meeting for the purpose of taking a vote of confidence on the pastor. Several church members began expressing dissatisfaction with their senior pastor’s effectiveness. Many concerns were shared with members of the church board. The board investigated the complaints, counseled with the pastor about the concerns, and formulated plans to resolve the matter. The board then held a meeting at which it passed a vote of confidence in the pastor. Some of the members of the church were unhappy with the board’s decision and filed a lawsuit seeking a court order compelling the board to call a meeting of the members to allow the church to consider the retention of the pastor. A trial court granted the requested relief, and ordered a membership meeting on a specified date. The pastor and board appealed, arguing that the dispute was ecclesiastical in nature and not within the jurisdiction of a civil court. The dissenting members insisted that the dispute arose from differing constructions of the church’s articles of incorporation and bylaws and not from an ecclesiastical dispute.

A state appeals court began its opinion by observing that “the courts will not assume jurisdiction, in fact has none, to resolve disputes regarding [a church’s] spiritual or ecclesiastical affairs. However, there is jurisdiction to resolve questions of civil or property rights.” The court concluded: “The board’s decision not to call a meeting to discuss the issues [the dissenting members] seek to raise because the board did not think that the spiritual health of the church would be advanced by such a meeting is an ecclesiastical decision of the church government and cannot be overridden by a civil court. In other words, the trial court did not have jurisdiction to entertain this lawsuit insofar as it requested that the board be compelled to call a general membership meeting. Accordingly, this appeal from the trial court’s order requiring that a general meeting be called to deal with the dissident members’ grievance is dismissed.” McGlathery v. Richardson, 2006 WL 1529701 (Ala. App. 2006).

Legal Developments

First Amendment Bars the Civil Courts from Intervening in Church Elections

A New Jersey court ruled that a trial court acted improperly in overseeing a church business meeting and the election of a pastor.

Richard R. Hammar, Attorney, CPA
Bio


Key point 6-06.1 . Churches select their officers and directors in various ways. For example, it is common for members of a church board to be elected by the church's membership, while officers are elected by the board. The civil courts generally refrain from resolving disputes involving the selection of church officers and directors on the ground that the first amendment guaranty of religious freedom prevents them from becoming involved in ecclesiastical disputes.

Key point 6-09.2. Church members have such legal authority as is vested in them by their church's governing documents, and in some cases by state nonprofit corporation law.

A New Jersey court ruled that a trial court acted improperly in overseeing a church business meeting and the election of a pastor in a church that was beset with internal strife over doctrinal issues.

A Baptist church was organized in 1980. The church's bylaws describe church governance and administration. The bylaws establish three bodies to govern the affairs of the church—an executive board, a board of trustees, and a board of deacons. The executive board consists of the pastor, the board of trustees, and the board of deacons; it meets monthly and discusses all matters of the church, spiritual and financial. The trustee board consists of nine to eleven members elected annually and holds in trust all property belonging to the church, and designates the bank where the funds of the church shall be deposited. The deacon board assists the pastor in his spiritual work and consists of deacons appointed by a "free vote of the church, after recommendation by the pastor and deacons who possess the qualifications as recorded in 1 Timothy 3:8-13." In addition, there is an advisory council, consisting of the elected officers of the church and the chairs of all standing committees. The council is authorized to review and amend all agenda items before presentation to the church. Other officers include a treasurer, a financial secretary, and a clerk.

The bylaws specify that election of church officers is to be held during annual meetings of the church in the third week of November. The bylaws prescribe the process for nominating persons for church office. The advisory council appoints a nominating committee who prepares a list of members qualified to hold the various church offices, interviews the candidates to ascertain their willingness to serve, nominates one or more persons from the list for each office, and reports the nominees to the congregation. In addition, any member present at the annual meeting and qualified to vote has the privilege of nominating "any eligible person for any office not so nominated."

The church hired a senior pastor in 1989 and entered into a "pastoral agreement" obligating him to be cooperative, act in agreement with the deacons, remain in accord with the executive board, abide by the church constitution and bylaws, and espouse Baptist doctrines. In 1994, the pastor began efforts to implement a "full gospel" ministry at the church, a doctrinal teaching at odds with church theology before his arrival on the scene. Despite the executive board's disapproval, in 1997 and 1998 the pastor took several steps to advance the full gospel ministry at the church, including bringing a full gospel bishop to the church to instruct the executive board on full gospel theology, taking church members to a full gospel Baptist conference, and petitioning the deacon board for spiritual and financial support for the full gospel ministry. Based on the recommendation of the deacon board, the executive board voted to call on the pastor to honor all aspects of his pastor agreement and, if he could not, to inform him that steps would be taken to remove him from office. In addition, the executive board voted to forbid Carlton from introducing any full gospel teachings at the church's worship services. Carlton, apparently, agreed to abide by these recommendations. However, he later attacked the executive board and told the congregation that "I am going to do what I have to do." The executive board and the advisory council voted to terminate the pastor.

