Church Officers, Directors, and Trustees

By Richard R. Hammar, J.D., LL.M., CPA

© Copyright 1991, 1998 by Church Law & Tax Report.  All rights reserved.  This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service.  If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m56

State laws generally require that church corporations appoint an initial board of directors which in turn elects the corporation's first president, secretary, and treasurer. The initial board of directors typically adopts a set of bylaws that specifies the term of office of both officers and directors and sets forth the procedure for electing successors. Directors of church corporations occasionally are called trustees. This terminology is perfectly appropriate if it is intended to suggest that the business and spiritual oversight of the church is delegated “in trust” to such individuals, or where it is required by law.¹ However, it often happens that such terminology is simply a holdover from a church's pre--incorporation status when title to church property was held in the name of church trustees. If this is the case, the continued use of the title trustee can be misleading.

Unincorporated churches that are required by law to hold title to church property in the name of trustees should add the words “or their successors” following the names of the church trustees in deeds, mortgages, and other legal documents of continuing relevance. Incorporated churches of course hold title to property in the name of the corporation. Incorporated churches that retain the use of the term trustee should be careful to refrain from listing the names of the trustees as either the transferor or transferee on a deed.

Directors of church corporations occasionally are called deacons, although it is common for churches to have both directors and deacons—directors having oversight of the temporal affairs of the church and deacons having oversight of the spiritual.²

The Model Nonprofit Corporation Act specifies that a corporation shall have a president, one or more vice--presidents, a secretary, a treasurer, and such other officers or assistant officers as the corporation deems necessary. The Act permits the same person to hold two or more offices except the offices of president and secretary. The term officer occasionally is interpreted broadly to include directors. Normally, however, a church president, secretary, treasurer, and vice--president (if any) are the only officers of the church.

There are no legal requirements regarding the number of trustees an unincorporated association must appoint or elect. Some states require that church corporations have a minimum number of directors.³

Unless stated otherwise in either the bylaws or state law, officers, directors, and trustees are elected by a majority vote of the congregation's membership. Thus, it has been held that where a church had no constitution or bylaws granting authority to the board of deacons to elect a church treasurer, the congregation, and not the board of deacons, had such authority.¹

Many churches have adopted a “staggered system” of electing directors whereby a minority (often a third) of the directors are elected at each annual meeting. This normally is accomplished by classifying directors in the bylaws according to tenure: the first class holding office for one year, the second class for two years, and the third class for three years. Thereafter successors for each class of directors are elected for three--year terms. This system helps to ensure that a majority of the board at all times will be experienced. Unless forbidden by charter, bylaw, or statute, directors or officers may succeed themselves in office.

Vacancies occurring in any office or on the board of directors or board of trustees are filled according to applicable provisions in state law or in the church's charter or bylaws. Church bylaws often permit vacancies in the board of directors to be filled by the board itself except for vacancies created by an increase in the number of directors. Vacancies typically are filled only for the unexpired term of the predecessor in office.

If the filling of vacancies is not provided for by state law or a church's charter or bylaws, there is no alternative but to await the next annual meeting of the congregation or to call a special meeting of the congregation expressly for the purpose of filling the vacancy for the unexpired term.

A minister it not entitled to serve as president of a church or even as a director or trustee unless specifically authorized in the church's charter or bylaws.²

Incorporated and unincorporated churches must follow the procedures in their charter or bylaws and in applicable state laws regarding the election or appointment of church officers, directors, and trustees. The courts have differed, however, as to the legal remedies available in the event that such internal procedures are not followed. Some courts have been willing to intervene in internal church controversies regarding the selection of officers and directors. To illustrate, members of a church were allowed to challenge in court the legality of a congregational election of directors that allegedly did not conform to the procedural requirements in the church bylaws.³ And, when a board of directors sought to perpetuate itself in office by refusing to call an election, church members were allowed to obtain legal redress because the state law under which the church was incorporated required annual elections of directors.⁴

The Virginia Supreme Court intervened in an internal church dispute concerning the term of office of church trustees. For nearly 70 years, the trustees of an Episcopal church's endowment fund served life terms. A dispute then arose, and the church's vestry sought a court ruling on the trustees' term of office. The court concluded that the trustees' term of office was one year on the basis of a provision in the Virginia nonprofit corporation law specifying that “in the absence of a provision in the articles of incorporation fixing a term of office, the term of office for a director shall be one year.” Since the court found no provision in the articles of incorporation (i.e., the corporate charter) “fixing a term of office,” it concluded that state law mandated a one--year term. In support of its conclusion, the court observed that “had the organizers intended to take the unusual step of providing life terms for trustees, they surely would have done so in unmistakable fashion.” It further noted that the articles of incorporation required “not less than three” trustees to be “vestrymen of the church.” And, since the terms of the church's vestrymen were limited to three years, there were at least three trustees (at any given time) who could not serve life terms. The court found this to be “unmistakable evidence of the organizers' intention not to fix the trustees' terms of office at life.” Since no provision in the articles of incorporation specified a life term (or any other term), the nonprofit corporation law fixed the trustees' term at one year.⁵

Another court intervened in a dispute concerning the dismissal of local church trustees by the regional diocese of the American--Bulgarian Eastern Orthodox Church. The diocese selected other church members to govern the church, and ordered the discharged trustees to deliver the church's assets and records over to the newly appointed trustees. When the discharged trustees refused to comply with these mandates, the newly appointed trustees filed suit. A state trial court issued an injunction ordering the former trustees to “turn over all documents and assets of (the church) currently in their possession,” and declaring that the church was subject to “the dictates of the regional diocese.” The former trustees appealed, and a state appeals court reversed the lower court's order and ruled in favor of the former trustees.⁶ The appeals court began its opinion by observing that “the state has a cognizable interest in the peaceful resolution of internal church disputes which are concerned with control or ownership of church property, and the civil courts have general authority to resolve such controversies.” However, “when doctrinal or polity issues arise in the determination of a property dispute, the courts must defer to the resolution reached by the church's highest ecclesiastical authority.”

