Officers, Directors, and Trustees – Part 1

A Pennsylvania court ruled that the state nonprofit corporation law could not be used by disgruntled church members as a legal basis for the removal of the church’s board.

Church Law and Tax2004-01-01

Officers, directors, and trustees – Part 1

Key point 6-06.4. Church officers and directors can be removed from office in the manner authorized by the church’s governing documents. It is common for church bylaws to give the membership the authority to remove officers and directors who engage in specified misconduct or change their doctrinal position.

Key point 6-12.1. Church membership meetings must be conducted in accordance with the procedural requirements ordinarily specified in the church’s governing documents. The most common requirements pertain to notice, quorum, and voting.

Key point 6-12.4. Most courts refuse to intervene in church disputes concerning the validity of a membership meeting that was not conducted in accordance with the procedural requirements specified in the church’s governing documents. However, some courts are willing to intervene in such disputes if they can do so without inquiring into religious doctrine or polity.
Church Officers, Directors, and Trustees
Church Business Meetings

* A Pennsylvania court ruled that the state nonprofit corporation law could not be used by disgruntled church members as a legal basis for the removal of the church’s board. The court also ruled that a financial transaction approved by the church board in a special meeting was null and void because the board did not comply with the applicable notice requirements. Two groups within a church accused each other of attempting to take over the corporation and its assets for its own personal gain. The struggle prompted one group (the plaintiffs) to ask a civil court to remove the church’s directors and appoint a custodian for the church pursuant to the following provisions in the state nonprofit corporation law:

(1) “The court may, upon petition of any member or director, remove from office any director in case of fraudulent or dishonest acts, or gross abuse of authority or discretion with reference to the corporation, or for any other proper cause, and may bar from office any director so removed for a period prescribed by the court. The corporation shall be made a party to such action.” Section 5726.

(2) “The court, upon application of any member, may appoint one or more persons to be custodians of and for any nonprofit corporation when it is made to appear … [that one or more specified conditions have occurred.”] Section 5764.

At a hearing, the plaintiffs attempted to prove that the conduct of the directors constituted “illegal, oppressive, or fraudulent acts of directors or those in control of a corporation and that they misapplied or wasted corporate assets,” and that the above-quoted provisions in the state nonprofit corporation law empowered the court to remove the directors and appoint a custodian for the church. The trial court concluded that the actions of the directors were not sufficiently severe to trigger “the drastic remedy of judicial supervision of the church’s affairs.” It determined that much of what the plaintiffs complained of in the way of financial irregularities was due to missing information for which records had never been maintained rather than information that had been hidden. Two individuals who examined the records of the church testified that they were not impressed with the way the records were compiled and maintained but that they were unable to uncover any irregularities that might constitute violations of the law. A significant finding was that the records found to be lacking in detail were generated during a period when one of the plaintiffs was in charge of the board of directors. Also significant in the eyes of the trial court was the fact that no member who demanded and received records from the board (pursuant a provision in the nonprofit corporation law giving members a legal right to inspect corporate records) was sufficiently dissatisfied to challenge any action by the board. The trial court concluded that “the return to normalcy will include strict adherence to the provisions of the bylaws, articles of incorporation and nonprofit corporation law.”

The plaintiffs also asked the court to rule that a $1.5 million transaction entered into by the board constituted an illegal diversion of corporate assets. According to the plaintiffs, the board, on two days notice, called a special meeting for the ostensible purpose of scheduling a meeting called for by the church membership. Also included on the agenda, however, was an item described only as “ICP Funding.” When this item came before the board, a majority of the board voted to transfer $1.5 million from the church to ICP. The ICP is composed of four members of the board, and the $1.5 million was placed in a fund under their sole control. The trial court declined to nullify this transaction on the ground that doing so would be prohibited by the first amendment guaranty of religious freedom.

A state appeals court agreed with the trial court’s conclusion that the directors’ conduct was not so severe as to warrant relief under the state nonprofit corporation law. However, the appeals court disagreed with the trial court’s conclusion concerning the $1.5 million transaction. The court concluded, “The resolution of the dispute regarding the transfer of the $1.5 million does not require a court to determine any ecclesiastical issue. The propriety of the transfer of the $1.5 million was a pure question of corporate law that should have been addressed by the trial court.” The court noted that the special board meeting in which the $1.5 million transaction was approved was “held on two days notice [which] means that the meeting was held in violation of [the state nonprofit corporation law] that requires written notice of a special meeting of the board of a nonprofit corporation be given to each director or member of that board at least five days before the day named for the meeting. Any action taken at that meeting was, therefore, void.”

Application. This case is important for the following reasons.

First, the court refused to allow state nonprofit corporation law to be used as a basis for removing the members of a church board. Pennsylvania law empowers the civil courts to remove an officer or director, upon the petition of any member or director, for “fraudulent or dishonest acts, or gross abuse of authority or discretion with reference to the corporation, or for any other proper cause.” Several other states have similar provisions in their nonprofit corporation law. This case illustrates that the civil courts generally will be reluctant to oust officers or directors of nonprofit corporations except in extreme cases.

Second, the court concluded that the $1.5 million transaction was null and void since it had been approved in a board meeting that did not comply with the notice requirements of state nonprofit corporation law. This illustrates the importance of compliance with the procedural requirements for general or special business meetings of both the membership and board. Applicable procedural requirements generally are set forth in a church’s bylaws or other organizational document, but if not, then the relevant provisions of the nonprofit corporation law will control. In re the Lord’s New Church, 817 A.2d 559 (Pa. Common. 2003).

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