The decision to remove the pastor created such a tumult within the church that the executive board padlocked church doors and suspended church services. The pastor's supporters held an outdoor meeting at which time they retained the pastor, abolished the church's executive board and advisory council, abolished the church bylaws, and appointed a new 5-member committee to draft new bylaws. A civil lawsuit was filed to determine which group controlled the church. A trial court appointed an attorney as "moderator" to assist the court in resolving the underlying dispute between the parties. Specifically, the moderator was empowered to (1) establish the criteria for membership and the eligibility of members of the church to participate and vote at the annual meeting; (2) determine the issues to be presented at the meeting; (3) determine the voting procedures at the meeting; (4) determine the ballot questions to be presented at that meeting; (5) establish the form and manner of notice to be given; (6) resolve any other matters that would permit a fair and reasonable membership meeting to occur.

The moderator designated seven members of the church to serve as the nominating committee and directed that the committee propose a slate of candidates for the following positions: board of trustees, treasurer, financial secretary, clerk, and superintendent of Sunday school. After determining voter qualifications, the moderator supervised the annual meeting in which the pastor's supporters prevailed by a vote of 180 to 153. As a result, ecclesiastical control of the church passed from the church's executive board to a board comprised of the pastor's supporters. In a subsequent meeting, the congregation voted to retain the pastor by a vote of 152 to 125.

Several of the ousted church leaders appealed the court's ruling. The ousted leaders claimed that the church elections were void because they were contrary to the church's bylaws that vested ecclesiastical authority to determine the eligibility of nominees for church office exclusively in internal church governing bodies. By holding that nominations could be made by the membership without prequalification by the nominating committee the trial court impermissibly intruded into matters of church governance, practice, and polity. The pastor and his supporters argued that the trial court correctly interpreted church law to mean that the only rule is that the majority rules and that their faction represented the majority.

A state appeals court concluded that "in the absence of clear and unambiguous direction in church law, an intrachurch dispute over eligibility for nomination to church office, implicating as it does the more fundamental question of church governance and congregational structure, does not present a proper issue for judicial consideration." It concluded,

Irrespective of the approach used, courts are admonished to scrupulously avoid incursions into questions of ecclesiastical polity or doctrine that would be constitutionally impermissible. To be sure, the task of reconciling respect for the autonomy of religious organizations with the responsibility of courts to resolve conflicts involving civil matters is a difficult one. Admittedly, in some instances there is a gray zone between express secular terms and religious doctrine, and the distinction between the court's duty to abstain from religious questions and to decide legal disputes is blurred. Complicating the matter is the fact that the once simple dichotomy between hierarchical and congregational polities does not reflect the diversity of contemporary denominational structures ….

In the present case, the trial court adjudicated no simple property or contract dispute but rather an essential issue of church governance, polity, and administration—namely whether the church is a true democracy controlled by its membership or a more republican, representative structure governed by internal ecclesiastical bodies. Purporting to apply so-called "neutral principles" of law, the trial court opted for the former based on an interpretation of church bylaws that vested nominating authority in any church member without prior screening and recommendation by the nominating committee …. We conclude that the trial court's ruling in this regard was an inappropriate application of "neutral principles" jurisprudence. First and foremost, the method of neutral principles does not allow for construction of church documents if their interpretation is the focus of dispute and if such documents are not so clear, provable, and express that the civil courts could enforce them without engaging in a searching, and therefore impermissible, inquiry into church polity. Here, the issue of eligibility for office was a highly controverted question of faith within the congregation. Despite the obvious division of opinion, the basis for the trial court's resolution allowing for floor nominations is unclear, as are the rules of common law it relied upon to structure the church-member relationship implicated in this matter. In essence, the trial judge interpreted the term "eligible" to be without any religious significance despite plaintiff's contrary contention that the nominating committee pre-screens candidates for spirituality and religiosity. We emphasize that the application of neutral principles does not require courts to "neutralize" ecclesiastical words.

In the absence of clear direction in church law, judicial inquiry into church procedures is precluded. Although courts may intervene to determine whether established procedures of a religious organization, as proven, have been followed, courts should not intervene where such procedures are … less than clearly defined, or ambiguous. Because of such uncertainty, resolution of intrachurch disputes cannot be made without extensive, and therefore impermissible, inquiry into religious law and polity …. In this case, inquiring whether the nominating committee has exclusive ecclesiastical authority to determine eligibility necessitates interpretation of ambiguous religious law, the resolution of which would require a deeper probe into the congregational structure and allocation of power within the church. For instance, in the absence of an express procedure in the church bylaws, inquiry need be made as to where within the church the rules of polity, accepted by its members before the schism, had placed ultimate authority over the eligibility question …. Simply stated, neutral principles of civil law do not include standards for judging appropriate qualities for church leadership ….