If doctrinal issues are not involved, “the first amendment does not require that the state adopt a rule of compulsory deference to religious authorities in resolving property disputes. Instead, the state courts may choose from a variety of approaches.” One of these, the neutral principles approach, allows a court to determine who owns or controls church property by applying objective legal principles to church documents and records. Another approach, the “compulsory deference rule,” requires the civil courts to always defer to religious hierarchies in any disputes involving local churches. The Illinois court chose to apply the “neutral principles” approach and accordingly concluded that it was not compelled to rule in favor of the diocese. Only when a church property dispute (or any other internal church dispute) involves doctrine or polity is a civil court compelled to defer to determinations of religious hierarchies. This was not such a case, concluded the court. The appeals court remanded the case to the trial court with instructions to resolve the dispute on the basis of “neutral principles of law.”

On the other hand, a number of courts have refused to intervene in such disputes even if the selection of church officers or directors allegedly violated a church's charter or bylaws. These courts have relied primarily on a 1976 decision of the United States Supreme Court which held:

The conclusion of the Illinois Supreme Court that the decisions of the [Diocese] were “arbitrary” was grounded upon an inquiry that persuaded the Illinois Supreme Court that the [Diocese] had not followed its own laws and procedures in arriving at those decisions. We have concluded that whether or not there is room for “marginal civil court review” under the narrow rubrics of “fraud” or “collusion” when church tribunals act in bad faith for secular purposes, no “arbitrariness” exception—in the sense of an inquiry whether the decisions of the highest ecclesiastical tribunal of a hierarchical church complied with church laws and regulations—is consistent with the constitutional mandate that civil courts are bound to accept the decisions of the highest judicatories of a religious organization of hierarchical polity on matters of discipline, faith, internal organization, or ecclesiastical rule, custom or law. For civil courts to analyze whether the ecclesiastical actions of a church judicatory are in that sense “arbitrary” must inherently entail inquiry into the procedures that canon or ecclesiastical law supposedly require the church adjudicatory to follow, or else into the substantive criteria by which they are supposedly to decide the ecclesiastical question. But this is exactly the inquiry that the first amendment prohibits . . . .⁷

This rule of judicial non--intervention in disputes concerning internal church government has been applied by some courts, since 1976, to disputes involving the selection of church officers and directors. To illustrate, a Pennsylvania court declined to rule on which of two warring factions of church trustees rightfully held office.⁸ A minister in a local church had ousted several trustees from office, replacing them with new trustees more loyal to himself. The ousted trustees alleged that the minister lacked the authority to replace them, and that they accordingly were still the lawful church board. The court, noting that civil courts must “defer” to churches and their own ecclesiastical organizations regarding any question of “discipline, faith, ecclesiastical rule, custom, or law,” held that the question of a minister's authority to replace church trustees involves ecclesiastical law and therefore must be resolved by the church itself. It ordered the trial court to identify the highest body within the church empowered to decide the issue. The issue of judicial intervention in internal church disputes is considered in detail in chapter 11 Judicial Resolution of Church Disputes.

It is often said that church officers may perform only those acts for which they have authority, and that the authority of church officers is similar to that exercised by officers of private corporations.⁹ The legal authority of a corporate officer may derive from four sources: express, implied, inherent, and apparent authority. The most basic kind of authority possessed by a church officer consists of express authority deriving from those powers and prerogatives conferred by statute, charter, bylaw, or resolution. Statutes occasionally confer certain powers upon the officers of church corporations, but by far the greatest sources of express authority are a church's charter, bylaws, and resolutions. Article V of the Model Nonprofit Corporation Bylaws lists the powers of corporate officers as follows:

President. The President shall be the principal executive officer of the corporation and shall in general supervise and control all of the business affairs of the corporation. He shall preside at all meetings of the Board of Directors. He may sign, with the Secretary or any other proper officer of the corporation authorized by the Board of Directors, any deeds, mortgages, bonds, contracts, or other instruments which the Board has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these bylaws or by statute to some other officer or agent of the corporation; and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time.

Vice President. In the absence of the President or in the event of his inability or refusal to act, the Vice President (or, in the event that there be more than one Vice President, the Vice Presidents in the order of their election) shall perform the duties of the President, and when so acting, shall have all powers of and be subject to all the restrictions upon the President. Any Vice President shall perform such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

Treasurer. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine. He shall have charge and custody of and be responsible for all funds and securities of the corporation; receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of . . . these bylaws; and in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

Secretary. The Secretary shall keep the minutes of the meetings of the Board of Directors in one or more books provided for that purpose; see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents, the execution of which on behalf of the corporation under its seal is duly authorized in accordance with the provisions of these bylaws . . . and in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

Officers also possess implied authority to perform all those acts that are necessary in performing an express power. The law essentially implies the existence of such authority, without which the express powers would be frustrated. To illustrate, the courts have held that express authority to manage a business includes the power to enter into contracts and to make purchases on behalf of the company. Authority to sell property has been held to include the power to execute a mortgage necessary for the sale of the property. And, authority to borrow money has been held to include the power to execute a guaranty.

Certain powers often are said to be inherent in a particular office, whether or not expressly granted in an organization's charter, bylaws, or resolutions. For example, it commonly is said that the president has inherent authority to preside at meetings of the corporation, that the vice--president has inherent authority to act as president if the president is absent or incapacitated, that the secretary has inherent authority to maintain the corporate seal and records and to serve as secretary in all corporate meetings, and that the treasurer has inherent authority to receive money for the corporation.¹⁰

Officers occasionally possess apparent authority, that is, authority that has not actually been granted by the corporation but which the corporation through its actions and representations leads others to believe has been granted.¹¹ The doctrine of apparent authority rests on the principle of estoppel, which forbids persons or organizations to give an officer or agent an appearance of authority that does not in fact exist and to benefit from such misleading conduct to the detriment of one who has relied on it.

