• Key point 6-03.2. Most courts have viewed requests by church members for an "accounting" of church funds to be an internal church matter over which the civil courts have no jurisdiction.
• 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.
• Key point 6-07.10. Church board members may be personally liable, under state nonprofit corporation law, for loans they authorize for any officer or director of the church.
• 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.
A District of Columbia appeals court ruled that it was prohibited by the first amendment from resolving a lawsuit brought by members of a church claiming that the board of trustees breached its fiduciary duties by authorizing an interest-free loan to the pastor and by failing to provide the congregation with adequate information regarding the church's finances.
In 1993, a church selected a new pastor. A few months later the official board of the church, consisting of the pastor, deacons, and trustees, agreed to lend the pastor money toward his purchase of a $325,000 home at an interest rate of six percent. The pastor did not take part in the vote. At a "special called" meeting of the church membership, the board recommended approval of the loan. One church member suggested that the loan be interest-free, commenting that "the church should not profit from this loan to the pastor."
The membership approved a no-interest loan at the meeting and eventually loaned the pastor some $256,000 for the purchase, which took place in 1994. In 1996, the pastor signed an agreement to repay the loan, and the purchase money mortgage held by the church was recorded. In December of 1996, certain church members wrote a letter to the pastor requesting disclosure of certain financial information to the membership within fourteen days.
Specifically, they requested "all the facts and documents surrounding the church's role in helping the pastor purchase a home," along with any audit reports for the years 1994, 1995 and 1996. They also asked for records of the "special called" meeting at which the loan to the pastor had been approved, and the church's records of past filings with the Internal Revenue Service. They apparently had learned of an audit and management report prepared by an outside CPA and submitted to the trustee board in 1993, which warned that loans made by the church to "members and sons of the church" would endanger its tax-exempt status.
The members also alleged that the congregation was asked to approve a $50,000 expenditure for a new car for the pastor in 1996 "without knowing how much money the church actually had on hand or what its financial budget was."
Not satisfied with the leadership's response to their demand for information, the members filed a lawsuit in which they asked a court to rule that the board had breached its fiduciary duties by authorizing the interest-free loan, and that the members "have a right to receive, review and inspect information and documents that will inform the members regarding the church's finances, compliance or non-compliance with federal and local laws, and other liabilities." The lawsuit also asked the court to order the church "to have an audit conducted of the church's finances by an outside Certified Public Accountant firm." The members conceded that the congregation voted to approve the loan to the pastor, but they insisted that the board failed to inform the membership of the 1993 audit report warning against such loans.
The pastor and trustees asked the court to dismiss the lawsuit on the ground that judicial intervention in the church's management would violate the first amendment. The trial court denied the motion, stating that he was "confident" he could adjudicate the dispute by applying the church's constitution and bylaws "without becoming involved with any ecclesiastical matters or doctrines." The pastor and trustees appealed. On appeal, the members insisted that the court could grant their demands without inquiring into ecclesiastical issues since they were only asking for an independent audit and disclosure of information which the church was obliged to provide to its members according to its own Constitution and Bylaws and the nonprofit corporation law under which it was incorporated. The appeals court disagreed. It observed:
[A] church's financial regime, including any required reports to members, necessarily reflects an array of decisions about a member's obligation to pledge funds, and about the leaders' corresponding responsibility to account for those funds, that a civil court cannot arbitrate without entangling itself in doctrinal interpretations …. Accounting is an area riddled with major subjective decisions. When the entity in question is a religious society, those subjective decisions raise questions of internal church governance which are often themselves based on the application of church doctrine ….
The [members claim] that the [church] has expressly adopted an annual audit requirement and an obligation to report to the membership annually on its finances. They point first to … the church's Constitution, which states in part that the official board "shall be authorized to transact all business of the church and report annually, or at request of the church, of its work," and to … the Bylaws [which state that] "[a]ll new business pertaining to the church must be brought to, and considered by, the official board before any action is taken by the church." These provisions, they argue, obligate the official board to furnish the members "with complete and accurate information," on matters on which "action is [to be] taken by the church" …. While [the Constitution] authorizes (though it does not literally compel) the board to "report annually" to the church membership, it is silent about the content of such reports or how much information they must contain. It says nothing at all about the kind or particularity of information "necessary" for the members to be able "to understand and determine the financial conditions of the church." Consequently, for a court to decide-as the complaint demands-what disclosures are needed "to help [the members] in making … informed decisions" would thrust it into that realm of subjective and even doctrinal decisionmaking that [is] out of bounds. Underscoring the point is the directive at the end of the Bylaws which states that "[w]here these regulations do not cover, we shall look to the New Testament … for guidance."
The [members] also gain no help from … the church Constitution, which states that "the trustees … shall see that all moneys are paid according to the wishes of the church." Even if the members received inadequate information before approving the loan to the pastor, nothing in [the Constitution] states that the wishes of the church have to be based on full or even accurate information-matters very much in the eye of the beholder. The [members] do not claim the leadership failed to determine the wishes of the congregation on the interest-free loan, only that it withheld information needed by the members to make an "intelligent and informed decision." The language cited provides no "clear, objective accounting and reporting standards" enabling a court to evaluate that claim.
The court then turned its attention to the members' request for the court to order the church to hire a CPA firm to conduct an annual audit. In support of this request, the members cited a provision of the church Bylaws stating that "the auditing committee, named by the church, shall audit the books of the church once a year." The court observed that this language "provides no basis for compelling an audit by an outside accountant; nor, indeed, does it say anything about the form that an in-house audit would have to take; and it confers no right on the members to learn the names of past auditing committee members."
Application. This case illustrates the reluctance that the civil courts express in resolving internal church disputes, even over financial matters that seemingly involve little if any doctrinal considerations. The court did express a willingness to resolve such claims, but only if church members "allege the application of neutral legal standards, either statutory or embodied in the church's governing instruments, that are clear and objective enough to permit a court to examine the church's financial practices without involving it in resolving a dispute with doctrinal implications." This standard was not met in this case. However, it is conceivable that it could be met if a church's governing document (constitution or bylaws), or the state nonprofit corporation law under which a church is incorporated, contain language that is sufficiently secular and precise that would allow a civil court to address issues of church finances or disclosure of information without any consideration of church doctrine. Kelsey v. Ray, 719 A.2d 1248 (D.C. App. 1998). Church Records, Church Officers, Directors, and Trustees and Judicial Resolution of Church Disputes