Application of these principles compels judicial abstention in this case. The trial court's opposite conclusion … unwittingly entrenched itself in church affairs …. The court below became entangled in election procedures, appointing a monitor with broad powers to determine not only qualifications of voters, but in essence qualifications for office. Unfortunately, the court's involvement did not end there. After approving the results of the election for church officers, the court, through its appointed representative, continued to monitor and supervise the pastoral election after first designating those members responsible for recommending candidates to the church for consideration and vote, a task that the bylaws clearly and expressly assign elsewhere.

What this means for churches

This case presented the difficult question of the appropriate role the civil courts should play in overseeing church elections. The court concluded that the first amendment bars the civil courts from intervening in church elections involving questions of ecclesiastical polity or doctrine. Such was the case here, since the basic questions involved the selection of the church's pastor and lay leaders. The opposite conclusion would entangle the civil courts in church affairs. The court concluded that it could intervene in an internal church dispute to see if a church had followed its own procedures, but only if those procedures were clear and "proven" and a decision could be made without "extensive, and therefore impermissible, inquiry into religious law and polity." Solid Rock Baptist Church v. Carlton, 789 A.2d 149 (N.J. Super. 2002).

Legal Developments

Court To Determine Whether Board Members May Serve

In a few cases, a court may resolve such disputes.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-05-01

Officers, Directors, and Trustees

Richard R. Hammar, J.D., LL.M., CPA

• Key point. The civil courts have consistently ruled that they cannot resolve disputes concerning the eligibility and status of church board members if any consideration of religious doctrine would be required. However, a small minority of courts have ruled that they can resolve such disputes if they can do so without considering religious doctrine.

A Missouri court ruled that it could determine whether two board members of a religious organization were qualified to serve, since it could do so without considering religious doctrine. A synagogue created a subsidiary corporation and transferred all of its property to the subsidiary in an attempt to protect its assets from liability. The subsidiary was incorporated as a nonprofit corporation under state law. Its bylaws specified that board members had to be members of the synagogue. A dispute arose among members of the subsidiary’s board, and two board members filed a lawsuit against other board members, and attempted to oust other board members and install new ones. In response to these actions, the board voted to expel the two dissident members. The two dissidents refused to honor this vote, but they did nothing to challenge it. The board then asked a court to determine that the dissidents were not qualified to serve as directors since they were no longer members of the congregation as required by the bylaws, and to remove them from office. A trial court refused, noting that this case involved “an ecclesiastical matter not to be decided by this court.” The board appealed, and a state appeals court ruled that it did have the authority to resolve the dispute. The court acknowledged that it had no authority to resolve ecclesiastical matters, and that “the removal or expulsion from a congregation is a matter for an ecclesiastical tribunal to decide and its decision thereon is binding and not reviewable by the civil courts.” However, in this case the two dissidents had already been removed, and their removal was not the issue. Rather, the court was asked to determine whether or not the dismissed board members were eligible to continue serving on the board. The court observed that “the true issue raised and presented for review is whether [the two dissidents] qualify to continue as directors of the board .” It then referred to state nonprofit corporation law:

When the incorporators decided to incorporate under the not for profit laws of Missouri, they submitted it to the state courts’ jurisdiction in all matters of a corporate nature. Under the not for profit corporation laws in Missouri, the corporation is authorized to promulgate bylaws for the administration and regulation of its affairs …. Under the laws of Missouri, the directors of the not for profit corporation are authorized to manage the corporation [and their] qualifications as directors may be prescribed by the articles or bylaws.

The court noted that the subsidiary corporation’s bylaws specified that the board members were to be elected by the entire board, that eligible candidates included those persons who were members of the congregation, and that the board was empowered to remove directors. The court noted that even apart from a specific bylaw provision, “the body which appoints a director may remove a director.” It then concluded:

The bylaws herein at issue specify that the directors shall serve their term unless sooner removed or disqualified. A director is no longer qualified to serve if he is not a member of the congregation. Nothing in the statutes prevents [the board] from seeking to initiate the court’s jurisdiction to enjoin [the two dissident board members] from serving as directors …. Such a cause of action involves nothing of an ecclesiastical nature. Although this care arises out of a religious dispute, we are of the opinion that to resolve the matter does not require the court to become entangled in religious doctrine or unconstitutionally interfere with a religious body’s affairs. Here, the court has jurisdiction to inquire as to what the bylaws require and determine the degree of the parties’ adherence to them. The inquiry focuses on the parties’ in their capacity as directors of a not for profit corporation organized under the laws of Missouri, not as congregation members seeking rights under ecclesiastical law.