Transactions entered into by church officers acting without authority are invalid. To illustrate, one court concluded that a land sales contract executed by a church secretary and treasurer was not legally enforceable.¹² The court observed that the officers of a corporation “have only those powers conferred on them by the bylaws of the corporation or by the resolution of the directors.” Neither the bylaws of the church nor any resolution by the board vested the secretary and treasurer with authority to enter into contracts on behalf of the church. Another court rejected the validity of a land sales contract executed by an officer of an unincorporated religious organization.¹³ The court emphasized that the officer had no actual or implied authority to sign contracts, and it concluded that “[t]rustees or similar officers of unincorporated religious organizations must have the consent of their organization in order to convey its property. . . . [We] see no evidence that [the officer] had obtained any authorization or consent for the proposed land sale from any membership group.”

Corporations can “ratify” the unauthorized acts of their officers and directors by consenting to them. Ratification generally is held to consist of three elements: acceptance by the corporation of the benefits of the officer's action, with full knowledge of the facts, and circumstances or affirmative conduct indicating an intention to adopt and approve the unauthorized action. Ratification may not occur before an unauthorized action, and must take place within a reasonable time after such action. Ratifications generally are considered to be irrevocable. Only that body possessing the power to perform or authorize an officer's unauthorized action has the power to ratify it. This generally is the board of directors. Ratification can be express, such as by formal, recorded action of the board of directors, or it can be implied from the acts and representations of the board. Implied ratification often occurs when a corporation knows or should have known of an unauthorized act and does nothing to repudiate it. Thus, when a church's parish committee should have known of various mortgages executed by the church's minister on behalf of the church but did nothing to disavow them, it was held to have ratified them by implication.¹⁴

Section 8.45 of the Revised Model Nonprofit Corporation Act specifies:

Any contract or other instrument in writing executed or entered into between a corporation and any other person is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the contract or other instrument if it is signed by any two officers in category 1 [i.e., the presiding officer of the board and the president] or by one officer in category 1 [see above] and one officer in category 2 [i.e., a vice president, the secretary, treasurer and executive director].

b. Directors and Trustees

Like officers, the authority of directors and trustees is to be found primarily in the express provisions of state law or in a church's charter or bylaws. In addition, directors and trustees will be deemed to have implied authority to do those things that are necessary to fulfill their express powers, and they will be clothed with apparent authority when a church through its actions or representations leads others to believe that authority to perform a particular act has been granted.¹⁵ There is one significant difference between officers and directors with respect to authority—while one or two corporate officers often have authority to act on behalf of the corporation in certain matters, directors never have authority, acting individually or in small groups, to bind the corporation. Directors can only act as a board, not as individuals. Accordingly, a director has no authority, acting alone, to purchase equipment or land, hire employees, or otherwise make legally binding commitments on behalf of the corporation. One or two officers, however, may be vested with this authority.

The United States Supreme Court has stated that “the first place one must look to determine the powers of corporate directors is in the relevant state's corporation law. Corporations are creatures of state law . . . and it is state law which is the font of corporate directors' powers.”¹⁶ The Model Nonprofit Corporation Act states that “the affairs of a corporation shall be managed by a board of directors.”¹⁷ Many states that have not adopted the Act have similar provisions in their religious or nonprofit corporation laws. Most state laws thus confer general managerial authority upon the directors or trustees of incorporated churches. This authority often is very broad, even to the point of empowering the board to act on behalf of the church in the ordinary business of the corporation without the necessity of obtaining the consent or approval of the membership. Thus, the board of a church corporation ordinarily has the authority to enter into contracts; elect officers; hire employees; authorize notes, deeds, and mortgages; and institute and settle lawsuits. The powers of the board, however, may be limited by church charter, bylaw, or resolution. The boards of unincorporated churches generally derive little or no authority from state law.

The courts often have held that a church board occupies a position similar to the managing directors of a business corporation, at least with respect to the temporal affairs of a church, and that the board has authority to act only at regularly assembled meetings.¹⁸ Accordingly, when four out of seven directors met informally and agreed to change the location of an annual church meeting, the election of directors at such a meeting was invalid.¹⁹ Another court observed that “only when acting as a board may trustees of a religious corporation perform or authorize acts binding on the corporation,” and therefore the attempt by an individual trustee of a church to employ an attorney on behalf of the church was invalidated.²⁰ The Revised Model Nonprofit Corporation Act confers upon the board of directors limited “emergency powers” (pertaining to the amendment of bylaws, selection of successors to incapacitated officers, relocation of the corporation's principal office, and notice and quorum requirements).²¹

Directors and trustees may not perform acts not authorized either by state law or the church's charter or bylaws. To illustrate, one court ruled that if a church charter gives the board of trustees authority to institute lawsuits in the corporation's name only after being directed to do so by a majority vote of the church membership, then a lawsuit instituted by the board itself without congregational approval is unauthorized.²² Another court ruled that the trustees of a church corporation do not possess the authority to adopt bylaws for the church unless the charter or constitution of the church specifically gives them such authority.²³ The Washington Supreme Court ruled that a church's board of elders was powerless to amend the church's articles of incorporation without the pastor's approval.²⁴ The church's articles of incorporation specified that neither the articles nor the bylaws could be amended without the pastor's approval. The church board members met without the pastor and voted to amend the articles by removing the provision requiring the pastor to approve all amendments to the articles. The pastor immediately filed a lawsuit asking a civil court to determine whether or not the elders had the authority to amend the articles without his approval. A trial court ruled in favor of the elders, and the pastor appealed.

