Breach of Fiduciary Duties

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

Church Law and Tax 1992-11-01 Recent Developments

Officers, Directors, and Trustees

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

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