Application. Consider the following: (1) The court’s ruling represents a minority view. Most courts would have viewed this dispute as ecclesiastical in nature—concerning the status of board members of a religious organization—and would have refused to intervene. (2) The congregation incorporated a subsidiary corporation and transferred assets to it in order to protect the congregation’s assets from liability. A number of religious organizations have done the same thing. Unfortunately, such arrangements will not protect the congregation’s assets from liability if the congregation exercises control over the subsidiary (as is almost always the case). (3) Some religious organizations have attempted to establish self-perpetuating boards. The legal validity of such boards has been questioned by some. While the court in this case did not directly address this issue, it is perhaps worth noting that the court recognized that the subsidiary’s board was self-perpetuating but made no comments regarding the legality or propriety of such boards under nonprofit corporation law. (4) The court noted that religious organizations that incorporate under their state’s nonprofit corporation law “submit to the state’s jurisdiction in all matters of a corporate nature.” This means that those administrative or corporate matters that are not addressed in a church’s articles of incorporation or bylaws will be resolved on the basis of nonprofit corporation law. (5) The dismissed board members argued that their dismissal should not be recognized as final since they never “exhausted” or pursued their ecclesiastical remedies within the congregation. The court rejected this argument, noting that the civil courts ordinarily will not resolve church disciplinary decisions if the disciplined member failed to exhaust appeal remedies under the church’s bylaws. The court noted that “without an ecclesiastical remedy being initiated by them, we consider their expulsion from the congregation as final and binding.” (6) The court observed that “the body which appoints a director may also remove a director.” This principle will be relevant to those churches whose bylaws make no provision for the removal of officers or directors. Beth Hamedrosh Hagodol Cemetery v. Levy, 923 S.W.2d 439 (Mo. App. 1996). [Church Officers, Directors, and Trustees, Judicial Resolution of Church Disputes]

© Copyright 1997, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m56 c0397

Legal Developments

Limited Liability of Charitable Organizations

Does this limitation extend to officers and directors?

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax1994-03-01Recent Developments

Personal Injuries – On Church Property or During Church Activities

Richard R. Hammar, J.D., LL.M., CPA

• Key point: A few states limit the amount of money damages that can be collected against a church or other charity. However, these laws do not necessarily protect officers or directors who are sued personally.

• The Supreme Judicial Court of Massachusetts ruled that a state law limiting the liability of charitable organizations to $20,000 does not apply to officers and directors of a charitable organization who are sued personally. A fire occurring on the premises of a nonprofit center for battered women and children killed two women. A lawsuit was filed against the charity that owned and operated the center. The lawsuit also named the four officers of the charity. Massachusetts law contains the following provision limiting the liability of charities to $20,000 in most cases:

It shall not constitute a defense to any cause of action based on tort brought against a corporation, trustees of a trust, or members of an association that said corporation, trust, or association is or at the time the cause of action arose was a charity; provided, that if the tort was committed in the course of any activity carried on to accomplish directly the charitable purposes of such corporation, trust, or association, liability in any such cause of action shall not exceed the sum of twenty thousand dollars exclusive of interest and cost. Notwithstanding any other provision of this section, the liability of charitable corporations, the trustees of charitable trusts, and the members of charitable associations shall not be subject to the limitations set forth in this section if the tort was committed in the course of activities primarily commercial in character even though carried on to obtain revenue to be used for charitable purposes. General Laws c. 231, sec. 85K.

On the basis of this provision, the court ruled that the charity that owned the center could not be liable for more than $20,000. The court observed:

Section 85K shields charitable organizations from tort liability in excess of $20,000 for torts committed in the course of any activity carried on to accomplish directly the charitable purpose of the organization. The purpose of the statutory limitation on damages is to protect the funds and other assets of charitable institutions so they may be devoted to charitable purposes. While we have expressed concerns about the paltriness of the $20,000 cap, we have sustained [it] against a variety of challenges. The statute must be given the scope intended for it by the legislature.

However, the court ruled that the charity’s officers could be sued personally. It observed: “[I]n our opinion, it is obvious that the provisions of [the statute] do not shield a trustee of a charitable organization from unlimited personal liability …. [The statute] which limits the liability of charitable corporations, as well as the liability of trustees of charitable trusts, does not purport to limit the individual liability of a charitable corporation’s officers of board members.” Morrison v. Lennett, 616 N.E.2d 92 (Mass. 1993).

See Also: Personal Liability of Officers, Directors, and Trustees | Negligence as a Basis of Liability – Defenses

© Copyright 1994, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m58 m56 c0294

Legal Developments

Breach of Fiduciary Duties

A court ruled that the directors of a charitable trust could be sued for breach of fiduciary duties.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-11-01 Recent Developments

