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 6-07.04. Church board members have a fiduciary duty of loyalty to their church, and they may be personally liable for breaching this duty by participating in board decisions that place the interests of one or more board members above the interests of the church itself.
Church Officers, Directors, and Trustees
* A Minnesota court ruled that a church officer violated his fiduciary duties to his church as a result of his secret efforts to remove the pastor and have the church property transferred to a new church that he had formed. This case is important, because it is one of the most extended discussions of church board members’ fiduciary obligations to their church, and as such it should be carefully studied by all church leaders. A church (the "original church") was established in 1985 and a member of the Lutheran Church, Missouri Synod (the "national church"). Congregations which affiliate themselves with the national church agree to accept its doctrinal positions, constitution, bylaws, and resolutions. The church, as a member of the national church, is served by a called pastor, who may be terminated only for specific reasons. In 1997 the church called a new pastor. As a part of his duties, the pastor conducted communion. According to the national church, the pastor was required to allow only those who were members of the national church to participate in communion. The pastor’s refusal to allow non-members to participate in communion became a point of contention that eventually led to a division in the congregation. A church officer ("Jack") sought to remove the pastor, but the board of elders unanimously determined that there was no basis to do so. Jack’s attempts to remove the pastor continued. A severance package was offered to the pastor, which he refused; an unsuccessful motion proposed a reduction of the pastor’s salary to $0; and another unsuccessful motion proposed the amendment of the termination provisions in the church’s constitution relating to called pastors. Following these unsuccessful attempts to remove the pastor, Jack and his supporters discontinued financial support of the church. Jack began organizing meetings that consisted of only those members of the congregation who opposed the pastor.
The church constitution provides that "If, at any time, a separation should take place within this congregation … [and] a division into factions of the congregation shall occur because of doctrinal issues, the property of the congregation and all benefits therewith connected shall remain with those members who adhere in confession and practice [of the national church]. If division takes place for non-doctrinal reasons, the property shall remain with the majority of the communicant members." Based on this provision, Jack and his supporters established a new church and then prepared a deed conveying the property of the original church to the new church. Throughout this time period, Jack retained his position as an officer of the original church. He did not inform other officers, or the general congregation, of his plans to seek separation and his efforts to form a new church. He also encouraged his supporters to remain quiet about their activities.
Eventually, Jack informed another officer of the original church that he intended to seek separation of the congregation at the annual meeting. At the annual meeting, a motion to separate was put before the congregation. A majority of those present at the meeting voted to separate based on non-doctrinal reasons and to transfer the church property to the new church without any payment of money. Following the annual meeting, Jack changed the locks on the church sanctuary and informed those who opposed the transfer that they would not be welcome. The ousted members began worshiping in members’ homes or in rented facilities.
The original church members who opposed the transfer of the church property to the new church filed a lawsuit in which they alleged that Jack had breached his fiduciary duties to the church. They also sought money damages from Jack, and a return of the property to the original church. A jury agreed that Jack had breached his fiduciary duties, and ordered him to pay $8,000 in damages. It also agreed that title to the church property should be returned to the original church. Jack appealed.
breach of fiduciary duties
The court began its opinion by observing that "the underlying issue that gave rise to this lawsuit involves a doctrinal dispute amongst the congregation" and that "a court can apply neutral principles of law in resolving church property disputes so long as it does not determine disputes by examining the basis of the religious doctrine." It observed, "Because it is not necessary for us to examine the religious doctrine underlying this lawsuit, we may resolve the property dispute … by applying neutral principles of law."
