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Loans to Directors

§ 6.07.10
Key point 6-07.10. Church board members may be personally liable, under state nonprofit corporation law, for loans they authorize for any officer or director of the church.

The Model Nonprofit Corporations Act, as well as various other laws under which some churches are incorporated, prohibit the board from making loans (out of corporate funds) to other directors or officers. Directors who vote in favor of such loans can be liable for them in the event that the loan is unauthorized or otherwise impermissible. Church boards must check the state law under which they are incorporated before considering any loans to a minister.

Case study. A District of Columbia appeals court ruled that it was prohibited by the from resolving a lawsuit brought by members of a church claiming that the board of trustees breached its fiduciary duties by authorizing an interest-free loan to the pastor and by failing to provide the congregation with adequate information regarding the church's finances. A church employed a new pastor, and the church board authorized a loan to enable the pastor to purchase a new home. Though the pastor was a member of the board by virtue of office, he did not participate in the vote. At a specially called business meeting of the church membership, the board recommended approval of the loan. One church member suggested that the loan be interest-free, commenting "the church should not profit from this loan to the pastor." The membership approved a no-interest loan at the meeting and eventually loaned the pastor some $256,000 for the purchase. A few years later, certain members of the church asked for more details from the church board regarding the loan, and other financial transactions involving the pastor. When their request was ignored, they filed a lawsuit in which they asked a court to declare that the board had breached its fiduciary duties by authorizing the interest-free loan, and that the members "have a right to receive, review and inspect information and documents that will inform the members regarding the church's finances, compliance or non-compliance with federal and local laws, and other liabilities." A trial court agreed to resolve the case, but an appeals court intervened and dismissed the members' claims. It concluded: "A church's financial regime … necessarily reflects an array of decisions about a member's obligation to pledge funds, and about the leaders' corresponding responsibility to account for those funds, that a civil court cannot arbitrate without entangling itself in doctrinal interpretations. … Accounting is an area riddled with major subjective decisions. When the entity in question is a religious society, those subjective decisions raise questions of internal church governance which are often themselves based on the application of church doctrine."[217] Kelsey v. Ray, 719 A.2d 1248 (D.C. App. 1998).
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