Officers, Directors and Trustees

Church Law and Tax 1989-09-01 Recent Developments Officers, Directors, and Trustees Richard R. Hammar, J.D.,

Church Law and Tax 1989-09-01 Recent Developments

Officers, Directors, and Trustees

Can an officer or trustee of an unincorporated religious organization legally sell the organization’s property? No, concluded the New Hampshire Supreme Court. In 1957, the Benedictine Sisters was organized in Bedford, New Hampshire as a nonprofit corporation. In 1977, the corporation was dissolved by the secretary of state for failure to file an information return and fee. Some seven years later, in 1984, Sister Simonis (the mother superior and former president of the nonprofit corporation) entered into a contract with a local real estate broker to sell him 8 of the 40 acres owned by the Benedictine Sisters. The broker was not represented by an attorney, and made no effort to verify the authority of Sister Simonis to execute the contract on behalf of the Sisters. While the broker was seeking city approval to subdivide the 8 acres into a real estate development, Sister Simonis notified the city and real estate broker that she wished to cancel the agreement. The broker sued the Sisters for damages, and requested a court order compelling the enforcement of the agreement. Sister Simonis argued that the agreement could not be enforced because (1) the Benedictine Sisters no longer existed as a corporation, (2) whether or not the Sisters existed as a corporation, Sister Simonis had acted outside her authority in executing the sales agreement, and (3) enforcement of the agreement would cause undue hardship. The broker maintained that even if the corporation had ceased to exist, the Sisters constituted an unincorporated association and as such had legal authority to enter into a sales contract. A trial court and state appeals court ruled in favor of the Sisters, and the broker appealed the case to the state supreme court which also ruled in favor of the Sisters. The court emphasized that Sister Simonis had no actual or implied authority to sign contracts whether the Benedictine Sisters was a corporation or an unincorporated association. It added: “Trustees or similar officers of unincorporated religious organizations must have the consent of their organization in order to convey its property …. [We] see no evidence that Sister Simonis had obtained any authorization or consent for the proposed land sale from any membership group.” The court further noted that the broker made no attempt to verify the corporation’s existence or the authority of Sister Simonis to sign the contract, and observed that “when a … broker signs a purchase and sale agreement without making any attempt to verify either the existence of the corporation with which he is contracting, or the authority of the person with whom he is dealing … he fails to exercise reasonable diligence.” The court acknowledged that the broker could sue Sister Simonis individually, but added that “we doubt the technical or practical merit of such a claim in light of the fact that the defendant would be an eighty-year-old nun who had long before taken a vow of poverty.” This case is significant for three reasons. First, it illustrates the fact that in many states a nonprofit corporation may cease to exist if it fails to file periodic reports (accompanied by a fee) with the state. These requirements typically apply only to organizations that are incorporated under the state “General Nonprofit Corporation Act” (which has been adopted by most states). However, many churches incorporate under this Act, and the corporate status of many such churches has lapsed inadvertently because of failure to file periodic reports with the secretary of state’s office. Neither Sister Simonis nor the Benedictine Sisters was aware, in 1984, that the corporate status of the Sisters had terminated seven years earlier. Churches that have incorporated under the General Nonprofit Corporation Act (sometimes referred to as the Model Nonprofit Corporations Act) should contact the secretary of state’s office in their state capital to confirm that they are in fact corporations in good standing. Many will discover that they are not. Second, the case demonstrates that a single officer or trustee of an incorporated or unincorporated church cannot sign legal documents on behalf of the church without authorization. Third, the case demonstrates that an individual officer or trustee who unsuccessfully attempts to sell church property to a third party can be personally sued for damages incurred by the third party as a result of the unsuccessful sale. Shakra v. Benedictine Sisters of Bedford, 553 A.2d 1327 (N.H. 1989).

See also Personal injuries—on church property or during church activities, Clark v. Moore Memorial United Methodist Church, 538 So.2d 760 (Miss. 1989).

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Officers, Directors, and Trustees

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

Church Law and Tax 1989-01-01 Recent Developments

Officers, Directors, and Trustees

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

Court Ruled Land Sales Contract Executed by a Church Secretary and Treasurer Were Not Legally Enforceable

Is a land sales contract executed by a church secretary and treasurer legally enforceable? No,

Is a land sales contract executed by a church secretary and treasurer legally enforceable? No, concluded the Supreme Court of New Hampshire.

The court observed that the officers of a corporation "have only those powers conferred on them by the bylaws of the corporation or by the resolution of the directors." Neither the bylaws of the church nor any resolution by the board vested the secretary and treasurer with authority to enter into contracts on behalf of the church.

