Officers, Directors, and Trustees

A New York court ruled that the officers of a nonprofit organization violated their fiduciary duties and could be removed from office.

Church Law and Tax2004-07-01

Officers, directors, and trustees

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.

Church Officers, Directors, and Trustees

* A New York court ruled that the officers of a nonprofit organization violated their fiduciary duties and could be removed from office by the attorney general and ordered to pay damages. The state attorney general of New York sued the officers of a charity seeking to hold them personally liable and financially accountable for amounts totaling more than $120,000 which they allegedly received in violation of their fiduciary duties. The attorney general also sought to remove two of the officers and permanently bar them from ever serving as board members of a public charity. One of the officers freely admitted that he charged several personal expenses to the charity, but defended himself by stating, “I erroneously believed that it would be permissible for me to charge certain personal expenses to [the charity] and have them reclassified as personal expenses to be paid back to [the charity].” The court called this allegation “startling,” and further observed, “This court is at a loss as to why anyone would think they could charge something to a not-for-profit corporation as long as they paid it back later. After all, [the charity] is a not-for-profit corporation and not a revolving credit line.”

The court noted that in order for an attorney general to obtain an injunction he or she must (1) demonstrate a probability of success on the merits of the case, and (2) show that a “balance of the equities” favors the injunction. The court concluded that both requirements were met: “The fact that defendants concede that they were using [the charity’s] money for personal expenses, by itself, meets the probable success requirement. With respect to balancing the equities, the need to protect [the charity] from mismanagement outweighs any need of the defendants to remain in control.”

Application. This case points out the potentially serious consequences of using a charity’s funds for personal uses, even if there is an “intent” to pay the funds back at a later time. The officers in this case used the charity’s funds to pay personal expenses. The fact that they fully intended to repay the amounts they “borrowed” was no defense as far as the court was concerned. In fact, it considered this defense “startling.” Spitzer v. Lev, 2003 WL 21649444 (N.Y. Sup. 2003).

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