The state supreme court ruled in favor of the pastor. It reasoned that the articles clearly specified that they could not be amended without the pastor's approval, and that as a result the elders' attempt to amend the articles without the pastor's approval was null and void. The court observed: “Neither of the parties has called to our attention any case holding that any corporation law in the country, profit or nonprofit, prohibits a provision in the articles of incorporation requiring the concurrence of a special individual to amend the articles.” The court agreed that the church's articles “might well, in retrospect, be viewed by some as an improvident provision,” but it concluded that “it is not the function of this court . . . to protect those who freely chose to enter into this kind of relationship.”  

The general authority to manage church affairs generally is vested in the directors or trustees, and their acts are binding on the corporation only when done as a board at a legal meeting. Thus, neither a minority nor a majority of the board has the authority to meet privately and take action binding upon the corporation. The reason for this rule has been stated as follows: “The law believes that the greatest wisdom results from conference and exchange of individual views, and it is for this reason that the law requires the united wisdom of a majority of the several members of the board in determining the business of the corporation.”²⁵

This rule of course has exceptions. For example, some state nonprofit corporation laws permit directors to take action without a meeting if they all submit written consents to a proposed action.²⁶ And some states permit directors to conduct meetings by conference telephone call. The entire board of directors can of course take action at a duly convened meeting to ratify an action taken by a minority or majority of the board acting separately and not in a legal meeting.

The corporate bylaws ordinarily specify that regular meetings of the directors or trustees shall occur at specified times and at a specified location. The designation in the bylaws of the time and place for regular meetings of the board generally will be considered sufficient notice of such meetings. In addition, special meetings may be convened by those officers or directors who are authorized by the bylaws to do so. The bylaws ordinarily require that notice of a special meeting be communicated to all directors at a prescribed interval before the meeting. The notice also must be in the form prescribed by the bylaws.

A meeting of the directors or trustees will not be legal unless a quorum is present. A quorum refers to that number or percentage of the total authorized number of directors that must be present in order for the board to transact business. The bylaws typically state the quorum requirements. In the absence of a bylaw provision, the number of directors constituting a quorum ordinarily will be determined by state corporation law (for incorporated churches). In many states, a majority of the board will constitute a quorum in the absence of a bylaw or statutory provision to the contrary. Some nonprofit corporation laws specify that a quorum may not consist of less than a certain number. If vacancies in the board reduce the number of directors to less than a quorum, some statutes permit the board to meet for the purpose of filling vacancies.²⁷

Board meetings are often informal. The president of the corporation generally presides at such meetings, and the secretary keeps minutes. Actions of the board may be in the form of a resolution, although this is not necessary since it has been held that actions taken by the board and recorded in the minutes constitute corporate actions as effectively as a formal resolution.²⁸

If a board meeting does not comply with the requirements in the corporation's bylaws or in state law, it will be invalid and its actions will have no legal effect. Thus, meetings will be invalid and ineffective if notice requirements are not satisfied, unless all of the directors waive the defect in notice either verbally or implicitly by their attendance without objection at the meeting. Meetings will also be invalid if quorum requirements are not satisfied, and an action taken by the board even at a duly called meeting will be invalid if it was adopted by less than the required number of votes.

A corporation possesses the inherent power to remove an officer, director, or trustee for cause.²⁹ To illustrate, one state appeals court ruled that the members of a nonprofit corporation may remove directors from office at a meeting called for this purpose, at any time.³⁰

Thus, the courts have held that a church congregation has the inherent authority to remove a director for cause even though the church bylaws did not address the removal of directors.³¹ In the context of church corporations, good cause ordinarily will consist of material doctrinal deviation, conduct deemed unacceptable behavior by established church custom and practice, incompetency, and incapacity. The church membership itself, and not the board, generally has the authority to remove directors or trustees for cause. Officers elected by the board may be removed by the board. Officers or directors removed for cause generally have no right to compensation (if any) for the unexpired term of office.

A church has no authority to remove an officer or director without cause prior to the expiration of a stated term of office unless a bylaw or statute specifically grants such authority. But an officer or director elected for an unspecified term generally may be removed at any time with or without cause by the body that elected him. And, when an officer's or director's term of office expires, a church congregation can fill the vacancy without demonstrating that good cause exists for not reelecting the former officer or director.³²

State laws under which incorporated churches are organized often provide for removal of officers and directors. For example, section 18 of the Model Nonprofit Corporation Act states that a director may be removed by any procedure set forth in the corporation's articles of incorporation, and section 24 specifies that an officer may be removed by the persons authorized to elect or appoint such officer whenever in their judgment it serves the best interests of the corporation.

Provisions in state law or a church's bylaws for removal of officers and directors must be followed. Thus, if a statute specifies that any ten members of a church can call for a congregational meeting for the purpose of removing directors from office, any action taken at a meeting called by only eight members will be ineffective.³³ And, if a church votes to remove certain officers at a meeting conducted in violation of church bylaws, the removal of the officers will be without effect.³⁴

Finally, it is the general rule that provisions in statutes, charters, or bylaws calling for an officer or director to serve for a prescribed term and until his or her successor is chosen do not prevent an officer or director from resigning. A resignation is complete upon its receipt by the corporation even though the corporate charter states that the office is to be held until a successor is elected and qualified.³⁵ Furthermore, the resignation of an officer or director will be effective even if not accepted at a formal meeting of the board of directors, at least if the board knew of the resignation and acquiesced in it.³⁶

The board members of business corporations are under a duty to perform their duties “in good faith, in a manner they reasonably believe to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances.” This duty commonly is referred to as the “prudent person rule” or the “duty of due care.” In recent years, some courts have extended this duty to the board members of nonprofit corporations. To illustrate, a federal district court ruled that the directors of a nonprofit corporation breached their fiduciary duty of care in managing the corporation's funds.³⁷ For nearly 20 years, management of the corporation had been dominated almost exclusively by two officers, whose decisions and recommendations were routinely adopted by the board. The corporation's finance committee had not convened in more than 11 years. Under these facts, the court concluded:

Total abdication of [a director's] supervisory role, however, is improper . . . . A director who fails to acquire the information necessary to supervise . . . or consistently fails even to attend the meetings . . . has violated his fiduciary duty to the corporation . . . . A director whose failure to supervise permits negligent mismanagement by others to go unchecked has committed an independent wrong against the corporation.³⁸

A ruling of the court overseeing the bankruptcy of the PTL “ministry” addressed the liability of directors and officers.³⁹ The court agreed with the bankruptcy trustee that Jim Bakker (as both an officer and director) had breached his legal duty of care to PTL. It quoted a South Carolina statute (PTL was located in South Carolina) that specifies the duty of care that a director or officer owes to his or her corporation:

A director or officer shall perform his duties as a director or officer, including his duties as a member of any committee of the board of directors upon which he may serve, in good faith, in the manner he reasonably believes to be in the best interest of the corporation and of its shareholders, and with such care as an ordinary prudent person in a like position would use under similar circumstances.⁴⁰

The court, in commenting upon this provision, observed:

Good faith requires the undivided loyalty of a corporate director or officer to the corporation and such a duty of loyalty prohibits the director or an officer, as a fiduciary, from using this position of trust for his own personal gain to the detriment of the corporation. In this instance, there are no shareholders of the corporation; however, even though there are no shareholders, the officers and directors still hold a fiduciary obligation to manage the corporation in its best interest and not to the detriment of the corporation itself.⁴¹

The court concluded that “the duty of care and loyalty required by [Bakker] was breached inasmuch as he (1) failed to inform the members of the board of the true financial position of the corporation and to act accordingly; (2) failed to supervise other officers and directors; (3) failed to prevent the depletion of corporate assets; and (4) violated the prohibition against self--dealing.”

With respect to Bakker's defense that his actions had been “approved” by the board, the court observed that Bakker “exercised a great deal of control over his board” and that “a director who exercises a controlling influence over co--directors cannot defend acts committed by him on the grounds that his actions were approved by the board.” The court acknowledged that officers and directors cannot be “held accountable for mere mistakes in judgment.” However, it found that “the acts of [Bakker]” did not constitute mere mistakes in judgment, but constituted gross mismanagement and a neglect of the affairs of the corporation.  “Clearly the salaries, the awards of bonuses and the carte blanche exercised over PTL checking accounts and credit cards were excessive and without justification and there was lack of proper care, attention and circumspection to the affairs of the corporation. [Bakker] breached [his] duty to manage and supervise . . . .”

In support of its conclusions, the court cited numerous findings, including the following: (a) Bakker failed to require firm bids on construction projects though this caused PTL substantial losses; (b) capital expenditures often greatly exceeded estimates, though Bakker was warned of the problem; (c) Bakker rejected warnings from financial officers about the dangers of debt financing; (d) many of the bonuses granted to Bakker were granted “during periods of extreme financial hardship for PTL”; (e) Bakker “let it be known that he did not want to hear any bad news, so people were reluctant to give him bad financial information”; (f) “it was a common practice for PTL to write checks for more money than it showed in its checkbook; the books would often show a negative balance, but the money would eventually be transferred or raised to cover the checks written—this `float' often would be three to four million dollars”; (g) most of the events and programs at PTL that were made available to the public were operated at a loss; since 1984, “energy was placed into raising lifetime partner funds rather than raising general contributions”; (h) Bakker “during the entire period in question, failed to give attention to financial matters and the problems of raising money and cutting expense.”

Though at the time of Bakker's resignation in 1987 PTL had outstanding liens of $35 million, and general contributions were in a state of decline, “millions of dollars were being syphoned off by excessive spending.” Such spending, noted the court, “is shocking to the conscience to the extent that it is unbelievable that a religious ministry would be operated in such a manner.” The court concluded that “Mr. Bakker, as an officer and director of PTL . . . approached the management of the corporation with reckless indifference to the financial consequences of [his] acts. While on the one hand [he was] experiencing inordinate personal gain from the revenues of PTL, on the other hand [he was] intentionally ignoring the extreme financial difficulties of PTL and, ironically, [was], in fact, adding to them.” To illustrate, Bakker accepted huge bonuses at times of serious financial crisis at PTL. “Such conduct,” noted the court, “demonstrates a total lack of fiduciary responsibility to PTL.”⁴² The court emphasized that “trustees and corporate directors for not--for--profit organizations are liable for losses occasioned by their negligent mismanagement.”⁴³

Lawsuits against nonprofit directors for breach of their “duty of care” are still rare. Directors of churches and religious organizations can reduce the risk of liability even further by (a) attending all of the meetings of the board and of any committees on which they serve; (b) thoroughly reviewing all interim and annual financial statements and reports, and seeking clarification of any irregularities or inconsistencies; (c) affirmatively investigating and rectifying any other irregularities or improprieties; (d) thoroughly reviewing the corporate charter, constitution, and bylaws; (e) dissenting from any board action with which they have any misgivings, and insisting that their objection be recorded in the minutes of the meeting; and (f) resigning from the board if and when they are unable to fulfill these duties. As one court has observed, “the law has no place for dummy directors.”

(4) Breach of the Duty of Loyalty

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. In most cases, a director breaches the duty of loyalty only through some secret or undisclosed interest in a transaction with the corporation. To illustrate, a director who owns a business (e.g., insurance, real estate, furnishings) may violate the duty of loyalty by inducing the board to enter into a transaction with his company without fully disclosing to the board his personal interest in the transaction. Additionally, the director ordinarily should abstain from voting on the transaction, and the transaction should be fair and reasonable to the corporation.