It is a good practice for churches to periodically review their charter, constitution, bylaws, and board minutes and resolutions to determine the appropriate method of authorizing and executing legal documents. Any variance from the authorized practice can lead to unwelcome legal difficulties in the future. Daniel Webster Council v. St. James Association, 553 A.2d 329 (N.H. 1987)

Court Applied the “Neutral Principles” Approach in the Resolution of a Nondoctrinal Internal Church Dispute

Internal church disputes present a difficult problem for the civil courts.

The regional diocese of the American-Bulgarian Eastern Orthodox Church dismissed certain church members from their position on a local church's board of trustees, selected other church members to govern the church, and ordered the discharged trustees to deliver the church's assets and records over to the newly appointed trustees.

When the discharged trustees refused to comply with the mandates, the newly appointed trustees filed suit. A state trial court issued an injunction ordering the former trustees to "turn over all documents and assets of (the church) currently in their possession," and declaring that the church was subject to "the dictates of the regional diocese."

The former trustees appealed, and a state appeals court reversed the lower court's order and ruled in favor of the former trustees. The appeals court began its opinion by observing that "the state has a cognizable interest in the peaceful resolution of internal church disputes which are concerned with control or ownership of church property, and the civil courts have general authority to resolve such controversies."

However, "when doctrinal or polity issues arise in the determination of a property dispute, the courts must defer to the resolution reached by the church's highest ecclesiastical authority." If doctrinal issues are not involved, "the first amendment does not require that the state adopt a rule of compulsory deference to religious authorities in resolving property disputes. Instead, the state courts may choose from a variety of approaches."

One of these, the neutral principles approach, allows a court to determine who owns or controls church property by applying objective legal principles to church documents and records. Another approach, the "compulsory deference rule," requires the civil courts to always defer to religious hierarchies in any disputes involving local churches.

The Illinois court chose to apply the "neutral principles" approach and accordingly concluded that it was not compelled to rule in favor of the diocese. Only when a church property dispute (or any other internal church dispute) involves doctrine or polity is a civil court compelled to defer to determinations of religious hierarchies.

This was not such a case, concluded the court. The appeals court remanded the case to the trial court with instructions to resolve the dispute on the basis of "neutral principles of law." Illinois is one of a number of states that have elected to apply the "neutral principles" approach in the resolution of nondoctrinal internal church disputes. Such an approach certainly has appeal in cases involving independent or "congregational" churches. But, the resolution of internal disputes involving "hierarchical" churches on the basis of "neutral principles"—contrary to the determinations of a denomination—is indeed troubling. Aglikin v. Kovacheff, 516 N.E.2d 704 (Ill. App. 1987)

Church’s Bylaws Vested Absolute Authority in Two Elders

A church's bylaws vested absolute authority in the hands of two elders. Either elder could

A church's bylaws vested absolute authority in the hands of two elders. Either elder could be disciplined or removed only by the other, and not by a vote of the congregation.

An internal dispute arose, and the church voted to request the voluntary resignation of both elders. This request was refused. Thereafter, the church secretary and treasurer (both of whom had been appointed by the elders) attempted to take over the administration of the church, resulting in their immediate dismissal by the elders. However, when they refused to recognize their dismissal, the elders sought a court order prohibiting them from exercising any further control over the religious or business affairs of the church.

An Illinois appeals court held that a court order was appropriate under the circumstances. The court reasoned that the elders in fact had absolute authority, that the secretary and treasurer had lawfully been relieved of their responsibilities, and that if the secretary and treasurer persisted in their actions, serious harm would result to the congregation. People ex rel. Stony Island Church of Christ v. Mannings, 509 N.E.2d 572 (Ill. App. 1987).

Minister’s Authority to Replace Trustees Involves Ecclesiastical Law

Civil courts must defer to churches and their own ecclesiastical organizations

Can a civil court determine which of two warring factions of church trustees rightfully holds office?

No, ruled a Pennsylvania appeals court. A minister in a local church had ousted several trustees from office, replacing them with new trustees more loyal to himself. The ousted trustees alleged that the minister lacked the authority to replace them, and that they accordingly were still the lawful church board.

The court, noting that civil courts must "defer" to churches and their own ecclesiastical organizations regarding any question of "discipline, faith, ecclesiastical rule, custom, or law," held that the question of a minister's authority to replace church trustees involves ecclesiastical law and therefore must be resolved by the church itself. It ordered the trial court to identify the highest body within the church empowered to decide the issue. Atterberry v. Smith, 522 A.2d 683 (Pa. App. 1987).

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