Officers, Directors, and Trustees

Richard R. Hammar, J.D., LL.M., CPA

• A New York appeals court ruled that directors of a charitable trust could be sued for breaching their fiduciary duties. A child of the founder of the trust filed a lawsuit seeking to remove 8 of the trust’s 11 directors. He asserted that the 8 directors breached their fiduciary duties, mismanaged the trust’s investments, and negligently selected the trust’s investment advisor. A trial court dismissed the lawsuit on the basis of the “business judgment rule,” and the case was appealed. A state appeals court reversed the trial court’s judgment, and ruled that the 8 directors could be sued. It began its opinion by noting that the New York Not-For-Profit Corporation Law requires that the officers and directors of a nonprofit corporation “discharge the duties of their respective positions in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.” Moreover, the court observed, “it is well established that, as fiduciaries, board members bear a duty of loyalty to the corporation and may not profit improperly at the expense of their corporation.” In this case, the lawsuit alleged that the 8 directors (1) breached their duty of loyalty to the charitable trust by selecting an investment company of which they were either owners or agents, and then attempting to cover up this improper relationship; (2) mismanaged the trust’s investments by authorizing the investment of a substantial portion of the trust’s assets in speculative securities and in the stock of a company with direct ties to the directors; and (3) authorized excessive trading in securities, thereby incurring substantial commissions. The court concluded that the “business judgment rule” (which protects directors from any liability for their reasonable and good faith decisions) did not apply in this case, since it was not available “when the good faith or oppressive conduct of the officers and directors is in issue.” This case illustrates a very important point—the officers and directors of nonprofit corporations (including churches) owe fiduciary duties of care and loyalty to their corporation. They are subject to removal, and possibly to money damages, for breaching these duties. How may this happen in the context of church directors? This case suggests that church directors should refrain from investing church funds in speculative investments, or in companies or projects in which they have a personal interest. Scheuer Family Foundation, Inc. v. 61 Associates, 582 N.Y.S.2d 662 (A.D. 1 Dept. 1992).

See Also: Personal Liability of Officers, Directors, and Trustees

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m56 c0692

Legal Developments

Charitable Immunity Law and Sexual Misconduct

Does a charitable immunity law protect from liability for sexual misconduct?

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax1992-05-01Recent Developments

Personal Injuries – On Church Property or During Church Activities

Richard R. Hammar, J.D., LL.M., CPA

• A New York court ruled that a “charitable immunity” law granting limited legal immunity to the uncompensated directors of a nonprofit organization did not protect a church’s trustees from liability for the sexual misconduct of their minister. An unincorporated church and its trustees were sued as a result of their minister’s alleged rape of a number of minor females in the church. Among other things, the lawsuit alleged that the church and trustees were responsible for the victims’ suffering as a result of their “negligent supervision” of the minister’s actions. In their defense, the trustees relied on a state law granting uncompensated directors of nonprofit organizations limited immunity from liability for their actions. The court rejected this defense for two reasons: “The [trustees] did not present presumptive evidence of uncompensated status in that they did not present an affidavit of a chief financial officer of the [church]. Further, there is a reasonable probability that the specific conduct of such [trustees] constitutes gross negligence. If the [trustees] did act as the [victims] allege, they may be found to have proceeded in reckless disregard of the consequences of their acts.” This case illustrates two very important limitations associated with many state laws conferring immunity on the directors of nonprofit organizations. First, such laws typically only apply to uncompensated directors. This case illustrates that directors must be prepared to submit appropriate evidence to a court of their uncompensated status (such as an affidavit of the church treasurer). Second, the case illustrates that director immunity laws generally do not apply to “gross negligence” or “reckless conduct.” Finally, it is interesting to note that the court ruled that the unincorporated church should be dropped as a defendant in the lawsuit, presumably because or its unincorporated status. This probably explains why the church’s trustees were sued personally. Church officers and directors should keep in mind this potential basis of liability when considering the unincorporated form of organization. Karen S. v. Streitferdt, 568 N.Y.S.2d 946 (A.D. 1 Dept. 1991).

See Also: Personal Liability of Officers, Directors, and Trustees | Theories of Legal Liability | Immunity Statutes

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m58 m67 m56 m09 m77 c0392

Legal Developments

Tax Court Denies Deductions for Alleged Contributions

A church trustee’s deductions were denied.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1991-11-01 Recent Developments

Charitable Contributions

Richard R. Hammar, J.D., LL.M., CPA

• The Tax Court denied a charitable contribution deduction to a church trustee for alleged contributions made to his church. In 1972, the trustee (who also served as choir leader and youth director of his church) purchased a home jointly with the church’s pastor. A few years later, the trustee transferred his interest in the home to the pastor. However, the trustee continued to live in the home. In 1983, the trustee claimed an income tax deduction for cash contributions to the church in the amount of $9,354.10. Attached to the trustee’s tax return was a letter from the pastor which stated: “Please be advised that the amount of monies reflected below indicates your contributions given to the church during the Year: Tithes (20%) of $ 3,346.22, church dues of $36, freewill offerings of $468, and building fund drive for 1983 of $5,503.88, for a total of $ 9,354.10.” The IRS later audited the trustee’s 1983 return and denied a deduction for the claimed contributions. The IRS based its action on the ground that the trustee received direct personal benefits from the church in exchange for his “contributions” (including housing and support). Accordingly, the IRS asked the trustee to respond to several questions. When the trustee refused to do so, the IRS subpoenaed several documents pertaining to the trustee’s personal financial records as well as the records of the church. The trustee failed to respond to this subpoena, and a court ordered him to respond. The trustee still refused to respond. The case went to trial, and the Tax Court agreed with the IRS that no deduction was allowable. The court noted that a charitable contribution is a gift given to a charity with no expectation of a return benefit. The court continued:

In this case, petitioner testified that he lived with [the pastor]. He testified that he paid no rent to the church or pastor and he paid nothing for the running or maintenance of the household, such as utilities, real estate taxes, etc. [The trustee] presented no evidence of his personal living expenditures above and beyond the alleged “contributions” made to the church. Furthermore, the record contains no information about the income and expenditures of the church and, accordingly, we do not know whether funds received by the church were used to defray expenses in the running of [the pastor’s] house. Based upon the record in this case, it is reasonable to infer that any monies contributed by [the trustee] were used in the running of [the pastor’s] household. It is further reasonable to infer that any “contributions” made by [the trustee] to the [church] benefitted him and were in anticipation of such housing or other benefits and, thus, did not proceed from “detached and disinterested generosity.” Based on the record before us, we hold that [the trustee] has failed to prove that he made a “contribution or gift” to the church during 1983 ….

The court added that the trustee failed another requirement of a valid charitable contribution—that the contribution must be made to a tax-exempt organization. The court pointed out that one of the requirements for tax-exempt status is that no part of the net earnings of the organization inures to the benefit of a private individual. The court concluded that “we infer that any contributions made by [the trustee] to the [church] were used to pay his personal living expenses and, therefore, inured to his benefit.” Finally, the court assessed negligence penalties against the trustee, along with a $2,000 penalty for maintaining a frivolous position before the Tax Court.

What is the significance of this ruling? Consider the following points: (1) The decision illustrates that no charitable contribution deduction will be allowed if the donor expects to receive a benefit in return for the “contribution.” This principle applies in several contexts, including attempts by parents to deduct “contributions” for tuition they pay to a church school in which their child is enrolled, or payments to a pastoral counselor for counseling services. (2) The tax-exempt status of a church is jeopardized if any of the church’s assets are distributed to a private individual other than as reasonable compensation for services rendered, or in the furtherance of the church’s exempt purposes. This is an extremely important point that churches must keep in mind before distributing monies for the personal support of private individuals. Again, exceptions to this rule would be compensation, and distributions (such as benevolence distributions, or missionary support) in direct furtherance of the church’s exempt purposes. (3) Federal law currently permits the Tax Court to assess penalties of up to $25,000 for maintaining frivolous positions before the court (the court only assessed $2,000 in this case). (4) The court also assessed a penalty against the trustee for intentional disregard of tax law, noting that “this Court has repeatedly sustained the [penalty] involving an alleged charitable contribution to a ‘church’ where, in fact, the funds were used for personal and family expenses.” Williamson v. Commissioner, 62 T.C. 610 (1991).

© Copyright 1991, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 c0691

Legal Developments

Disputes Over Congregational Churches’ Property

A South Carolina court recently ruled on this issue.

Richard R. Hammar, Attorney, CPA
Bio

A South Carolina court ruled that a local Baptist church congregation had the authority to authorize its trustees to obtain financing to purchase a new building by mortgaging the existing facility.

In 1952, a minister deeded a church building and lot to 5 individuals as trustees of his church. The deed provided that the trustees would hold the property for the benefit of the congregation, and subject to the "laws" of the Baptist church.

In 1983, the church membership became divided over the issue of moving to a new building. The existing sanctuary had become dilapidated, and repairs were not feasible. The majority of the congregation voted to move to a new facility and to change the church's name. The minority resolved to remain in the old building and continue using the church's original name.

Two of the original trustees, representing the majority faction, deeded the old church property to themselves as trustees of the new church. Later, these same trustees mortgaged the old building to a local bank in order to secure financing to purchase a new church building. Two of the other original trustees filed a lawsuit seeking to have title to the old church building vested in themselves as trustees, and to invalidate the mortgage.

A state appeals court ruled that the congregation is the governing body in a Baptist church, and that "the actions of the [church] in changing its name, moving to a new location, transferring the property, and mortgaging it were valid and consistent with Baptist church policy." Further, "because such actions are ecclesiastical in nature, they are not reviewable by this court in the absence of fraud, collusion, or arbitrariness."

The court noted that the 2 trustees representing the minority faction did not have "standing" to sue because they were not members of the present congregation. Finally, the court felt that its decision was bolstered by the wording of the original deed, which was made subject to the "laws" of the Baptist church. It observed: "Surely by providing in their deed that the trustees would hold the property subject to the laws of the Baptist church, the [donors] knew that in the event of a schism in the church the majority would continue to control the property under Baptist church policy." Blair v. Blair, 396 S.E.2d 374 (S.C. App. 1990).

