Legal Liability of a Church Board

A court recently made an important decision.

Church Law and Tax 1992-03-01 Recent Developments

Officers, Directors, and Trustees

The Wisconsin Supreme Court addressed the legal liability of church board members in an important decision. A church-sponsored relief agency needed some plumbing work done. Its director negotiated and signed a contract with a plumbing company. The name of the relief agency was mentioned prominently in the contract, as was the fact that the director was signing in his capacity as director of the agency. The agency was unable to pay the plumbing bill, and the plumbing company sued the director personally. The director claimed that he was immune from liability on the grounds that (1) a director of an incorporated organization is immune from personal liability for his acts on behalf of the corporation, and (2) directors of nonprofit organizations are immune by law (in Wisconsin as well as in most other states) from liability for their actions on behalf of their corporation. The state supreme court rejected both defenses, and found the director personally liable on the contract. In rejecting the director’s first defense, the court observed:

This court has long adhered to the general rule that, where an agent merely contracts on behalf of a disclosed principal, the agent does not become personally liable to the other contracting party …. [H]owever, an agent will be considered a party to the contract and held liable for its breach where the principal is only partially disclosed. A principal is considered partially disclosed where, at the time of contracting, the other party has notice that the agent is acting for a principal but has no notice of the principal’s corporate or other business organization identity …. The general rule that agents are contractually liable where the principal is partially disclosed has produced the rule that an agent is liable where the contracting party is not aware of the corporate status of the principal.

The court concluded that the director, by mentioning the agency’s name in the contract but not whether or not it was incorporated, assumed personal liability on the contract under this rule. The court noted that the fact that the plumbing company was aware that the director was acting on behalf of a named agency “reveals nothing of its awareness of the type of business organization it was dealing with. All business entities are not corporations.” Further, the court stressed that the plumbing company “had no affirmative duty to investigate” whether or not the agency was a corporation. This was the director’s responsibility, if he wanted to escape personal liability on the contract.

The court also rejected the director’s claim that he was exempt from liability under a state law granting limited legal immunity to the uncompensated directors of nonprofit organizations. Wisconsin law specifies that a director or officer of a nonprofit corporation is not liable for “monetary liabilities arising from a breach of, or failure to perform, any duty resulting solely from his or her status as a director or officer.” The court stressed that a director “cannot be granted immunity unless his liability related solely to his status as a director.” In this case, however, the director’s contractual liability to the plumbing company “stems from his position as an agent to a partially disclosed corporate principal and not from his status as a director.”

What is the significance of this case to church leaders? Consider the following: (1) It suggests that church officers and directors should be sure that the corporate status of their church is clearly indicated on any legal document they sign (assuming that the church is incorporated). Simply naming the church may not be enough to avoid personal liability. For example, if John Smith is signing a legal document on behalf of First Church (a Wisconsin corporation), he should insure that First Church is identified in the body of the document as “First Church, a nonprofit corporation organized under the laws of the State of Wisconsin.” John Smith should be sure to sign in a representative capacity, such as “First Church, a nonprofit corporation organized under the laws of the State of Wisconsin, by John Smith, president.” (2) It suggests that “charitable immunity” statutes granting uncompensated directors and officers of nonprofit corporations limited immunity from liability may be interpreted narrowly. Such statutes have been enacted in almost every state over the past five years. However, this case illustrates that such statutes do not provide protection against all forms of director liability. (3) The court went out of its way to emphasize that “all members of a voluntary association are jointly and severally liable for the association’s contractual obligations …. It is generally recognized, furthermore, that numerous charitable and religious organizations are unincorporated associations consisting of a large and changing membership.” In other words, members of an unincorporated church are personally liable for the contracts of their church. This is an important consideration for members of unincorporated churches to bear in mind. Benjamin Plumbing, Inc. v. Barnes, 470 N.W.2d 888 (Wis. 1991).

See Also: Officers, Directors, and Trustees

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