(5) Violation of Trust Terms

Church officers and directors may be legally accountable for violating the terms or restrictions of properties and funds held in trust by the church. To illustrate, the trustees of one church were sued by church members when they attempted to sell church assets contrary to the restrictions specified in the church charter.⁴⁴ The original charter of the church stated that it was formed “for the purpose of religious worship . . . at the corner of Fifth Street and E Street, Southeast, in the City of Washington.” In 1982, after the safety of the historic church building became an issue, the pastor and board of trustees decided to close the church and move to a new location. For at least ten years prior to the sale of the church property, relations between the board of trustees and a segment of the congregation became increasingly hostile. After the sale of the church building, a group of the dissidents filed a lawsuit alleging that the trustees and pastor had violated their fiduciary duty as trustees to hold church properties for the purposes specified in the corporate charter (i.e., to conduct religious worship “at the church building on the southeast corner of Fifth Street and E Street”). The dissidents claimed they were attempting to “salvage the historic old Mount Jezreel church building.” The dissidents pointed out that title to the church's properties was in the name of the trustees who held church properties “in trust” for the members of the congregation, and that church members were “trust beneficiaries” who could sue the trustees for improper or unauthorized transactions with respect to those properties.

A trial court dismissed the lawsuit, but an appeals court ruled in favor of the dissidents. The appeals court observed:

Although title to the church property is vested in the trustees or directors, the property itself is held in trust for the uses and purposes named and no other. Because the church was incorporated for the purpose of religious worship, and because the property was held in trust for that purpose, the members of the congregation are indeed the beneficiaries of the trust. As such, they have standing to sue the trustees in the event that the trust property is used or disposed of in a manner contrary to the stated purposes of the trust. . . . We therefore hold that, as a general principle, bona fide members of a church have standing to bring suit as trust beneficiaries when there is a dispute over the use or disposition of church property.⁴⁵

The same principle may apply to board members who authorize the diversion of designated funds from their intended purposes or projects. For example, assume that a member donates $10,000 to a church's new building fund, and that the church later decides not to build a new facility. Can the church board divert the $10,000 to another use, or must it return the funds to the donor? Or, assume that the church raises several contributions totalling $250,000 for a new building fund and later decides to postpone the project. Does the board have an obligation to track down all of the donors and offer to return their contributions? In many states, the answer to these questions is set forth in the Uniform Management of Institutional Funds Act, which has been adopted in 31 states.⁴⁶ This Act is designed specifically to provide the boards and trustees of charitable organizations (including churches) with guidance in handling designated gifts. An introductory note to the Act states:

It is established law that the donor may place restrictions on his largesse which the donee institution must honor. Too often, the restrictions on use or investment become outmoded or wasteful or unworkable. There is a need for review of obsolete restrictions and a way of modifying or adjusting them. The Act authorizes the governing board to obtain the acquiescence of the donor to a release of restrictions and, in the absence of the donor, to petition the appropriate court for relief in appropriate cases.

The Act contains the following relevant provisions:

§ 7. (a) With the written consent of the donor, the governing board may release, in whole or in part, a restriction imposed by the applicable gift instrument on the use or investment of an institutional fund.

(b) If written consent of the donor cannot be obtained by reason of his death, disability, unavailability, or impossibility of identification, the governing board may apply in the name of the institution to the [appropriate] court for release of a restriction imposed by the applicable gift instrument on the use or investment of an institutional fund. The [attorney general] shall be notified of the application and shall be given an opportunity to be heard. If the court finds that the restriction is obsolete, inappropriate, or impracticable, it may by order release the restriction in whole or in part. A release under this subsection may not change an endowment fund to a fund that is not an endowment fund.

(c) A release under this section may not allow a fund to be used for purposes other than the educational, religious, charitable, or other eleemosynary purposes of the institution affected.

(d) This section does not limit the application of the doctrine of cy pres.

An official comment to this section of the Act contains the following additional guidance:

One of the difficult problems of fund management involves gifts restricted to uses which cannot be feasibly administered or to investments which are no longer available or productive. There should be an expeditious way to make necessary adjustments when the restrictions no longer serve the original purpose. . . . This section permits a release of limitations that imperil efficient administration of a fund or prevent sound investment management if the governing board can secure the approval of the donor or the appropriate court.

Although the donor has no property interest in a fund after the gift, nonetheless if it is the donor's limitation that controls the governing board and he or she agrees that the restriction need not apply, the board should be free of the burden. . . .

If the donor is unable to consent or cannot be identified, the appropriate court may upon application of a governing board release a limitation which is shown to be obsolete, inappropriate or impracticable.

This section of the Act, which remains largely unknown to church leaders and their advisers, provides important guidance in the event that the purpose of a designated gift is frustrated and the church would like to expend the gift for another purpose.

Note that  Section 7(c) of the Uniform Management of Institutional Funds Act (quoted above) specifies that the Act does not limit the application of the cy pres doctrine. This is a potentially significant provision. The “cy pres” doctrine (which has been adopted by most states) generally specifies that if property is given in trust to be applied to a particular charitable purpose, and it is or becomes impossible or impracticable or illegal to carry out the particular purpose, and if the donor manifested a more general intention to devote the property to charitable purposes, the trust will not fail but the court will direct the application of the property to some charitable purpose which falls within the general charitable intention of the donor. Consider the following illustration, based on a ruling by the Iowa Supreme Court.⁴⁷ An elderly man drafted a will in 1971 that left most of his estate “in trust” to his sisters, and upon the death of the surviving sister, to a local Congregational church with the stipulation that the funds be used “solely for the building of a new church.” The man died in 1981, and his surviving sister died in 1988. Since the Congregational church had no plans to build a new sanctuary, it asked a local court to interpret the will to permit the church to use the trust fund not only for construction of a new facility but also “for the remodeling, improvement, or expansion of the existing church facilities” and for the purchase of real estate that may be needed for future church construction. The church also asked the court for permission to use income from the trust fund for any purposes that the church board wanted. The state attorney general, pursuant to state law, reviewed the church's petition and asked the court to grant the church's requests. However, a number of heirs opposed the church's position, and insisted that the decedent's will was clear, and that the church was attempting to use the trust funds “for purposes other than building a new church.” They asked the court to distribute the trust fund to the decedent's lawful heirs.

