Church Members Sue for Breach of Fiduciary Duties

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

Church Law & Tax Report

Church Members Sue for Breach of Fiduciary Duties

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

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.

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