The court, referring to Minnesota law, noted that "an officer of a nonprofit corporation owes a fiduciary duty to that corporation to act in good faith, with honesty in fact, with loyalty, in the best interests of the corporation, and with the care of an ordinary, prudent person under similar circumstances." Jack conceded that as an officer he owed a fiduciary duty to the original church, but he insisted that the evidence did not support a finding that he breached his fiduciary duty because his actions were consistent with the wishes of the church members who supported him. The court disagreed with Jack’s assessment. It observed,
Contrary to Jack’s argument, as the bearer of a fiduciary duty, the law imposed on him the highest standard of integrity in his dealings with the other officers of [the church] and the entire [church] congregation, not just those who [supported him]. Therefore, his actions must be viewed in light of the fact that as an officer of [the original church] his fiduciary duty prevented him from assuming positions, and taking actions, that conflicted with the interests of [the church] and the congregation as a whole.
Reviewing the evidence presented to the jury … there is sufficient evidence in the record to establish that Jack breached his fiduciary duty to [the original church]. He admitted that while he was vice president of the church he organized a faction for the purpose of forming another church to directly compete with [the original church]. Further, the formation of a new church was intended to be a method of circumventing the national church’s termination provisions governing the pastor’s services. To achieve his goals, Jack held secret meetings and continuously encouraged secrecy among [his supporters]. He did not inform other church officials and members of … his plans to form [a new church], separate from [the original church], and transfer the church property from [the original church to the new church] without compensation ….
The court noted that Jack had testified at the trial that he did not disclose to the president of the church corporation that he was conducting secret meetings and preparing legal documents that would result in the transfer of the church’s property to the new entity. The court concluded, "Holding secret meetings and advance preparation of legal documents is improper conduct by an officer, amounting to a breach of fiduciary duty. Based on Jack’s own testimony, we cannot say that the jury’s verdict or the trial court’s amended order finding that he breached his fiduciary duty to [the original church] was unsupported by the evidence."
The court rejected Jack’s argument that a state law providing uncompensated board members of nonprofit corporations with limited immunity from liability prevented him from being found liable in this case. The court observed, "The Minnesota Nonprofit Corporation Act provides immunity from civil liability to unpaid directors of nonprofit organizations if the director (1) acts in good faith; (2) within the scope of his responsibilities as a director; and (3) does not commit reckless or willful misconduct. The party relying upon the immunity bears the burden of proving he or she fits within the scope of the immunity. The court concluded, "Jack is not entitled to statutory immunity because his actions in bringing about the separation of the congregation and the transfer of the church property constituted ‘willful or reckless misconduct.’ It is misconduct for an officer to withhold material information from other officers and members of the corporation. Because Jack testified that he intentionally withheld material information from other church officials and certain members of the congregation, his actions constituted willful misconduct."
Application. This decision is one of the most extended discussions ever provided by a court on the nature of a church officer’s fiduciary duties to the church. There are several points to note.
First, church officers and directors owe fiduciary duties to their church. These duties are imposed on these persons because they have been selected to represent and promote the best interests of the church.
Second, these duties may be summarized as follows, "An officer of a nonprofit corporation owes a fiduciary duty to that corporation to act in good faith, with honesty in fact, with loyalty, in the best interests of the corporation, and with the care of an ordinary, prudent person under similar circumstances."
Third, a church officer or directors owes fiduciary duties to the entire church membership and not simply a particular group of members.
Fourth, Jack violated his fiduciary duties by (1) creating a separate church to directly compete with the original church; (2) creating a separate church in order to circumvent the national church’s provisions pertaining to the termination of a pastor; (3) conducting secret meetings of members; (4) preparing legal documents to facilitate the transfer of the church’s property to the new church, without compensation; (5) not disclosing his actions to other church officers and directors.
Fifth, the state charitable immunity law protecting uncompensated board members of nonprofit corporations from personal liability did not apply to Jack, because his actions could be characterized as "willful misconduct" and the law provides no protection for such behavior.
Sixth, the court upheld the $8,000 verdict against Jack based on the breach of his fiduciary duties. This illustrates that money damages may be assessed against church board members who violate their fiduciary duties. Shepherd of the Valley Lutheran Church v. Hope Lutheran Church, 626 N.W.2d 436 (Minn. App. 2001).
© Copyright 2002 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m56 c0402