The local court agreed with the church on the ground that “gifts to charitable uses and purposes are highly favored in law and will be most liberally construed to make effectual the intended purpose of the donor.” The trial court's ruling was appealed by the heirs, and the state supreme court agreed with the trial court and ruled in favor of the church. The supreme court began its opinion by observing that “it is contrary to the public policy of this state to indulge in strained construction of the provisions of a will in order to seek out and discover a basis for avoiding the primary purpose of the [decedent] to bestow a charitable trust.” The court emphasized that the “cy pres” doctrine clearly required it to rule in favor of the church. Applying the cy pres rule, the court concluded:

The will gave the property in trust for a particular charitable purpose, the building of a new church. The evidence clearly indicated that it was impractical to carry out this particular purpose. Furthermore, the [decedent] did not provide that the trust should terminate if the purpose failed. A trust is not forfeited when it becomes impossible to carry out its specific purpose, and there is no forfeiture or reversion clause.⁴⁸

The court concluded that the trial court's decision to permit the church to use the trust fund for the remodeling, improvement, or expansion of the existing church facilities “falls within the [decedent's] general charitable intention.” Accordingly, the trial court's decision represented a proper application of the cy pres rule.

Another court ruled that church funds earmarked by a donor for a specific purpose could by used by the church for other, related purposes.⁴⁹ In 1911, a Quaker church established a fund for the care and maintenance of its graveyard, and began soliciting contributions for the fund. By 1988, the fund had increased to nearly $200,000, and had annual income far in excess of expenses. In 1985, the church discussed the possibility of using the excess income for purposes other than graveyard maintenance, and ultimately expressed a desire to use excess income from the fund for general church purposes (including upkeep and maintenance of church properties). A church trustee who administered the fund took an unbending position that the fund could not be used for any purpose other than graveyard maintenance. The church and trustee thereupon sought an opinion (“declaratory judgment”) from a local court as to the use of the fund for other purposes.

The trial court ruled that the excess income could be used for general church purposes other than graveyard maintenance, and the trustee appealed the case to a state appeals court on the ground that the trial court's decision “conflicts with the express intent of the donors.” The appeals court agreed with the trial court on the basis of the “cy pres” doctrine. The court observed that the cy pres doctrine was created “for the preservation of a charitable trust when accomplishment of the particular purpose of the trust becomes impossible, impractical, or illegal.” The court concluded that “if income from a charitable trust exceeds that which is necessary to achieve the donor's charitable objective, cy pres may be applied to the surplus income `since there is an impossibility of using the income to advance any of the charitable purposes of the [donor].” Therefore, to the extent that the graveyard fund in question “exceeds maintenance and preservation costs, application of cy pres is appropriate since there is an impossibility of using the excess income to advance the particular purpose expressed by the donors.”

The only remaining question was whether or not the donors manifested an intention to devote excess income to a charitable purpose more general than graveyard maintenance. The court concluded that the donors to the graveyard fund in fact manifested such an intent:

Since the donations were made for the perpetual maintenance of a graveyard, it is logical to assume conclude that the donors expected excess income would be used . . . “to strengthen the very institution to which [they] entrusted their money” to permit it to survive in perpetuity in order to carry out the donors' intent. A contrary result, that the income be held in the trust and accumulate in perpetuity for maintenance of the graveyard, is both illogical and contrary to the probable intent of the donors. The only sensible conclusion to be reached is that the donors did not intend that the trusts would grow while the [church] itself may cease to exist because of lack of funds. We are also convinced that use of the funds for general meeting purposes is sufficiently similar to the particular purpose of the [donors] to apply the cy pres doctrine.⁵⁰

Finally, the court emphasized that only trust income in excess of graveyard expenses could be applied for general church purposes, and that the church's bylaws required an annual audit of the fund by certified public accountants.

(6) Securities Law

Section 410(b) of the Uniform Securities Act (adopted in about 40 states) imposes civil liability on every officer or director of an organization that (a) offers or sells unregistered, nonexempt securities; (b) uses unlicensed agents in the offer or sale of its securities (unless the agents are specifically exempted from registration under state law); or (c) offers or sells securities by means of any untrue statement of a material fact or any omission of a material fact. In recent years, a number of churches have violated some or all of these requirements. Such violations render each officer and director of the church potentially liable. Section 410(b) does provide that an officer or director of an organization that sells securities in violation of any of the three provisions discussed above is not liable if he “sustains the burden of proof that he did not know, and in the exercise of reasonable care could not have known of the existence of the facts by reason of which the liability is alleged to exist.”

(7) Wrongful Discharge of an Employee

In the past, employment agreements of unspecified duration were considered to be terminable at the will of either the employer or the employee. No “cause” was necessary. In recent years, the courts of a number of states have permitted discharged “at will” employees to sue their former employer on the basis of one or more legal theories, including: (a) wrongful discharge in violation of public policy (e.g., employee terminated for filing a worker's compensation claim, or for reporting illegal employer activities); (b) intentional infliction of emotional distress (e.g., discharge accompanied by extreme and outrageous conduct); (c) fraud (e.g., employee accepts job in reliance on employer misrepresentations); (d) defamation (e.g., malicious and false statements made by previous employer to prospective employers); (e) breach of contract terms (e.g., employer made oral representations, or written representations contained in a contract of employment or employee handbook, that were not kept). Directors may be personally liable to the extent that they participate in such activities. The subject of employee terminations is addressed further in chapter 10 Termination of Employees.

