Unincorporated Churches

A Colorado court ruled that an officer of a nonprofit unincorporated association was not personally liable for compensation that the association had failed to pay to former employees.

Church Law and Tax2001-01-01

Unincorporated churches

Key point 6-01.2. The traditional rule is that members of an unincorporated association are personally liable for the acts of other members committed within the course of association activities. Some courts have modified or rejected this rule. Unincorporated Associations

A Colorado court ruled that an officer of a nonprofit unincorporated association was not personally liable for compensation that the association had failed to pay to former employees, since the association was located in a state that had enacted the Uniform Nonprofit Unincorporated Associations Act. Two former employees of an unincorporated association claimed they were owed back wages for services they had performed. The association refused to pay them, stating that it did not have sufficient funds to pay the compensation. The former employees then sued the principal officer of the association, claiming that he was legally responsible to pay the back wages. The court ruled that the officer was not legally obligated to pay the back wages. It relied solely on the Uniform Unincorporated Nonprofit Association Act (the “Association Act”), which was adopted by the Colorado legislature in 1994. The court noted that prior to the adoption of the Association Act, unincorporated associations were treated the same as partnerships, meaning that members could be individually liable for obligations of the association. The Association Act made a significant change in this legal rule. Section 106 specifies:

(1) A nonprofit association is a legal entity separate from its members for the purposes of determining and enforcing rights, duties, and liabilities in contract and tort.

(2) A person is not liable for a breach of a nonprofit association’s contract merely because the person is a member of the nonprofit association, is authorized to participate in the management of the affairs of the nonprofit association, or is a person considered to be a member by the nonprofit association.

The court explained these provisions as follows: “The Association Act makes a nonprofit unincorporated association a legal entity separate and apart from its members. Therefore, logically, nonprofit unincorporated associations are more in the nature of corporations, limited partnerships, or limited liability companies. This basic and fundamental change has a considerable impact on the liability of members and others for the liabilities of nonprofit unincorporated associations.” The court concluded that the Association Act makes it clear that an officer is not liable for the contracts of an unincorporated association merely because he had management responsibilities or negotiated the former employees’ employment contracts.

Application. Many churches are unincorporated. This may be due to one or more of several factors, including the following: (1) the church never incorporated; (2) the church incorporated, but its corporate status “lapsed” due to noncompliance with legal requirements (such as filing an annual report with the secretary of state); (3) the church was incorporated for a specified term of years, and the term expired; (4) the church incorporated, but later decided to change its legal status to that of an unincorporated association; or (5) the church is located in Virginia or West Virginia, where churches are not permitted to incorporate. Whatever the reason for unincorporated status, an unincorporated church’s leaders should know whether their state has adopted the Uniform Nonprofit Unincorporated Association Act, since this will have a direct bearing on the liability of leaders and members alike for (1) contracts executed by other members on behalf of the church, and (2) personal injuries inflicted by other members in the course of church activities. Unfortunately, few states have implemented the Act, in part because it is a recent development. Mohr v. Kelley, 2000 WL 177691 (Colo. App. 2000).

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