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Legal Developments

Members’ Right to Challenge Sale of Church Assets

Can members stop a board from selling church assets?

Richard R. Hammar, Attorney, CPA
Bio

Do church members have the authority to challenge the sale of church assets by the church board?

That was the question before the District of Columbia Court of Appeals in an important decision. Mount Jezreel Baptist Church was incorporated in 1883. The original certificate of incorporation stated that it was formed "for the purpose of religious worship … at the corner of Fifth Street and E Street, Southeast, in the City of Washington."

In 1982, after the safety of the historic church building became an issue, the pastor and board of trustees decided to close the church and move to a new location. For at least ten years prior to the sale of the church property, relations between the board of trustees and a segment of the congregation became increasingly hostile.

After the sale of the church building, a group of the dissidents filed a lawsuit alleging that the trustees and pastor had violated their fiduciary duty as trustees to hold church properties for the purposes specified in the corporate charter (i.e., to conduct religious worship "at the church building on the southeast corner of Fifth Street and E Street"). The dissidents further alleged that the board of trustees and pastor had "improperly managed the church's assets and business affairs" and had exceeded their authority in selling the church building.

The dissidents claimed they were attempting to "salvage the historic old Mount Jezreel church building." A trial court dismissed the lawsuit on the ground that the dissidents were not members of the church and accordingly lacked "standing" to sue. The dissidents appealed this ruling. The appeals court noted that there were two questions—whether the dissidents had "standing" to filed the lawsuit against the board of trustees and pastor, and if so whether church members have the legal authority to challenge the decisions of a church board.

The court concluded that most of the dissidents did have standing, since they were lawful members of the church. It acknowledged that the congregation had voted in an annual business meeting to automatically dismiss any member who filed a lawsuit against the church. However, this action was taken after this lawsuit was filed. At the time the dissidents sued the board of trustees and pastor, they were members of the church, and this was all that was necessary to have "standing" to sue.

Next, the court addressed the question of whether church members have the legal authority to sue church trustees for the wrongful transfer of church property. The dissidents pointed out that title to the church's properties was in the name of the trustees who held church properties "in trust" for the members of the congregation, and that church members were "trust beneficiaries" who could sue the trustees for improper or unauthorized transactions with respect to those properties.

The court observed: "Although title to the church property is vested in the trustees or directors, the property itself is held in trust for the uses and purposes named and no other. Because the church was incorporated for the purpose of religious worship, and because the property was held in trust for that purpose, the members of the congregation are indeed the beneficiaries of the trust. As such, they have standing to sue the trustees in the event that the trust property is used or disposed of in a manner contrary to the stated purposes of the trust …. We therefore hold that, as a general principle, bona fide members of a church have standing to bring suit as trust beneficiaries when there is a dispute over the use or disposition of church property."

Mt. Jezreel Christians Without a Home v. Board of Trustees of Mount Jezreel Baptist Church, 582 A.2d 237 (D.C. App. 1990).

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Legal Developments

Officers, Directors, and Trustees

Can a civil court overturn a church’s election of trustees?

Richard R. Hammar, Attorney, CPA
Bio

Can a civil court overturn a church's election of trustees? That was the issue before a New York state court. Five of the church's original trustees filed a lawsuit asking a state court to declare "null and void" two elections of trustees and officers. The first election filled a vacancy that occurred when a trustee died, and the second election attempted to add new trustees to the church board. The five trustees claimed that

  1. state religious corporation law specifies that vacancies in a church's board of trustees are to be filled by the remaining trustees, and not by the church membership in an election; and
  2. state religious corporation law permits an increase in the number of trustees only if the church's charter (articles of incorporation) is amended. Since the charter was not amended, the election of additional trustees was improper.

    3. A trial court agreed with the five trustees, and set aside the two church elections and ordered a new election. A state appeals court reversed this ruling. It acknowledged that state corporation law authorizes the civil courts to order new church elections "upon the petition of any member aggrieved by an election."

    However, it pointed out that the law requires that "a proceeding against a body of officers must be commenced within four months after the determination to be reviewed becomes final and binding." Since the five trustees were seeking to overturn church elections that occurred at least two years previously, their lawsuit had to be dismissed.

    In re Uranian 1st Gnostic Lyceum Temple, 547 N.Y.S.2d 63 (N.Y. App. 1989).

