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Breach of the Fiduciary Duty of Loyalty

§ 6.07.04
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.

Directors of nonprofit corporations have a fiduciary duty of loyalty to the corporation. This duty generally requires that any transaction between the board and one of its directors be (a) fully disclosed, (b) approved by the board without the vote of the interested director, and (c) fair and reasonable to the corporation. A board member does not have to offer the church the lowest price for a product or service to discharge the duty of loyalty. All that is required is that the price be fair and reasonable to the corporation.

There are sound reasons why a church might want to do business with a member of the board at a cost that is higher than what another business may charge. To illustrate, a church board may conclude that the church will receive better quality, and customer support, by doing business with a fellow board member. Of course, this does not mean that cost is irrelevant. At some point, the price for a product or service offered by a board member may be so much higher than what is offered by competitors that it ceases to be fair and reasonable to the church. In such a case, the duty of loyalty may be violated.

The duty of loyalty also means that a board member will not usurp a corporate opportunity. This means that board members may not enter into personal transactions in which the church would have an interest. To illustrate, assume that a church is needing to expand its facilities, and a 5-acre tract of undeveloped land lies adjacent to the church's property. The senior pastor of the church (who is president of the church corporation) purchases the land for himself at a cost of $100,000, and later offers to sell it to the church for $250,000. Under these circumstances the pastor likely has violated the fiduciary duty of loyalty by usurping a corporate opportunity.

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