(8) Willful Failure to Withhold Taxes

The officers and directors of a church or other nonprofit organization can be personally liable for the amount of payroll taxes that are not withheld or paid over to the government. To illustrate, a church--operated charitable organization failed to pay over to the IRS withheld income taxes and the employer's and employees' share of FICA taxes for a number of quarters in both 1984 and 1985. Accordingly, the IRS assessed a penalty in the amount of 100 percent of the unpaid taxes ($230,245.86) against each of the four officers of the organization pursuant to section 6672 of the Internal Revenue Code, which specifies that “any person required to collect . . . and pay over any [FICA or income] tax who willfully fails to collect such tax . . . or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.” The officers challenged the validity of the IRS actions. A federal district court in New York observed that federal law requires employers to withhold FICA and income taxes from the wages of their employees, and to hold the withheld taxes as a “special trust fund” for the benefit of the United States government until paid or deposited.⁵¹ If an employer fails to make the required payments, “the government may actually suffer a loss because the employees are given credit for the amount of the taxes withheld regardless of whether the employer ever pays the money to the government.” Accordingly, “section 6672 of the Code supplies an alternative method for collecting the withheld taxes. Pursuant to this section, the government may assess a penalty, equal to the full amount of the unpaid tax, against a person responsible for paying over the money who willfully fails to do so.” The court observed that a person is liable for the full amount of taxes under section 6672 if “(1) he or she was under a duty to collect, account for, and pay over the taxes (i.e., a `responsible person'), and (2) the failure to pay the taxes was `willful.'”

The court concluded that the four officers of the church--related charitable organization satisfied both requirements, and accordingly that they were personally liable for the unpaid taxes under section 6672. The officers were “responsible persons” since (a) they were directors as well as officers, (b) they had the authority to sign checks (including payroll checks), and (c) they were involved in “routine business concerns such as corporate funding, bookkeeping, salaries, and hiring and firing.” The fact that a nonprofit organization was involved, and that the officers donated their services without compensation, did not relieve them of liability. The court also ruled that the officers acted “willfully” and accordingly met the second requirement of section 6672. It defined “willful action” as “voluntary, conscious and intentional—as opposed to accidental—decisions not to remit funds properly withheld to the government.” There need not be “an evil motive or an intent to defraud.” The court specifically held that “the failure to investigate or to correct mismanagement after having notice that withheld taxes have not been remitted to the government is deemed to be willful conduct.” Further, the court concluded that payment of employee wages and other debts with the knowledge that the payment of payroll taxes is “late” constitutes willful conduct.

This case demonstrates that church officers and directors can be personally liable for the payment of income taxes and FICA taxes that they fail to withhold, account for, or pay to the government. It does not matter that they serve without compensation, so long as they satisfy the definition of a “responsible person” and act willfully. Many church officers and directors will satisfy the definition of a “responsible person,” and such persons can be personally liable for unpaid payroll taxes if they act under the liberal definition of “willfully” described above. Clearly, church leaders must be knowledgeable regarding a church's payroll tax obligations, and insure that such obligations are satisfied. This subject is discussed further in chapter 10 Federal Payroll Tax Reporting Requirements.

(9) Exceeding the Authority of the Board

Occasionally, it is asserted that the directors of a nonprofit corporation have exceeded their authority or power. Some courts have held that directors of nonprofit corporations have a fiduciary relationship with the members of the corporation that requires them to follow the corporate charter and bylaws. For example, one court held that directors who attempted to amend the bylaws of a nonprofit corporation without the knowledge or approval of the membership violated their fiduciary duty to the corporation: “[I]n seeking to disenfranchise the members of the corporation, some or all of the officers and directors of the corporation failed to meet their fiduciary obligation to the members.”

(10) Loans to Directors

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 either 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. 

b. Immunity Statutes

Several states have enacted laws limiting the liability of church officers and directors. In some states, these laws protect all church volunteers. In some cases, the statute may protect only officers and directors of churches that are incorporated under the state's general nonprofit corporation law. The most common type of statute immunizes uncompensated directors and officers from legal liability for any negligent act committed within the scope of their official duties. “Willful and wanton” conduct typically is not protected by such statutes.

“Compensation” ordinarily is defined to exclude reimbursement of expenses incurred while serving as a director or officer. Churches that compensate their directors and officers over and above the reimbursement of expenses should reconsider such a policy if they are located in a state that grants limited immunity to uncompensated officers and directors. Obviously, these statutes will not be of any help to ministers who receive compensation from a church. However, a church board, in determining a minister's compensation package for the year, could stipulate that all of the minister's compensation is for pastoral duties, and that none of it is for the minister's duties on the church board. Whether such an approach would enable the minister to benefit from the protection afforded by the immunity statute is unclear.

Statutes immunizing the directors and officers of nonprofit organizations from liability do not prevent the organization itself from being sued on the basis of the negligence of an officer or director. The immunity statutes only protect the officers or directors themselves. Many of the immunity statutes apply only to the directors and officers of organizations exempt from federal income tax under section 501(c) of the Internal Revenue Code. Some of them appear to apply only to incorporated organizations.

Why have states enacted such laws? Obviously, the primary reason is to encourage persons to serve as directors of nonprofit organizations. In the past, many qualified individuals have declined to serve as directors of such organizations out of a fear of legal liability. The immunity statutes respond directly to this concern by providing directors of nonprofit organizations with limited immunity from legal liability.

Finally, nearly every state that has not adopted a law limiting the liability of directors and officers has such a bill pending. So, if your state has not yet enacted such a law, you may wish to contact your state legislators and inquire about the status of such a provision in your state. If a bill is pending, you may wish to express your individual support. If a bill is not pending, you may wish to request that one be introduced.

This is an area of change. It is probable that many states will modify their statutes in future legislative sessions, and that many of those states that have not enacted such a law will do so in the near future.

Unincorporated Associations

Corporations

Church Records

Reporting Requirements for Churches

Church Names

Church Members

Church Business Meetings

Removing Disruptive Individuals

Powers of a Local Church

Church Merger and Consolidation

Dissolution of a Church