Legal Developments

Officers, Directors and Trustees – Part 1

Church Law and Tax 1989-11-01 Recent Developments Officers, Directors, and Trustees Richard R. Hammar, J.D.,

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1989-11-01 Recent Developments

Officers, Directors, and Trustees

Richard R. Hammar, J.D., LL.M., CPA

• Can the officers and directors of a church or other nonprofit organization be personally liable for the amount of payroll taxes that are not withheld or paid over to the government? Yes, concluded a federal district court in New York in a significant ruling. A church-operated charitable organization failed to pay over to the IRS withheld income taxes and the employer’s and employees’ share of FICA taxes for a number of quarters in both 1984 and 1985. Accordingly, the IRS assessed a penalty in the amount of 100% of the unpaid taxes ($230,245.86) against each of the four officers of the organization pursuant to section 6672 of the Internal Revenue Code, which specifies that “any person required to collect … and pay over any [FICA or income] tax who willfully fails to collect such tax … or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.” The officers challenged the validity of the IRS actions. The court observed that federal law requires employers to withhold FICA and income taxes from the wages of their employees, and to hold the withheld taxes as a “special trust fund” for the benefit of the United States government until paid or deposited. If an employer fails to make the required payments, “the government may actually suffer a loss because the employees are given credit for the amount of the taxes withheld regardless of whether the employer ever pays the money to the government.” Accordingly, “section 6672 of the Code supplies an alternative method for collecting the withheld taxes. Pursuant to this section, the government may assess a penalty, equal to the full amount of the unpaid tax, against a person responsible for paying over the money who willfully fails to do so.” The court observed that a person is liable for the full amount of taxes under section 6672 if “(1) he or she was under a duty to collect, account for, and pay over the taxes (i.e., a ‘responsible person’), and (2) the failure to pay the taxes was ‘willful.'” The court concluded that the four officers of the church-related charitable organization satisfied both requirements, and accordingly that they were personally liable for the unpaid taxes under section 6672. The officers were “responsible persons” since (1) they were directors as well as officers, (2) they had the authority to sign checks (including payroll checks), and (3) they were involved in “routine business concerns such as corporate funding, bookkeeping, salaries, and hiring and firing.” The fact that a nonprofit organization was involved, and that the officers donated their services without compensation, did not relieve them of liability. The court also ruled that the officers acted “willfully” and accordingly met the second requirement of section 6672. It defined “willful action” as “voluntary, conscious and intentional—as opposed to accidental—decisions not to remit funds properly withheld to the government.” There need not be “an evil motive or an intent to defraud.” The court specifically held that “the failure to investigate or to correct mismanagement after having notice that withheld taxes have not been remitted to the government is deemed to be willful conduct.” Further, the court concluded that payment of employee wages and other debts with the knowledge that the payment of payroll taxes is “late” constitutes willful conduct. What is the relevance of this case to churches and church leaders? It demonstrates that church officers and directors can be personally liable for the payment of income taxes and FICA taxes that they fail to withhold, account for, or pay to the government. It does not matter that they serve without compensation, so long as they satisfy the definition of a “responsible person” and act willfully. Many church officers and directors will satisfy the definition of a “responsible person,” and such persons can be personally liable for unpaid payroll taxes if they act under the liberal definition of “willfully” described above. Clearly, church leaders must be knowledgeable regarding a church’s payroll tax obligations, and insure that such obligations are satisfied. Carter v. United States, 89-2 USTC para. 9446 (S.D.N.Y. 1989).

© Copyright 1989, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m56 m22 m71 c0689

Legal Developments

Officers, Directors and Trustees – Part 2

Church Law and Tax 1989-11-01 Recent Developments Officers, Directors, and Trustees Richard R. Hammar, J.D.,

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1989-11-01 Recent Developments

Officers, Directors, and Trustees

Richard R. Hammar, J.D., LL.M., CPA

• The Virginia Supreme Court was called upon to determine whether the term of office of a church’s trustees was one year or life. For nearly 70 years, the trustees of an Episcopal church’s endowment fund served life terms. A dispute then arose, and the church’s vestry sought a court ruling on the trustees’ term of office. The court concluded that the trustees’ term of office was one year on the basis of a provision in the Virginia nonprofit corporation law specifying that “in the absence of a provision in the articles of incorporation fixing a term of office, the term of office for a director shall be one year.” Since the court found no provision in the articles of incorporation (i.e., the corporate charter) “fixing a term of office,” it concluded that state law mandated a one-year term. In support of its conclusion, the court observed that “had the organizers intended to take the unusual step of providing life terms for trustees, they surely would have done so in unmistakable fashion.” It further noted that the articles of incorporation required “not less than three” trustees to be “vestrymen of the church.” And, since the terms of the church’s vestrymen were limited to three years, there were at least three trustees (at any given time) who could not serve life terms. The court found this to be “unmistakable evidence of the organizers’ intention not to fix the trustees’ terms of office at life.” Since no provision in the articles of incorporation specified a life term (or any other term), the nonprofit corporation law fixed the trustees’ term at one year. This case illustrates the important principle that questions of church administration may be resolved by state nonprofit corporation law if the church is incorporated under the general nonprofit corporation law and the church’s articles of incorporation do not address a particular matter. St. John’s Protestant Episcopal Church Endowment Fund, Inc. v. Vestry of St. John’s Protestant Episcopal Church, 377 S.E.2d 375 (Va. 1989).

© Copyright 1989, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m56 0689

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